XML 68 R30.htm IDEA: XBRL DOCUMENT v2.4.0.6
Derivative Financial Instruments
 12 Months Ended
Dec. 31, 2012
Derivative Financial Instruments [Abstract]  
Derivative Financial Instruments

Note 21 — 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 December 31, 2012 and $30.5 million at December 31, 2011. 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 December 31, 2012 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 December 31, 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 $81.0 million at December 31, 2012 and $52.2 million at December 31, 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 December 31, 2012 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
December 31, 2012

    

Liability Derivatives

December 31, 2012

  
Derivatives designated as hedging   Balance Sheet         Balance Sheet      
instruments (Unaudited)  

Location

   Fair Value    

Location

   Fair Value  

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  
       

 

 

        

 

 

  
     
   

Asset Derivative
December 31, 2011

    

Liability Derivatives
December 31, 2011

  
Derivatives designated as hedging   Balance Sheet         Balance Sheet      
instruments (Unaudited)  

Location

   Fair Value    

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 twelve month periods ended is as follows:

 

                         
Derivative in cash flow  

Amount of Loss Recognized in Other Comprehensive

Income on Derivative (Effective Portion)

Years Ended December 31

  

hedging relationship

   2012     2011     2010  

Interest rate contracts

   $ (377 )    $ (2,299 )    $ (1,172 ) 

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  
Derivative in fair value   Location of gain (loss)   Years Ended December 31  

hedging relationship

  

recognized on derivative

   2012     2011     2010  

Interest rate contracts

   Interest income—loans   $ 28     $ 147     $ 898  

Interest rate contracts

   Interest income—loans     (28 )      (147 )      (898 ) 
       

 

 

    

 

 

    

 

 

  

Total

       $ —       $ —       $ —    
       

 

 

    

 

 

    

 

 

  
     
        Amount of Gain (Loss) Recognized on Derivative  
Derivative not designated   Location of gain (loss)   Years Ended December 31  

as hedging relationship

  

recognized on derivative

   2012     2011     2010  

Mortgage contracts

   Other income—gain on sale of loans   $ 196     $ 255     $ (538 )