Note 4 – Loans


	March 31			December 31
	2016			2015
Commercial
Working capital and equipment	$	381,425		$	381,245
Real estate, including agriculture		381,256			391,668
Tax exempt		9,072			8,674
Other		26,001			23,408

Total		797,754			804,995
Real estate
1–4 family		438,391			433,015
Other		4,415			4,129

Total		442,806			437,144
Consumer
Auto		164,600			168,397
Recreation		5,021			5,365
Real estate/home improvement		49,114			47,015
Home equity		125,556			127,113
Unsecured		3,836			4,120
Other		11,509			10,290

Total		359,636			362,300
Mortgage warehouse		119,876			144,692

Total loans		1,720,072			1,749,131
Allowance for loan losses		(14,236	)		(14,534	)

Loans, net	$	1,705,836		$	1,734,597

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 individual mortgage and the related mortgagee are underwritten 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 reaquire 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.


March 31, 2016	Loan Balance			Interest Due		Deferred Fees / (Costs)			Recorded Investment
Owner occupied real estate	$	264,899		$	611	$	1,205		$	266,715
Non owner occupied real estate		324,824			336		506			325,666
Residential spec homes		7,011			12		17			7,040
Development & spec land loans		19,961			46		18			20,025
Commercial and industrial		179,006			1,101		307			180,414

Total commercial		795,701			2,106		2,053			799,860
Residential mortgage		421,422			1,283		2,364			425,069
Residential construction		19,020			34		—			19,054
Mortgage warehouse		119,876			480		—			120,356

Total real estate		560,318			1,797		2,364			564,479
Direct installment		56,767			160		(360	)		56,567
Direct installment purchased		140			—		—			140
Indirect installment		147,574			304		—			147,878
Home equity		156,160			621		(645	)		156,136

Total consumer		360,641			1,085		(1,005	)		360,721

Total loans		1,716,660			4,988		3,412			1,725,060
Allowance for loan losses		(14,236	)		—		—			(14,236	)

Net loans	$	1,702,424		$	4,988	$	3,412		$	1,710,824


December 31, 2015	Loan Balance			Interest Due		Deferred Fees / (Costs)			Recorded Investment
Owner occupied real estate	$	268,281		$	613	$	1,328		$	270,222
Non owner occupied real estate		326,399			306		497			327,202
Residential spec homes		5,018			9		17			5,044
Development & spec land loans		18,183			33		26			18,242
Commercial and industrial		184,911			1,246		335			186,492

Total commercial		802,792			2,207		2,203			807,202
Residential mortgage		414,924			1,275		2,470			418,669
Residential construction		19,751			34		—			19,785
Mortgage warehouse		144,692			480		—			145,172

Total real estate		579,367			1,789		2,470			583,626
Direct installment		54,341			168		(359	)		54,150
Direct installment purchased		153			—		—			153
Indirect installment		151,523			323		—			151,846
Home equity		157,164			628		(522	)		157,270

Total consumer		363,181			1,119		(881	)		363,419

Total loans		1,745,340			5,115		3,792			1,754,247
Allowance for loan losses		(14,534	)		—		—			(14,534	)

Net loans	$	1,730,806		$	5,115	$	3,792		$	1,739,713