updated: 10/18/2013 1:07:21 PM

Horizon Bancorp Profits Nearly Flat

InsideINdianaBusiness.com Report

Michigan City-based Horizon Bancorp Inc. (Nasdaq: HBNC) is reporting third quarter net income of $4.8 million, compared to $4.9 million for the same period a year earlier. Chief Executive Officer Craig Dwight says the slight decrease can be partly attributed to an anticipated slowdown in residential mortgage refinancings.

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October 17, 2013

News Release

MICHIGAN CITY, Ind. - Horizon Bancorp (Nasdaq: HBNC) today announced its unaudited financial results for the three and nine-month periods ended September 30, 2013.

SUMMARY AND HIGHLIGHTS:

-Third quarter 2013 net income declined 1.3 percent compared to the same period in 2012 to $4.8 million or $.52 diluted earnings per share, with the decline primarily reflecting lower income from residential lending, including mortgage warehousing, as demand for mortgage refinancing slowed.
-Net income for the first nine months of 2013 rose 9.7 percent compared to the same period in 2012 to $15.8 million or $1.72 diluted earnings per share, the highest first nine months of net income in the Company's history.
-Net interest income, before provisions for loan losses, for the first nine months of 2013 was $47.3 million compared with $41.2 million for the same period of 2012, partially reflecting commercial loan growth that helped offset lower mortgage business revenue.
-Non-interest income rose 4.2 percent to $20.2 million for the first nine months of 2013 compared with $19.4 million for the same period of 2012, partially reflecting growth in fees from debit and credit card interchange services and income growth from fiduciary activities, partially offset by a decline in gains on sale of mortgage loans.
-Return on average assets was 1.09 percent for the third quarter of 2013 and 1.20 percent for the first nine months of 2013.
-Return on average common equity was 12.60 percent for the third quarter of 2013 and 13.82 percent for the first nine months of 2013.
-Purchase money mortgage originations for the third quarter of 2013 increased 7.7 percent to $73.3 million, representing 69.5 percent of total mortgage originations compared to $68.0 million or 51.4 percent of total mortgage originations for the same period of 2012.
-Kalamazoo and Indianapolis markets posted quarterly loan growth of $2.2 million and $8.9 million, respectively, and year over year loan growth of $17.9 million and $34.4 million to $106.9 million and $68.3 million, respectively.
-Tangible book value per share increased to $14.82 at September 30, 2013, compared to $14.42 and $13.85 at June 30, 2013 and September 30, 2012, respectively.
-Horizon Bank's capital ratios, including Tier 1 Capital to Average Assets Ratio of 9.13 percent and Total Capital to Risk Weighted Assets Ratio of 14.09 percent as of September 30, 2013, continue to be well above the regulatory standards for well-capitalized banks.

Craig M. Dwight, Chairman and CEO, commented: "During the past several quarters, we believe results from all five of our core banking revenue sources have been nothing short of exceptional. Our strategy is to generate balanced results in a variety of economic and market conditions. While the anticipated slowdown in residential mortgage refinancings led to less income from mortgage warehousing and gains on sale of mortgage loans, the growth of business loans and commercial banking services, purchase money mortgage originations and investment management activities generated meaningful core growth."

During the third quarter of 2013, the Company continued investing in markets with strong growth potential to complement the Company's current growth markets of Kalamazoo, MI and Indianapolis, IN. During the third quarter of 2013, the Company made an offer to purchase land in Fishers, IN, a suburb northeast of Indianapolis and east of Carmel, IN. This location complements the planned Carmel office and existing downtown Indianapolis loan production office by continuing to build the Company's overall presence in the Indianapolis region. A team for the previously announced Carmel location began to take shape in the third quarter of 2013 with the hiring of a senior lender, who will serve as group manager, and a second commercial lender. Additionally, the Company hired a senior lender in the third quarter of 2013 who will build a loan production team in Grand Rapids, MI, 50 miles north of Kalamazoo.

"Our growth strategy starts with identifying and hiring exceptional advisors and continuing our investment in markets with significant growth potential," Dwight explained. "Our investment in the Carmel and Fishers markets will continue to build our presence in vibrant communities with tremendous economic prospects for the Company."

"The Company's entry into Grand Rapids, MI, the state's second largest city, will be led by our recently hired market leader who is tasked with building a loan production team similar to our investments in both Indianapolis and Kalamazoo. We believe the upfront costs associated with these market entries are well worth the investment as evidenced by the significant growth we have achieved in Indianapolis and Kalamazoo."

In addition to new market entries, the Company continues to capitalize on strategic opportunities within the existing branch footprint as evidenced by the hiring of two seasoned commercial lenders in Northwest Indiana. "These additions strengthen the Company’s presence in Lake and Porter Counties, Indiana and will enable the Company to capitalize on the business activity in these markets," Dwight explained.

Non-interest bearing deposits increased 6.8% to $223.4 million at September 30, 2013 compared to $209.2 million at December 31, 2012, reflecting the growth in the number of small and mid-sized business banking relationships. Interest bearing transaction accounts increased 6.0% to $816.2 million at September 30, 2013 compared to $769.8 million at December 31, 2012.

Income Statement Highlights

Net income for the third quarter of 2013 decreased 1.3% to $4.8 million or $.52 diluted earnings per share, compared to $4.9 million or $.54 diluted earnings per share in the third quarter of 2012. The decrease in net income for the third quarter primarily reflects the decline in mortgage warehouse activity as mortgage warehouse balances decreased from $244.2 million as of September 30, 2012 to $113.6 million as of September 30, 2013 and the decrease in gain on sale of mortgage loans of $2.8 million from $4.4 million in the third quarter of 2012 to $1.7 million in the third quarter of 2013.

Net income for the first nine months of 2013 increased 9.7% to $15.8 million or $1.72 diluted earnings per share, compared to $14.4 million or $1.75 diluted earnings per share for the first nine months of 2012. The decline in earnings per share reflects the increase in weighted average diluted shares outstanding resulting from the Heartland acquisition, which occurred during the third quarter of 2012.

The Company’s net interest margin was 3.78% during the three-month period ended September 30, 2013, compared with 3.79% for the three-month period ending September 30, 2012 and down 43 basis points from the three-month period ending June 30, 2013. Interest income during the third quarter of 2013 compared to the same period in 2012 included approximately $1.0 million of interest income from Heartland loan valuation discounts recognized at the time of acquisition being accreted and discounts recognized from loans paying off. Excluding the interest income recognized from the loan discounts, the margin would have been 3.52% for the three-month period ending September 30, 2013. The decrease in net interest margin of 43 basis points from June 30, 2013 primarily reflected a decrease of $1.4 million in interest from loan discounts being accreted and discounts recognized from loans paying off and a reduction in mortgage warehouse activity in the third quarter of 2013 compared to the second quarter of 2013.

The net interest margin was 4.06% for the nine-month period ending September 30, of 2013, up from 3.80% for the same period in 2012. Excluding the interest income recognized from the loan discounts of $5.4 million for the first nine months of 2013, the margin would have been 3.61% for the nine-month period ending September 30, 2013.

Residential mortgage lending activity during the third quarter of 2013 generated $1.7 million in income from the gain on sale of mortgage loans, a decrease of $1.1 million from the second quarter of 2013 and $2.8 million from the third quarter of 2012. Total origination volume in the third quarter of 2013 decreased 10.5% from the previous quarter from $117.7 million to $105.4 million. The reduction in the gain on sale of mortgages was primarily due to the decrease in the percentage earned on the sale of these loans due to a rapid increase in interest rates against uncommitted, unfunded loans and, to a lesser extent, the decrease in overall origination volume. Purchase money mortgage originations for the third quarter of 2013 increased 7.7% to $73.3 million, representing 69.5% of total mortgage originations compared to $68.0 million or 51.4% of total mortgage originations for the same period of 2012.

Lending Activity

Total loans decreased from $1.2 billion at December 31, 2012 to $1.1 billion at September 30, 2013 as mortgage warehouse loans decreased by $137.9 million, residential mortgage loans decreased by $460,000 and consumer loans decreased by $10.1 million, partially offset by commercial loan growth.

Commercial loans increased from $460.5 million at December 31, 2012 to $499.6 million at September 30, 2013. Dwight noted the continued investment in the commercial lending division and growth markets such as Indianapolis and Kalamazoo has effectively supported the Company’s goal to expand business banking activity.

Total loan balances in the Kalamazoo and Indianapolis markets continued their growth during the quarter to $106.9 million and $68.3 million, respectively, as of September 30, 2013. Kalamazoo’s aggregate loan balances increased $17.9 million or 20.1% and Indianapolis’ aggregate loan balances increased $34.4 million or 101.5% compared to December 31, 2012.

The provision for loan losses declined to $104,000 in the third quarter of 2013, which was $937,000 lower than the provision for the same period of the prior year and $625,000 less than the previous quarter. The lower provision for loan losses in the third quarter of 2013 compared to the previous quarter and the third quarter of 2012 was primarily due to continued improvement of nonperforming and substandard loans. For the first nine months of 2013, the provision for loan losses was $2.9 million, which was $1.1 million more than the provision for the same period of the prior year.

The ratio of the allowance for loan losses to total loans increased to 1.64% as of September 30, 2013 from 1.52% as of December 31, 2012. The increase in the ratio was due to the decrease in total loans outstanding of $118.5 million during the first nine months of 2013. The allowance for loan losses decreased from $18.3 million as of December 31, 2012 to $17.8 million as of September 30, 2013 primarily due to loans with specific reserves charged off during the third quarter of 2013.

Non-performing loans totaled $22.4 million as of September 30, 2013, down from $23.8 million as of December 31, 2012 and $24.0 million as of September 30, 2012. Compared to December 31, 2012, non-performing commercial loans and real estate loans decreased by $2.8 million and $1.1 million, respectively, partially offset by an increase of $2.6 million in non-performing consumer loans. The increase in non-performing consumer loans from December 31, 2012 was primarily due to the addition of three large home equity lines of credit totaling $2.0 million, which have specific reserves included in the allowance for loan losses. As a percentage of total loans, non-performing loans were 2.07% at September 30, 2013, up from 1.97% at December 31, 2012 and 2.05% at September 30, 2012.

At September 30, 2013, loans acquired in the Heartland acquisition represented $6.2 million in non-performing, $12.2 million in substandard and $231,000 in delinquent loans, which compares to $7.3 million in non-performing, $18.1 million in substandard and $3.4 million in delinquent loans represented at December 31, 2012.

Expense Management

Total non-interest expense was $4.7 million higher in the first nine months of 2013 compared to the first nine months of 2012 and $734,000 lower in the three-month period ending September 30, 2013 compared to the previous quarter. Salaries and employee benefits increased $2.5 million in the first nine months of 2013 compared to the same period in 2012 and decreased $211,000 in the third quarter of 2013 compared to the previous quarter. The increase over the previous year was primarily the result of changes to annual merit pay, employee benefits costs, commissions earned, and Horizon's investment in growth markets. In addition, some of the increase in the first nine months of 2013 compared to the first nine months of 2012 was also related to the Heartland acquisition.

Dwight concluded: "With clear focus on efficiency, productivity and credit quality, our Horizon team continues to identify opportunities for growth through new business and expanding relationships with clients. We intend to stay focused on our goals for growth, financial performance, and building shareholder value."

Horizon Bancorp is a locally owned, independent, commercial bank holding company serving Northern and Central Indiana and Southwest Michigan through its commercial banking subsidiary Horizon Bank, NA. Horizon also offers mortgage-banking services throughout the Midwest. Horizon Bancorp may be reached online at www.accesshorizon.com. Its common stock is traded on the NASDAQ Global Market under the symbol HBNC.

Source: Horizon Bancorp

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