Business Context and Reporting Period
Company: Horizon Bancorp Inc. (Horizon)
Reporting Period: Fiscal year ended December 31, 2009
Business Overview: Horizon is a registered bank holding company headquartered in Michigan City, Indiana, operating primarily through its subsidiary, Horizon Bank, N.A. The bank provides commercial and retail banking services in Northwestern Indiana and Southwestern Michigan through 19 full-service offices. The company is a participant in the U.S. Treasury's Capital Purchase Program (TARP).
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Net Income | $9.14 million | $8.97 million |
| Net Income Available to Common Shareholders | $7.74 million | $8.93 million |
| Diluted Earnings Per Share | $2.37 | $2.75 |
| Total Assets | $1.39 billion | $1.31 billion |
| Total Loans (Gross) | $886.3 million | $882.0 million |
| Total Deposits | $951.7 million | $841.2 million |
| Net Interest Margin | 3.66% | 3.45% |
| Return on Average Assets | 0.68% | 0.75% |
| Return on Average Equity | 8.92% | 11.81% |
| Allowance for Loan Losses | $16.02 million (1.80% of loans) | $11.41 million (1.29% of loans) |
| Non-Performing Loans | $17.15 million (1.92% of loans) | $7.86 million (0.89% of loans) |
| Stockholders' Equity | $114.6 million | $103.4 million |
Material Changes vs. Prior Period
- Profitability: Net income increased by 1.9% to $9.14 million, marking the tenth consecutive year of record earnings. However, net income available to common shareholders decreased due to preferred stock dividends and discount accretion associated with the TARP investment.
- Asset Quality: Non-performing loans increased significantly by $9.3 million (118% increase) to $17.15 million, driven by economic conditions and an increase in consumer bankruptcies. Consequently, the provision for loan losses rose 79.7% to $13.6 million.
- Loan Portfolio: Total loans remained relatively flat (+0.5%). Mortgage warehouse loans grew 35.2% due to refinancing activity, while residential mortgage loans declined 20.2% and consumer installment loans declined 3.2%.
- Deposits: Total deposits increased 13.1% to $951.7 million, providing a stable funding base.
- Non-Interest Income: Increased 29.1% to $17.9 million, primarily driven by a 105% increase in gains on the sale of mortgage loans and higher interchange fees.
- Non-Interest Expense: Increased 15.4% to $37.8 million. FDIC insurance expense surged 289.4% to $2.13 million due to higher assessment rates and special assessments.
Guidance, Outlook, and Risks
- Acquisition: On December 29, 2009, Horizon announced an agreement to acquire substantially all assets and assume deposits of American Trust & Savings Bank (approx. $110 million in assets, $112 million in deposits). The transaction is expected to close in Q2 2010.
- TARP Restrictions: As a TARP recipient, Horizon is restricted from increasing common stock dividends above $0.17 per share or repurchasing common stock without Treasury consent until December 2011. Executive compensation is also subject to strict limitations under the American Recovery and Reinvestment Act (ARRA).
- Capital Position: The company remains "well capitalized" under regulatory guidelines, with a Tier 1 leverage ratio of 9.86% and a total risk-based capital ratio of 14.74%.
- Risk Factors: Management highlights risks related to the economic slowdown in Northwestern Indiana and Southwestern Michigan, potential increases in loan charge-offs, rising FDIC premiums, and the impact of interest rate fluctuations on net interest margin.
Investor Verification Checklist
- Asset Quality Trends: Verify the trajectory of non-performing loans and the adequacy of the allowance for loan losses given the 118% increase in non-performing assets.
- FDIC Expense Impact: Assess the sustainability of earnings given the 289% increase in FDIC insurance costs and the potential for further rate hikes.
- TARP Redemption: Monitor the company's ability to access capital markets to redeem the $25 million Series A Preferred Stock to lift dividend and buyback restrictions.
- Acquisition Integration: Evaluate the financial impact and integration risks of the pending acquisition of American Trust & Savings Bank.
- Loan Concentration: Review the exposure to mortgage warehouse loans (19% of portfolio) and consumer installment loans (31% of portfolio) in the context of local economic conditions.