Non-performing Loans and Impaired Loans

3 Months Ended

Mar. 31, 2020

Receivables [Abstract]

Non-performing Loans and Impaired Loans

Note 7 – 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:

	March 31, 2020
	Non-accrual		Loans Past Due Over 90 Days Still Accruing		Non-performing TDRs		Performing TDRs		Total Non-performing Loans		Non-accrual with no Allowance for Credit Losses
Commercial
Owner occupied real estate	$	5,512	$	—	$	629	$	139	$	6,280	$	3,123
Non-owner occupied real estate	641		—		361		—		1,002		888
Residential spec homes	—		—		—		—		—		—
Development & spec land	73		—		—		—		73		73
Commercial and industrial	791		11		1,422		—		2,224		816
Total commercial	7,017		11		2,412		139		9,579		4,900
Real estate
Residential mortgage	8,040		—		733		1,638		10,411		—
Residential construction	—		—		—		—		—		—
Mortgage warehouse	—		—		—		—		—		—
Total real estate	8,040		—		733		1,638		10,411		—
Consumer
Direct installment	18		—		—		—		18		18
Indirect installment	1,168		196		—		—		1,364		1,168
Home equity	2,038		39		215		338		2,630		2,038
Total consumer	3,224		235		215		338		4,012		3,224
Total	$	18,281	$	246	$	3,360	$	2,115	$	24,002	$	8,124

There was no interest income recognized on non-accrual loans during the three months ended March 31, 2020 and 2019 while the loans were in non-accrual status.

	December 31, 2019
	Non-accrual		Loans Past Due Over 90 Days Still Accruing		Non-performing TDRs		Performing TDRs		Total Non-performing Loans		Non-accrual with no Allowance for Credit Losses
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

Included in the $18.3 million of non-accrual loans and the $3.4 million of non-performing TDRs at March 31, 2020 were $3.5 million and $101,000, respectively, of loans acquired for which accretable yield was recognized.

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 March 31, 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 March 31, 2020, the Company had $5.5 million in TDRs, $3.4 million were performing according to the restructured terms, and one TDR was returned to accrual status during the first three months of 2020. There were $435,000 of specific reserves allocated to TDRs at March 31, 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 quarter of 2020.

The following table presents TDRs by loan portfolio:

	March 31, 2020						December 31, 2019
	Non-accrual		Accruing		Total		Non-accrual		Accruing		Total
Commercial
Owner occupied real estate	$	629	$	139	$	768	$	629	$	139	$	768
Non-owner occupied real estate	361		—		361		374		—		374
Residential spec homes	—		—		—		—		—		—
Development & spec land	—		—		—		—		—		—
Commercial and industrial	1,422		—		1,422		78		1,345		1,423
Total commercial	2,412		139		2,551		1,081		1,484		2,565
Real estate
Residential mortgage	733		1,638		2,371		708		1,561		2,269
Residential construction	—		—		—		—		—		—
Mortgage warehouse	—		—		—		—		—		—
Total real estate	733		1,638		2,371		708		1,561		2,269
Consumer
Direct installment	—		—		—		—		—		—
Indirect installment	—		—		—		—		—		—
Home equity	215		338		553		217		309		526
Total consumer	215		338		553		217		309		526
Total	$	3,360	$	2,115	$	5,475	$	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 March 31, 2020, the Bank modified loans totaling $56.6 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 March 31, 2020:

	March 31, 2020
Commercial
Owner occupied real estate	$	3,018
Non-owner occupied real estate	114
Commercial and industrial	626
Total commercial	3,758
Real estate
Residential mortgage	681
Total real estate	681
Total collateral dependent loans	$	4,439

The following table presents the payment status by class of loan, excluding non-accrual loans of $18.3 million and non-performing TDRs of $3.4 million at March 31, 2020:

	March 31, 2020
	Current			30-59 Days Past Due			60-89 Days Past Due			90 Days or Greater Past Due			Total  Past Due Loans			Total Loans
Commercial
Owner occupied real estate	$	499,639		$	4,532		$	589		$	—		$	5,121		$	504,760
Non-owner occupied real estate	989,572			2,021			—			—			2,021			991,593
Residential spec homes	11,533			135			—			—			135			11,668
Development & spec land	32,918			—			—			—			—			32,918
Commercial and industrial	499,845			178			—			11			189			500,034
Total commercial	2,033,507			6,866			589			11			7,466			2,040,973
Real estate
Residential mortgage	722,866			1,395			—			—			1,395			724,261
Residential construction	24,495			—			—			—			—			24,495
Mortgage warehouse	223,519			—			—			—			—			223,519
Total real estate	970,880			1,395			—			—			1,395			972,275
Consumer
Direct installment	39,841			190			15			—			205			40,046
Indirect installment	356,702			1,967			260			196			2,423			359,125
Home equity	272,465			621			114			39			774			273,239
Total consumer	669,008			2,778			389			235			3,402			672,410
Total	$	3,673,395		$	11,039		$	978		$	246		$	12,263		$	3,685,658
Percentage of total loans	99.67		%	0.30		%	0.03		%	0.01		%	0.33		%	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 Past Due			60-89 Days Past Due			90 Days or Greater Past Due			Total  Past Due Loans			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). 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 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 with required margins where there is no impediment to liquidation; loans to individuals backed by liquid personal assets and unblemished credit histories; or loans to publicly held companies with current long-term debt ratings of Baa or better and meeting defined key financial metric ranges.

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 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 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.

March 31, 2020	2020		2019		2018		2017		2016		Prior		Revolving Loans		Total
Commercial
Owner occupied real estate
Pass	$	13,838	$	63,995	$	62,398	$	60,650	$	60,221	$	173,904	$	36,254	$	471,260
Special Mention	174		291		5,276		3,896		2,348		9,114		—		21,099
Substandard	—		1,482		3,014		824		500		8,105		4,617		18,542
Doubtful	—		—		—		—		—		—		—		—
Total owner occupied real estate	$	14,012	$	65,768	$	70,688	$	65,370	$	63,069	$	191,123	$	40,871	$	510,901
Non-owner occupied real estate
Pass	$	25,445	$	129,457	$	86,194	$	150,894	$	130,686	$	249,361	$	156,142	$	928,179
Special Mention	1,947		11,515		27,560		2,220		299		11,783		1,086		56,410
Substandard	—		—		2,439		114		457		4,996		—		8,006
Doubtful	—		—		—		—		—		—		—		—
Total non-owner occupied real estate	$	27,392	$	140,972	$	116,193	$	153,228	$	131,442	$	266,140	$	157,228	$	992,595
Residential spec homes
Pass	$	—	$	190	$	—	$	312	$	957	$	2,093	$	8,116	$	11,668
Special Mention	—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—
Total residential spec homes	$	—	$	190	$	—	$	312	$	957	$	2,093	$	8,116	$	11,668
Development & spec land
Pass	$	30	$	932	$	2,568	$	4,496	$	1,586	$	14,645	$	8,595	$	32,852
Special Mention	—		—		—		—		—		139		—		139
Substandard	—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—
Total development & spec land	$	30	$	932	$	2,568	$	4,496	$	1,586	$	14,784	$	8,595	$	32,991
Commercial & industrial
Pass	$	23,969	$	71,713	$	70,277	$	108,382	$	36,067	$	102,731	$	34,331	$	447,470
Special Mention	122		3,563		10,134		3,857		2,872		12,926		1,005		34,479
Substandard	—		5,611		3,169		3,558		619		4,938		2,403		20,298
Doubtful	—		—		—		—		—		—		—		—
Total commercial & industrial	$	24,091	$	80,887	$	83,580	$	115,797	$	39,558	$	120,595	$	37,739	$	502,247
Total commercial	$	65,525	$	288,749	$	273,029	$	339,203	$	236,612	$	594,735	$	252,549	$	2,050,402

March 31, 2020	2020		2019		2018		2017		2016		Prior		Revolving Loans		Total
Real estate
Residential mortgage
Performing	$	29,138	$	74,317	$	139,327	$	130,086	$	96,489	$	254,575	$	329	$	724,261
Non-performing	—		267		148		372		1,377		6,609		—		8,773
Total residential mortgage	$	29,138	$	74,584	$	139,475	$	130,458	$	97,866	$	261,184	$	329	$	733,034
Residential construction
Performing	$	—	$	338	$	—	$	—	$	—	$	—	$	24,157	$	24,495
Non-performing	—		—		—		—		—		—		—		—
Total residential construction	$	—	$	338	$	—	$	—	$	—	$	—	$	24,157	$	24,495
Mortgage warehouse
Performing	$	—	$	—	$	—	$	—	$	—	$	—	$	223,519	$	223,519
Non-performing	—		—		—		—		—		—		—		—
Total mortgage warehouse	$	—	$	—	$	—	$	—	$	—	$	—	$	223,519	$	223,519
Total real estate	$	29,138	$	74,922	$	139,475	$	130,458	$	97,866	$	261,184	$	248,005	$	981,048

March 31, 2020	2020		2019		2018		2017		2016		Prior		Revolving Loans		Total
Consumer
Direct installment
Performing	$	2,774	$	13,701	$	8,699	$	8,267	$	3,476	$	3,014	$	115	$	40,046
Non-performing	—		6		3		1		—		6		2		18
Total direct installment	$	2,774	$	13,707	$	8,702	$	8,268	$	3,476	$	3,020	$	117	$	40,064
Indirect installment
Performing	$	42,135	$	129,329	$	106,358	$	56,278	$	14,661	$	10,168	$	—	$	358,929
Non-performing	—		228		282		478		154		222		—		1,364
Total indirect installment	$	42,135	$	129,557	$	106,640	$	56,756	$	14,815	$	10,390	$	—	$	360,293
Home equity
Performing	$	10,688	$	58,444	$	48,683	$	38,878	$	30,030	$	82,155	$	4,322	$	273,200
Non-performing	—		9		66		81		19		1,089		1,028		2,292
Total home equity	$	10,688	$	58,453	$	48,749	$	38,959	$	30,049	$	83,244	$	5,350	$	275,492
Total consumer	$	55,597	$	201,717	$	164,091	$	103,983	$	48,340	$	96,654	$	5,467	$	675,849

	December 31, 2019
	Pass			Special Mention			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		%