Non-performing Loans and Impaired Loans | Note 7 – Non-performing The following table presents the non-accrual, June 30, 2019 Non-accrual Loans Past Non-peforming Performing Total Non-performing Commercial Owner occupied real estate $ 3,694 $ 63 $ 389 $ 139 $ 4,285 Non-owner 616 — 635 — 1,251 Residential spec homes — — — — — Development & spec land 140 — — — 140 Commercial and industrial 3,021 — — — 3,021 Total commercial 7,471 63 1,024 139 8,697 Real estate Residential mortgage 4,219 77 416 1,732 6,444 Residential construction — — — — — Mortgage warehouse — — — — — Total real estate 4,219 77 416 1,732 6,444 Consumer Direct installment 36 — — — 36 Indirect installment 1,129 156 — — 1,285 Home equity 1,909 95 136 327 2,467 Total consumer 3,074 251 136 327 3,788 Total $ 14,764 $ 391 $ 1,576 $ 2,198 $ 18,929 December 31, 2018 Non-accrual Loans Past Non-peforming Performing Total Non-performing Commercial Owner occupied real estate $ 3,413 $ — $ — $ 109 $ 3,522 Non-owner 554 — 492 — 1,046 Residential spec homes — — — — — Development & spec land 68 — — — 68 Commercial and industrial 2,059 208 — — 2,267 Total commercial 6,094 208 492 109 6,903 Real estate Residential mortgage 2,846 180 423 1,558 5,007 Residential construction — — — — — Mortgage warehouse — — — — — Total real estate 2,846 180 423 1,558 5,007 Consumer Direct installment 35 — — — 35 Indirect installment 916 173 — — 1,089 Home equity 1,657 7 142 335 2,141 Total consumer 2,608 180 142 335 3,265 Total $ 11,548 $ 568 $ 1,057 $ 2,002 $ 15,175 Included in the $14.8 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 June 30, 2019, 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 June 30, 2019, the Company had $3.8 million in TDRs and $2.2 million were performing according to the restructured terms and no The following table presents commercial loans individually evaluated for impairment by class of loan: June 30, 2019 Three Months Ended Six Months Ended Unpaid Recorded Allowance for Average Cash/Accrual Average Cash/Accrual With no recorded allowance Commercial Owner occupied real estate $ 3,851 $ 3,851 $ — $ 5,987 $ 76 $ 6,005 $ 130 Non-owner 1,116 1,143 — 1,260 33 1,293 64 Residential spec homes — — — — — — — Development & spec land 140 139 — 226 2 224 2 Commercial and industrial 1,797 1,778 — 2,073 15 2,078 22 Total commercial 6,904 6,911 — 9,546 126 9,600 218 With an allowance recorded Commercial Owner occupied real estate 371 371 3 372 10 365 10 Non-owner 135 135 40 135 — 135 — Residential spec homes — — — — — — — Development & spec land — — — — — — — Commercial and industrial 1,224 1,224 744 1,252 25 1,258 25 Total commercial 1,730 1,730 787 1,759 35 1,758 35 Total $ 8,634 $ 8,641 $ 787 $ 11,305 $ 161 $ 11,358 $ 253 June 30, 2018 Three Months Ended Six Months Ended Unpaid Recorded Allowance for Average Cash/Accrual Average Cash/Accrual With no recorded allowance Commercial Owner occupied real estate $ 4,765 $ 4,762 $ — $ 5,271 $ 59 $ 5,303 $ 96 Non-owner 1,344 1,360 — 1,591 5 1,559 10 Residential spec homes — — — — — — — Development & spec land 72 70 — 71 — 73 — Commercial and industrial 1,943 1,943 — 1,916 7 1,886 7 Total commercial 8,124 8,135 — 8,849 71 8,821 113 With an allowance recorded Commercial Owner occupied real estate 864 864 184 871 — 885 — Non-owner — — — — — — — Residential spec homes — — — — — — — Development & spec land — — — — — — — Commercial and industrial — — — — — — — Total commercial 864 864 184 871 — 885 — Total $ 8,988 $ 8,999 $ 184 $ 9,720 $ 71 $ 9,706 $ 113 The following table presents the payment status by class of loan: June 30, 2019 Current 30-59 60-89 90 Days or Non-accrual Total Past Due Non-accrual Total Commercial Owner occupied real estate $ 705,186 $ 265 $ — $ 63 $ 4,083 $ 4,411 $ 709,597 Non-owner 781,012 829 — — 1,251 2,080 783,092 Residential spec homes 14,862 — — — — — 14,862 Development & spec land 40,509 453 — — 140 593 41,102 Commercial and industrial 513,126 2,234 499 — 3,021 5,754 518,880 Total commercial 2,054,695 3,781 499 63 8,495 12,838 2,067,533 Real estate Residential mortgage 791,704 2,272 125 77 4,635 7,109 798,813 Residential construction 22,403 — — — — — 22,403 Mortgage warehouse 133,428 — — — — — 133,428 Total real estate 947,535 2,272 125 77 4,635 7,109 954,644 Consumer Direct installment 46,203 180 49 — 36 265 46,468 Indirect installment 326,970 1,268 250 156 1,129 2,803 329,773 Home equity 272,047 640 569 95 2,045 3,349 275,396 Total consumer 645,220 2,088 868 251 3,210 6,417 651,637 Total $ 3,647,450 $ 8,141 $ 1,492 $ 391 $ 16,340 $ 26,364 $ 3,673,814 Percentage of total loans 99.28 % 0.22 % 0.04 % 0.01 % 0.44 % 0.72 % 100.00 % December 31, 2018 Current 30-59 60-89 90 Days or Non-accrual Total Past Due Non-accrual Total Commercial Owner occupied real estate $ 556,516 $ 537 $ 997 $ — $ 3,413 $ 4,947 $ 561,463 Non-owner 716,574 175 19 — 1,046 1,240 717,814 Residential spec homes 4,707 492 — — — 492 5,199 Development & spec land 46,479 — — — 68 68 46,547 Commercial and industrial 390,828 515 736 208 2,059 3,518 394,346 Total commercial 1,715,104 1,719 1,752 208 6,586 10,265 1,725,369 Real estate Residential mortgage 641,500 1,131 56 180 3,269 4,636 646,136 Residential construction 24,030 — — — — — 24,030 Mortgage warehouse 74,120 — — — — — 74,120 Total real estate 739,650 1,131 56 180 3,269 4,636 744,286 Consumer Direct installment 38,027 93 18 — 35 146 38,173 Indirect installment 311,494 1,396 198 173 916 2,683 314,177 Home equity 192,162 761 37 7 1,799 2,604 194,766 Total consumer 541,794 2,250 253 180 2,750 5,433 547,116 Total $ 2,996,548 $ 5,100 $ 2,061 $ 568 $ 12,605 $ 20,334 $ 3,016,771 Percentage of total loans 99.33 % 0.17 % 0.07 % 0.02 % 0.42 % 0.67 % 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 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 • 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. 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 unstablized, 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. 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. June 30, 2019 Pass Special Substandard Doubtful Total Commercial Owner occupied real estate $ 686,630 $ 5,711 $ 17,256 $ — $ 709,597 Non-owner 764,517 13,002 5,573 — 783,092 Residential spec homes 14,862 — — — 14,862 Development & spec land 37,847 97 3,158 — 41,102 Commercial and industrial 482,043 25,214 11,623 — 518,880 Total commercial 1,985,899 44,024 37,610 — 2,067,533 Real estate Residential mortgage 792,446 — 6,367 — 798,813 Residential construction 22,403 — — — 22,403 Mortgage warehouse 133,428 — — — 133,428 Total real estate 948,277 — 6,367 — 954,644 Consumer Direct installment 46,433 — 35 — 46,468 Indirect installment 328,488 — 1,285 — 329,773 Home equity 272,929 — 2,467 — 275,396 Total consumer 647,850 — 3,787 — 651,637 Total $ 3,582,026 $ 44,024 $ 47,764 $ — $ 3,673,814 Percentage of total loans 97.50 % 1.20 % 1.30 % 0.00 % 100.00 % December 31, 2018 Pass Special Substandard Doubtful Total Commercial Owner occupied real estate $ 538,177 $ 6,618 $ 16,668 $ — $ 561,463 Non-owner 702,269 9,682 5,863 — 717,814 Residential spec homes 5,199 — — — 5,199 Development & spec land 46,382 97 68 — 46,547 Commercial and industrial 379,607 6,655 8,084 — 394,346 Total commercial 1,671,634 23,052 30,683 — 1,725,369 Real estate Residential mortgage 641,309 — 4,827 — 646,136 Residential construction 24,030 — — — 24,030 Mortgage warehouse 74,120 — — — 74,120 Total real estate 739,459 — 4,827 — 744,286 Consumer Direct installment 38,138 — 35 — 38,173 Indirect installment 313,088 — 1,089 — 314,177 Home equity 192,625 — 2,141 — 194,766 Total consumer 543,851 — 3,265 — 547,116 Total $ 2,954,944 $ 23,052 $ 38,775 $ — $ 3,016,771 Percentage of total loans 97.95 % 0.76 % 1.29 % 0.00 % 100.00 % |