Business Context and Reporting Period
Company: Horizon Bancorp Inc. (Horizon)
Reporting Period: Fiscal year ended December 31, 2008
Business Overview: Horizon is a registered bank holding company headquartered in Michigan City, Indiana, operating primarily through its subsidiary, Horizon Bank, N.A. The company provides commercial and retail banking services in Northwestern Indiana and Southwestern Michigan through 17 full-service offices. The business is not seasonal and is not dependent on a single customer group.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Total Assets | $1,306.9 million | $1,258.9 million |
| Total Loans (Gross) | $882.0 million | $888.9 million |
| Total Deposits | $841.2 million | $893.7 million |
| Net Interest Income | $37.4 million | $32.8 million |
| Net Interest Margin | 3.32% | 2.98% |
| Provision for Loan Losses | $7.6 million | $3.1 million |
| Net Income | $9.0 million | $8.1 million |
| Diluted Earnings Per Share | $2.75 | $2.51 |
| Stockholders' Equity | $103.4 million | $70.6 million |
| Return on Average Assets | 0.75% | 0.69% |
| Return on Average Equity | 11.73% | 12.29% |
Liquidity and Capital: As of December 31, 2008, the Bank was categorized as "well capitalized." Total risk-based capital ratio was 13.11% (Bank) and 14.38% (Consolidated). Tier 1 leverage ratio was 9.44% (Bank) and 10.45% (Consolidated). The company received $25 million in Tier 1 capital through the Treasury's Capital Purchase Program (TARP) in December 2008.
Material Changes vs. Prior Period
- Net Income Growth: Net income increased 10.2% to $8.97 million, marking the ninth consecutive year of record earnings, despite a challenging economic environment.
- Net Interest Margin Expansion: The net interest margin improved by 35 basis points to 3.32%, driven by a 108 basis point drop in the cost of funds which outpaced the 72 basis point decline in yield on earning assets.
- Loan Loss Provisions: The provision for loan losses more than doubled to $7.6 million (from $3.1 million in 2007) due to deteriorating loan quality. Net charge-offs increased to $5.9 million.
- Non-Performing Assets: Non-performing loans increased significantly to $7.9 million (0.89% of total loans) from $2.9 million (0.33%) in 2007. This was primarily due to increases in commercial and residential real estate loans.
- Deposit Decline: Total deposits decreased 5.9% to $841.2 million, largely due to a reduction in high-cost, short-term consumer certificates of deposit.
- Capital Injection: Stockholders' equity increased significantly from $70.6 million to $103.4 million, primarily due to the $25 million TARP preferred stock issuance and retained earnings.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary & Outlook: Management anticipates continued challenges due to the national economic recession, rising unemployment, and declining real estate values in their primary markets. They expect FDIC deposit insurance premiums to increase significantly in the future. The company plans to continue growing consumer and commercial loan portfolios while maintaining strict underwriting standards.
Unusual Items:
- TARP Participation: In December 2008, Horizon sold $25 million of Fixed Rate Cumulative Preferred Stock to the U.S. Treasury. This includes a 5% dividend rate for the first five years (increasing to 9% thereafter) and restrictions on increasing common stock dividends or repurchasing common stock for three years.
- FDIC Special Assessment: A subsequent event noted a new FDIC special assessment of 10 basis points effective June 30, 2009, estimated to cost the Bank approximately $779,000.
- Life Insurance Benefit: The company recognized a $538,000 death benefit from a deceased bank officer's life insurance policy, which reduced the effective tax rate.
Risks:
- Credit Risk: Increased exposure to commercial and consumer loans, particularly indirect auto loans and residential real estate, in a slowing economy.
- Interest Rate Risk: Sensitivity to changes in market rates affecting net interest income.
- Regulatory Risk: Potential for increased FDIC assessments and stricter capital requirements.
- Operational Risk: Fraud risk associated with mortgage warehouse and indirect lending operations.
Investor Verification Checklist
- Asset Quality Trends: Verify the trajectory of non-performing loans and the adequacy of the allowance for loan losses (currently 1.29% of total loans) given the doubling of the provision expense.
- TARP Restrictions: Confirm the impact of the three-year restriction on common stock dividend increases and share repurchases on shareholder returns.
- Deposit Stability: Monitor the 5.9% decline in deposits and the company's reliance on borrowed funds (which increased to $324.4 million) to fund loan growth.
- FDIC Costs: Assess the financial impact of the anticipated $779,000 special assessment and rising base insurance premiums.
- Goodwill Impairment: Review the third-party impairment test results for goodwill ($5.8 million), noting that while the test passed, the stock price dropped below book value for the first time in Q4 2008.