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Derivative Financial Instruments
 9 Months Ended
Sep. 30, 2015
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments

Note 9 – 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 September 30, 2015 and December 31, 2014. 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 September 30, 2015, 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 September 30, 2015, 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 $113.9 million at September 30, 2015 and $102.7 million at December 31, 2014.

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, 2015, 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:

 

     Asset Derivative      Liability Derivatives  
     September 30, 2015      September 30, 2015  
Derivatives designated as hedging instruments (Unaudited)    Balance Sheet
Location		    Fair Value      Balance Sheet
Location		    Fair Value  

Interest rate contracts

    Loans    $ —         Other liabilities    $ 1,787   

Interest rate contracts

    Other Assets      1,787       Other liabilities      3,671   
     

 

 

        

 

 

  

Total derivatives designated as hedging instruments

         1,787            5,458   
     

 

 

        

 

 

  

Derivatives not designated as hedging instruments

            

Mortgage loan contracts

    Other assets      643       Other liabilities      —     
     

 

 

        

 

 

  

Total derivatives not designated as hedging instruments

         643            —     
     

 

 

        

 

 

  

Total derivatives

       $ 2,430          $ 5,458   
     

 

 

        

 

 

  
     Asset Derivative      Liability Derivatives  
     December 31, 2014      December 31, 2014  
Derivatives designated as hedging instruments (Unaudited)    Balance Sheet
Location		    Fair Value      Balance Sheet
Location		    Fair Value  

Interest rate contracts

    Loans    $ —          Other liabilities    $ 1,208   

Interest rate contracts

    Other Assets      1,208       Other liabilities      3,339   
     

 

 

        

 

 

  

Total derivatives designated as hedging instruments

         1,208            4,547   
     

 

 

        

 

 

  

Derivatives not designated as hedging instruments

            

Mortgage loan contracts

    Other assets      447       Other liabilities      —     
     

 

 

        

 

 

  

Total derivatives not designated as hedging instruments

         447            —     
     

 

 

        

 

 

  

Total derivatives

       $ 1,655          $ 4,547   
     

 

 

        

 

 

  

 

The effect of the derivative instruments on the condensed consolidated statement of income for the three and nine-month periods ending September 30 is as follows:

 

     Comprehensive Income on Derivative
(Effective Portion)		      Comprehensive Income on Derivative
(Effective Portion)		  
     Three Months Ended September 30      Nine Months Ended September 30  
Derivative in cash flow    2015      2014      2015      2014  

hedging relationship

    (Unaudited)      (Unaudited)      (Unaudited)      (Unaudited)  

Interest rate contracts

    $ (335 )     $ 242       $ (217 )     $ (110 ) 

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

    

Amount of Gain (Loss)

Recognized on Derivative

  
          Three Months Ended September 30     Nine Months Ended September 30  
Derivative in fair value    Location of gain (loss)    2015     2014     2015     2014  

hedging relationship

   

recognized on derivative

    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  

Interest rate contracts

    Interest income - loans    $ 765      $ (326 )    $ 579      $ 425   

Interest rate contracts

    Interest income - loans      (765 )      326        (579 )      (425 ) 
     

 

 

    

 

 

    

 

 

    

 

 

  

Total

       $ —        $ —        $ —        $ —     
     

 

 

    

 

 

    

 

 

    

 

 

  
         

Amount of Gain (Loss)

Recognized on Derivative

     Amount of Gain (Loss)
Recognized on Derivative		  
          Three Months Ended September 30     Nine Months Ended September 30  
Derivative not designated    Location of gain (loss)    2015     2014     2015     2014  

as hedging relationship

   

recognized on derivative

    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  

Mortgage contracts

    Other income -gain on sale of loans    $ (77 )    $ (22 )    $ 196      $ (1 )