MICHIGAN CITY, Ind. ( TheStreet) -- Market watchers gave a thumbs up to Horizon Bancorp's ( HBNC) 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.

Horizon Bancorp had $1.5 billion in total assets as of September 30, and its nonperforming assets - including nonaccrual loans, restructured loans, loans past due 30 or more days and repossessed real estate - totaled $25.8 million, or 1.74% of total assets.

The regulatory Tier 1 leverage ratio was 8.53% and the total risk-based capital ratio was 12.89% as of September 30, well-above the 5% and 10% required for most U.S. banks and thrifts to be considered well-capitalized by regulators.

Shares were trading slightly below tangible book value as of Friday's close according to SNL Financial, and 8.6 times the consensus earnings estimate of $2.90 for 2011. Out of four analysts covering Horizon Bancorp, two have buy ratings and the other two recommend investors hold the shares.

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-- Written by Philip van Doorn in Jupiter, Fla.

To contact Philip van Doorn, click here: Philip van Doorn.

To follow the writer on Twitter, go to http://twitter.com/PhilipvanDoorn.
Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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