Note 3—Loans


	March 31			December 31
	2014			2013
Commercial
Working capital and equipment	$	253,939		$	241,569
Real estate, including agriculture		254,734			245,313
Tax exempt		2,483			2,898
Other		17,479			15,409

Total		528,635			505,189
Real estate
1–4 family		185,428			181,393
Other		4,465			4,565

Total		189,893			185,958
Consumer
Auto		140,147			139,915
Recreation		5,107			4,839
Real estate/home improvement		31,139			30,729
Home equity		96,682			96,924
Unsecured		3,780			3,825
Other		3,265			3,293

Total		280,120			279,525
Mortgage warehouse		102,146			98,156

Total loans		1,100,794			1,068,828
Allowance for loan losses		(16,102	)		(15,992	)

Loans, net	$	1,084,692		$	1,052,836

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. The Company 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.


March 31, 2014	Loan Balance			Interest Due		Deferred Fees / (Costs)			Recorded Investment
Owner occupied real estate	$	173,514		$	268	$	245		$	174,027
Non owner occupied real estate		230,225			201		266			230,692
Residential spec homes		833			1		—			834
Development & spec land loans		21,347			61		43			21,451
Commercial and industrial		102,112			715		50			102,877

Total commercial		528,031			1,246		604			529,881
Residential mortgage		180,849			579		352			181,780
Residential construction		8,692			14		—			8,706
Mortgage warehouse		102,146			480		—			102,626

Total real estate		291,687			1,073		352			293,112
Direct installment		30,556			104		(278	)		30,382
Direct installment purchased		270			—		—			270
Indirect installment		131,394			301		—			131,695
Home equity		118,132			517		46			118,695

Total consumer		280,352			922		(232	)		281,042

Total loans		1,100,070			3,241		724			1,104,035
Allowance for loan losses		(16,102	)		—		—			(16,102	)

Net loans	$	1,083,968		$	3,241	$	724		$	1,087,933


December 31, 2013	Loan Balance			Interest Due		Deferred Fees / (Costs)			Recorded Investment
Owner occupied real estate	$	156,262		$	257	$	207		$	156,726
Non owner occupied real estate		224,713			105		299			225,117
Residential spec homes		400			—		—			400
Development & spec land loans		21,289			62		42			21,393
Commercial and industrial		101,920			737		57			102,714

Total commercial		504,584			1,161		605			506,350
Residential mortgage		176,068			578		382			177,028
Residential construction		9,508			14		—			9,522
Mortgage warehouse		98,156			480		—			98,636

Total real estate		283,732			1,072		382			285,186
Direct installment		29,983			104		(281	)		29,806
Direct installment purchased		294			—		—			294
Indirect installment		131,384			320		—			131,704
Home equity		117,958			529		187			118,674

Total consumer		279,619			953		(94	)		280,478

Total loans		1,067,935			3,186		893			1,072,014
Allowance for loan losses		(15,992	)		—		—			(15,992	)

Net loans	$	1,051,943		$	3,186	$	893		$	1,056,022