Derivative financial instruments

6 Months Ended

Jun. 30, 2011

Derivative financial instruments [Abstract]

Derivative financial instruments

Note 6 – 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 5.63% on a notional amount of $30.6 million at June 30, 2011. Under these 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 the 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 June 30, 2011, the Company’s cash flow hedge was effective and is not expected to have a significant impact 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 activities. 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 June 30, 2011, the Company’s fair value hedges were effective and are not expected to have a significant impact 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 $47.6 million at June 30, 2011.

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 June 30, 2011, the Company’s fair value of these derivatives was recorded and over the next 12 months is 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
	June 30, 2011			June 30, 2011
	Balance Sheet			Balance Sheet
Derivatives designated as hedging instruments	Location	Fair Value		Location	Fair Value
Interest rate contracts	Loans	$	1,128	Other liabilities	$	1,980
Interest rate contracts	Other Assets		852	Other liabilities		1,865
Total derivatives designated as hedging instruments			1,980			3,845
Derivatives not designated as hedging instruments
Mortgage loan contracts	Other assets		455	Other liabilities		64
Total derivatives not designated as hedging instruments			455			64
Total derivatives		$	2,435		$	3,909

	Asset Derivative			Liability Derivatives
	December 31, 2010			December 31, 2010
	Balance Sheet			Balance Sheet
Derivatives designated as hedging instruments	Location	Fair Value		Location	Fair Value
Interest rate contracts	Loans	$	1,388	Other liabilities	$	2,039
Interest rate contracts	Other Assets		651	Other liabilities		1,376
Total derivatives designated as hedging instruments			2,039			3,415
Derivatives not designated as hedging instruments
Mortgage loan contracts	Other assets		407	Other liabilities		—
Total derivatives not designated as hedging instruments			407			—
Total derivatives		$	2,446		$	3,415

The effect of the derivative instruments on the consolidated statement of income for the three-month period ended is as follows:

	Amount of Loss Recognized in						Amount of Loss Recognized in
	Other Comprehensive Income on						Other Comprehensive Income on
	Derivative (Effective Portion)						Derivative (Effective Portion)
	Three Months Ended June 30						Six Months Ended June 30
Derivative in cash flow	2011			2010			2011			2010
hedging relationship	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Interest rate contracts	$	(611	)	$	(1,421	)	$	(318	)	$	(1,694	)

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)						Amount of Gain (Loss)
		Recognized on Derivative						Recognized on Derivative
		Three Months Ended June 30						Six Months Ended June 30
	Location of gain (loss)	2011			2010			2011			2010
Derivative in fair value hedging relationship	recognized on derivative	(Unaudited)			(Unaudited)
Interest rate contracts	Interest income - loans	$	351		$	810		$	(59	)	$	1,213
Interest rate contracts	Interest income - loans		(351	)		(810	)		59			(1,213	)
Total		$	—		$	—		$	—		$	—

		Amount of Gain (Loss)				Amount of Gain (Loss)
		Recognized on Derivative				Recognized on Derivative
		Three Months Ended June 30				Six Months Ended June 30
	Location of gain (loss)	2011		2010		2011		2010
Derivative not designated as hedging relationship	recognized on derivative	(Unaudited)		(Unaudited)
Mortgage contracts	Other income - gain on sale of loans	$	165	$	362	$	799	$	600
Total		$	165	$	362	$	799	$	600