Note 4 – Loans


	June 30 2014			December 31 2013
Commercial
Working capital and equipment	$	276,180		$	241,569
Real estate, including agriculture		347,051			245,313
Tax exempt		4,670			2,898
Other		20,301			15,409

Total		648,202			505,189

Real estate
1–4 family		231,230			181,393
Other		4,293			4,565

Total		235,523			185,958

Consumer
Auto		142,464			139,915
Recreation		5,677			4,839
Real estate/home improvement		34,084			30,729
Home equity		106,517			96,924
Unsecured		4,126			3,825
Other		4,005			3,293

Total		296,873			279,525

Mortgage warehouse		140,896			98,156

Total loans		1,321,494			1,068,828
Allowance for loan losses		(15,660	)		(15,992	)

Loans, net	$	1,305,834		$	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.


June 30, 2014	Loan Balance			Interest Due		Deferred Fees / (Costs)			Recorded Investment
Owner occupied real estate	$	206,000		$	332	$	642		$	206,974
Non owner occupied real estate		294,681			345		542			295,568
Residential spec homes		835			1		—			836
Development & spec land loans		24,188			81		33			24,302
Commercial and industrial		121,192			830		89			122,111

Total commercial		646,896			1,589		1,306			649,791

Residential mortgage		225,819			872		636			227,327
Residential construction		9,068			17		—			9,085
Mortgage warehouse		140,896			480		—			141,376

Total real estate		375,783			1,369		636			377,788

Direct installment		34,106			110		(335	)		33,881
Direct installment purchased		256			—		—			256
Indirect installment		132,053			287		—			132,340
Home equity		130,734			567		59			131,360

Total consumer		297,149			964		(276	)		297,837


Total loans		1,319,828			3,922		1,666			1,325,416
Allowance for loan losses		(15,660	)		—		—			(15,660	)

Net loans	$	1,304,168		$	3,922	$	1,666		$	1,309,756


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