	December 31, 2018
	Non-accrual		Loans Past Due Over 90 Days Still Accruing		Non-peforming TDRs		Performing TDRs		Total Non-performing Loans
Commercial
Owner occupied real estate	$	3,413	$	—	$	—	$	109	$	3,522
Non-owner occupied real estate		554		—		492		—		1,046
Residential spec homes		—		—		—		—		—
Development & spec land		68		—		—		—		68
Commercial and industrial		2,059		208		—		—		2,267
Total commercial		6,094		208		492		109		6,903
Real estate
Residential mortgage		2,846		180		423		1,558		5,007
Residential construction		—		—		—		—		—
Mortgage warehouse		—		—		—		—		—
Total real estate		2,846		180		423		1,558		5,007
Consumer
Direct installment		35		—		—		—		35
Indirect installment		916		173		—		—		1,089
Home equity		1,657		7		142		335		2,141
Total consumer		2,608		180		142		335		3,265
Total	$	11,548	$	568	$	1,057	$	2,002	$	15,175

	December 31, 2017
	Non-accrual		Loans Past Due Over 90 Days Still Accruing		Non-peforming TDRs		Performing TDRs		Total Non-performing Loans
Commercial
Owner occupied real estate	$	4,877	$	—	$	11	$	1	$	4,889
Non-owner occupied real estate		115		—		440		—		555
Residential spec homes		—		—		—		—		—
Development & spec land		176		—		—		—		176
Commercial and industrial		1,734		—		—		—		1,734
Total commercial		6,902		—		451		1		7,354
Real estate
Residential mortgage		3,693		—		351		1,450		5,494
Residential construction		—		—		—		222		222
Mortgage warehouse		—		—		—		—		—
Total real estate		3,693		—		351		1,672		5,716
Consumer
Direct installment		160		—		—		—		160
Direct installment purchased		—		—		—		—		—
Indirect installment		1,041		167		—		—		1,208
Home equity		1,480		—		211		285		1,976
Total consumer		2,681		167		211		285		3,344
Total	$	13,276	$	167	$	1,013	$	1,958	$	16,414

From time to time, the Bank obtains information that may lead management to believe that the collection of payments may be doubtful on a particular loan. In recognition of this, it is management’s policy to convert the loan from an “earning asset” to a non-accruing loan. The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date. Further, it is management’s policy to generally place a loan on a non-accrual status when the payment is delinquent in excess of 90 days or the loan has had the accrual of interest discontinued by management. The officer responsible for the loan and the Chief Credit Officer and/or the Chief Operations Officer must review all loans placed on non-accrual status. Subsequent payments on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Non-accrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal in accordance with the loan terms. The Company requires a period of satisfactory performance of not less than six months before returning a non-accrual loan to accrual status.

A loan becomes impaired when, based on current information, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is classified as impaired, the degree of impairment must be recognized by estimating future cash flows from the debtor. The present value of these cash flows is computed at a discount rate based on the interest rate contained in the loan agreement. However, if a particular loan has a determinable market value for its collateral, the creditor may use that value. Also, if the loan is secured and considered collateral dependent, the creditor may use the fair value of the collateral. Interest income on loans individually classified as impaired is recognized on a cash basis after all past due and current principal payments have been made.

Smaller-balance, homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by 1–4 family residences, residential construction loans, automobile, home equity, second mortgage loans and mortgage warehouse loans. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. When analysis of borrower operating results and financial condition indicate that underlying cash flows of a borrower’s business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 30 days or more. Loans are generally moved to non-accrual status when they are 90 days or more past due. These loans are often considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms, including TDRs, are measured for impairment. Allowable methods for determining the amount of impairment include the three methods described above.

The Company’s TDRs are considered impaired loans and included in the allowance methodology using the guidance for impaired loans. At December 31, 2018, the type of concessions the Company has made on restructured loans has been temporary rate reductions and/or reductions in monthly payments and there have been no restructured loans with modified recorded balances. Any modification to a loan that is a concession and is not in the normal course of lending is considered a restructured loan. A restructured loan is returned to accruing status after six consecutive payments but is still reported as TDR unless the loan bears interest at a market rate. As of December 31, 2018, the Company had $3.1 million in TDRs and $2.0 million were performing according to the restructured terms and one TDR was returned to accrual status during 2018. There was $20,000 of specific reserves allocated to TDRs at December 31, 2018 based on the collateral deficiencies.

	December 31, 2018
							Twelve Months Ended
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Loss Allocated		Average Balance in Impaired Loans		Cash/Accrual Interest Income Recognized
With no recorded allowance
Commercial
Owner occupied real estate	$	2,696	$	2,689	$	—	$	3,048	$	71
Non-owner occupied real estate		860		888		—		1,096		12
Residential spec homes		—		—		—		—		—
Development & spec land		68		66		—		71		—
Commercial and industrial		1,344		1,337		—		1,239		27
Total commercial		4,968		4,980		—		5,454		110
With an allowance recorded
Commercial
Owner occupied real estate		827		828		145		864		—
Non-owner occupied real estate		186		186		30		180		4
Residential spec homes		—		—		—		—		—
Development & spec land		—		—		—		—		—
Commercial and industrial		715		714		860		870		14
Total commercial		1,728		1,728		1,035		1,914		18
Total	$	6,696	$	6,708	$	1,035	$	7,368	$	128

	December 31, 2017
							Twelve Months Ended
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Loss Allocated		Average Balance in Impaired Loans		Cash/Accrual Interest Income Recognized
With no recorded allowance
Commercial
Owner occupied real estate	$	3,824	$	3,849	$	—	$	1,673	$	11
Non-owner occupied real estate		554		570		—		345		—
Residential spec homes		—		—		—		—		—
Development & spec land		176		174		—		233		4
Commercial and industrial		1,656		1,663		—		1,445		25
Total commercial		6,210		6,256		—		3,696		40
With an allowance recorded
Commercial
Owner occupied real estate		931		931		184		78		46
Non-owner occupied real estate		—		—		—		—		—
Residential spec homes		—		—		—		—		—
Development & spec land		—		—		—		—		—
Commercial and industrial		—		—		—		—		—
Total commercial		931		931		184		78		46
Total	$	7,141	$	7,187	$	184	$	3,774	$	86

	December 31, 2016
							Twelve Months Ended
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Loss Allocated		Average Balance in Impaired Loans		Cash/Accrual Interest Income Recognized
With no recorded allowance
Commercial
Owner occupied real estate	$	1,533	$	1,533	$	—	$	1,619	$	58
Non-owner occupied real estate		440		440		—		871		18
Residential spec homes		—		—		—		—		—
Development & spec land		118		118		—		61		16
Commercial and industrial		128		127		—		349		1
Total commercial		2,219		2,218		—		2,900		93
With an allowance recorded
Commercial
Owner occupied real estate		—		—		—		—		—
Non-owner occupied real estate		—		—		—		—		—
Residential spec homes		—		—		—		—		—
Development & spec land		—		—		—		—		—
Commercial and industrial		31		32		4		5		2
Total commercial		31		32		4		5		2
Total	$	2,250	$	2,250	$	4	$	2,905	$	95

				December 31, 2018
	Current			30-59 Days Past Due			60-89 Days Past Due			90 Days or Greater Past Due			Total Past Due			Total Past Due & Non-accrual Loans			Total
Commercial
Owner occupied real estate	$	556,516		$	537		$	997		$	—		$	3,413		$	4,947		$	561,463
Non-owner occupied real estate		716,574			175			19			—			1,046			1,240			717,814
Residential spec homes		4,707			492			—			—			—			492			5,199
Development & spec land		46,479			—			—			—			68			68			46,547
Commercial and industrial		390,828			515			736			208			2,059			3,518			394,346
Total commercial		1,715,104			1,719			1,752			208			6,586			10,265			1,725,369
Real estate
Residential mortgage		641,500			1,131			56			180			3,269			4,636			646,136
Residential construction		24,030			—			—			—			—			—			24,030
Mortgage warehouse		74,120			—			—			—			—			—			74,120
Total real estate		739,650			1,131			56			180			3,269			4,636			744,286
Consumer
Direct installment		38,138			93			18			—			35			35			38,173
Indirect installment		313,088			1,396			198			173			916			1,089			314,177
Home equity		192,960			761			37			7			1,799			1,806			194,766
Total consumer		544,186			2,250			253			180			2,750			2,930			547,116
Total	$	2,998,940		$	5,100		$	2,061		$	568		$	12,605		$	17,831		$	3,016,771
Percentage of total loans		99.41	%		0.17	%		0.07	%		0.02	%		0.42	%		0.59	%

				December 31, 2017
	Current			30-59 Days Past Due			60-89 Days Past Due			90 Days or Greater Past Due			Total Past Due			Total Past Due & Non-accrual Loans			Total
Commercial
Owner occupied real estate	$	567,571		$	1,613		$	1,950		$	—		$	4,888		$	8,451		$	576,022
Non-owner occupied real estate		682,712			512			122			—			555			1,189			683,901
Residential spec homes		16,591			—			—			—			—			—			16,591
Development & spec land		49,789			31			—			—			176			207			49,996
Commercial and industrial		346,830			520			1			—			1,734			2,255			349,085
Total commercial		1,663,493			2,676			2,073			—			7,353			12,102			1,675,595
Real estate
Residential mortgage		590,746			1,248			49			—			4,044			5,341			596,087
Residential construction		15,964			63			—			—			—			63			16,027
Mortgage warehouse		94,508			—			—			—			—			—			94,508
Total real estate		701,218			1,311			49			—			4,044			5,404			706,622
Consumer
Direct installment		36,489			78			10			—			160			248			36,737
Indirect installment		224,348			1,859			244			167			1,041			3,311			227,659
Home equity		192,140			502			527			—			1,691			2,720			194,860
Total consumer		452,977			2,439			781			167			2,892			6,279			459,256
Total	$	2,817,688		$	6,426		$	2,903		$	167		$	14,289		$	23,785		$	2,841,473
Percentage of total loans		99.16	%		0.23	%		0.10	%		0.01	%		0.50	%		0.84	%

Horizon Bank’s processes for determining credit quality differ slightly depending on whether a new loan or a renewed loan is being underwritten, or whether an existing loan is being re-evaluated for credit quality. The latter usually occurs upon receipt of current financial information or other pertinent data that would trigger a change in the loan grade.

•

For new and renewed commercial loans, the Bank’s Credit Department, which acts independently of the loan officer, assigns the credit quality grade to the loan. Loan grades for loans with an aggregate credit exposure that exceeds the authorities in the respective markets (ranging from $1,000,000 to $3,500,000)

are validated by the Loan Committee, which is chaired by the Chief Commercial Banking Officer (CCBO).

•

Commercial loan officers are responsible for reviewing their loan portfolios and report any adverse material change to the CCBO or Loan Committee. When circumstances warrant a change in the credit quality grade, loan officers are required to notify the CCBO and the Credit Department of the change in the loan grade. Downgrades are accepted immediately by the CCBO, however, lenders must present their factual information to either the Loan Committee or the CCBO when recommending an upgrade.

•	The CCBO, or his designee, meets weekly with loan officers to discuss the status of past-due loans and classified loans. These meetings are also designed to give the loan officers an opportunity to identify an existing loan that should be downgraded to a classified grade.

•

Monthly, senior management meets with the Watch Committee, which reviews all of the past due, classified, and impaired loans and the relative trends of these assets. This committee also reviews the actions taken by management regarding foreclosure mitigation, loan extensions, troubled debt restructures, other real estate owned and personal property repossessions. The information reviewed in this meeting acts as a precursor for developing management’s analysis of the adequacy of the Allowance for Loan and Lease Losses.

For residential real estate and consumer loans, Horizon uses a grading system based on delinquency. Loans that are 90 days or more past due, on non-accrual, or are classified as a TDR are graded “Substandard.” After being 90 to 120 days delinquent a loan is charged off unless it is well secured and in the process of collection. If the latter case exists, the loan is placed on non-accrual. Occasionally a mortgage loan may be graded as “Special Mention.” When this situation arises, it is because the characteristics of the loan and the borrower fit the definition of a Risk Grade 5 described below, which is normally used for grading commercial loans. Loans not graded Substandard are considered Pass.

Horizon Bank employs a nine-grade rating system to determine the credit quality of commercial loans. The first five grades represent acceptable quality, and the last four grades mirror the criticized and classified grades used by the bank regulatory agencies (special mention, substandard, doubtful, and loss). The loan grade definitions are detailed below.

Loans secured by liquid collateral, such as certificates of deposit, reputable bank letters of credit, or other cash equivalents; loans that are guaranteed or otherwise backed by the full faith and credit of the United States government or an agency thereof, such as the Small Business Administration; or loans to any publicly held company with a current long-term debt rating of A or better.

Loans to businesses that have strong financial statements containing an unqualified opinion from a CPA firm and at least three consecutive years of profits; loans supported by unaudited financial statements containing strong balance sheets, five consecutive years of profits, a five-year satisfactory relationship with the Bank, and key balance sheet and income statement trends that are either stable or positive; loans secured by publicly traded marketable securities where there is no impediment to liquidation; loans to individuals backed by liquid personal assets and unblemished credit history; or loans to publicly held companies with current long-term debt ratings of Baa or better.

Loans supported by financial statements (audited or unaudited) that indicate average or slightly below average risk and having some deficiency or vulnerability to changing economic conditions; loans with some weakness but offsetting features of other support are readily available; loans that are meeting the terms of repayment, but which may be susceptible to deterioration if adverse factors are encountered. Loans may be graded Satisfactory when there is no recent information on which to base a current risk evaluation and the following conditions apply:

Loans in this category are considered to be of acceptable credit quality, but contain greater credit risk than Satisfactory loans. Borrower displays acceptable liquidity, leverage, and earnings performance within the Bank’s minimum underwriting guidelines. The level of risk is acceptable but conditioned on the proper level of loan officer supervision. Loans that normally fall into this grade include acquisition, construction and development loans and income producing properties that have not reached stabilization.

Loans in this category are considered to be of acceptable quality, but with above normal risk. Borrower displays potential indicators of weakness in the primary source of repayment resulting in a higher reliance on secondary sources of repayment. Balance sheet may exhibit weak liquidity and/or high leverage. There is inconsistent earnings performance without the ability to sustain adverse economic conditions. Borrower may be operating in a declining industry or the property type, as for a commercial real estate loan, may be high risk or in decline. These loans require an increased level of loan officer supervision and monitoring to assure that any deterioration is addressed in a timely fashion.

Loans which possess some credit deficiency or potential weakness which deserves close attention. Such loans pose an unwarranted financial risk that, if not corrected, could weaken the loan by adversely impacting the future repayment ability of the borrower. The key distinctions of a Special Mention classification are that (1) it is indicative of an unwarranted level of risk and (2) weaknesses are considered “potential,” not “defined,” impairments to the primary source of repayment. These loans may be to borrowers with adverse trends in financial performance, collateral value and/or marketability, or balance sheet strength.

Loans are considered uncollectible and of such little value that continuing to carry them as assets is not feasible. Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.

	December 31, 2018
	Pass			Special Mention			Substandard			Doubtful			Total
Commercial
Owner occupied real estate	$	538,177		$	6,618		$	16,668		$	—		$	561,463
Non-owner occupied real estate		702,269			9,682			5,863			—			717,814
Residential spec homes		5,199			—			—			—			5,199
Development & spec land		46,382			97			68			—			46,547
Commercial and industrial		379,607			6,655			8,084			—			394,346
Total commercial		1,671,634			23,052			30,683			—			1,725,369
Real estate
Residential mortgage		641,309			—			4,827			—			646,136
Residential construction		24,030			—			—			—			24,030
Mortgage warehouse		74,120			—			—			—			74,120
Total real estate		739,459			—			4,827			—			744,286
Consumer
Direct installment		38,138			—			35			—			38,173
Indirect installment		313,088			—			1,089			—			314,177
Home equity		192,625			—			2,141			—			194,766
Total consumer		543,851			—			3,265			—			547,116
Total	$	2,954,944		$	23,052		$	38,775		$	—		$	3,016,771
Percentage of total loans		97.95	%		0.76	%		1.29	%		0.00	%

	December 31, 2017
	Pass			Special Mention			Substandard			Doubtful			Total
Commercial
Owner occupied real estate	$	549,198		$	8,622		$	18,202		$	—		$	576,022
Non-owner occupied real estate		675,030			3,864			5,007			—			683,901
Residential spec homes		16,591			—			—			—			16,591
Development & spec land		48,884			886			226			—			49,996
Commercial and industrial		327,970			7,448			13,667			—			349,085
Total commercial		1,617,673			20,820			37,102			—			1,675,595
Real estate
Residential mortgage		590,593			—			5,494			—			596,087
Residential construction		15,805			—			222			—			16,027
Mortgage warehouse		94,508			—			—			—			94,508
Total real estate		700,906			—			5,716			—			706,622
Consumer
Direct installment		36,577			—			160			—			36,737
Indirect installment		226,451			—			1,208			—			227,659
Home equity		192,884			—			1,976			—			194,860
Total consumer		455,912			—			3,344			—			459,256
Total	$	2,774,491		$	20,820		$	46,162		$	—		$	2,841,473
Percentage of total loans		97.64	%		0.73	%		1.62	%		0.00	%