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Horizon's TARP Plan Gets Market Approval

MICHIGAN CITY, Ind. ( TheStreet) -- Market watchers gave a thumbs up to Horizon Bancorp's (HBNC - Get Report) plan to repay government bailout money while avoiding a dilutive capital raise.

Shares were up 1% to $25.28 in early afternoon trading.

Horizon Bancorp announced Friday that it had redeemed $6.25 million out of a total of $25 million in preferred shares held by the U.S. Treasury Department for assistance received through the Troubled Assets Relief Program, or TARP, in December 2008. The company plans "to repurchase the remaining preferred shares over the next three years from earnings."

Horizon said that beginning in the first quarter of 2011, the partial repayment of the TARP preferred shares would save $312,500 in dividend payments per quarter, of 11 cents per common share.

The announcement was good news for shareholders, as it implied the company would avoid a dilutive common equity offering when repaying TARP. Daniel Arnold of Sandler O'Neill was upbeat, saying that his firm expected the company to succeed in repaying TARP without raising capital, "unless the company were to complete an acquisition of some kind in the near term." He added that the approval of Horizon's plan by regulators was "an indication that the company is on sound financial footing."

Arnold has a buy rating on the shares with a $30 price target, which would represent a 20% gain from Friday's closing price of $24.93.

Horizon Bancorp reported third-quarter net income available to common shareholders of $2.9 million, or 88 cents a share, rising from $2.2 million, or 65 cents a share, the previous quarter and $2 million, or 61 cents a share, a year earlier. The company's return on average assets for the third quarter was 0.90% and its return on average common equity was 12.12%, which are very respectable numbers in the current environment.

The company was continuing to build loan loss reserves, as its third-quarter provision for loan losses was $2.7 million, while net charge-offs (loan losses less recoveries) totaled $1.2 million. The annualized ratio of net charge-offs to average loans for the third quarter was 0.51% and loan loss reserves covered 1.85% of total loans as of September 30, according to SNL Financial.
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