| Non-performing Loans | Non-performing Loans The following table presents the non–accrual, loans past due over 90 days still on accrual, and troubled debt restructured (“TDRs”) by class of loans: September 30, 2020 Non–accrual Loans Past Non–performing Performing Total Non–accrual Commercial Owner occupied real estate $ 11,105 $ — $ 629 $ 169 $ 11,903 $ 8,715 Non–owner occupied real estate 1,181 — 340 — 1,521 1,033 Residential spec homes — — — — — — Development & spec land 70 — — — 70 70 Commercial and industrial 2,152 — 523 — 2,675 1,921 Total commercial 14,508 — 1,492 169 16,169 11,739 Real estate Residential mortgage 6,606 205 988 1,410 9,209 7,594 Residential construction — — — — — — Mortgage warehouse — — — — — — Total real estate 6,606 205 988 1,410 9,209 7,594 Consumer Direct installment 23 — — — 23 23 Indirect installment 1,122 69 — — 1,191 1,122 Home equity 2,195 57 224 246 2,722 2,419 Total consumer 3,340 126 224 246 3,936 3,564 Total $ 24,454 $ 331 $ 2,704 $ 1,825 $ 29,314 $ 22,897 There was no interest income recognized on non–accrual loans during the three and nine months ended September 30, 2020 and 2019 while the loans were in non–accrual status. Included in the $24.5 million of non–accrual loans and the $2.7 million of non–performing TDRs at September 30, 2020 were $3.5 million and $993,000, respectively, of loans acquired for which accretable yield was recognized. December 31, 2019 Non–accrual Loans Past Non–performing Performing Total Non–accrual Commercial Owner occupied real estate $ 2,424 $ — $ 629 $ 139 $ 3,192 $ 2,563 Non–owner occupied real estate 682 — 374 — 1,056 937 Residential spec homes — — — — — — Development & spec land 73 — — — 73 73 Commercial and industrial 1,603 — 78 1,345 3,026 514 Total commercial 4,782 — 1,081 1,484 7,347 4,087 Real estate Residential mortgage 7,614 1 708 1,561 9,884 8,322 Residential construction — — — — — — Mortgage warehouse — — — — — — Total real estate 7,614 1 708 1,561 9,884 8,322 Consumer Direct installment 30 5 — — 35 30 Indirect installment 1,234 135 — — 1,369 1,234 Home equity 2,019 5 217 309 2,550 2,236 Total consumer 3,283 145 217 309 3,954 3,500 Total $ 15,679 $ 146 $ 2,006 $ 3,354 $ 21,185 $ 15,909 Troubled Debt Restructurings Loans modified as TDRs generally consist of allowing borrowers to defer scheduled principal payments and make interest only payments for a specified period of time at the stated interest rate of the original loan agreement or lower payments due to a modification of the loans’ contractual terms. TDRs that continue to accrue interest are individually monitored on a monthly basis and evaluated for impairment annually and transferred to non–accrual status when it is probable that any remaining principal and interest payments due on the loan will not be collected in accordance with the contractual terms of the loan. TDRs that subsequently default are individually evaluated for impairment at the time of default. At September 30, 2020, the type of concessions the Company has made on restructured loans has been temporary rate reductions and/or reductions in monthly payments, and there have been no restructured loans with modified recorded balances. Any modification to a loan that is a concession and is not in the normal course of lending is considered a restructured loan. A restructured loan is returned to accruing status after six consecutive payments but is still reported as TDR unless the loan bears interest at a market rate. As of September 30, 2020, the Company had $4.5 million in TDRs, $1.8 million were performing according to the restructured terms, and one TDR was returned to accrual status during the first nine months of 2020. There were $117,000 of specific reserves allocated to TDRs at September 30, 2020 based on the discounted cash flows or, when appropriate, the fair value of the collateral. These TDRs are exclusive of loans modified under the CARES Act during the first nine months of 2020. The following table presents TDRs by loan portfolio: September 30, 2020 December 31, 2019 Non–accrual Accruing Total Non–accrual Accruing Total Commercial Owner occupied real estate $ 629 $ 169 $ 798 $ 629 $ 139 $ 768 Non–owner occupied real estate 340 — 340 374 — 374 Residential spec homes — — — — — — Development & spec land — — — — — — Commercial and industrial 523 — 523 78 1,345 1,423 Total commercial 1,492 169 1,661 1,081 1,484 2,565 Real estate Residential mortgage 988 1,410 2,398 708 1,561 2,269 Residential construction — — — — — — Mortgage warehouse — — — — — — Total real estate 988 1,410 2,398 708 1,561 2,269 Consumer Direct installment — — — — — — Indirect installment — — — — — — Home equity 224 246 470 217 309 526 Total consumer 224 246 470 217 309 526 Total $ 2,704 $ 1,825 $ 4,529 $ 2,006 $ 3,354 $ 5,360 Loans Modified under the CARES Act The Bank has elected (i) to suspend the requirements under GAAP for loan modifications related to the COVID–19 pandemic that would otherwise be categorized as a TDR; and (ii) to suspend any determination of a loan modified as a result of the effects of COVID–19 pandemic as being a TDR, including impairment for accounting purposes. At September 30, 2020, the Bank modified loans totaling $160.1 million which qualify for treatment under the CARES Act. Collateral Dependent Financial Assets A collateral dependent financial loan relies solely on the operation or sale of the collateral for repayment. In evaluating the overall risk associated with a loan, the Company considers character, overall financial condition and resources, and payment record of the borrower; the prospects for support from any financially responsible guarantors; and the nature and degree of protection provided by the cash flow and value of any underlying collateral. However, as other sources of repayment become inadequate over time, the significance of the collateral’s value increases and the loan may become collateral dependent. The table below presents the value of collateral dependent loans by loan class as of September 30, 2020: September 30, 2020 Commercial Owner occupied real estate $ 3,018 Non–owner occupied real estate 488 Commercial and industrial 754 Total commercial 4,260 Total collateral dependent loans $ 4,260 The following table presents the payment status by class of loan, excluding non–accrual loans of $24.5 million and non–performing TDRs of $2.7 million at September 30, 2020: September 30, 2020 Current 30–59 Days 60–89 Days 90 Days or Total Total Commercial Owner occupied real estate $ 491,393 $ — $ — $ — $ — $ 491,393 Non–owner occupied real estate 1,017,130 282 238 — 520 1,017,650 Residential spec homes 11,190 — — — — 11,190 Development & spec land 25,771 544 — — 544 26,315 Commercial and industrial 759,010 — 50 — 50 759,060 Total commercial 2,304,494 826 288 — 1,114 2,305,608 Real estate Residential mortgage 641,882 1,894 105 205 2,204 644,086 Residential construction 23,540 — — — — 23,540 Mortgage warehouse 374,653 — — — — 374,653 Total real estate 1,040,075 1,894 105 205 2,204 1,042,279 Consumer Direct installment 38,974 24 28 — 52 39,026 Indirect installment 357,060 878 170 69 1,117 358,177 Home equity 256,760 1,069 231 57 1,357 258,117 Total consumer 652,794 1,971 429 126 2,526 655,320 Total $ 3,997,363 $ 4,691 $ 822 $ 331 $ 5,844 $ 4,003,207 Percentage of total loans 99.85 % 0.12 % 0.02 % 0.01 % 0.15 % 100.00 % The following table presents the payment status by class of loan, excluding non–accrual loans of $15.7 million and non–performing TDRs of $2.0 million at December 31, 2019: December 31, 2019 Current 30–59 Days 60–89 Days 90 Days or Total Total Commercial Owner occupied real estate $ 515,604 $ 920 $ — $ — $ 920 $ 516,524 Non–owner occupied real estate 972,195 80 — — 80 972,275 Residential spec homes 12,925 — — — — 12,925 Development & spec land 35,881 — — — — 35,881 Commercial and industrial 503,348 819 11 — 830 504,178 Total commercial 2,039,953 1,819 11 — 1,830 2,041,783 Real estate Residential mortgage 740,712 1,984 — 1 1,985 742,697 Residential construction 19,686 — — — — 19,686 Mortgage warehouse 150,293 — — — — 150,293 Total real estate 910,691 1,984 — 1 1,985 912,676 Consumer Direct installment 40,864 175 5 5 185 41,049 Indirect installment 344,478 2,407 404 135 2,946 347,424 Home equity 273,050 904 20 5 929 273,979 Total consumer 658,392 3,486 429 145 4,060 662,452 Total $ 3,609,036 $ 7,289 $ 440 $ 146 $ 7,875 $ 3,616,911 Percentage of total loans 99.78 % 0.20 % 0.01 % 0.01 % 0.22 % 100.00 % The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date. Horizon Bank’s processes for determining credit quality differ slightly depending on whether a new loan or a renewed loan is being underwritten, or whether an existing loan is being re-evaluated for credit quality. The latter usually occurs upon receipt of current financial information or other pertinent data that would trigger a change in the loan grade. • For new and renewed commercial loans, the Bank’s Credit Department, which acts independently of the loan officer, assigns the credit quality grade to the loan. Loan grades for loans with an aggregate credit exposure that exceeds the authorities in the respective markets (ranging from $1,000,000 to $3,500,000) are validated by the Loan Committee, which is chaired by the Chief Commercial Banking Officer (“CCBO”). • Commercial loan officers are responsible for reviewing their loan portfolios and reporting any adverse material change to the CCBO or Loan Committee. When circumstances warrant a change in the credit quality grade, loan officers are required to notify the CCBO and the Credit Department of the change in the loan grade. Downgrades are accepted immediately by the CCBO, however, lenders must present their factual information to either the Loan Committee or the CCBO when recommending an upgrade. • The CCBO, or his designee, meets regularly with loan officers to discuss the status of past-due loans and classified loans. These meetings are also designed to give the loan officers an opportunity to identify an existing loan that should be downgraded to a classified grade. • Monthly, senior management meets with the Watch Committee, which reviews all of the past due, classified, and impaired loans and the relative trends of these assets. This committee also reviews the actions taken by management regarding foreclosure mitigation, loan extensions, troubled debt restructures, other real estate owned and personal property repossessions. The information reviewed in this meeting acts as a precursor for developing management’s analysis of the adequacy of the Allowance for Credit Losses for loans. For residential real estate and consumer loans, Horizon uses a grading system based on delinquency. Loans that are 90 days or more past due, on non–accrual, or are classified as a TDR are graded “Substandard.” After being 90 to 120 days delinquent a loan is charged–off unless it is well secured and in the process of collection. If the latter case exists, the loan is placed on non–accrual. Occasionally a mortgage loan may be graded as “Special Mention.” When this situation arises, it is because the characteristics of the loan and the borrower fit the definition of a Risk Grade 5 described below, which is normally used for grading commercial loans. Loans not graded Substandard are considered Pass. Horizon Bank employs a nine–grade rating system to determine the credit quality of commercial loans. The first five grades represent acceptable quality, and the last four grades mirror the criticized and classified grades used by the bank regulatory agencies (special mention, substandard, doubtful, and loss). Loan grade definitions are reviewed annually via the approval of the overall loan policy. The most recent review and approval of the loan policy was in October 2020. The loan grade definitions are detailed below. Risk Grade 1: Excellent (Pass) Loans secured by liquid collateral, such as certificates of deposit, reputable bank letters of credit, or other cash equivalents or loans to any publicly held company with a current long–term debt rating of A or better and meeting defined key financial metric ranges. Risk Grade 2: Good (Pass) Loans to businesses that have strong financial statements containing an unqualified opinion from a CPA firm and at least three five Risk Grade 3: Satisfactory (Pass) Loans supported by financial statements (audited or unaudited) that indicate average or slightly below average risk and having some deficiency or vulnerability to changing economic conditions; loans with some weakness but offsetting features of other support are readily available; loans that are meeting the terms of repayment, but which may be susceptible to deterioration if adverse factors are encountered and meeting defined key financial metric ranges. Loans may be graded Satisfactory when there is no recent information on which to base a current risk evaluation and the following conditions apply: • At inception, the loan was properly underwritten, did not possess an unwarranted level of credit risk, and the loan met the above criteria for a risk grade of Excellent, Good, or Satisfactory; • At inception, the loan was secured with collateral possessing a loan value adequate to protect the Bank from loss. • The loan has exhibited two • During the period that the loan has been outstanding, there has been no evidence of any credit weakness. Some examples of weakness include slow payment, lack of cooperation by the borrower, breach of loan covenants, or the borrower is in an industry known to be experiencing problems. If any of these credit weaknesses is observed, a lower risk grade may be warranted. Risk Grade 4 Satisfactory/Monitored: Loans in this category are considered to be of acceptable credit quality, but contain greater credit risk than Satisfactory rated loans and meet defined key financial metric ranges. Borrower displays acceptable liquidity, leverage, and earnings performance within the Bank’s minimum underwriting guidelines. The level of risk is acceptable but conditioned on the proper level of loan officer supervision. Loans that normally fall into this grade include acquisition, construction and development loans and income producing properties that have not reached stabilization. Risk Grade 4W Management Watch: Loans in this category are considered to be of acceptable quality and meet defined key financial metric ranges, but with above normal risk. Borrower displays potential indicators of weakness in the primary source of repayment resulting in a higher reliance on secondary sources of repayment. Balance sheet may exhibit weak liquidity and/or high leverage. There is inconsistent earnings performance without the ability to sustain adverse economic conditions. Borrower may be operating in a declining industry or the property type, as for a commercial real estate loan, may be high risk or in decline. These loans require an increased level of loan officer supervision and monitoring to assure that any deterioration is addressed in a timely fashion. Commercial construction loans are graded as 4W Management Watch until the projects are completed and stabilized. Risk Grade 5: Special Mention Loans which possess some temporary (normally less than one year) credit deficiency or potential weakness which deserves close attention. Such loans pose an unwarranted financial risk that, if not corrected, could weaken the loan by adversely impacting the future repayment ability of the borrower. The key distinctions of a Special Mention classification are that (1) it is indicative of an unwarranted level of risk and (2) weaknesses are considered “potential,” not “defined,” impairments to the primary source of repayment. These loans may be to borrowers with adverse trends in financial performance, collateral value and/or marketability, or balance sheet strength and must meet defined key financial metric ranges. Risk Grade 6: Substandard One or more of the following characteristics may be exhibited in loans classified Substandard: • Loans which possess a defined credit weakness. The likelihood that a loan will be paid from the primary source of repayment is uncertain. Financial deterioration is under way and very close attention is warranted to ensure that the loan is collected without loss. • Loans are inadequately protected by the current net worth and paying capacity of the obligor. • The primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment, such as collateral liquidation or guarantees. • Loans have a distinct possibility that the Bank will sustain some loss if deficiencies are not corrected. • Unusual courses of action are needed to maintain a high probability of repayment. • The borrower is not generating enough cash flow to repay loan principal; however, it continues to make interest payments. • The lender is forced into a subordinated or unsecured position due to flaws in documentation. • Loans have been restructured so that payment schedules, terms, and collateral represent concessions to the borrower when compared to the normal loan terms. • The lender is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan. • There is a significant deterioration in market conditions to which the borrower is highly vulnerable. • The borrower meets defined key financial metric ranges. Risk Grade 7: Doubtful One or more of the following characteristics may be present in loans classified Doubtful: • Loans have all of the weaknesses of those classified as Substandard. However, based on existing conditions, these weaknesses make full collection of principal highly improbable. • The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of repayment. • The possibility of loss is high but because of certain important pending factors which may strengthen the loan, loss classification is deferred until the exact status of repayment is known. • The borrower meets defined key financial metric ranges. Risk Grade 8: Loss Loans are considered uncollectible and of such little value that continuing to carry them as assets is not feasible. Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future. The following tables present loans by credit grades and origination year. September 30, 2020 2020 2019 2018 2017 2016 Prior Revolving Loans Total Commercial Owner occupied real estate Pass $ 43,528 $ 65,996 $ 53,374 $ 50,523 $ 51,460 $ 144,099 $ 37,557 $ 446,537 Special Mention — 855 4,934 10,175 4,532 12,614 — 33,110 Substandard 1,026 1,231 4,048 2,832 2,564 7,912 3,867 23,480 Doubtful — — — — — — — — Total owner occupied real estate $ 44,554 $ 68,082 $ 62,356 $ 63,530 $ 58,556 $ 164,625 $ 41,424 $ 503,127 Non–owner occupied real estate Pass $ 97,251 $ 121,030 $ 77,110 $ 141,356 $ 105,581 $ 224,430 $ 167,632 $ 934,390 Special Mention 1,403 1,247 27,471 2,211 2,610 15,282 4,840 55,064 Substandard — 15,589 304 622 6,802 4,828 1,572 29,717 Doubtful — — — — — — — — Total non–owner occupied real estate $ 98,654 $ 137,866 $ 104,885 $ 144,189 $ 114,993 $ 244,540 $ 174,044 $ 1,019,171 Residential spec homes Pass $ 495 $ — $ — $ 1,660 $ — $ 1,237 $ 7,228 $ 10,620 Special Mention — 212 — — — — 358 570 Substandard — — — — — — — — Doubtful — — — — — — — — Total residential spec homes $ 495 $ 212 $ — $ 1,660 $ — $ 1,237 $ 7,586 $ 11,190 Development & spec land Pass $ 30 $ 885 $ 267 $ 2,232 $ 777 $ 12,224 $ 9,165 $ 25,580 Special Mention — — — — — 276 — 276 Substandard — — — — — 529 — 529 Doubtful — — — — — — — — Total development & spec land $ 30 $ 885 $ 267 $ 2,232 $ 777 $ 13,029 $ 9,165 $ 26,385 Commercial & industrial Pass $ 339,106 $ 64,658 $ 65,712 $ 87,782 $ 27,728 $ 75,580 $ 30,909 $ 691,475 Special Mention 7,650 1,852 10,922 9,880 1,953 5,684 10,641 48,582 Substandard 4,002 6,181 3,584 1,443 816 3,331 2,321 21,678 Doubtful — — — — — — — — Total commercial & industrial $ 350,758 $ 72,691 $ 80,218 $ 99,105 $ 30,497 $ 84,595 $ 43,871 $ 761,735 Total commercial $ 494,491 $ 279,736 $ 247,726 $ 310,716 $ 204,823 $ 508,026 $ 276,090 $ 2,321,608 September 30, 2020 2020 2019 2018 2017 2016 Prior Revolving Loans Total Real estate Residential mortgage Performing $ 103,964 $ 65,835 $ 102,061 $ 101,581 $ 76,188 $ 190,453 $ 2,389 $ 642,471 Non–performing — 180 639 93 605 7,692 — 9,209 Total residential mortgage $ 103,964 $ 66,015 $ 102,700 $ 101,674 $ 76,793 $ 198,145 $ 2,389 $ 651,680 Residential construction Performing $ 596 $ — $ — $ — $ — $ — $ 22,944 $ 23,540 Non–performing — — — — — — — — Total residential construction $ 596 $ — $ — $ — $ — $ — $ 22,944 $ 23,540 Mortgage warehouse Performing $ — $ — $ — $ — $ — $ — $ 374,653 $ 374,653 Non–performing — — — — — — — — Total mortgage warehouse $ — $ — $ — $ — $ — $ — $ 374,653 $ 374,653 Total real estate $ 104,560 $ 66,015 $ 102,700 $ 101,674 $ 76,793 $ 198,145 $ 399,986 $ 1,049,873 September 30, 2020 2020 2019 2018 2017 2016 Prior Revolving Loans Total Consumer Direct installment Performing $ 10,115 $ 11,016 $ 6,517 $ 6,594 $ 2,558 $ 2,191 $ 35 $ 39,026 Non–performing — — — 11 4 7 1 23 Total direct installment $ 10,115 $ 11,016 $ 6,517 $ 6,605 $ 2,562 $ 2,198 $ 36 $ 39,049 Indirect installment Performing $ 105,780 $ 108,049 $ 84,773 $ 42,883 $ 10,393 $ 6,230 $ — $ 358,108 Non–performing — 146 377 408 92 168 — 1,191 Total indirect installment $ 105,780 $ 108,195 $ 85,150 $ 43,291 $ 10,485 $ 6,398 $ — $ 359,299 Home equity Performing $ 47,991 $ 46,114 $ 38,357 $ 30,295 $ 24,204 $ 65,933 $ 4,920 $ 257,814 Non–performing — 9 61 78 50 1,100 1,424 2,722 Total home equity $ 47,991 $ 46,123 $ 38,418 $ 30,373 $ 24,254 $ 67,033 $ 6,344 $ 260,536 Total consumer $ 163,886 $ 165,334 $ 130,085 $ 80,269 $ 37,301 $ 75,629 $ 6,380 $ 658,884 December 31, 2019 Pass Special Substandard Doubtful Total Commercial Owner occupied real estate $ 492,386 $ 8,328 $ 18,863 $ — $ 519,577 Non–owner occupied real estate 957,990 7,824 7,517 — 973,331 Residential spec homes 12,925 — — — 12,925 Development & spec land 35,815 — 139 — 35,954 Commercial and industrial 468,893 18,652 18,314 — 505,859 Total commercial 1,968,009 34,804 44,833 — 2,047,646 Real estate Residential mortgage 741,136 — 9,883 — 751,019 Residential construction 19,686 — — — 19,686 Mortgage warehouse 150,293 — — — 150,293 Total real estate 911,115 — 9,883 — 920,998 Consumer Direct installment 41,044 — 35 — 41,079 Indirect installment 347,289 — 1,369 — 348,658 Home equity 273,665 — 2,550 — 276,215 Total consumer 661,998 — 3,954 — 665,952 Total $ 3,541,122 $ 34,804 $ 58,670 $ — $ 3,634,596 Percentage of total loans 97.43 % 0.96 % 1.61 % 0.00 % 100.00 % Commercial loans modified due to the impact of the COVID–19 pandemic were immediately downgraded one level resulting in the increase of Special Mention commercial loans from December 31, 2019 to September 30, 2020. |
