Derivative financial instruments

9 Months Ended

Sep. 30, 2013

Derivative Instruments And Hedging Activities Disclosure [Abstract]

Derivative financial instruments

Note 7 – 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 month LIBOR and to pay interest to the counterparty at a weighted average fixed rate of 6.14% on a notional amount of $30.5 million at September 30, 2013 and December 31, 2012. Under the agreements, 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 September 30, 2013 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 September 30, 2013 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 agreements being hedged were $90.3 million at September 30, 2013 and $81.0 million at December 31, 2012.

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 September 30, 2013, 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 Bancorp:

	Asset Derivative			Liability Derivatives
	September 30, 2013			September 30, 2013
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments (Unaudited)
Interest rate contracts	Loans	$	23	Other liabilities	$	579
Interest rate contracts	Other Assets		556	Other liabilities		3,435
Total derivatives designated as hedging instruments			579			4,014
Derivatives not designated as hedging instruments
Mortgage loan contracts	Other assets		619	Other liabilities		—
Total derivatives not designated as hedging instruments			619			—
Total derivatives		$	1,198		$	4,014

	Asset Derivative			Liability Derivatives
	December 31, 2012			December 31, 2012
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments (Unaudited)
Interest rate contracts	Loans	$	279	Other liabilities	$	2,214
Interest rate contracts	Other Assets		1,935	Other liabilities		5,493
Total derivatives designated as hedging instruments			2,214			7,707
Derivatives not designated as hedging instruments
Mortgage loan contracts	Other assets		858	Other liabilities		—
Total derivatives not designated as hedging instruments			858			—
Total derivatives		$	3,072		$	7,707

The effect of the derivative instruments on the condensed consolidated statement of income for the three and nine month periods ending 2013 and 2012 is as follows:

	Comprehensive Income on Derivative (Effective Portion)					Comprehensive Income on Derivative (Effective Portion)
	Three Months Ended September 30					Nine Months Ended September 30
Derivative in cash flow hedging relationship	2013 (Unaudited)		2012 (Unaudited)			2013 (Unaudited)		2012 (Unaudited)
Interest rate contracts	$	25	$	(169	)	$	1,338	$	(588	)

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.

		Amount of Gain (Loss) Recognized on Derivative						Amount of Gain (Loss) Recognized on Derivative
		Three Months Ended September 30						Nine Months Ended September 30
Derivative in fair value hedging relationship	Location of gain (loss) recognized on derivative	2013 (Unaudited)			2012 (Unaudited)			2013 (Unaudited)			2012 (Unaudited)
Interest rate contracts	Interest income - loans	$	211		$	112		$	(1,635	)	$	336
Interest rate contracts	Interest income - loans		(211	)		(112	)		1,635			(336	)
Total		$	—		$	—		$	—		$	—

		Amount of Gain (Loss) Recognized on Derivative				Amount of Gain (Loss) Recognized on Derivative
		Three Months Ended September 30				Nine Months Ended September 30
Derivative not designated as hedging relationship	Location of gain (loss) recognized on derivative	2013 (Unaudited)		2012 (Unaudited)		2013 (Unaudited)			2012 (Unaudited)
Mortgage contracts	Other income - gain on sale of loans	$	169	$	320	$	(239	)	$	600