Note 4 – Loans


	March 31			December 31
	2015			2014
Commercial
Working capital and equipment	$	311,789		$	300,940
Real estate, including agriculture		354,356			343,455
Tax exempt		8,890			8,595
Other		20,701			21,324

Total		695,736			674,314
Real estate
1–4 family		256,809			250,799
Other		3,581			3,826

Total		260,390			254,625
Consumer
Auto		160,668			154,538
Recreation		5,645			5,673
Real estate/home improvement		38,371			38,288
Home equity		112,180			112,426
Unsecured		3,437			3,613
Other		6,033			5,921

Total		326,334			320,459
Mortgage warehouse		178,899			129,156

Total loans		1,461,359			1,378,554
Allowance for loan losses		(16,634	)		(16,501	)

Loans, net	$	1,444,725		$	1,362,053

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 its 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.


	Loan					Deferred			Recorded
March 31, 2015	Balance			Interest Due		Fees / (Costs)			Investment
Owner occupied real estate	$	240,027		$	426	$	658		$	241,111
Non owner occupied real estate		308,420			345		515			309,280
Residential spec homes		3,409			5		3			3,417
Development & spec land loans		11,229			28		25			11,282
Commercial and industrial		131,422			828		28			132,278

Total commercial		694,507			1,632		1,229			697,368
Residential mortgage		244,081			743		546			245,370
Residential construction		15,763			22		—			15,785
Mortgage warehouse		178,899			480		—			179,379

Total real estate		438,743			1,245		546			440,534
Direct installment		41,476			135		(380	)		41,231
Direct installment purchased		195			—		—			195
Indirect installment		146,938			302		—			147,240
Home equity		138,458			557		(353	)		138,662

Total consumer		327,067			994		(733	)		327,328

Total loans		1,460,317			3,871		1,042			1,465,230
Allowance for loan losses		(16,634	)		—		—			(16,634	)

Net loans	$	1,443,683		$	3,871	$	1,042		$	1,448,596


	Loan					Deferred			Recorded
December 31, 2014	Balance			Interest Due		Fees / (Costs)			Investment
Owner occupied real estate	$	228,380		$	385	$	680		$	229,445
Non owner occupied real estate		297,299			309		506			298,114
Residential spec homes		2,027			2		—			2,029
Development & spec land loans		12,097			28		30			12,155
Commercial and industrial		133,256			859		39			134,154

Total commercial		673,059			1,583		1,255			675,897
Residential mortgage		242,521			737		599			243,857
Residential construction		11,505			21		—			11,526
Mortgage warehouse		129,156			480		—			129,636

Total real estate		383,182			1,238		599			385,019
Direct installment		40,137			129		(375	)		39,891
Direct installment purchased		219			—		—			219
Indirect installment		141,868			314		(163	)		142,019
Home equity		139,007			568		(234	)		139,341

Total consumer		321,231			1,011		(772	)		321,470

Total loans		1,377,472			3,832		1,082			1,382,386
Allowance for loan losses		(16,501	)		—		—			(16,501	)

Net loans	$	1,360,971		$	3,832	$	1,082		$	1,365,885