Note 4 – Loans


	September 30			December 31
	2018			2017
Commercial
Working capital and equipment	$	764,422		$	720,477
Real estate, including agriculture		850,364			880,861
Tax exempt		46,171			36,324
Other		37,625			32,066

Total		1,698,582			1,669,728
Real estate 1-4 family		643,396			599,217
Other		7,854			7,543

Total		651,250			606,760
Consumer
Auto		316,925			244,003
Recreation		13,339			8,728
Real estate/home improvement		39,104			37,052
Home equity		161,398			165,240
Unsecured		4,017			3,479
Other		1,349			2,497

Total		536,132			460,999
Mortgage warehouse		71,422			94,508

Total loans		2,957,386			2,831,995
Allowance for loan losses		(17,798	)		(16,394	)

Loans, net	$	2,939,588		$	2,815,601

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, the general economy or fluctuations in interest rates. 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 mortgage loan funded by Horizon undergoes an underwriting review by Horizon to the end investor guidelines and 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 reacquires the loan under its option within the agreement. Due to the reacquire 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 reacquire 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 reacquire 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 reacquire 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, 2018
	Loan Balance			Interest Due		Deferred Costs/(Fees)			Recorded Investment
Owner occupied real estate	$	583,261		$	1,690	$	(1,693	)	$	583,258
Non-owner occupied real estate		704,284			1,091		(2,128	)		703,247
Residential spec homes		7,254			16		(2	)		7,268
Development & spec land		43,889			127		(27	)		43,989
Commercial and industrial		364,151			2,919		(407	)		366,663

Total commercial		1,702,839			5,843		(4,257	)		1,704,425
Residential mortgage		630,955			1,995		(2,099	)		630,851
Residential construction		22,394			41		—			22,435
Mortgage warehouse		71,422			480		—			71,902

Total real estate		724,771			2,516		(2,099	)		725,188
Direct installment		37,895			107		586			38,588
Indirect installment		303,579			696		—			304,275
Home equity		192,397			931		1,675			195,003

Total consumer		533,871			1,734		2,261			537,866

Total loans		2,961,481			10,093		(4,095	)		2,967,479
Allowance for loan losses		(17,798	)		—		—			(17,798	)

Net loans	$	2,943,683		$	10,093	$	(4,095	)	$	2,949,681


	December 31, 2017
	Loan Balance			Interest Due		Deferred Costs/(Fees)			Recorded Investment
Owner occupied real estate	$	575,816		$	1,511	$	(1,917	)	$	575,410
Non-owner occupied real estate		683,901			1,138		(2,478	)		682,561
Residential spec homes		16,591			63		(80	)		16,574
Development & spec land		49,996			117		(579	)		49,534
Commercial and industrial		349,085			2,572		(607	)		351,050

Total commercial		1,675,389			5,401		(5,661	)		1,675,129
Residential mortgage		593,108			1,776		(2,375	)		592,509
Residential construction		16,027			39		—			16,066
Mortgage warehouse		94,508			480		—			94,988

Total real estate		703,643			2,295		(2,375	)		703,563
Direct installment		36,737			113		552			37,402
Indirect installment		227,659			528		(168	)		228,019
Home equity		194,860			889		1,359			197,108

Total consumer		459,256			1,530		1,743			462,529

Total loans		2,838,288			9,226		(6,293	)		2,841,221
Allowance for loan losses		(16,394	)		—		—			(16,394	)

Net loans	$	2,821,894		$	9,226	$	(6,293	)	$	2,824,827