Note 4 – Loans


	March 31 2017			December 31 2016
Commercial
Working capital and equipment	$	559,733		$	539,403
Real estate, including agriculture		499,009			485,620
Tax exempt		16,399			15,486
Other		31,330			29,447

Total		1,106,471			1,069,956

Real estate
1–4 family		527,994			526,024
Other		5,652			5,850

Total		533,646			531,874

Consumer
Auto		188,601			174,773
Recreation		7,264			5,669
Real estate/home improvement		54,414			53,898
Home equity		147,528			144,508
Unsecured		3,536			3,875
Other		16,133			15,706

Total		417,476			398,429

Mortgage warehouse		89,360			135,727

Total loans		2,146,953			2,135,986
Allowance for loan losses		(15,054	)		(14,837	)

Loans, net	$	2,131,899		$	2,121,149

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 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.


March 31, 2017	Loan Balance			Interest Due		Deferred Fees / (Costs)			Recorded Investment
Owner occupied real estate	$	339,341		$	813	$	951		$	341,105
Non owner occupied real estate		475,766			596		2,340			478,702
Residential spec homes		6,437			15		—			6,452
Development & spec land loans		35,395			58		114			35,567
Commercial and industrial		245,702			1,732		425			247,859

Total commercial		1,102,641			3,214		3,830			1,109,685

Residential mortgage		508,645			1,461		3,058			513,164
Residential construction		21,943			43		—			21,986
Mortgage warehouse		89,360			480		—			89,840

Total real estate		619,948			1,984		3,058			624,990

Direct installment		74,195			201		(423	)		73,973
Direct installment purchased		99			—		—			99
Indirect installment		166,802			355		182			167,339
Home equity		177,551			691		(930	)		177,312

Total consumer		418,647			1,247		(1,171	)		418,723

Total loans		2,141,236			6,445		5,717			2,153,398
Allowance for loan losses		(15,054	)		—		—			(15,054	)

Net loans	$	2,126,182		$	6,445	$	5,717		$	2,138,344


December 31, 2016	Loan Balance			Interest Due		Deferred Fees / (Costs)			Recorded Investment
Owner occupied real estate	$	337,548		$	899	$	1,022		$	339,469
Non owner occupied real estate		461,897			624		2,176			464,697
Residential spec homes		5,006			8		(2	)		5,012
Development & spec land loans		31,228			56		119			31,403
Commercial and industrial		230,520			1,906		442			232,868

Total commercial		1,066,199			3,493		3,757			1,073,449
Residential mortgage		508,233			1,492		3,030			512,755
Residential construction		20,611			33		—			20,644
Mortgage warehouse		135,727			480		—			136,207

Total real estate		664,571			2,005		3,030			669,606
Direct installment		71,150			199		(385	)		70,964
Direct installment purchased		119			—		—			119
Indirect installment		153,204			345		—			153,549
Home equity		175,126			703		(785	)		175,044

Total consumer		399,599			1,247		(1,170	)		399,676

Total loans		2,130,369			6,745		5,617			2,142,731
Allowance for loan losses		(14,837	)		—		—			(14,837	)

Net loans	$	2,115,532		$	6,745	$	5,617		$	2,127,894