Non-performing Loans and Impaired Loans | Note 7 – Non-performing The following table presents the non-accrual, September 30, 2019 Non-accrual Loans Past Non-peforming Performing Total Non-performing Commercial Owner occupied real estate $ 3,320 $ — $ 629 $ 139 $ 4,088 Non-owner 168 — 385 — 553 Residential spec homes — — — — — Development & spec land 140 — — — 140 Commercial and industrial 1,989 — — 1,423 3,412 Total commercial 5,617 — 1,014 1,562 8,193 Real estate Residential mortgage 5,031 1 573 1,607 7,212 Residential construction — — — — — Mortgage warehouse — — — — — Total real estate 5,031 1 573 1,607 7,212 Consumer Direct installment 77 — — — 77 Indirect installment 1,121 33 — — 1,154 Home equity 1,977 — 220 322 2,519 Total consumer 3,175 33 220 322 3,750 Total $ 13,823 $ 34 $ 1,807 $ 3,491 $ 19,155 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 $13.8 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 six months 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 September 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 no The following table presents commercial loans individually evaluated for impairment by class of loan: September 30, 2019 Three Months Ended Nine Months Ended Unpaid Recorded Allowance for Average Cash/Accrual Average Cash/Accrual With no recorded allowance Commercial Owner occupied real estate $ 3,718 $ 3,719 $ — $ 5,854 $ 83 $ 5,895 $ 259 Non-owner 427 427 — 459 8 504 15 Residential spec homes — — — — — — — Development & spec land 140 140 — 225 1 224 3 Commercial and industrial 1,876 1,879 — 2,419 71 2,429 83 Total commercial 6,161 6,165 — 8,957 163 9,052 360 With an allowance recorded Commercial Owner occupied real estate 370 370 3 371 4 367 14 Non-owner 126 126 35 130 — 133 — Residential spec homes — — — — — — — Development & spec land — — — — — — — Commercial and industrial 1,537 1,537 868 1,563 30 1,589 51 Total commercial 2,033 2,033 906 2,064 34 2,089 65 Total $ 8,194 $ 8,198 $ 906 $ 11,021 $ 197 $ 11,141 $ 425 September 30, 2018 Three Months Ended Nine Months Ended Unpaid Principal Balance Recorded Investment Allowance for Loan Loss Allocated Average Balance in Impaired Loans Cash/Accrual Interest Income Recognized Average Balance in Impaired Loans Cash/Accrual Interest Income Recognized With no recorded allowance Commercial Owner occupied real estate $ 4,496 $ 4,490 $ — $ 5,014 $ (25 ) $ 5,077 $ 71 Non-owner occupied real estate 841 857 — 936 (5 ) 1,119 5 Residential spec homes — — — — — — — Development & spec land 71 69 — 69 — 72 — Commercial and industrial 1,165 1,160 — 1,418 5 1,241 12 Total commercial 6,573 6,576 — 7,437 (25 ) 7,509 88 With an allowance recorded Commercial Owner occupied real estate 845 845 145 852 — 874 — Non-owner occupied real estate 187 187 30 189 4 178 4 Residential spec homes — — — — — — — Development & spec land — — — — — — — Commercial and industrial 750 750 749 750 4 750 4 Total commercial 1,782 1,782 924 1,791 8 1,802 8 Total $ 8,355 $ 8,358 $ 924 $ 9,228 $ (17 ) $ 9,311 $ 96 The following table presents the payment status by class of loan: September 30, 2019 Current 30-59 60-89 90 Days or Non-accrual Total Past Due Non-accrual Total Commercial Owner occupied real estate $ 718,761 $ 508 $ — $ — $ 3,949 $ 4,457 $ 723,218 Non-owner 764,987 778 256 — 553 1,587 766,574 Residential spec homes 10,813 — — — — — 10,813 Development & spec land 36,055 920 — — 140 1,060 37,115 Commercial and industrial 506,893 767 666 — 1,989 3,422 510,315 Total commercial 2,037,509 2,973 922 — 6,631 10,526 2,048,035 Real estate Residential mortgage 764,308 3,531 — 1 5,604 9,136 773,444 Residential construction 23,041 — — — — — 23,041 Mortgage warehouse 155,631 — — — — — 155,631 Total real estate 942,980 3,531 — 1 5,604 9,136 952,116 Consumer Direct installment 41,843 124 4 — 77 205 42,048 Indirect installment 341,554 1,427 432 33 1,121 3,013 344,567 Home equity 275,589 600 191 — 2,197 2,988 278,577 Total consumer 658,986 2,151 627 33 3,395 6,206 665,192 Total $ 3,639,475 $ 8,655 $ 1,549 $ 34 $ 15,630 $ 25,868 $ 3,665,343 Percentage of total loans 99.29 % 0.24 % 0.04 % 0.00 % 0.43 % 0.71 % 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 $ 558,982 $ 537 $ 997 $ — $ 3,413 $ 4,947 $ 563,929 Non-owner 712,896 175 19 — 1,046 1,240 714,136 Residential spec homes 4,703 492 — — — 492 5,195 Development & spec land 46,455 — — — 68 68 46,523 Commercial and industrial 390,234 515 736 208 2,059 3,518 393,752 Total commercial 1,713,270 1,719 1,752 208 6,586 10,265 1,723,535 Real estate Residential mortgage 639,458 1,131 56 180 3,269 4,636 644,094 Residential construction 24,030 — — — — — 24,030 Mortgage warehouse 74,120 — — — — — 74,120 Total real estate 737,608 1,131 56 180 3,269 4,636 742,244 Consumer Direct installment 34,087 93 18 — 35 146 34,233 Indirect installment 311,494 1,396 198 173 916 2,683 314,177 Home equity 195,760 761 37 7 1,799 2,604 198,364 Total consumer 541,341 2,250 253 180 2,750 5,433 546,774 Total $ 2,992,219 $ 5,100 $ 2,061 $ 568 $ 12,605 $ 20,334 $ 3,012,553 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 3,500,000 • 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. 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 five 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. 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 • 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. • 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. September 30, 2019 Pass Special Substandard Doubtful Total Commercial Owner occupied real estate $ 696,380 $ 7,776 $ 19,062 $ — $ 723,218 Non-owner 751,995 5,654 8,925 — 766,574 Residential spec homes 10,813 — — — 10,813 Development & spec land 33,957 — 3,158 — 37,115 Commercial and industrial 470,722 19,569 20,024 — 510,315 Total commercial 1,963,867 32,999 51,169 — 2,048,035 Real estate Residential mortgage 766,233 — 7,211 — 773,444 Residential construction 23,041 — — — 23,041 Mortgage warehouse 155,631 — — — 155,631 Total real estate 944,905 — 7,211 — 952,116 Consumer Direct installment 41,971 — 77 — 42,048 Indirect installment 343,413 — 1,154 — 344,567 Home equity 276,058 — 2,519 — 278,577 Total consumer 661,442 — 3,750 — 665,192 Total $ 3,570,214 $ 32,999 $ 62,130 $ — $ 3,665,343 Percentage of total loans 97.40 % 0.90 % 1.70 % 0.00 % 100.00 % December 31, 2018 Pass Special Substandard Doubtful Total Commercial Owner occupied real estate $ 540,643 $ 6,618 $ 16,668 $ — $ 563,929 Non-owner 698,591 9,682 5,863 — 714,136 Residential spec homes 5,195 — — — 5,195 Development & spec land 46,358 97 68 — 46,523 Commercial and industrial 379,013 6,655 8,084 — 393,752 Total commercial 1,669,800 23,052 30,683 — 1,723,535 Real estate Residential mortgage 639,267 — 4,827 — 644,094 Residential construction 24,030 — — — 24,030 Mortgage warehouse 74,120 — — — 74,120 Total real estate 737,417 — 4,827 — 742,244 Consumer Direct installment 34,198 — 35 — 34,233 Indirect installment 313,088 — 1,089 — 314,177 Home equity 196,223 — 2,141 — 198,364 Total consumer 543,509 — 3,265 — 546,774 Total $ 2,950,726 $ 23,052 $ 38,775 $ — $ 3,012,553 Percentage of total loans 97.95 % 0.77 % 1.29 % 0.00 % 100.00 % |