Derivative Financial Instruments

3 Months Ended

Mar. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Note 9 – Derivative Financial Instruments

Cash Flow Hedges - As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flow due to interest rate fluctuations, the Company entered into interest rate swap agreements for a portion of its floating rate debt. The agreements provide for the Company to receive interest from the counterparty at three months LIBOR and to pay interest to the counterparty at a weighted average fixed rate of 4.03% on a notional amount of $15.5 million at March 31, 2020 and December 31, 2019. Under the agreements, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense.

The Company assumed additional interest rate swap agreements as the result of the LaPorte acquisition in July 2016. The agreements provide for the Company to receive interest from the counterparty at one month LIBOR and to pay interest to the counterparty at a weighted average fixed rate of 2.42% on a notional amount of $20.0 million at March 31, 2020 and at a weighted average fixed rate of 2.31% on a notional amount of $30.0 million at December 31, 2019. Under the agreements, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense.

On July 20, 2018, the Company entered into an interest rate swap agreement for an additional portion of its floating rate debt. The agreement provides for the Company to receive interest from the counterparty at one month LIBOR and to pay interest to the counterparty at a rate of 2.81% on a notional amount of $50.0 million at March 31, 2020 and December 31, 2019. Under the agreement, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense.

Management has designated the interest rate swap agreement as a cash flow hedging instrument. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. At March 31, 2020, the Company’s cash flow hedge was effective and is not expected to have a significant impact on the Company’s net income over the next 12 months.

Fair Value Hedges

Fair value hedges are intended to reduce the interest rate risk associated with the underlying hedged item. The Company enters into fixed rate loan agreements as part of its lending policy. To mitigate the risk of changes in fair value based on fluctuations in interest rates, the Company has entered into interest rate swap agreements on individual loans, converting the fixed rate loans to a variable rate. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current earnings. At March 31, 2020, the Company’s fair value hedges were effective and are not expected to have a significant impact on the Company’s net income over the next 12 months.

The change in fair value of both the hedge instruments and the underlying loan agreements are recorded as gains or losses in interest income. The fair value hedges are considered to be highly effective and any hedge ineffectiveness was deemed not material. The notional amounts of the loan and security agreements being hedged were $400.5 million at March 31, 2020 and $361.0 million at December 31, 2019.

Other Derivative Instruments

The Company enters into non-hedging derivatives in the form of mortgage loan forward sale commitments with investors and commitments to originate mortgage loans as part of its mortgage banking business. At March 31, 2020, the Company’s fair value of these derivatives were recorded and over the next 12 months are not expected to have a significant impact on the Company’s net income.

The change in fair value of both the forward sale commitments and commitments to originate mortgage loans were recorded and the net gains or losses included in the Company’s gain on sale of loans.

The following tables summarize the fair value of derivative financial instruments utilized by Horizon:


	Asset Derivatives				Liability Derivatives
	March 31, 2020				March 31, 2020
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Interest rate contracts	Other assets	$	37,537	Other liabilities	$	47,620
Total derivatives designated as hedging instruments		37,537			47,620
Derivatives not designated as hedging instruments
Mortgage loan contracts	Other assets	1,269		Other liabilities	—
Total derivatives not designated as hedging instruments		1,269			—
Total derivatives		$	38,806		$	47,620


	Asset Derivatives				Liability Derivatives
	December 31, 2019				December 31, 2019
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Interest rate contracts	Other assets	$	11,422	Other liabilities	$	15,861
Total derivatives designated as hedging instruments		11,422			15,861
Derivatives not designated as hedging instruments
Mortgage loan contracts	Other assets	264		Other liabilities	38
Total derivatives not designated as hedging instruments		264			38
Total derivatives		$	11,686		$	15,899

The effect of the derivative instruments on the condensed consolidated statements of income for the three-month periods ending March 31 is as follows:


	Amount of Loss Recognized in Other Comprehensive Income on Derivative (Effective Portion)
	Three Months Ended
	March 31, 2020		March 31, 2019
Derivatives in cash flow hedging relationship
Interest rate contracts	$	(3,132)	$	(874)

FASB Accounting Standards Codification (“ASC”) Topic 820-10-20 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820-10-55 establishes a fair value hierarchy that emphasizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.


	Location of gain (loss) recognized on derivative	Amount of Gain (Loss) Recognized on Derivative
						Three Months Ended
				March 31, 2020			March 31, 2019
Derivative in fair value hedging relationship
Interest rate contracts	Interest income - loans	$	(26,330)	$	(4,051)
Interest rate contracts	Interest income - loans	26,330		4,051
Total		$	—	$	—

Location of gain
(loss)
recognized on derivative

Amount of Gain (Loss) Recognized on Derivative

Three Months Ended

March 31, 2020

March 31, 2019

Derivative not designated as hedging relationship

Mortgage contracts

Other income - gain on sale of loans

1,043

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