Non-performing Assets and Impaired Loans | Note 8 – Non-performing The following table presents the nonaccrual, loans past due over 90 days still on accrual, and troubled debt restructured (“TDRs”) by class of loans: December 31, 2019 Non-accrual Loans Past Non-peforming Performing Total Non-performing Commercial Owner occupied real estate $ 2,424 $ — $ 629 $ 139 $ 3,192 Non-owner 682 — 374 — 1,056 Residential spec homes — — — — — Development & spec land 73 — — — 73 Commercial and industrial 1,603 — 78 1,345 3,026 Total commercial 4,782 — 1,081 1,484 7,347 Real estate Residential mortgage 7,614 1 708 1,561 9,884 Residential construction — — — — — Mortgage warehouse — — — — — Total real estate 7,614 1 708 1,561 9,884 Consumer Direct installment 30 5 — — 35 Indirect installment 1,234 135 — — 1,369 Home equity 2,019 5 217 309 2,550 Total consumer 3,283 145 217 309 3,954 Total $ 15,679 $ 146 $ 2,006 $ 3,354 $ 21,185 December 31, 2018 Non-accrual Loans Past Non-peforming Performing Total Non-performing Commercial Owner occupied real estate $ 3,531 $ 208 $ — $ 109 $ 3,848 Non-owner 554 — 492 — 1,046 Residential spec homes — — — — — Development & spec land 68 — — — 68 Commercial and industrial 1,941 — — — 1,941 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 $15.7 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 Executive Vice President and Chief Commercial Banking Officer and/or the Executive Vice President and Chief Operations Officer must review all loans placed on non-accrual status. Subsequent payments on non-accrual Non-accrual less than six months before returning a 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 December 31, 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 December 31, 2019, the Company had $5.4 million in TDRs and $3.4 million were performing according to the restructured terms and no TDRs were returned to accrual status during 2019. There was $133,000 of specific reserves allocated to TDRs at December 31, 2019 based on the collateral deficiencies. The following table presents commercial loans individually evaluated for impairment by class of loans: December 31, 2019 Twelve Months Ended Unpaid Recorded Allowance for Loan Loss Average Cash/Accrual With no recorded allowance Commercial Owner occupied real estate $ 3,192 $ 3,193 $ — $ 3,608 $ 246 Non-owner 937 937 — 2,810 98 Residential spec homes — — — — — Development & spec land 73 73 — 158 — Commercial and industrial 1,859 1,861 — 2,464 100 Total commercial 6,061 6,064 — 9,040 444 With an allowance recorded Commercial Owner occupied real estate — — — — — Non-owner 119 119 25 130 — Residential spec homes — — — — — Development & spec land — — — — — Commercial and industrial 1,167 1,168 516 1,225 46 Total commercial 1,286 1,287 541 1,355 46 Total $ 7,347 $ 7,351 $ 541 $ 10,395 $ 490 December 31, 2018 Twelve Months Ended Unpaid Recorded Allowance for Average Cash/Accrual With no recorded allowance Commercial Owner occupied real estate $ 2,814 $ 2,815 $ — $ 3,168 $ 77 Non-owner 860 860 — 1,096 12 Residential spec homes — — — — — Development & spec land 68 68 — 71 — Commercial and industrial 1,226 1,226 — 1,119 21 Total commercial 4,968 4,969 — 5,454 110 With an allowance recorded Commercial Owner occupied real estate 827 827 145 864 — Non-owner 186 186 30 180 4 Residential spec homes — — — — — Development & spec land — — — — — Commercial and industrial 715 715 860 870 14 Total commercial 1,728 1,728 1,035 1,914 18 Total $ 6,696 $ 6,697 $ 1,035 $ 7,368 $ 128 December 31, 2017 Twelve Months Ended Unpaid Recorded Allowance for Average Cash/Accrual With no recorded allowance Commercial Owner occupied real estate $ 1,255 $ 1,270 $ — $ 1,168 $ 4 Non-owner 3,123 3,139 — 850 7 Residential spec homes — — — — — Development & spec land 176 176 — 233 4 Commercial and industrial 1,656 1,656 — 1,445 25 Total commercial 6,210 6,241 — 3,696 40 With an allowance recorded Commercial Owner occupied real estate 704 704 78 59 33 Non-owner 227 227 106 19 13 Residential spec homes — — — — — Development & spec land — — — — — Commercial and industrial — — — — — Total commercial 931 931 184 78 46 Total $ 7,141 $ 7,172 $ 184 $ 3,774 $ 86 The following table presents the payment status by class of loans: December 31, 2019 Current 30-59 60-89 90 Days or Non-accrual Non-peforming Total Past Due Non-accrual Total Commercial Owner occupied real estate $ 515,604 $ 920 $ — $ — $ 3,053 $ 3,973 $ 519,577 Non-owner 972,195 80 — — 1,056 1,136 973,331 Residential spec homes 12,925 — — — — — 12,925 Development & spec land 35,881 — — — 73 73 35,954 Commercial and industrial 503,348 819 11 — 1,681 2,511 505,859 Total commercial 2,039,953 1,819 11 — 5,863 7,693 2,047,646 Real estate Residential mortgage 740,712 1,984 — 1 8,322 10,307 751,019 Residential construction 19,686 — — — — — 19,686 Mortgage warehouse 150,293 — — — — — 150,293 Total real estate 910,691 1,984 — 1 8,322 10,307 920,998 Consumer Direct installment 40,864 175 5 5 30 215 41,079 Indirect installment 344,478 2,407 404 135 1,234 4,180 348,658 Home equity 273,050 904 20 5 2,236 3,165 276,215 Total consumer 658,392 3,486 429 145 3,500 7,560 665,952 Total $ 3,609,036 $ 7,289 $ 440 $ 146 $ 17,685 $ 25,560 $ 3,634,596 Percentage of total loans 99.30 % 0.20 % 0.01 % 0.00 % 0.49 % 0.70 % 100.00 % December 31, 2018 Current 30-59 60-89 90 Days or Non-accrual Non-peforming Total Past Due Non-accrual Total Commercial Owner occupied real estate $ 439,542 $ 537 $ 1,016 $ 208 $ 3,531 $ 5,292 $ 444,834 Non-owner 851,587 203 19 — 1,046 1,268 852,855 Residential spec homes 4,703 492 — — — 492 5,195 Development & spec land 50,638 — — — 68 68 50,706 Commercial and industrial 365,817 487 717 — 1,941 3,145 368,962 Total commercial 1,712,287 1,719 1,752 208 6,586 10,265 1,722,552 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 34,957 93 18 — 35 146 35,103 Indirect installment 311,494 1,396 198 173 916 2,683 314,177 Home equity 194,890 761 37 7 1,799 2,604 197,494 Total consumer 541,341 2,250 253 180 2,750 5,433 546,774 Total $ 2,991,236 $ 5,100 $ 2,061 $ 568 $ 12,605 $ 20,334 $ 3,011,570 Percentage of total loans 99.32 % 0.17 % 0.07 % 0.02 % 0.42 % 0.68 % 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 regions (ranging from $1,500,000 to $3,500,000) are validated by the Loan Committee, which is chaired by the Executive Vice President and Chief Commercial Banking Officer (EVP/CCBO). • Commercial loan officers are responsible for reviewing their loan portfolios and reporting any adverse material change to the EVP/CCBO or Loan Committee. When circumstances warrant a change in the credit quality grade, loan officers are required to notify the EVP/CCBO and the Credit Department of the change in the loan grade. Downgrades are accepted immediately by the EVP/CCBO, however, lenders must present their factual information to either the Loan Committee or the EVP/CCBO when recommending an upgrade. • The EVP/CCBO, or a designee, meets periodically with loan officers to discuss the status of past-due • Monthly, senior management meets as members of 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. December 31, 2019 Pass Special Substandard Doubtful Total Commercial Owner occupied real estate $ 492,386 $ 8,328 $ 18,863 $ — $ 519,577 Non-owner 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 % December 31, 2018 Pass Special Substandard Doubtful Total Commercial Owner occupied real estate $ 426,887 $ 3,664 $ 14,283 $ — $ 444,834 Non-owner 834,582 9,682 8,591 — 852,855 Residential spec homes 5,195 — — — 5,195 Development & spec land 47,523 3,115 68 — 50,706 Commercial and industrial 354,630 6,591 7,741 — 368,962 Total commercial 1,668,817 23,052 30,683 — 1,722,552 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 35,068 — 35 — 35,103 Indirect installment 313,088 — 1,089 — 314,177 Home equity 195,353 — 2,141 — 197,494 Total consumer 543,509 — 3,265 — 546,774 Total $ 2,949,743 $ 23,052 $ 38,775 $ — $ 3,011,570 Percentage of total loans 97.95 % 0.76 % 1.29 % 0.00 % 100.00 % |