Loans

12 Months Ended

Dec. 31, 2019

Note 5

–

Loans


	December 31			December 31
	2019			2018
Commercial
Working capital and equipment	$	938,317		$	804,083
Real estate, including agriculture		978,891			834,037
Tax exempt		63,571			48,975
Other		65,872			34,495

Total		2,046,651			1,721,590
Real estate
1-4 family		762,571			659,754
Other		8,146			8,387

Total		770,717			668,141
Consumer
Auto		362,729			327,413
Recreation		16,262			13,975
Real estate/home improvement		43,585			39,587
Home equity		237,979			163,209
Unsecured		7,286			4,043
Other		1,339			1,254

Total		669,180			549,481
Mortgage warehouse		150,293			74,120

Total loans		3,636,841			3,013,332
Allowance for loan losses		(17,667	)		(17,820	)

Loans, net	$	3,619,174		$	2,995,512

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.


	December 31, 2019
	Loan Balance			Interest Due		Deferred Costs/ (Fees)			Recorded Investment
Owner occupied real estate	$	519,577		$	784	$	(148	)	$	520,213
Non-owner occupied real estate		973,331			1,752		(763	)		974,320
Residential spec homes		12,925			15		(2	)		12,938
Development & spec land		35,954			101		(14	)		36,041
Commercial and industrial		505,859			4,600		(68	)		510,391

Total commercial		2,047,646			7,252		(995	)		2,053,903
Residential mortgage		751,019			2,245		12			753,276
Residential construction		19,686			40		—			19,726
Mortgage warehouse		150,293			242		—			150,535

Total real estate		920,998			2,527		12			923,537
Direct installment		41,079			148		678			41,905
Indirect installment		348,658			911		—			349,569
Home equity		276,215			1,304		2,550			280,069

Total consumer		665,952			2,363		3,228			671,543

Total loans		3,634,596			12,142		2,245			3,648,983
Allowance for loan losses		(17,667	)		—		—			(17,667	)

Net loans	$	3,616,929		$	12,142	$	2,245		$	3,631,316


	December 31, 2018
	Loan Balance			Interest Due		Deferred Costs/ (Fees)			Recorded Investment
Owner occupied real estate	$	444,834		$	931	$	(130	)	$	445,635
Non-owner occupied real estate		852,855			1,436		(747	)		853,544
Residential spec homes		5,195			13		—			5,208
Development & spec land		50,706			153		(15	)		50,844
Commercial and industrial		368,962			3,063		(70	)		371,955

Total commercial		1,722,552			5,596		(962	)		1,727,186
Residential mortgage		644,094			1,861		17			645,972
Residential construction		24,030			42		—			24,072
Mortgage warehouse		74,120			132		—			74,252

Total real estate		742,244			2,035		17			744,296
Direct installment		35,103			108		593			35,804
Indirect installment		314,177			738		—			314,915
Home equity		197,494			968		2,114			200,576

Total consumer		546,774			1,814		2,707			551,295

Total loans		3,011,570			9,445		1,762			3,022,777
Allowance for loan losses		(17,820	)		—		—			(17,820	)

Net loans	$	2,993,750		$	9,445	$	1,762		$	3,004,957