News Column

Banks See Earnings Boost Across the Board

Feb 4, 2013

Kevin Allen

Despite continuing unease about the overall economy, many banks' bottom lines looked better than ever at the end of last year.

Several large, national banks as well as regional and community banks posted record profits for 2012 when they issued their earnings reports in January.

Firms based in north-central Indiana were among the record breakers.

1st Source Corp., the parent company of 1st Source Bank, earned $49.6 million in 2012 -- the highest annual net income or profit in its history.

Horizon Bancorp, which owns Horizon Bank based in Michigan City, also set a company record by earning net income of $19.5 million for the year.

Lakeland Financial Corp., the Warsaw-based parent company of Lake City Bank, had record net income of $35.4 million in 2012.

Other banks with a Michiana presence -- Wells Fargo & Co. and JPMorgan Chase & Co. -- also posted record profits in 2012. Old National Bancorp, the Evansville, Ind.-based parent company of Old National Bank, reported its best annual net income in 10 years.

Local bank executives said the economy is gaining strength, and their companies have had to reserve less money for potential loan losses as a result. At the same time, low interest rates have motivated more people to buy homes or refinance mortgages, which have produced additional fees for financial institutions.

"The industry in general is setting aside significantly less for loan losses than we have been historically," said David Findlay, Lake City's president and chief financial officer. "We have seen improvement in the performance of our borrowers, particularly on the commercial side, during the last 12 months."

For example, Findlay said, Lake City's provision for loan losses was $2.5 million in 2012 compared with $13.8 million in 2011. Horizon's was $3.5 million in 2012 versus $5.3 million in 2011.

1st Source Chairman Chris Murphy said the bank's provision for loan losses wasn't a major factor in its earnings numbers.

He said 1st Source has focused on keeping costs down and growing the company's customer base. In addition to traditional banking, its business includes financing for construction machinery, trucking, rental car fleets, delivery vans, and individual and corporate aircraft.

"Our focus is to make sure we're building sustainable earnings that come from doing a better job for our clients, getting our costs down and being productive," he said.

Local banks saw a boost in mortgage income as well in 2012.

1st Source's mortgage income increased to $8.3 million in 2012 from $3.8 million in 2011. That line item jumped to $2.5 million from $1 million at Lake City.

Horizon boosted its residential mortgage loan income to $4 million during the fourth quarter of 2012 from $1.5 million during the fourth quarter of 2011.

"People are coming back into the market and purchasing homes again," said Craig Dwight, president and CEO at Horizon. "We had a record year for mortgage loans."

Dwight added that he believes the wave of people looking to refinance mortgages could continue as they recover from the recession and rebuild their credit scores.

"People should refinance -- rates are not going to stay low forever," he said. "With our government's borrowing, at some point there's going to be pressure for rates to go up."

Keith Leggett, vice president and senior economist at the American Bankers Association, said those who work in banking do have some concerns about the future.

While low interest rates have helped spur demand for new mortgages and refinancing, low rates have also shrunk net interest margins -- that is, how much a bank can earn on the difference between what it pays for deposits and what it charges for loans.

Leggett added that financial regulations are also imposing new costs on banks.

He said bankers will be encouraged when they begin to see their revenues grow in addition to bottom-line profits.

"That would mean we're seeing broader improvements in loan demand and, additionally, an environment where net interest margins move from these artificial lows that have been imposed by the Federal Reserve," he said.

1st Source's Murphy noted, "We may have a record absolute number (for net income), but our return on equity and assets are not records."

He said the low interest rates help large banks involved in investment banking, but low rates put pressure on the community banks that do business on Main Street.

"People like us and people like Lake City or Horizon will eventually feel the effects of these rates because we're being squeezed on the margin side," Murphy said.

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Source: (c) 2013 the South Bend Tribune (South Bend, Ind.)


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