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Derivative Financial Instruments
 9 Months Ended
Sep. 30, 2012
Derivative Financial Instruments [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 5.63% on a notional amount of $30.5 million at September 30, 2012. 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 September 30, 2012, 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 is recognized in current earnings. At September 30, 2012, 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 $72.4 million at September 30, 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, 2012, the Company’s fair value of these derivatives was recorded and over the next 12 months, this activity 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
September 30, 2012		     Liability Derivatives
September 30, 2012		  
Derivatives designated as hedging instruments (Unaudited)   Balance Sheet
Location		   Fair Value     Balance Sheet
Location		     Fair Value  

Interest rate contracts

   Loans   $ 443       Other liabilities     $ 2,523  

Interest rate contracts

   Other Assets     2,080       Other liabilities       5,820  
       

 

 

            

 

 

  

Total derivatives designated as hedging instruments

         2,523               8,343  
       

 

 

            

 

 

  
         

Derivatives not designated as hedging instruments

                            

Mortgage loan contracts

   Other assets     1,262       Other liabilities       —    
       

 

 

            

 

 

  

Total derivatives not designated as hedging instruments

         1,262               —    
       

 

 

            

 

 

  

Total derivatives

       $ 3,785             $ 8,343  
       

 

 

            

 

 

  

 

                             
    Asset Derivative
December 31, 2011		     Liability Derivatives
December 31, 2011		  
Derivatives designated as hedging instruments (Unaudited)   Balance Sheet
Location		   Fair Value     Balance Sheet
Location		     Fair Value  

Interest rate contracts

   Loans   $ 754       Other liabilities     $ 2,187  

Interest rate contracts

   Other Assets     1,433       Other liabilities       4,914  
       

 

 

            

 

 

  

Total derivatives designated as hedging instruments

         2,187               7,101  
       

 

 

            

 

 

  
         

Derivatives not designated as hedging instruments

                            

Mortgage loan contracts

   Other assets     662       Other liabilities       —    
       

 

 

            

 

 

  

Total derivatives not designated as hedging instruments

         662               —    
       

 

 

            

 

 

  

Total derivatives

       $ 2,849             $ 7,101  
       

 

 

            

 

 

  

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

 

                                 
    Amount of Loss Recognized in Other
Comprehensive Income on Derivative
(Effective Portion)
Three Months Ended September 30		     Amount of Loss Recognized in
Other Comprehensive Income on
Derivative (Effective Portion)
Nine Months Ended September 30		  

Derivative in cash flow hedging relationship

   2012
(Unaudited)		     2011
(Unaudited)		     2012
(Unaudited)		     2011
(Unaudited)		  

Interest rate contracts

   $ (170 )    $ (1,951 )    $ (589 )    $ (2,268 ) 

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
Three Months Ended September 30		     Amount of Gain (Loss) Recognized
on Derivative
Nine Months Ended September 30		  

Derivative in fair value
hedging relationship

  

Location of gain (loss)
recognized on derivative

   2012 (Unaudited)     2011 (Unaudited)     2012 (Unaudited)     2011 (Unaudited)  

Interest rate contracts

   Interest income - loans   $ 112     $ 394     $ 336     $ 335  

Interest rate contracts

   Interest income - loans     (112 )      (394 )      (336 )      (335 ) 
       

 

 

    

 

 

    

 

 

    

 

 

  

Total

       $ —       $ —       $ —       $ —    
       

 

 

    

 

 

    

 

 

    

 

 

  
       
        Amount of Gain (Loss) Recognized
on Derivative
Three Months Ended September 30		     Amount of Gain (Loss) Recognized
on Derivative
Nine Months Ended September 30		  

Derivative not designated as
hedging relationship

  

Location of gain (loss)
recognized on derivative

   2012 (Unaudited)     2011 (Unaudited)     2012 (Unaudited)     2011 (Unaudited)  

Mortgage contracts

   Other income - gain on sale of loans   $ 320     $ 359     $ 600     $ 1,157