HBNC

Horizon Bancorp Inc. - 10-Q Summary (Period Ended June 30, 2009)

Business Context and Reporting Period

Horizon Bancorp Inc. is a registered bank holding company headquartered in Michigan City, Indiana, operating as a single commercial banking segment. This report covers the quarterly period ended June 30, 2009. The company operates in a challenging economic environment characterized by rising unemployment in Northwest Indiana and Southwest Michigan, impacting the steel, recreational vehicle, and housing industries. Despite these headwinds, the company maintained positive results and capital ratios above regulatory standards for "well-capitalized" banks.

Key Financial Metrics

Material Changes vs. Prior Period

• Earnings Decline: Net income for the three months ended June 30, 2009, decreased 31.0% compared to the same period in 2008 ($2.1 million vs. $3.0 million). For the six-month period, net income decreased 14.8% ($4.7 million vs. $5.5 million).
• Provision Increase: The provision for loan losses increased significantly to $3.3 million for the quarter (from $1.5 million in 2008) and $6.5 million for the six months (from $2.3 million in 2008), driven by economic conditions and specific charge-offs in installment loans.
• Non-Performing Assets: Non-performing loans rose to $13.5 million (1.49% of total loans) from $7.9 million (0.89%) at year-end 2008. This increase was attributed to the slower economy and higher unemployment.
• Expense Growth: Non-interest expense increased 20.5% for the quarter, primarily due to a special FDIC assessment of $663,000 and higher salaries/benefits linked to increased mortgage loan volume.
• Income Drivers: Non-interest income increased 15.9% for the quarter, largely driven by a 152.8% increase in gains on the sale of loans due to high mortgage refinancing volumes.

Guidance, Outlook, and Risks

Management Commentary: Management maintains that the allowance for loan losses is adequate to absorb probable incurred losses. The company successfully extended the duration of liabilities to lock in low funding costs. While the market value of stock dropped below book value in late 2008, management believes this reflects broader industry trends rather than company-specific issues, and no goodwill impairment was required.

Risks and Contingencies:

• FDIC Assessments: The company recorded a special FDIC assessment of $663,000 for Q2 2009. Future assessments may be required to replenish the insurance fund, potentially impacting earnings and dividend capacity.
• TARP Restrictions: As a participant in the Treasury's Capital Purchase Program (TARP), the company faces restrictions on dividends, share repurchases, and executive compensation until the preferred shares are redeemed or transferred.
• Credit Risk: Continued economic weakness in the company's primary markets poses a risk of increased loan charge-offs and non-performing assets.
• Legal Proceedings: A class action lawsuit regarding vehicle repossession notices was settled in April 2009 with a payment of up to $28,000 in legal fees and costs. A trademark dispute with First Horizon National Corporation is ongoing but not expected to have a material adverse effect.

Key Facts for Investor Verification

• Verify the adequacy of the $12.6 million allowance for loan losses given the 1.49% non-performing loan ratio and recent charge-offs in installment loans.
• Monitor the impact of the special FDIC assessment and potential future assessments on net income and dividend sustainability.
• Assess the sustainability of the high mortgage refinancing volume driving non-interest income gains.
• Review the company's ability to meet TARP lending goals without compromising asset quality in a weak economic environment.
• Confirm the status of the trademark dispute with First Horizon National Corporation and any potential costs associated with the settlement of the repossession class action.