Note 4 – Loans


	September 30 2013			December 31 2012
Commercial
Working capital and equipment	$	239,305		$	198,805
Real estate, including agriculture		243,262			247,108
Tax exempt		3,093			4,579
Other		13,924			9,979

Total		499,584			460,471

Real estate
1-4 family		184,928			185,940
Other		4,326			3,774

Total		189,254			189,714

Consumer
Auto		137,991			142,149
Recreation		4,955			5,163
Real estate/home improvement		31,045			29,989
Home equity		98,657			104,974
Unsecured		3,785			4,194
Other		2,557			2,615

Total		278,990			289,084

Mortgage warehouse		113,591			251,448

Total loans		1,081,419			1,190,717
Allowance for loan losses		(17,848	)		(18,270	)

Loans, net	$	1,063,571		$	1,172,447

Commercial

Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves larger loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of property type, and are monitored for concentrations of credit. Management monitors and evaluates commercial real estate loans based on collateral, cash flow and risk grade criteria. As a general rule, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.

Real Estate and Consumer

With respect to residential loans that are secured by 1-4 family residences and are generally owner occupied, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Mortgage Warehousing

Horizon’s mortgage warehouse lending has specific mortgage companies as customers of Horizon Bank. Individual mortgage loans originated by these mortgage companies are funded as a secured borrowing with a pledge of collateral under Horizon’s agreement with the mortgage company. Each individual mortgage is assigned to Horizon until the loan is sold to the secondary market by the mortgage company. In addition, Horizon takes possession of each original note and forwards such note to the end investor once the mortgage company has sold the loan. At the time a loan is transferred to the secondary market, the mortgage company repurchases the loan under its option within the agreement. Due to the repurchase feature contained in the agreement, the transaction does not qualify as a sale and therefore is accounted for as a secured borrowing with a pledge of collateral pursuant to the agreement with the mortgage company. When the individual loan is sold to the end investor by the mortgage company, the proceeds from the sale of the loan are received by Horizon and used to pay off the loan balance with Horizon along with any accrued interest and any related fees. The remaining balance from the sale is forwarded to the mortgage company. These individual loans typically are sold by the mortgage company within 30 days and are seldom held more than 90 days. Interest income is accrued during this period and collected at the time each loan is sold. Fee income for each loan sold is collected when the loan is sold, and no costs are deferred due to the term between each loan funding and related payoff, which is typically less than 30 days.

Based on the agreements with each mortgage company, at any time a mortgage company can repurchase from Horizon their outstanding loan balance on an individual mortgage and regain possession of the original note. Horizon also has the option to request that the mortgage company repurchase an individual mortgage. Should this occur, Horizon would return the original note and reassign the assignment of the mortgage to the mortgage company. Also, in the event that the end investor would not be able to honor the purchase commitment and the mortgage company would not be able to repurchase its loan on an individual mortgage, Horizon would be able to exercise its rights under the agreement.

The following table shows the recorded investment of individual loan categories.


September 30, 2013	Loan Balance			Interest Due		Deferred Fees / (Costs)			Recorded Investment
Owner occupied real estate	$	153,113		$	226	$	212		$	153,551
Non owner occupied real estate		229,654			175		430			230,259
Residential spec homes		242			—		—			242
Development & spec land loans		15,621			39		43			15,703
Commercial and industrial		100,194			732		75			101,001

Total commercial		498,824			1,172		760			500,756

Residential mortgage		179,964			567		409			180,940
Residential construction		8,881			17		—			8,898
Mortgage warehouse		113,591			480		—			114,071

Total real estate		302,436			1,064		409			303,909

Direct installment		28,968			92		(278	)		28,782
Direct installment purchased		331			—		—			331
Indirect installment		129,450			306		—			129,756
Home equity		120,222			517		297			121,036

Total consumer		278,971			915		19			279,905

Total loans		1,080,231			3,151		1,188			1,084,570
Allowance for loan losses		(17,848	)		—		—			(17,848	)

Net loans	$	1,062,383		$	3,151	$	1,188		$	1,066,722


December 31, 2012	Loan Balance			Interest Due		Deferred Fees / (Costs)			Recorded Investment
Owner occupied real estate	$	162,694		$	503	$	485		$	163,682
Non owner occupied real estate		201,763			467		276			202,506
Residential spec homes		1,056			8		—			1,064
Development & spec land loans		6,963			11		—			6,974
Commercial and industrial		87,082			380		152			87,614

Total commercial		459,558			1,369		913			461,840

Residential mortgage		181,450			565		583			182,598
Residential construction		7,681			13		—			7,694
Mortgage warehouse		251,448			480		—			251,928

Total real estate		440,579			1,058		583			442,220

Direct installment		27,831			115		(204	)		27,742
Direct installment purchased		429			—		—			429
Indirect installment		133,481			370		—			133,851
Home equity		126,588			605		959			128,152

Total consumer		288,329			1,090		755			290,174

Total loans		1,188,466			3,517		2,251			1,194,234
Allowance for loan losses		(18,270	)		—		—			(18,270	)

Net loans	$	1,170,196		$	3,517	$	2,251		$	1,175,964