Non-performing Assets and Impaired Loans

6 Months Ended

Jun. 30, 2011

Non-performing Assets and Impaired Loans [Abstract]

Non-performing Assets and Impaired Loans

Note 5 — Non-performing Assets and Impaired Loans

The following table presents the nonaccrual, loans past due over 90 days still on accrual, and trouble debt restructured (“TDR’s”) by class of loans:

			Loans Past
			Due Over 90		Non				Total Non-
			Days Still		Performing		Performing		Performing
June 30, 2011	Nonaccrual		Accruing		TDR’s		TDR’s		Loans
Commercial
Owner occupied real estate	$	2,471	$	—	$	—	$	—	$	2,471
Non owner occupied real estate		5,113		—		413		—		5,526
Residential development		—		—		—		—		—
Development & Spec Land Loans		214		—		—		—		214
Commercial and industrial		414		—		147		840		1,401
Total commercial		8,212		—		560		840		9,612
Real estate
Residential mortgage		2,834		—		1,352		2,301		6,487
Residential construction		204		—				293		497
Mortgage warehouse		—		—		—		—		—
Total real estate		3,038		—		1,352		2,594		6,984
Consumer
Direct Installment		274		1		—		—		275
Direct Installment Purchased		—		1		—		—		1
Indirect Installment		1,182		53		—		—		1,235
Home Equity		1,724		—		—		793		2,517
Total Consumer		3,180		55		—		793		4,028
Total	$	14,430	$	55	$	1,912	$	4,227	$	20,624

			Loans Past
			Due Over 90		Non				Total Non-
			Days Still		Performing		Performing		Performing
December 31, 2010	Nonaccrual		Accruing		TDR’s		TDR’s		Loans
Commercial
Owner occupied real estate	$	1,358	$	—	$	—	$	—	$	1,358
Non owner occupied real estate		5,439		—		421		—		5,860
Residential development		16		—		—		—		16
Development & Spec Land Loans		250		—		—		—		250
Commercial and industrial		445		—		153		—		598
Total commercial		7,508		—		574		—		8,082
Real estate
Residential mortgage		5,278		222		241		3,380		9,121
Residential construction		205		—		—		—		205
Mortgage warehouse		—		—		—		—		—
Total real estate		5,483		222		241		3,380		9,326
Consumer
Direct Installment		251		23		—		—		274
Direct Installment Purchased		—		5		—		—		5
Indirect Installment		1,328		98		—		—		1,426
Home Equity		2,103		10		37		165		2,315
Total Consumer		3,682		136		37		165		4,020
Total	$	16,673	$	358	$	852	$	3,545	$	21,428

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 loan. 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. Further, it is management’s policy to place a loan on a non-accrual status when delinquent in excess of 90 days or have had the accrual of interest discontinued by management. The officer responsible for the loan, the Chief Operating Officer and the senior collection officer must review all loans placed on non-accrual status. Subsequent payments on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Company requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status.

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, 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 status when 90 days or more past due. These loans are often considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms, including TDR’s, are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans.

The Company’s TDR’s are considered impaired loans and included in the allowance methodology using the guidance for impaired loans. At June 30, 2011 the type of concessions the Company has made on restructured loans has been temporary rate reductions and/or reductions in monthly payments. 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 June 30, 2011, the Company had $6.1 million in TDR’s and $4.2 million were performing according to the restructured terms. The Company experienced no TDR default for the three months ending June 30, 2011 and one during the twelve months ending December 31, 2010.

The following table presents commercial loans individually evaluated for impairment by class of loans:

							Six Months Ending				Three Months Ending
							Average				Average
	Unpaid				Allowance For		Balance in		Interest		Balance in		Interest
	Principal		Recorded		Loan Loss		Impaired		Income		Impaired		Income
June 30, 2011	Balance		Investment		Allocated		Loans		Recognized		Loans		Recognized
With no recorded allowance Commercial
Owner occupied real estate	$	1,027	$	1,030	$	—	$	732	$	10	$	894	$	9
Non owner occupied real estate		813		813		—		701		5		851		1
Residential development		—		—		—		13		—		10		—
Development & Spec Land Loans		124		124		—		104		—		124		—
Commercial and industrial		1,067		1,069		—		1,056		6		1,072		6
Total commercial		3,031		3,036		—		2,606		21		2,951		16
With an allowance recorded Commercial
Owner occupied real estate		1,444		1,443		460		1,083		—		1,339		—
Non owner occupied real estate		4,713		4,752		665		4,818		—		4,751		—
Residential development		—		—		—		—		—		—		—
Development & Spec Land Loans		90		90		125		223		—		197		—
Commercial and industrial		334		334		240		473		2		444		2
Total commercial		6,581		6,619		1,490		6,597		2		6,731		2
Total	$	9,612	$	9,655	$	1,490	$	9,203	$	23	$	9,682	$	18

							Twelve Months Ending
							Average
December 31, 2010	Unpaid				Allowance For		Balance in		Interest
	Principal		Recorded		Loan Loss		Impaired		Income
	Balance		Investment		Allocated		Loans		Recognized
With no recorded allowance Commercial
Owner occupied real estate	$	720	$	721	$	—	$	2,434	$	19
Non owner occupied real estate		928		929		—		1,195		36
Residential development		—		—		—		—		—
Development & Spec Land Loans		—		—		—		770		—
Commercial and industrial		118		118		—		785		—
Total commercial		1,766		1,768		—		5,184		55
With an allowance recorded Commercial
Owner occupied real estate		639		640		385		68		15
Non owner occupied real estate		4,932		4,970		665		2,677		115
Residential development		16		16		16		7		2
Development & Spec Land Loans		250		250		126		250		—
Commercial and industrial		479		479		265		316		13
Total commercial		6,316		6,355		1,457		3,318		145
Total	$	8,082	$	8,123	$	1,457	$	8,502	$	200

The following table presents the payment status by class of loans:

	30 - 59 Days		60 - 89 Days		Greater than 90				Loans Not Past
June 30, 2011	Past Due		Past Due		Days Past Due		Total Past Due		Due		Total
Commercial
Owner occupied real estate	$	363	$	—	$	—	$	363	$	125,035	$	125,398
Non owner occupied real estate		1,058		13		—		1,071		140,380		141,451
Residential development		—		—		—		—		2,828		2,828
Development & Spec Land Loans		42		—		—		42		7,848		7,890
Commercial and industrial		137		20		—		157		60,605		60,762
Total commercial		1,600		33		—		1,633		336,696		338,329
Real estate
Residential mortgage		540		—		—		540		154,383		154,923
Residential construction		—		—		—		—		8,830		8,830
Mortgage warehouse		—		—		—		—		75,057		75,057
Total real estate		540		—		—		540		238,270		238,810
Consumer
Direct Installment		192		55		1		248		23,130		23,378
Direct Installment Purchased		29		9		1		39		1,204		1,243
Indirect Installment		1,959		215		53		2,227		123,306		125,533
Home Equity		229		42		—		271		112,640		112,911
Total consumer		2,409		321		55		2,785		260,280		263,065
Total	$	4,549	$	354	$	55	$	4,958	$	835,246	$	840,204

	30 - 59 Days		60 - 89 Days		Greater than 90				Loans Not Past
December 31, 2010	Past Due		Past Due		Days Past Due		Total Past Due		Due		Total
Commercial
Owner occupied real estate	$	229	$	—	$	—	$	229	$	125,654	$	125,883
Non owner occupied real estate		461		—		—		461		136,525		136,986
Residential development		—		—		—		—		2,257		2,257
Development & Spec Land Loans		—		—		—		—		6,439		6,439
Commercial and industrial		74		—		—		74		58,262		58,336
Total commercial		764		—		—		764		329,137		329,901
Real estate
Residential mortgage		317		91		222		630		154,261		154,891
Residential construction		293		—		—		293		7,174		7,467
Mortgage warehouse		—		—		—		—		123,743		123,743
Total real estate		610		91		222		923		285,178		286,101
Consumer
Direct Installment		294		156		23		473		23,054		23,527
Direct Installment Purchased		51		31		5		87		1,782		1,869
Indirect Installment		2,360		433		98		2,891		125,231		128,122
Home Equity		899		218		10		1,127		113,075		114,202
Total consumer		3,604		838		136		4,578		263,142		267,720
Total	$	4,978	$	929	$	358	$	6,265	$	877,457	$	883,722

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 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 of $500,000 or greater are validated by the Loan Committee, which is chaired by the Chief Operating Officer (COO).

• Commercial loan officers are responsible for reviewing their loan portfolios and report any adverse material change to the COO or Loan Committee. When circumstances warrant a change in the credit quality grade, loan officers are required to notify the COO and the Credit Department of the change in the loan grade. Downgrades are accepted immediately by the COO however, lenders must present their factual information to either the Loan Committee or the COO when recommending an upgrade. One of the requirements for a loan officer to meet the annual bonus criteria is that the loan officer did not have any of his/her loans downgraded by either Internal Loan Review or Bank Regulators to a classified grade; that is, substandard, doubtful or loss.

• The COO meets weekly 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 attends 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, and collateral 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 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 a troubled debt restructure are graded “Substandard.” After being 90 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 an eight-grade rating system to determine the credit quality of commercial loans. The first four 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 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 (Pass)

Loans in this category are considered to be of acceptable credit quality, but contain greater credit risk than Satisfactory loans due to weak balance sheets, marginal earnings or cash flow, lack of financial information, weakening markets, insufficient or questionable collateral coverage or other uncertainties. These loans warrant a higher than average level of monitoring to ensure that weaknesses do not advance. The level of risk in a Satisfactory/Monitored loan is within acceptable underwriting guidelines so long as the loan is given the proper level of management supervision. Loans that normally fall into this grade include construction of commercial real estate buildings, land development and subdivisions, and rental properties that have not attained stabilization.

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.

			Special
June 30, 2011	Pass		Mention		Substandard		Doubtful		Total
Commercial
Owner occupied real estate	$	98,823	$	7,659	$	18,916	$	—	$	125,398
Non owner occupied real estate		117,696		9,774		13,981		—		141,451
Residential development		822		535		1,471		—		2,828
Development & Spec Land Loans		3,259		1,046		3,585		—		7,890
Commercial and industrial		49,388		2,574		8,800		—		60,762
Total commercial		269,988		21,588		46,753		—		338,329
Real estate
Residential mortgage		148,436		—		6,487		—		154,923
Residential construction		8,333		—		497		—		8,830
Mortgage warehouse		75,057		—		—		—		75,057
Total real estate		231,826		—		6,984		—		238,810
Consumer
Direct Installment		23,103		—		275		—		23,378
Direct Installment Purchased		1,242		—		1		—		1,243
Indirect Installment		124,298		—		1,235		—		125,533
Home Equity		110,394		—		2,517		—		112,911
Total Consumer		259,037		—		4,028		—		263,065
Total	$	760,851	$	21,588	$	57,765	$	—	$	840,204

			Special
December 31, 2010	Pass		Mention		Substandard		Doubtful		Total
Commercial
Owner occupied real estate	$	94,722	$	13,656	$	17,506	$	—	$	125,883
Non owner occupied real estate		119,041		6,107		11,838		—		136,986
Residential development		834		537		886		—		2,257
Development & Spec Land Loans		4,378		746		1,315		—		6,439
Commercial and industrial		45,831		6,856		5,649		—		58,336
Total commercial		264,805		27,902		37,195		—		329,901
Real estate
Residential mortgage		145,770		—		9,121		—		154,891
Residential construction		7,262		—		205		—		7,467
Mortgage warehouse		123,743		—		—		—		123,743
Total real estate		276,775		—		9,326		—		286,101
Consumer
Direct Installment		23,253		—		274		—		23,527
Direct Installment Purchased		1,864		—		5		—		1,869
Indirect Installment		126,696		—		1,426		—		128,122
Home Equity		111,888		—		2,314		—		114,202
Total Consumer		263,701		—		4,019		—		267,720
Total	$	805,281	$	27,902	$	50,539	$	—	$	883,722