HEARTLAND FINANCIAL USA, INC. REPORTS LITIGATION LOSS AND A RESULTING RESTATEMENT OF PREVIOUSLY RELEASED FIRST QUARTER EARNINGS
NOTE: The following is a revised copy of Heartland Financial USA, Inc.’s press release announcing earnings for the quarter ended March 31, 2006. As previously disclosed, Heartland and Wisconsin Community Bank, a wholly-owned subsidiary, were defendants in a lawsuit regarding a breach of contract claim relating to the sale of Wisconsin Community Bank’s Eau Claire branch and Heartland filed a counterclaim against the plaintiff. On May 3, 2006, Heartland was notified that a verdict was entered awarding the plaintiff $2.4 million on its claim and awarding Heartland $286,000 for its counterclaim against the plaintiff. Heartland has recorded the judgments in the first quarter of 2006. Therefore, the original earnings release, dated April 25, 2006, and issued prior to the announcement of the court’s judgments, is being revised by this earnings release and should not be relied upon. The revised release is as follows:
First Quarter 2006 Highlights
| § | Net interest margin improved by 17 basis points over first quarter 2005 |
| § | Average earning assets increased 8% over first quarter 2005 |
| § | Net litigation loss of $2.1 million recorded during the first quarter of 2006 |
| § | Exclusive of the judgment, net income improved by 9% over first quarter 2005 |
| | | | Three Months Ended March 31, |
| | | | | | | | | 2006 | | | | 2005 | |
| Net income (in millions) | | | | | | | $ | 4.5 | | | $ | 5.3 | |
| Diluted earnings per share | | | | | | | | .27 | | | | .32 | |
| | | | | | | | | | | | | | |
| Return on average assets | | | | | | | | .65 | % | | | .81 | % |
| Return on average equity | | | | | | | | 9.56 | | | | 12.06 | |
| Net interest margin | | | | | | | | 4.14 | | | | 3.97 | |
“While we are disappointed in the decision of the trial court, we are delighted to report that our net interest margin continues to grow despite a yield curve that remains essentially flat. Not only are we experiencing solid loan growth, but our balance sheet remains well-positioned for an increasing rate environment.”-- Lynn B. Fuller, chairman, president and chief executive officer, Heartland Financial USA
Dubuque, Iowa, May 5, 2006—Heartland Financial USA, Inc. (NASDAQ: HTLF) today reported revised earnings for the first quarter of 2006. Net income for the quarter ended March 31, 2006, was $4.5 million, or $0.27 per diluted share, compared to net income of $5.3 million, or $0.32 per diluted share, during the first quarter of 2005. Return on average equity was 9.56 percent and return on average assets was 0.65 percent for the first quarter of 2006, compared to 12.06 percent and 0.81 percent, respectively, for the same quarter in 2005.
As previously disclosed, Heartland and Wisconsin Community Bank, a wholly-owned bank subsidiary, were defendants in a lawsuit regarding a breach of contract claim relating to the 2002 sale of Wisconsin Community Bank’s Eau Claire branch. Heartland and Wisconsin Community Bank filed a counterclaim against the plaintiff. The matters were tried in the State of Wisconsin Circuit Court, St. Croix County, in December, 2005. On May 3, 2006, Heartland was notified by the court that a verdict was entered awarding the plaintiff $2.4 million for its original claim and awarding Heartland $286,000 for its counterclaim against the plaintiff. Heartland has recorded the judgments in the quarter ended March 31, 2006. Heartland and its legal counsel are reviewing the judgments to determine what post-trial motions Heartland will file. The pre-tax judgment of $2.4 million against Heartland and Wisconsin Community Bank was recorded as noninterest expense, while the $286,000 award under the counterclaim was recorded as a loan loss recovery. The net after tax adjustment to net income for this one-time event was $1.3 million. Exclusive of this expense, Heartland’s net income for the first quarter of 2006 was $5.7 million, or $0.35 per diluted share, an increase of $482,000 or 9 percent over the first quarter of 2005. Because of the non-recurring nature of this expense, Heartland believes that this pro-forma presentation is important for investors to understand Heartland’s financial performance for the first quarter of 2006.
Lynn B. Fuller, Heartland’s chairman, president and CEO stated, “While we are disappointed in the decision of the trial court, we are delighted to report that our net interest margin continues to grow despite a yield curve that remains essentially flat. Not only are we experiencing solid loan growth, but our balance sheet remains well-positioned for an increasing rate environment. Given a steady rate scenario, we anticipate our net interest margin will also hold constant for the remainder of the year.”
Net interest margin, expressed as a percentage of average earning assets, was 4.14 percent during the first quarter of 2006 compared to 3.97 percent for the first quarter of 2005 and 3.97 percent for the fourth quarter of 2005. Net interest income on a tax-equivalent basis totaled $25.7 million during the first quarter of 2006, an increase of $2.9 million or 13 percent from the $22.8 million recorded during the first quarter of 2005. Contributing to this increase was the $186.0 million or 8 percent growth in average earning assets along with a shift in balances to loans from securities. The percentage of average loans to total assets increased from 68 percent during the first quarter of 2005 to 71 percent during the first quarter of 2006. More than half of the credits in Heartland’s commercial and agricultural loan portfolios are floating rate loans, thus increases in the national prime rate, as experienced during the first quarter of 2006, have an immediate positive impact on interest income. On a tax-equivalent basis, interest income in the first quarter of 2006 totaled $44.2 million compared to $35.7 million in the first quarter of 2005, an increase of $8.5 million or 24 percent. As rates continued to move upward during the first quarter of 2006, Heartland experienced some movement in deposit balances from lower yielding accounts into higher yielding money market and certificate of deposit accounts. Interest expense for the first quarter of 2006 was $18.6 million compared to $13.0 million in the first quarter of 2005, an increase of $5.6 million or 43 percent.
Net interest income simulations reflect an asset sensitive posture leading to stronger earnings performance in a rising interest rate environment. Should the current rising rate environment reverse, net interest income would likely decline. In order to reduce the potentially negative impact a downward movement in interest rates would have on net interest income, Heartland entered into a two-year floor transaction on a notional $100.0 million in July 2005, a five-year collar transaction on a notional $50.0 million in September 2005 and an additional three-year collar transaction on a notional $50.0 million in April 2006.
Noninterest income increased by $1.5 million or 15 percent during the first quarter of 2006 compared to the same quarter in 2005. Rental income on operating leases represented $490 thousand or 33% of the increase in noninterest income. The increase in this category is directly related to the increase in the vehicles under operating lease at ULTEA, Inc., Heartland’s fleet management subsidiary, from 2,351 at March 31, 2005 to 2,462 at March 31, 2006. The other categories experiencing the largest increases were service charges and fees, loan servicing income and trust fees.
For the first quarter of 2006, noninterest expense increased $5.8 million or 26 percent in comparison with the same period in 2005. The largest component of noninterest expense, salaries and employee benefits, increased $1.9 million or 17 percent during the first quarter of 2006 in comparison to the first quarter of 2005. In addition to the merit increases for all salaried employees that are made on January 1 of each year, the growth in salaries and employee benefits expense was a result of additional staffing at the holding company to provide support services to the growing number of bank subsidiaries, the addition of branches at New Mexico Bank & Trust, Riverside Community Bank and Arizona Bank & Trust, and the new bank subsidiary being formed in Denver, Colorado, which began operations in October 2005 as a loan production office under the Rocky Mountain umbrella. Total full-time equivalent employees increased to 938 at March 31, 2006, from 859 at March 31, 2005. The previously mentioned judgment against Heartland and a bank subsidiary was also a major factor in the increase in noninterest expense. Exclusive of the $2.4 million judgment recorded during the first quarter of 2006, noninterest expense increased $3.4 million or 15 percent in comparison to the first quarter of 2005.
Fuller commented, “We continue to monitor the expense growth, particularly as it relates to our investment in new branches and our de novo, Summit Bank & Trust in Broomfield, Colorado. As I have noted in the past, however, the increase in noninterest expense should be seen as a measure of our commitment to build the infrastructure necessary to compete in our attractive western markets.”
Heartland’s effective tax rate was 28.81 percent for the first quarter of 2006 compared to 30.80 percent during the first quarter of 2005. Tax-exempt interest income as a percentage of pre-tax income was 25.66 percent during the first quarter of 2006 compared to 18.94 percent during the same quarter of 2005. The tax-equivalent adjustment for this tax-exempt interest income was $868,000 during the first quarter of 2006 compared to $775,000 during the same quarter in 2005. This increase in tax-exempt interest income partially mitigated the impact that reduced tax credits had on income taxes recorded during the first quarter of 2006. Income taxes recorded during the first quarter of 2005 included low-income housing tax credits totaling $440,000 for the year. During the first quarter of 2006, these credits decreased to approximately $225,000 for the year.
At March 31, 2006, total assets remained steady during the quarter at $2.8 billion. Total loans and leases were $2.0 billion at March 31, 2006, an increase of $37.8 million or 8 percent annualized since year-end 2005. This growth was an improvement over the $10.3 million or 2 percent annualized increase in loans experienced during the first quarter of 2005. The Heartland subsidiary banks experiencing notable loan growth since year-end 2005 were Dubuque Bank and Trust Company, New Mexico Bank & Trust and Rocky Mountain Bank. The commercial and commercial real estate loan category grew by $59.1 million or 18 percent annualized.
Total deposits at March 31, 2006, were $2.13 billion, an increase of $13.7 million for the quarter or nearly 3 percent annualized. As with loans, this was an improvement over the $6.7 million or 1 percent annualized growth experienced during the first quarter of 2005. Except for First Community Bank, New Mexico Bank & Trust and Rocky Mountain Bank, all of Heartland’s subsidiary banks increased deposits during the first quarter of 2006. Demand deposits experienced a $17.8 million or 20 percent annualized decline, in large part, due to normal seasonal fluctuations that many banks experience during the first quarter of the year. Savings deposit balances increased by $24.6 million or 13 percent annualized and time deposit balances increased $6.8 million or 3 percent annualized. Of particular note is that all of the growth in time deposits occurred in deposits from local markets as total brokered deposits decreased from $145.5 million at year-end 2005 to $115.4 million at March 31, 2006, and exclusive of brokered deposits, time deposits increased $37.0 million or 17 percent annualized. As interest rates have increased, many deposit customers have shifted a portion of their lower yielding deposit balances into higher yielding money market and certificate of deposit accounts. The Heartland bank subsidiaries have priced these products competitively in order to retain existing deposit customers, as well as to attract new customers.
“Competition for retail deposit growth appears to be growing in intensity as rates gradually move higher. While we realize we need to pay competitive rates, our primary focus continues to be on relationship building and targeted promotions,” Fuller stated.
The allowance for loan and lease losses at March 31, 2006, was 1.44 percent of loans and 172 percent of nonperforming loans, compared to 1.42 percent of loans and 185 percent of nonperforming loans at December 31, 2005. Provision for loan losses decreased $192,000 or 14 percent during the first quarter of 2006 compared to the same quarter of 2005, primarily as a result of the $286,000 recovery awarded to Wisconsin Community Bank under the previously discussed court decision. Nonperforming loans were $16.7 million or .84 percent of total loans and leases at March 31, 2006, compared to $15.0 million or 0.77 percent of total loans and leases at December 31, 2005, primarily due to two credits at Rocky Mountain Bank. Management does not feel this increase is an indication of any trend developing and, because of the net realizable value of collateral, guarantees and other factors, does not expect losses on Heartland’s nonperforming loans to be significant and has specifically provided for any probable losses in the allowance for loan and lease losses.
According to Fuller, “Asset quality continues as one of Heartland’s franchise strengths. Despite a slight uptick in nonperforming loans, we continue to emphasize credit quality and disciplined lending ahead of loan volume.”
About Heartland Financial USA:
Heartland Financial USA, Inc. is a $2.8 billion diversified financial services company providing banking, mortgage, wealth management, insurance, fleet management and consumer finance services to individuals and businesses in 43 communities in nine states -- Iowa, Illinois, Wisconsin, New Mexico, Arizona, Montana, Colorado, Minnesota and Massachusetts. Heartland Financial USA, Inc. is listed on NASDAQ. Its trading symbol is HTLF.
Additional information about Heartland Financial USA, Inc. is available through our website at www.htlf.com.
This release may contain, and future oral and written statements of the Company and its management may contain, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company’s management and on information currently available to management, are generally identifiable by the use of words such as believe, expect, anticipate, plan, intend, estimate, may, will, would, could, should or similar expressions. Additionally, all statements in this release, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.
A number of factors, many of which are beyond the ability of the Company to control or predict, could cause actual results to differ materially from those in its forward-looking statements. These factors include, among others, the following: (i) the strength of the local and national economy; (ii) the economic impact of past and any future terrorist threats and attacks and any acts of war or threats thereof, (iii) changes in state and federal laws, regulations and governmental policies concerning the Company’s general business; (iv) changes in interest rates and prepayment rates of the Company’s assets; (v) increased competition in the financial services sector and the inability to attract new customers; (vi) changes in technology and the ability to develop and maintain secure and reliable electronic systems; (vii) the loss of key executives or employees; (viii) changes in consumer spending; (ix) unexpected results of acquisitions; (x) unexpected outcomes of existing or new litigation involving the Company; and (xi) changes in accounting policies and practices. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Additional information concerning the Company and its business, including other factors that could materially affect the Company’s financial results, is included in the Company’s filings with the Securities and Exchange Commission
