
	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	$	3,531	$	208	$	—	$	109	$	3,848
Non-owner occupied real estate		554		—		492		—		1,046
Residential spec homes		—		—		—		—		—
Development & spec land		68		—		—		—		68
Commercial and industrial		1,941		—		—		—		1,941

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

Included in the $15.7 million of

non-accrual

loans and the $2.0 million of

non-performing

TDRs at December 31, 2019 were $2.3 million and $182,000, respectively, of loans acquired for which there were accretable yields recognized.

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

Executive Vice President and Chief Commercial Banking Officer and/or the Executive Vice President and 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, 2019, 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, 2019, the Company had $5.4 million in TDRs and $3.4 million were performing according to the restructured terms and no TDRs were returned to accrual status during 2019. There was $133,000 of specific reserves allocated to TDRs at December 31, 2019 based on the collateral deficiencies.

The following table presents commercial loans individually evaluated for impairment by class of loans:


	December 31, 2019
							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	$	3,192	$	3,193	$	—	$	3,608	$	246
Non-owner occupied real estate		937		937		—		2,810		98
Residential spec homes		—		—		—		—		—
Development & spec land		73		73		—		158		—
Commercial and industrial		1,859		1,861		—		2,464		100

Total commercial		6,061		6,064		—		9,040		444
With an allowance recorded
Commercial
Owner occupied real estate		—		—		—		—		—
Non-owner occupied real estate		119		119		25		130		—
Residential spec homes		—		—		—		—		—
Development & spec land		—		—		—		—		—
Commercial and industrial		1,167		1,168		516		1,225		46

Total commercial		1,286		1,287		541		1,355		46

Total	$	7,347	$	7,351	$	541	$	10,395	$	490


	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	$	2,814	$	2,815	$	—	$	3,168	$	77
Non-owner occupied real estate		860		860		—		1,096		12
Residential spec homes		—		—		—		—		—
Development & spec land		68		68		—		71		—
Commercial and industrial		1,226		1,226		—		1,119		21

Total commercial		4,968		4,969		—		5,454		110
With an allowance recorded
Commercial
Owner occupied real estate		827		827		145		864		—
Non-owner occupied real estate		186		186		30		180		4
Residential spec homes		—		—		—		—		—
Development & spec land		—		—		—		—		—
Commercial and industrial		715		715		860		870		14

Total commercial		1,728		1,728		1,035		1,914		18

Total	$	6,696	$	6,697	$	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	$	1,255	$	1,270	$	—	$	1,168	$	4
Non-owner occupied real estate		3,123		3,139		—		850		7
Residential spec homes		—		—		—		—		—
Development & spec land		176		176		—		233		4
Commercial and industrial		1,656		1,656		—		1,445		25

Total commercial		6,210		6,241		—		3,696		40
With an allowance recorded
Commercial
Owner occupied real estate		704		704		78		59		33
Non-owner occupied real estate		227		227		106		19		13
Residential spec homes		—		—		—		—		—
Development & spec land		—		—		—		—		—
Commercial and industrial		—		—		—		—		—

Total commercial		931		931		184		78		46

Total	$	7,141	$	7,172	$	184	$	3,774	$	86

The following table presents the payment status by class of loans:


	December 31, 2019
	Current			30-59 Days Past Due			60-89 Days Past Due			90 Days or Greater Past Due			Non-accrual & Non-peforming TDRs			Total Past Due & Non-accrual Loans			Total
Commercial
Owner occupied real estate	$	515,604		$	920		$	—		$	—		$	3,053		$	3,973		$	519,577
Non-owner occupied real estate		972,195			80			—			—			1,056			1,136			973,331
Residential spec homes		12,925			—			—			—			—			—			12,925
Development & spec land		35,881			—			—			—			73			73			35,954
Commercial and industrial		503,348			819			11			—			1,681			2,511			505,859

Total commercial		2,039,953			1,819			11			—			5,863			7,693			2,047,646
Real estate
Residential mortgage		740,712			1,984			—			1			8,322			10,307			751,019
Residential construction		19,686			—			—			—			—			—			19,686
Mortgage warehouse		150,293			—			—			—			—			—			150,293

Total real estate		910,691			1,984			—			1			8,322			10,307			920,998
Consumer
Direct installment		40,864			175			5			5			30			215			41,079
Indirect installment		344,478			2,407			404			135			1,234			4,180			348,658
Home equity		273,050			904			20			5			2,236			3,165			276,215

Total consumer		658,392			3,486			429			145			3,500			7,560			665,952

Total	$	3,609,036		$	7,289		$	440		$	146		$	17,685		$	25,560		$	3,634,596

Percentage of total loans		99.30	%		0.20	%		0.01	%		0.00	%		0.49	%		0.70	%		100.00	%


	December 31, 2018
	Current			30-59 Days Past Due			60-89 Days Past Due			90 Days or Greater Past Due			Non-accrual & Non-peforming TDRs			Total Past Due & Non-accrual Loans			Total
Commercial
Owner occupied real estate	$	439,542		$	537		$	1,016		$	208		$	3,531		$	5,292		$	444,834
Non-owner occupied real estate		851,587			203			19			—			1,046			1,268			852,855
Residential spec homes		4,703			492			—			—			—			492			5,195
Development & spec land		50,638			—			—			—			68			68			50,706
Commercial and industrial		365,817			487			717			—			1,941			3,145			368,962

Total commercial		1,712,287			1,719			1,752			208			6,586			10,265			1,722,552
Real estate
Residential mortgage		639,458			1,131			56			180			3,269			4,636			644,094
Residential construction		24,030			—			—			—			—			—			24,030
Mortgage warehouse		74,120			—			—			—			—			—			74,120

Total real estate		737,608			1,131			56			180			3,269			4,636			742,244
Consumer
Direct installment		34,957			93			18			—			35			146			35,103
Indirect installment		311,494			1,396			198			173			916			2,683			314,177
Home equity		194,890			761			37			7			1,799			2,604			197,494

Total consumer		541,341			2,250			253			180			2,750			5,433			546,774

Total	$	2,991,236		$	5,100		$	2,061		$	568		$	12,605		$	20,334		$	3,011,570

Percentage of total loans		99.32	%		0.17	%		0.07	%		0.02	%		0.42	%		0.68	%		100.00	%

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.

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 regions (ranging from $1,500,000 to $3,500,000) are validated by the Loan Committee, which is chaired by the Executive Vice President and Chief Commercial Banking Officer (EVP/CCBO).

•

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

•

The EVP/CCBO, or a designee, meets periodically 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 as members of 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.

Risk Grade 1: Excellent (Pass)

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.

Risk Grade 2: Good (Pass)

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.

Risk Grade 3: Satisfactory (Pass)

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:

•

At inception, the loan was properly underwritten, did

not

possess an unwarranted level of credit risk, and the loan met the above criteria for a risk grade of Excellent, Good, or Satisfactory;

•

At inception, the loan was secured with collateral possessing a loan value adequate to protect the Bank from loss.

•

The loan has exhibited two or more years of satisfactory repayment with a reasonable reduction of the principal balance.

•

During the period that the loan has been outstanding, there has been no evidence of any credit weakness. Some examples of weakness include slow payment, lack of cooperation by the borrower, breach of loan covenants, or the borrower is in an industry known to be experiencing problems. If any of these credit weaknesses is observed, a lower risk grade may be warranted.

Risk Grade 4 Satisfactory/Monitored:

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.

Risk Grade 4W Management Watch:

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.

Risk Grade 5: Special Mention

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.

Risk Grade 6: Substandard

One or more of the following characteristics may be exhibited in loans classified Substandard:

•

Loans which possess a defined credit weakness. The likelihood that a loan will be paid from the primary source of repayment is uncertain. Financial deterioration is under way and very close attention is warranted to ensure that the loan is collected without loss.

•

Loans are inadequately protected by the current net worth and paying capacity of the obligor.

•

The primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment, such as collateral liquidation or guarantees.

•

Loans have a distinct possibility that the Bank will sustain some loss if deficiencies are not corrected.

•

Unusual courses of action are needed to maintain a high probability of repayment.

•

The borrower is not generating enough cash flow to repay loan principal; however, it continues to make interest payments.

•

The lender is forced into a subordinated or unsecured position due to flaws in documentation.

•

Loans have been restructured so that payment schedules, terms, and collateral represent concessions to the borrower when compared to the normal loan terms.

•

The lender is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan.

•

There is a significant deterioration in market conditions to which the borrower is highly vulnerable.

Risk Grade 7: Doubtful

One or more of the following characteristics may be present in loans classified Doubtful:

•

Loans have all of the weaknesses of those classified as Substandard. However, based on existing conditions, these weaknesses make full collection of principal highly improbable.

•

The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of repayment.

•

The possibility of loss is high but because of certain important pending factors which may strengthen the loan, loss classification is deferred until the exact status of repayment is known.

Risk Grade 8: Loss

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.

The following table presents loans by credit grades.


	December 31, 2019
	Pass			Special Mention			Substandard			Doubtful			Total
Commercial
Owner occupied real estate	$	492,386		$	8,328		$	18,863		$	—		$	519,577
Non-owner occupied real estate		957,990			7,824			7,517			—			973,331
Residential spec homes		12,925			—			—			—			12,925
Development & spec land		35,815			—			139			—			35,954
Commercial and industrial		468,893			18,652			18,314			—			505,859

Total commercial		1,968,009			34,804			44,833			—			2,047,646
Real estate
Residential mortgage		741,136			—			9,883			—			751,019
Residential construction		19,686			—			—			—			19,686
Mortgage warehouse		150,293			—			—			—			150,293

Total real estate		911,115			—			9,883			—			920,998
Consumer
Direct installment		41,044			—			35			—			41,079
Indirect installment		347,289			—			1,369			—			348,658
Home equity		273,665			—			2,550			—			276,215

Total consumer		661,998			—			3,954			—			665,952

Total	$	3,541,122		$	34,804		$	58,670		$	—		$	3,634,596

Percentage of total loans		97.43	%		0.96	%		1.61	%		0.00	%		100.00	%


	December 31, 2018
	Pass			Special Mention			Substandard			Doubtful			Total
Commercial
Owner occupied real estate	$	426,887		$	3,664		$	14,283		$	—		$	444,834
Non-owner occupied real estate		834,582			9,682			8,591			—			852,855
Residential spec homes		5,195			—			—			—			5,195
Development & spec land		47,523			3,115			68			—			50,706
Commercial and industrial		354,630			6,591			7,741			—			368,962

Total commercial		1,668,817			23,052			30,683			—			1,722,552
Real estate
Residential mortgage		639,267			—			4,827			—			644,094
Residential construction		24,030			—			—			—			24,030
Mortgage warehouse		74,120			—			—			—			74,120

Total real estate		737,417			—			4,827			—			742,244
Consumer
Direct installment		35,068			—			35			—			35,103
Indirect installment		313,088			—			1,089			—			314,177
Home equity		195,353			—			2,141			—			197,494

Total consumer		543,509			—			3,265			—			546,774

Total	$	2,949,743		$	23,052		$	38,775		$	—		$	3,011,570

Percentage of total loans		97.95	%		0.76	%		1.29	%		0.00	%		100.00	%