Horizon Reports Record Year to Date Earnings
July 20, 2011 12:55 PM
Michigan City, Indiana (NASDAQ GM: HBNC) - Horizon Bancorp today announced its unaudited financial results for the three and six month periods ended June 30, 2011.
Horizon's second quarter 2011 net income was $3.1 million or $.83 diluted earnings per share, a 23.0% increase in net income from the same period in 2010 and the highest second quarter net income in the Company's history.
Horizon's net income for the first half of 2011 was $5.9 million or $1.57 diluted earnings per share, a 36.0% increase in net income from the same period in 2010 and the highest first half net income in the Company's history.
Total deposits surpassed $1.0 billion at June 30, 2011 and increased $34.8 million from December 31, 2010.
Borrowings decreased by $30.6 million since December 31, 2010.
Net interest income, after provisions for loan losses, during the six months of 2011 was $19.7 million compared with $15.7 million for the same period in the prior year.
Horizon's non-performing loans decreased by 6.7% in the second quarter of 2011 compared to the first quarter of 2011.
The provision for loan losses decreased to $2.9 million for the first six months of 2011 compared to $6.2 million for the same period in 2010.
The Company's mortgage servicing asset recovered $728,000 of impairment during the first six months of 2011 as mortgage loan refinancing activity slowed.
Horizon's tangible book value per share rose to $28.76 compared with $25.39 at the close of the second quarter of 2010.
Horizon's capital ratios, including Tier 1 Capital to total risk weighted assets of 13.61%, continue to be well above the regulatory standards for well-capitalized banks.
Craig M. Dwight, President and CEO, stated: "Our continuing ability to generate record earnings reflects our commitment to balanced revenue streams and the tremendous dedication and quality of Horizon's employees. We have acquired new customers and expanded banking relationships with existing clients by providing exceptional service at competitive pricing. We continued to win market share."
"While a slowdown in residential mortgage lending and refinancing led to lower income from mortgage warehousing, other areas of our diversified and balanced business mix more than offset the declines. This is our strategy which is working as designed."
Mr. Dwight also stated: "The operating efficiencies implemented in the past several years have made us more productive and profitable. Economic recovery is slow, with businesses and consumers remaining cautious and conservative. We have focused on pursing every quality opportunity available to build and expand banking relationships."
"An encouraging sign for Horizon and the economy is a measurable reduction of non-accrual loans and a decline in loans that are 30 to 89 days delinquent, which represent the highest risk for requiring additional loan loss reserves or restructuring."
"We continue to develop initiatives to expand our product and service capabilities and build market share. In addition, we remain watchful for opportunities to grow organically by hiring exceptionally talented producers and for accretive acquisition opportunities in a consolidated banking market."
Net income for the second quarter of 2011 was $3.1 million or $.83 diluted earnings per share, up 23% compared to $2.5 million or $.65 diluted earnings per share in the second quarter of 2010.
Net income for the first six months of 2011 rose 36% to $5.9 million or $1.57 diluted earnings per share, compared with $4.3 million or $1.09 diluted earnings per share in the first half of 2010. This is the highest first six months of net income in the Company's history.
Net interest income increased $609,000 for the first six months of 2011 compared to the same prior year period. This was primarily due to an increase in the balance of interest earning assets partially offset by a slight decrease in the net interest margin. The net interest margin was 3.62% in the first half of 2011 compared to 3.66% in the prior year for the same period.
The net interest margin decreased to 3.67% in the second quarter of 2011 from 3.78% for the three month period ending June 30, 2010. The decrease in the net interest margin during the first and second quarters of 2011, as compared to the same periods in 2010 was primarily due to the decline in average mortgage warehouse loan volume and balances, which caused a corresponding increase in average federal funds sold and investments during the quarters at lower yields.
"We have operated our mortgage warehousing business for 12 years without a loss," noted Mr. Dwight, "While it is subject to seasonal and rate-driven fluctuations in the mortgage market, it is an important part of our diversified income stream. Mortgage warehouse loans in 2011 are significantly lower than in 2010, but this was anticipated. Overall, in an environment that has caused margin compression, we were satisfied with our ability to maintain relative stability in our net interest margin."
With respect to Horizon's lending activities, Mr. Dwight commented, "Horizon's overall loan activity continues to be a challenge, given the local and national economies. Given this challenge, Horizon has increased its marketing and outbound calling efforts in order to increase market share. In addition, we continue to pursue the hiring of good people to help fuel our expansion efforts."
Total loans decreased during the first six months as the balance of mortgage warehouse loans decreased $48.7 million from December 31, 2010 as a result of decreased refinancing activity.
Residential mortgage loan activity during the second quarter of 2011 generated $1.3 million of income from the gain on sale of mortgage loans, down $366,000 from the same period in 2010 but an increase of $775,000 from the first quarter of 2011. In addition, Horizon recognized a gain on the sale of securities of $365,000 during the second quarter of 2011 as the result of restructuring a portion of the investment portfolio.
The provision for loan losses was $1.3 million in the second quarter 2011, which was approximately $1.7 million less than the provision for the same period of the prior year. The 2011 second quarter provision was $216,000 less than the 2011 first quarter provision and was the lowest quarterly provision since the first quarter of 2008.
The ratio of allowance for loan losses to total loans increased to 2.20% from 2.11% as of June 30, 2011 and December 31, 2010, respectively. The increase in the ratio was due to an overall decline in total loan balances since the total non-performing loan balance amount also decreased. Horizon's net loans charged off decreased during the second quarter of 2011 to $1.8 million compared to $2.6 million in second quarter 2010.
Non-performing loans totaled $20.6 million on June 30, 2011, down from $22.1 million on March 31, 2011, and from $21.2 million on June 30, 2010. As a percentage of total loans non-performing loans were 2.44% on June 30, 2011, down from 2.71% on March 31, 2011, but up from 2.26% on June 30, 2010. The increase from a year ago was due to a decrease in total loans.
The decrease of non-performing loans from the prior quarter was primarily due to lower non-performing mortgage loans, partially offset by higher non-performing installment and commercial loans. Non-performing mortgage loans declined from $8.7 million at March 31, 2011, to $7.0 million on June 30, 2011. This decrease was primarily due to $2.7 million of loans moving to OREO during the quarter. It was also reduced by $384,000 for a loan brought current and $659,000 of charge-offs. These reductions were partially offset by the addition of $2.1 million of mortgage loans to non-performing status.
Non-performing installment loans increased from $3.9 million on March 31, 2011 to $4.0 million during the quarter. Non-performing commercial loans increased from $9.4 million on March 31, 2011 to $9.6 million on June 30, 2011.
"We have confidence in our credit analysis and risk management capabilities," said Mr. Dwight. "We believe the decrease in total non-performing loans indicates a slowing of financial problems caused by the sluggish economy, challenging employment conditions, and a housing market that continues to struggle with an overload of inventory."
"We continue to reserve for potential loan losses, but we believe the outlook is significantly more encouraging than a year ago. Because our non-performing assets represent a small percentage of our total loans, and our capital position remains strong, we are able to seek out new quality lending opportunities that other banks are not able to pursue because of their financial or regulatory situation. We are not afraid to lend."
Real estate and installment non-performing loans on June 30, 2011 include $1.7 million and $2.7 million, respectively, of loans in bankruptcy. This compares to $1.8 million and $2.0 million on March 31, 2011. These loans are not considered troubled debt restructures (TDRs) while they are going through bankruptcy, a process that can take six to eighteen months. The Company's experience with loans in bankruptcy has demonstrated that some debtors continue to make payments during the bankruptcy process, many reaffirm their obligations to the Court when they come out of bankruptcy, and some loans are discharged or restructured by the court.
TDRs are also included in total non-performing loans. TDRs increased from $4.7 million on March 31, 2011 to $6.1 million on June 30, 2011. Of these, $3.9 million were mortgage loans, $1.4 million were commercial loans, and $793,000 were consumer installment loans. The increase was primarily due to the addition of one commercial loan to a developer totaling $841,000 and a mortgage and second mortgage to one individual totaling $1.1 million. The commercial loan did not increase the total non-performing loans since it was comprised of the refinancing of several previously non-performing commercial loans.
Non-accrual loans totaled $14.4 million on June 30, 2011, down from $17.4 million on March 31, 2011, and $17.7 million on June 30, 2010. On June 30, 2011, non-accrual commercial loans were the largest component at $8.2 million. Non-accrual commercial loans to hotel owners totaled $4.3 million, with no other group over $1.0 million. Loans 90 days delinquent but still on accrual totaled $55,000 on June 30, 2011, similar to $57,000 on March 31, 2011, and down from $77,000 on June 30, 2010. Horizon's policy is to place loans over 90 days delinquent on non-accrual status unless they are in the process of collection and a full recovery is expected.
Other Real Estate Owned (OREO) totaled $4.1 million on June 30, 2011, up from $2.3 million on March 31, 2011, and $2.9 million on June 30, 2010. During the quarter five properties with a book value of $477,000 as of March 31, 2010 were sold. Seventeen properties with a book value of $2.4 million on June 30, 2011 were transferred to OREO status during the quarter. On June 30, 2011, OREO was comprised of 28 properties. Of these, five totaling $1.6 million were commercial properties and 23 totaling $2.5 million were residential real estate.
Total non-interest expenses were $303,000 higher in the second quarter of 2011 compared to the second quarter of 2010 and $1.0 million higher for the six months ended June 30, 2011 compared to the same period in the prior year. Salaries and employee benefits increased $280,000 compared to the same quarter in 2010 and $843,000 compared to the same six-month period of 2010. These increases are primarily the result of additional payroll expense from the consolidation of the American Trust & Savings Bank transaction that closed at the end of the second quarter of 2010, the expansion into Portage, Michigan, and annual merit pay increases. Other losses during the second quarter of 2011 included a write down on bank owned property of $140,000.
Mr. Dwight explained: "Our increased investment in people and facilities has directly resulted in income production. We expect these expenditures to generate additional income for Horizon well in excess of the related cost."
Diluted earnings per share were reduced by $.08 and $.16 for the three and six months ending June 30, 2011, respectively, and $.11 and $.22 for the three and six months ending June 30, 2010, respectively, due to the decrease in preferred stock dividends and the accretion of the discount on the preferred stock. The reduction in 2011 on the preferred stock dividend and the accretion of the discount on the preferred stock was due to the repurchase of $6.25 million of preferred stock issued pursuant to the US Treasury's Capital Purchase Program during the fourth quarter of 2010.
Horizon has applied to the US Treasury Department to make its second $6.25 million repurchase of preferred stock. In addition, Horizon has applied to the US Treasury to participate in the Small Business Lending Fund. Both applications are still pending approval from the US Treasury and at this time Horizon is not aware of any issues that would cause a denial of its applications.
Mr. Dwight concluded: "Horizon's business model continues to perform well during these challenging times, and as a result, we believe it will provide us with new opportunities. We also believe that the increase in regulatory burdens on banks and the decreasing fee revenue most banks are facing are likely to result in continued consolidation in the banking industry, and Horizon's historical performance has positioned us well for these opportunities."
Horizon Bancorp is a locally owned, independent, commercial bank holding company serving Northern Indiana and Southwest Michigan. 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.
This press release may contain forward-looking statements regarding the financial performance, business prospects, growth and operating strategies of Horizon. For these statements, Horizon claims the protections of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Statements in this press release should be considered in conjunction with the other information available about Horizon, including the information in the filings we make with the Securities and Exchange Commission. Forward-looking statements provide current expectations or forecasts of future events and are not guarantees of future performance. The forward-looking statements are based on management's expectations and are subject to a number of risks and uncertainties. We have tried, wherever possible, to identify such statements by using words such as "anticipate," "estimate," "project," "intend," "plan," "believe," "will" and similar expressions in connection with any discussion of future operating or financial performance. Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements. Risks and uncertainties that could cause actual results to differ materially include risk factors relating to the banking industry and the other factors detailed from time to time in Horizon's reports filed with the Securities and Exchange Commission, including those described in "Item 1A Risk Factors" of Part I of Horizon's Annual Report on Form 10-K for the fiscal year ended December 31, 2010. Undue reliance should not be placed on the forward-looking statements, which speak only as of the date hereof. Horizon does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions that may be made to update any forward-looking statement to reflect the events or circumstances after the date on which the forward-looking statement is made, or reflect the occurrence of unanticipated events, except to the extent required by law.
Contact: Horizon Bancorp
Mark E. Secor
Chief Financial Officer
Fax: (219) 874-9280