HBNC

Horizon Bancorp Inc. - Q1 2009 10-Q Summary

Business Context and Reporting Period

Horizon Bancorp Inc. (Horizon) is a registered bank holding company incorporated in Indiana, operating primarily through its subsidiary, 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 March 31, 2009. Horizon is classified as a smaller reporting company.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income Growth: Consolidated net income increased 4.2% to $2.6 million, driven by a 27.9% increase in net interest income.
• Net Interest Margin Expansion: The net interest margin improved by 68 basis points to 3.78%, as the cost of interest-bearing liabilities decreased 101 basis points, outpacing the 34 basis point decline in asset yields.
• Loan Loss Provisions: The provision for loan losses surged to $3.2 million (from $0.8 million in Q1 2008) due to economic pressures affecting commercial and installment loan portfolios. Charge-offs totaled $3.3 million.
• Asset Quality Deterioration: Non-performing loans increased to $10.5 million (1.11% of total loans) from $3.1 million in the prior year, though this remains below national and state peer averages.
• Non-Interest Income: Increased 39.9% to $4.5 million, primarily due to a $1.9 million gain on the sale of mortgage loans, driven by high refinancing activity.
• Liquidity Position: Cash and cash equivalents increased by $52.9 million, largely due to a $50.0 million fixed-rate long-term corporate repurchase agreement entered into on March 31, 2009.

Guidance, Outlook, and Risks

Management Commentary: Management notes that while the company operates in a challenging economic environment with rising unemployment in its primary markets (Northwest Indiana and Southwest Michigan), it reported earnings growth for the first time in its history for nine consecutive years. The company is actively extending the duration of its liabilities to lock in low interest rates.

Goodwill Impairment: Despite the stock price dropping below book value in late 2008, management concluded that goodwill ($5.8 million) is not impaired based on a third-party valuation performed in late 2008.

Risks and Contingencies:

• Credit Risk: Continued economic decline could lead to increased loan charge-offs and non-performing assets.
• Legal Proceedings: A class action lawsuit regarding vehicle repossession notices was settled in April 2009 for up to $28,000 in legal fees plus $200 to the lead plaintiff. A trademark dispute with First Horizon National Corporation regarding the name "Horizon Bank" is ongoing.
• Operational Risk: The company incurred a one-time $210,000 loss in Q1 2009 due to wire transfer fraud, with an expected insurance recovery of $110,000 in Q2 2009.

Investor Verification Checklist

• Verify the adequacy of the $11.6 million allowance for loan losses given the 1.11% non-performing loan ratio and rising charge-offs in commercial and installment segments.
• Monitor the impact of preferred stock dividends ($0.11 per share reduction in common EPS) on future earnings per share calculations.
• Assess the sustainability of the gain on sale of loans ($1.9 million) which drove non-interest income, as this is dependent on mortgage refinancing volumes.
• Review the status of the trademark dispute with First Horizon National Corporation and potential costs associated with rebranding or licensing.
• Confirm the insurance recovery of $110,000 related to the Q1 wire transfer fraud loss is recorded in Q2 2009 as expected.