Non-performing Loans and Impaired Loans | Note 7 – Non-performing The following table presents the non-accrual, March 31, 2018 Non-accrual Loans Past Due Over 90 Days Still Accruing Non-peforming TDRs Performing TDRs Total Non-performing Loans Commercial Owner occupied real estate $ 4,921 $ — $ 9 $ 1 $ 4,931 Non-owner 596 — 438 — 1,034 Residential spec homes — — — — — Development & spec land 76 — — — 76 Commercial and industrial 737 — — — 737 Total commercial 6,330 — 447 1 6,778 Real estate Residential mortgage 3,162 — 458 1,656 5,276 Residential construction — — — — — Mortgage warehouse — — — — — Total real estate 3,162 — 458 1,656 5,276 Consumer Direct installment 153 — — — 153 Direct installment purchased — — — — — Indirect installment 866 30 — — 896 Home equity 1,551 — 185 242 1,978 Total consumer 2,570 30 185 242 3,027 Total $ 12,062 $ 30 $ 1,090 $ 1,899 $ 15,081 December 31, 2017 Non-accrual Loans Past Due Over 90 Days Still Accruing Non-peforming TDRs Performing TDRs Total Non-performing Loans Commercial Owner occupied real estate $ 4,877 $ — $ 11 $ 1 $ 4,889 Non-owner 115 — 440 — 555 Residential spec homes — — — — — Development & spec land 176 — — — 176 Commercial and industrial 1,734 — — — 1,734 Total commercial 6,902 — 451 1 7,354 Real estate Residential mortgage 3,693 — 351 1,450 5,494 Residential construction — — — 222 222 Mortgage warehouse — — — — — Total real estate 3,693 — 351 1,672 5,716 Consumer Direct installment 160 — — — 160 Direct installment purchased — — — — — Indirect installment 1,041 167 — — 1,208 Home equity 1,480 — 211 285 1,976 Total consumer 2,681 167 211 285 3,344 Total $ 13,276 $ 167 $ 1,013 $ 1,958 $ 16,414 Included in the $12.1 million of non-accrual non-performing From time to time, the Bank obtains information that may lead management to believe that the collection of payments may be doubtful on a particular loan. In recognition of this, it is management’s policy to convert the loan from an “earning asset” to a non-accruing non-accrual non-accrual non-accrual Non-accrual non-accrual 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 for its collateral, 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. Interest income on loans individually classified as impaired is recognized on a cash basis after all past due and current principal payments have been made. 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 non-accrual Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms, including TDRs, are measured for impairment. Allowable methods for determining the amount of impairment include the three methods described above. The Company’s TDRs are considered impaired loans and included in the allowance methodology using the guidance for impaired loans. At March 31, 2018, 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 March 31, 2018, the Company had $3.0 million in TDRs and $1.1 million were performing according to the restructured terms and $0 in TDRs were returned to accrual status during the first three months of 2018. There were $70,000 specific reserves allocated to TDRs at March 31, 2018 based on the discounted cash flows or when appropriate the fair value of the collateral. The following table presents commercial loans individually evaluated for impairment by class of loan: March 31, 2018 Three Months Ended Unpaid Principal Balance Recorded Investment Allowance for Loan Loss Allocated Average Balance in Impaired Loans Cash/Accrual Interest Income Recognized With no recorded allowance Commercial Owner occupied real estate $ 4,038 $ 4,063 $ — $ 4,590 $ 37 Non-owner 1,033 1,049 — 975 5 Residential spec homes — — — — — Development & spec land 76 74 — 75 — Commercial and industrial 737 745 — 1,447 — Total commercial 5,884 5,931 — 7,087 42 With an allowance recorded Commercial Owner occupied real estate 893 893 184 900 — Non-owner — — — — — Residential spec homes — — — — — Development & spec land — — — — — Commercial and industrial — — — — — Total commercial 893 893 184 900 — Total $ 6,777 $ 6,824 $ 184 $ 7,987 $ 42 March 31, 2017 Three Months Ended Unpaid Principal Balance Recorded Investment Allowance for Loan Loss Allocated Average Balance in Impaired Loans Cash/Accrual Interest Income Recognized With no recorded allowance Commercial Owner occupied real estate $ 759 $ 759 $ — $ 1,021 $ — Non-owner 387 387 — 393 — Residential spec homes — — — — — Development & spec land 112 112 — 238 — Commercial and industrial 121 121 — 350 — Total commercial 1,379 1,379 — 2,002 — With an allowance recorded Commercial Owner occupied real estate — — — — — Non-owner — — — — — Residential spec homes — — — — — Development & spec land — — — — — Commercial and industrial — — — — — Total commercial — — — — — Total $ 1,379 $ 1,379 $ — $ 2,002 $ — The following table presents the payment status by class of loan: March 31, 2018 30-59 Days Past Due 60-89 Days Past Due 90 Days or Greater Past Due Total Past Due Loans Not Past Due Total Commercial Owner occupied real estate $ 5,341 $ 195 $ — $ 5,536 $ 576,160 $ 581,696 Non-owner 1,048 — — 1,048 676,884 677,932 Residential spec homes — — — — 17,473 17,473 Development & spec land 12 — — 12 33,724 33,736 Commercial and industrial 922 109 — 1,031 339,487 340,518 Total commercial 7,323 304 — 7,627 1,643,728 1,651,355 Real estate Residential mortgage 602 79 — 681 594,743 595,424 Residential construction — — — — 20,447 20,447 Mortgage warehouse — — — — 101,299 101,299 Total real estate 602 79 — 681 716,489 717,170 Consumer Direct installment 7 — — 7 37,407 37,414 Indirect installment 747 201 30 978 249,947 250,925 Home equity 253 104 — 357 194,138 194,495 Total consumer 1,007 305 30 1,342 481,492 482,834 Total $ 8,932 $ 688 $ 30 $ 9,650 $ 2,841,709 $ 2,851,359 Percentage of total loans 0.31 % 0.02 % 0.00 % 0.34 % 99.66 % December 31, 2017 30-59 Days Past Due 60-89 Days Past Due 90 Days or Greater Past Due Total Past Due Loans Not Past Due Total Commercial Owner occupied real estate $ 1,613 $ 1,950 $ — $ 3,563 $ 568,419 $ 571,982 Non-owner 512 122 — 634 678,311 678,945 Residential spec homes — — — — 16,431 16,431 Development & spec land 31 — — 31 48,807 48,838 Commercial and industrial 520 1 — 521 347,350 347,871 Total commercial 2,676 2,073 — 4,749 1,659,318 1,664,067 Real estate Residential mortgage 1,248 49 — 1,297 587,061 588,358 Residential construction 63 — — 63 15,964 16,027 Mortgage warehouse — — — — 94,508 94,508 Total real estate 1,311 49 — 1,360 697,533 698,893 Consumer Direct installment 78 10 — 88 37,753 37,841 Indirect installment 1,859 244 167 2,270 225,053 227,323 Home equity 502 527 — 1,029 196,549 197,578 Total consumer 2,439 781 167 3,387 459,355 462,742 Total $ 6,426 $ 2,903 $ 167 $ 9,496 $ 2,816,206 $ 2,825,702 Percentage of total loans 0.23 % 0.10 % 0.01 % 0.34 % 99.66 % 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 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 report 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 weekly with loan officers to discuss the status of past-due • 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 Loan and Lease Losses. 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, non-accrual. 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). 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; loans that are guaranteed or otherwise backed by the full faith and credit of the United States government or an agency thereof, such as the Small Business Administration; or loans to any publicly held company with a current long-term debt rating of A or better. 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 consecutive years of profits; loans supported by unaudited financial statements containing strong balance sheets, five consecutive years of profits, a five-year satisfactory relationship with the Bank, and key balance sheet and income statement trends that are either stable or positive; loans secured by publicly traded marketable securities where there is no impediment to liquidation; loans to individuals backed by liquid personal assets and unblemished credit history; or loans to publicly held companies with current long-term debt ratings of Baa or better. 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. 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 • At inception, the loan was secured with collateral possessing a loan value adequate to protect the Bank from loss. • The loan has exhibited two or more years of satisfactory repayment with a reasonable reduction of the principal balance. • 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 loans. 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, 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. Risk Grade 5: Special Mention Loans which possess some 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. 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. 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. 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 table presents loans by credit grades. March 31, 2018 Pass Special Mention Substandard Doubtful Total Commercial Owner occupied real estate $ 551,813 $ 13,215 $ 16,668 $ — $ 581,696 Non-owner 667,528 5,014 5,390 — 677,932 Residential spec homes 17,473 — — — 17,473 Development & spec land 33,660 — 76 — 33,736 Commercial and industrial 323,117 4,803 12,598 — 340,518 Total commercial 1,593,591 23,032 34,732 — 1,651,355 Real estate Residential mortgage 590,148 — 5,276 — 595,424 Residential construction 20,447 — — — 20,447 Mortgage warehouse 101,299 — — — 101,299 Total real estate 711,894 — 5,276 — 717,170 Consumer Direct installment 37,261 — 153 — 37,414 Indirect installment 250,029 — 896 — 250,925 Home equity 192,517 — 1,978 — 194,495 Total consumer 479,807 — 3,027 — 482,834 Total $ 2,785,292 $ 23,032 $ 43,035 $ — $ 2,851,359 Percentage of total loans 97.68 % 0.81 % 1.51 % 0.00 % December 31, 2017 Pass Special Mention Substandard Doubtful Total Commercial Owner occupied real estate $ 545,158 $ 8,622 $ 18,202 $ — $ 571,982 Non-owner 670,074 3,864 5,007 — 678,945 Residential spec homes 16,431 — — — 16,431 Development & spec land 47,726 886 226 — 48,838 Commercial and industrial 326,756 7,448 13,667 — 347,871 Total commercial 1,606,145 20,820 37,102 — 1,664,067 Real estate Residential mortgage 582,864 — 5,494 — 588,358 Residential construction 15,805 — 222 — 16,027 Mortgage warehouse 94,508 — — — 94,508 Total real estate 693,177 — 5,716 — 698,893 Consumer Direct installment 37,681 — 160 — 37,841 Indirect installment 226,115 — 1,208 — 227,323 Home equity 195,602 — 1,976 — 197,578 Total consumer 459,398 — 3,344 — 462,742 Total $ 2,758,720 $ 20,820 $ 46,162 $ — $ 2,825,702 Percentage of total loans 97.63 % 0.74 % 1.63 % 0.00 % |