HBNC

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

Business Context and Reporting Period

Horizon Bancorp Inc. is a registered bank holding company headquartered in Michigan City, Indiana, operating Horizon Bank, N.A. The company provides commercial and retail banking services in Northwestern Indiana and Southwestern Michigan. This report covers the quarterly period ended September 30, 2009, and the nine-month period ended on the same date. The company is classified as a smaller reporting company.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability: Net income for Q3 2009 increased 77% compared to Q3 2008, driven by higher net interest income and non-interest income. However, YTD diluted EPS decreased due to preferred stock dividends and discount accretion introduced in late 2008.
• Net Interest Income: Increased 14% in Q3 and 20.7% YTD. The net interest margin expanded by 19 basis points in Q3 and 33 basis points YTD, as the cost of interest-bearing liabilities decreased more significantly than the yield on earning assets.
• Asset Quality: Non-performing loans increased to $16.5 million (1.87% of total loans) from $7.9 million at year-end 2008. The provision for loan losses rose significantly YTD ($9.9M vs $5.4M) due to increased charge-offs in installment loans, including $1.4 million related to recreational vehicle loan fraud.
• Non-Interest Income: Increased 35.5% in Q3, primarily due to a $1.28 million gain on the sale of mortgage loans and a $422,000 gain on the sale of securities. Wire transfer and interchange fees also grew.
• Expenses: Non-interest expense increased 7.8% in Q3. FDIC insurance expense surged 174% due to higher assessment rates and participation in the Temporary Liquidity Guarantee Program (TLGP).

Guidance, Outlook, Risks, and Unusual Items

• Outlook: Management does not expect a rise in interest rates in the short term but anticipates an increase eventually. The company does not anticipate a need to maintain excess liquidity levels in the fourth quarter as it did in the first half of the year.
• Risks:
  • Credit Risk: Rising unemployment in the steel, RV, and housing sectors has led to increased delinquencies and bankruptcies.
  • Regulatory Risk: As a TARP Capital Purchase Program participant, the company faces restrictions on dividends, share repurchases, and executive compensation until the preferred shares are redeemed or transferred.
  • FDIC Assessments: A proposed rule could require a prepayment of approximately $5.7 million in deposit insurance assessments by December 30, 2009.
• Unusual Items:
  • Q3 included a $422,000 gain on the sale of securities.
  • YTD 2009 included a $1.4 million charge-off related to RV loan fraud and a $100,000 deductible for wire transfer fraud.
  • YTD 2008 included a $538,000 tax-free death benefit on officer life insurance, which is not present in 2009.

Investor Verification Checklist

• Asset Quality Trends: Verify the trajectory of non-performing loans (up 109% since Dec 2008) and the adequacy of the allowance for loan losses (1.58% of total loans).
• FDIC Prepayment Impact: Assess the potential cash flow impact of the proposed $5.7 million FDIC prepayment assessment.
• TARP Restrictions: Confirm the timeline and conditions for redeeming Series A Preferred Shares to lift restrictions on dividends and buybacks.
• Non-Recurring Income: Evaluate the sustainability of earnings given the reliance on gains from the sale of securities and mortgage loans.
• Legal Proceedings: Monitor the status of the trademark dispute with First Horizon National Corporation regarding the name "Horizon Bank."