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Derivative Financial Instruments
 3 Months Ended
Mar. 31, 2013
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 6.14% on a notional amount of $30.5 million at March 31, 2013 and $30.5 million at 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 March 31, 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 March 31, 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 $75.6 million at March 31, 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 March 31, 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
March 31, 2013		     Liability Derivatives
March 31, 2013		  

Derivatives designated as hedging

instruments (Unaudited)

   Balance Sheet
Location		   Fair Value     Balance Sheet
Location		   Fair Value  

Interest rate contracts

   Loans   $ 89     Other liabilities   $ 1,813  

Interest rate contracts

   Other Assets     1,724     Other liabilities     5,055  
       

 

 

        

 

 

  

Total derivatives designated as hedging instruments

         1,813           6,868  
       

 

 

        

 

 

  

Derivatives not designated as hedging instruments

                        

Mortgage loan contracts

   Other assets     846     Other liabilities     —    
       

 

 

        

 

 

  

Total derivatives not designated as hedging instruments

         846           —    
       

 

 

        

 

 

  

Total derivatives

       $ 2,659         $ 6,868  
       

 

 

        

 

 

  
     
    Asset Derivative
December 31, 2012		     Liability Derivatives
December 31, 2012		  

Derivatives designated as hedging

instruments (Unaudited)

   Balance Sheet
Location		   Fair Value     Balance Sheet
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  
       

 

 

        

 

 

  

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

 

                 
    Comprehensive Income on Derivative  
    (Effective Portion)  
    Three Months Ended March 31  

Derivative in cash flow

hedging relationship

   2013
(Unaudited)		     2012
(Unaudited)		  

Interest rate contracts

   $ 285     $ 367  

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 March 31  

Derivative in fair value

hedging relationship

  

Location of gain (loss)

recognized on derivative

   2013
(Unaudited)		     2012
(Unaudited)		  

Interest rate contracts

   Interest income - loans   $ (401 )    $ (74 ) 

Interest rate contracts

   Interest income - loans     401       74  
       

 

 

    

 

 

  

Total

       $ —       $ —    
       

 

 

    

 

 

  
     
        Amount of Gain (Loss) Recognized on  
        Derivative  
        Three Months Ended March 31  

Derivative not designated

as hedging relationship

  

Location of gain (loss)

recognized on derivative

   2013
(Unaudited)		     2012
(Unaudited)		  

Mortgage contracts

   Other income - gain on sale of loans   $ (12 )    $ (223 )