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Derivative Financial Instruments
 3 Months Ended
Mar. 31, 2016
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 March 31, 2016 and December 31, 2015. 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, 2016, 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, 2016, 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 $115.1 million at March 31, 2016 and $117.3 million at December 31, 2015.

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, 2016, 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 Derivatives      Liability Derivatives  
     March 31, 2016      March 31, 2016  
Derivatives designated as hedging instruments (Unaudited)    Balance
Sheet
Location		    Fair
Value		      Balance Sheet
Location		    Fair
Value		  

Interest rate contracts

    Loans    $ —         Other liabilities    $ 4,283   

Interest rate contracts

    Other Assets      4,283       Other liabilities      3,702   
     

 

 

        

 

 

  

Total derivatives designated as hedging instruments

         4,283            7,985   
     

 

 

        

 

 

  

Derivatives not designated as hedging instruments

            

Mortgage loan contracts

    Other assets      644       Other liabilities      —     
     

 

 

        

 

 

  

Total derivatives not designated as hedging instruments

         644            —     
     

 

 

        

 

 

  

Total derivatives

       $ 4,927          $ 7,985   
     

 

 

        

 

 

  

 

     Asset Derivatives      Liability Derivatives  
     December 31, 2015      December 31, 2015  
Derivatives designated as hedging instruments (Unaudited)    Balance
Sheet
Location		    Fair
Value		      Balance Sheet
Location		    Fair
Value		  

Interest rate contracts

    Loans    $ —         Other liabilities    $ 1,782   

Interest rate contracts

    Other Assets      1,782       Other liabilities      3,141   
     

 

 

        

 

 

  

Total derivatives designated as hedging instruments

         1,782            4,923   
     

 

 

        

 

 

  

Derivatives not designated as hedging instruments

            

Mortgage loan contracts

    Other assets      642       Other liabilities      —     
     

 

 

        

 

 

  

Total derivatives not designated as hedging instruments

         642            —     
     

 

 

        

 

 

  

Total derivatives

       $ 2,424          $ 4,923   
     

 

 

        

 

 

  

 

The effect of the derivative instruments on the condensed consolidated statement of income for the three-month periods ending March 31 is as follows:

 

    

Comprehensive Income on Derivative

(Effective Portion)

  
     Three Months Ended March 31  
Derivative in cash flow    2016      2015  

hedging relationship

    (Unaudited)      (Unaudited)  

Interest rate contracts

    $ (365 )     $ (214 ) 

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    Location of gain (loss)    2016     2015  

hedging relationship

   

recognized on derivative

    (Unaudited)     (Unaudited)  

Interest rate contracts

    Interest income - loans    $ 1,478      $ 719   

Interest rate contracts

    Interest income - loans      (1,478 )      (719 ) 
     

 

 

    

 

 

  

Total

       $ —        $ —     
     

 

 

    

 

 

  

 

          Amount of Gain (Loss) Recognized on Derivative  
          Three Months Ended March 31  
Derivative not designated as    Location of gain (loss)    2016      2015  

hedging relationship

   

recognized on derivative

    (Unaudited)      (Unaudited)  

Mortgage contracts

    Other income - gain on sale of loans    $ 2       $ 189