CONTACT:
John K. Schmidt
Chief Operating Officer
Chief Financial Officer
(563) 589-1994
jschmidt@htlf.com
FOR IMMEDIATE RELEASE
MONDAY, JULY 28, 2008
HEARTLAND FINANCIAL USA, INC. REPORTS SECOND QUARTER 2008 EARNINGS
Highlights
| § | Net interest margin maintained at 3.92% compared to 4.02% in second quarter 2007 |
| § | Average earning assets increased $199.7 million or 7% over second quarter 2007 |
| § | Income from continuing operations increased $66,000 or 1% over second quarter 2007 |
| § | Diluted EPS from continuing operations improved to $0.29 per share compared to $0.28 for second quarter 2007 |
| | | | Quarters Ended June 30, | | | | Six Months Ended June 30, | |
| | | | 2008 | | | | 2007 | | | | 2008 | | | | 2007 | |
| Net income (in millions) | | $ | 4.7 | | | $ | 6.2 | | | $ | 11.0 | | | $ | 12.0 | |
| Income from continuing operations (in millions) | | | 4.7 | | | | 4.6 | | | | 11.0 | | | | 10.3 | |
| Diluted earnings per share | | | 0.29 | | | | 0.37 | | | | 0.67 | | | | 0.72 | |
| Diluted earnings per share from continuing operations | | | 0.29 | | | | 0.28 | | | | 0.67 | | | | 0.62 | |
| | | | | | | | | | | | | | | | | |
| Return on average assets | | | 0.56 | % | | | 0.79 | % | | | 0.67 | % | | | 0.77 | % |
| Return on average equity | | | 8.08 | | | | 11.72 | | | | 9.40 | | | | 11.45 | |
| Net interest margin | | | 3.92 | | | | 4.02 | | | | 3.90 | | | | 4.03 | |
“In the most difficult banking environment we’ve seen in years, Heartland showed year-over-year improvement in income from continuing operations and earnings per share from continuing operations for the second quarter of 2008. Equally significant is the maintenance of our margin at 3.92%, making four straight quarters at or near this level. Nevertheless, nonperforming loans present an obstacle to current and future earnings.”-- Lynn B. Fuller, chairman, president and chief executive officer, Heartland Financial USA, Inc.
Dubuque, Iowa, July 28, 2008—Heartland Financial USA, Inc. (NASDAQ: HTLF) today reported earnings for the second quarter of 2008. Net income was $4.7 million, or $0.29 per diluted share, for the quarter ended June 30, 2008, compared to $6.2 million, or $0.37 per diluted share, earned during the second quarter of 2007. Return on average equity was 8.08 percent and return on average assets was 0.56 percent for the second quarter of 2008, compared to 11.72 percent and 0.79 percent, respectively, for the same quarter in 2007.
Net income recorded for the first six months of 2008 was $11.0 million, or $0.67 per diluted share, compared to $12.0 million, or $0.72 per diluted share, recorded during the first six months of 2007. Return on average equity was 9.40 percent and return on average assets was 0.67 percent for the first six months of 2008, compared to 11.45 percent and 0.77 percent, respectively, for the same period in 2007.
The 2007 results were impacted by the sale of Rocky Mountain Bank’s branch banking office in Broadus, Montana, which was completed on June 22, 2007. Included in the sale were $20.9 million of loans and $30.2 million of deposits. The results of operations of the branch are reflected on the income statement as discontinued operations for the prior periods reported. During the second quarter of 2007, income from discontinued operations included a $2.4 million pre-tax gain recorded as a result of the sale of the Broadus branch.
Lynn B. Fuller, Heartland’s chairman, president and chief executive officer stated, “In the most difficult banking environment we’ve seen in years, Heartland showed year-over-year improvement in income from continuing operations and earnings per share from continuing operations for the second quarter of 2008. Equally significant is the maintenance of our margin at 3.92%, making four straight quarters at or near this level. Nevertheless, nonperforming loans present an obstacle to current and future earnings.”
Income from continuing operations was $4.7 million, or $0.29 per diluted share, during the second quarter of 2008 compared to $4.6 million, or $0.28 per diluted share, during the second quarter of 2007. During both years, earnings from continuing operations were significantly impacted by the provision for loan losses, which was $5.4 million during the second quarter of 2008 and $4.3 million during the second quarter of 2007. These increases were due, in large part, to charge-offs of $2.0 million on one credit at Arizona Bank & Trust during 2008 and $1.6 million on one credit at Galena State Bank during 2007. The quarterly performance during 2008 was positively affected by increased net interest income, growth in noninterest income and slower growth in noninterest expense.
For the six months ended June 30, 2008, income from continuing operations was $11.0 million, or $0.67 per diluted share, an increase of $685,000 or 7 percent over the $10.3 million, or $0.62 per diluted share, earned during the same period in 2007. The provision for loan losses for the six-month comparative period was $7.1 million during 2008 compared to $6.2 million during 2007. In addition to the significant charge-offs during the second quarters of both years, the provision for loan losses increased as a result of loan growth, an increase in nonperforming loans and the impact historical losses have on the calculation of the adequacy of Heartland’s allowance for loan and lease losses.
Net Interest Margin Sustained; Net Interest Income Grows
Net interest margin, expressed as a percentage of average earning assets, was 3.92 percent during the second quarter of 2008 compared to 4.02 percent for the second quarter of 2007. For the six-month periods ended on June 30, net interest margin, expressed as a percentage of average earning assets, was 3.90 percent during 2008 and 4.03 percent during 2007. Affecting the net interest margin throughout the second half of 2007 and first six months of 2008 was the impact of foregone interest on Heartland’s nonperforming loans, which had balances of $42.9 million at June 30, 2008, compared to $31.8 million at year-end 2007 and $19.1 million at June 30, 2007. Additionally, early in the third quarter of 2007, a $20.5 million investment was made in bank owned life insurance upon which interest expense associated with the funding of this investment is reflected in net interest margin while the corresponding earnings on this investment are recorded as noninterest income.
Fuller said, “Net interest margin is up a bit from the first quarter, indicating that our pricing discipline and strategies are producing the desired results. Achievement of our number one priority, a reduction in nonperforming loans, will have a positive effect on our net interest margin.”
Net interest income on a tax-equivalent basis totaled $29.8 million during the second quarter of 2008, an increase of $1.2 million or 4 percent from the $28.6 million recorded during the second quarter of 2007. For the six-month period during 2008, net interest income on a tax-equivalent basis was $58.5 million, an increase of $2.0 million or 4 percent from the $56.5 million recorded during the first six months of 2007. These increases occurred as Heartland’s interest bearing liabilities repriced downward more quickly than its interest bearing assets. Also contributing to these increases was the $199.7 million or 7 percent growth in average earning assets during the second quarter of 2008 compared to the same quarter in 2007 and the $191.9 million or 7 percent growth in average earning assets during the first six months of 2008 compared to the same six months of 2007.
On a tax-equivalent basis, interest income in the second quarter of 2008 totaled $51.1 million compared to $55.4 million in the second quarter of 2007, a decrease of $4.3 million or 8 percent. For the first six months of 2008, interest income on a tax-equivalent basis decreased $5.3 million or 5 percent over the same period in 2007. Nearly half of the loans in Heartland’s commercial and agricultural loan portfolios are floating rate loans that reprice immediately upon a change in the national prime interest rate, thus changes in the national prime rate impact interest income more quickly than if there were more fixed rate loans. The national prime interest rate was 8.25% for the first six months of 2007. During the first six months of 2008, the national prime interest rate decreased 225 basis points, ranging from 7.25% on January 1, 2008, to 5.00% on June 30, 2008.
Interest expense for the second quarter of 2008 was $21.3 million compared to $26.7 million in the second quarter of 2007, a decrease of $5.4 million or 20 percent. On a six-month comparative basis, interest expense decreased $7.3 million or 14 percent. Interest rates paid on Heartland’s deposits and borrowings were significantly lower during the first six months of 2008 compared to the first six months of 2007. Approximately 51 percent of Heartland’s certificate of deposit accounts will mature within the next six months at a weighted average rate of 3.84 percent.
Fuller commented, “We have seen a favorable effect on our deposit costs as higher rate certificates of deposit matured and repriced into lower rates. At this juncture, however, we are beginning to see the opportunity to lock in some longer term maturities in anticipation of higher rates over the next three years.”
Noninterest Income Rises; Growth in Noninterest Expense Stabilizes
Noninterest income increased by $225,000 or 3 percent during the second quarter of 2008 compared to the same quarter in 2007. The categories experiencing the largest increases for the comparative quarters were loan servicing income and securities gains. For the first six months of 2008, noninterest income increased $1.1 million or 7 percent over the same period in 2007, primarily from loan servicing income, brokerage and insurance commissions and securities gains. For both comparative periods, the improvements in the aforementioned categories were partially offset by increased losses on trading account securities and reduced gains on sale of loans.
Commenting on noninterest income, Fuller stated, “Most sources of noninterest income are performing well in 2008. We are pleased that income from our Wealth Management Group and brokerage unit continue to make healthy contributions.”
For the second quarter of 2008, noninterest expense increased $509,000 or 2 percent from the same period in 2007. The largest component of noninterest expense, salaries and employee benefits, increased $456,000 or 3 percent during the second quarter of 2008 compared to the second quarter of 2007. For the six-month period ended June 30, 2008, noninterest expense increased $1.9 million or 4 percent when compared to the same six-month period in 2007. Again, the largest component of noninterest expense, salaries and employee benefits, grew by $1.1 million or 4 percent during this six-month comparative period. Total full-time equivalent employees were 1,002 at June 30, 2008, compared to 1,004 at June 30, 2007. Occupancy expense increased during the quarter and six-month comparative periods, primarily as a result of the opening of six new banking offices during 2007 and the 2008 opening of Heartland’s 10th bank subsidiary, Minnesota Bank & Trust. The other category of noninterest expense that increased significantly during the 2008 quarter and six-month period was outside services, resulting primarily from additional FDIC assessments as a majority of the FDIC credits at Heartland’s bank subsidiaries were utilized during 2007.
In reference to Heartland’s expansion efforts, Fuller said, “We have purposefully slowed the pace of new office expansion this year, with one new location scheduled to open in Albuquerque in the third quarter. However, given the difficulty many banks are experiencing in the present environment, we are beginning to see attractive acquisition opportunities. In this regard, we will focus our attention on existing Heartland markets where we can achieve efficiencies and grow market share while providing more convenience to our current clients.”
Heartland’s effective tax rate was 27.03 percent for the first six months of 2008 compared to 31.83 percent for the first six months of 2007. The decrease in Heartland’s effective tax rate during the first six months of 2008 resulted primarily from $170,000 in federal rehabilitation tax credits associated with Dubuque Bank and Trust Company’s ownership interest in a limited liability company that owns a certified historic structure and also from $225,000 of additional non-taxable income associated with the increase in the cash surrender value on life insurance policies. Heartland’s effective tax rate is also affected by the level of tax-exempt interest income which, as a percentage of pre-tax income, was 23.36 percent during the first six months of 2008 compared to 19.57 percent during the same six months of 2007. The tax-equivalent adjustment for this tax-exempt interest income was $1.9 million during the first six months of 2008 compared to $1.8 million during the same six months in 2007.
Loan Growth Picks Up; Growth in Deposits Slows
At June 30, 2008, total assets had increased $114.9 million or 7 percent annualized since year-end 2007. Total loans and leases were nearly $2.30 billion at June 30, 2008, compared to $2.28 billion at year-end 2007, an increase of $15.2 million or 1 percent annualized. Aside from the payoff of one commercial real estate loan totaling $24.3 million, growth in loans totaled $39.5 million or 3 percent annualized since year-end 2007. This growth was distributed among the commercial, agricultural and consumer loan categories at $20.3 million, $14.6 million and $12.7 million, respectively. Loan growth at Summit Bank & Trust comprised $13.7 million of the growth in the commercial and commercial real estate loan category. A majority of the increase in agricultural and agricultural real estate loans occurred at Dubuque Bank and Trust Company. New Mexico Bank & Trust, Rocky Mountain Bank and Citizens Finance Co. were responsible for most of the growth in the consumer loan portfolio.
Total deposits grew to $2.41 billion at June 30, 2008, an increase of $32.6 million or 3 percent annualized since year-end 2007. Growth in deposits was weighted more heavily in Heartland’s Western markets. Demand deposits experienced an increase of $1.6 million or 1 percent annualized since year-end 2007. Savings deposit balances experienced an increase of $39.0 million or 9 percent annualized since year-end 2007 and time deposits, exclusive of brokered deposits, experienced a decrease of $18.6 million or 3 percent annualized since year-end 2007. At June 30, 2008, brokered time deposits totaled $79.5 million or 3 percent of total deposits compared to $69.0 million or 3 percent of total deposits at year-end 2007. A large portion of the growth in savings deposits is attributable to the January introduction of a new retail interest-bearing checking account product and the conversion of several retail repurchase agreement sweep accounts to a new money market sweep product rolled out to business depositors during the second quarter of 2008.
Increase in Nonperforming Loans
The allowance for loan and lease losses at June 30, 2008, was 1.52 percent of loans and 81 percent of nonperforming loans, compared to 1.45 percent of loans and 104 percent of nonperforming loans at December 31, 2007. Additions to the allowance for loan and lease losses were primarily driven by the continued softening of the economy and reduced real estate values, particularly in the Phoenix market. Nonperforming loans were $42.9 million or 1.87 percent of total loans and leases at June 30, 2008, compared to $31.8 million or 1.40 percent of total loans and leases at December 31, 2007. The majority of the $11.1 million increase in nonperforming loans from December 31, 2007, resulted from two large credits originated by Arizona Bank & Trust and Rocky Mountain Bank. Approximately 63 percent, or $26.9 million, of Heartland’s nonperforming loans are to six borrowers, with $13.2 million originated by Arizona Bank & Trust, $7.5 million originated by Wisconsin Community Bank, $4.8 million originated by Rocky Mountain Bank and $1.4 million originated by Summit Bank & Trust. The portion of Heartland’s nonperforming loans covered by government guarantees was $3.4 million at June 30, 2008.
Net charge-offs during the first six months of 2008 were $5.2 million compared to $3.3 million during the first six months of 2007. Net charge-offs at Arizona Bank & Trust comprised $3.4 million or 65 percent of the total net charge-offs for the first six months of 2008. Due to the untimely death of the sole owner of a business in June of 2008 and the filing of Chapter 11 bankruptcy shortly thereafter by the business, the $2.0 million outstanding on a line of credit for working capital was charged-off. Included in the remaining $1.4 million of net charge-offs at Arizona Bank & Trust was $1.2 million on four residential lot loans. Management monitors the loan portfolio of each bank subsidiary and, at this point, does not believe that the increase in nonperforming loans is any indication of a systemic problem but is more likely a result of the continuing shift in the economy in some of Heartland’s markets.
Fuller concluded, “Managing nonperforming loans continues to be our highest priority. We have allocated additional resources and focused our energies in those markets that are the most challenged. We are hopeful that an improving trend will be evident by year end.”
Conference Call Details
Heartland will host a conference call for investors at 4:00 p.m. EDT today. To participate, dial 800-219-6110 at least five minutes before start time, or log onto www.htlf.com. If you are unable to participate on the call, a replay will be available through August 4, 2008, by dialing 800-405-2236, passcode 11116230, or by logging onto www.htlf.com.
About Heartland Financial USA, Inc.:
Heartland Financial USA, Inc. is a $3.4 billion diversified financial services company providing banking, mortgage, wealth management, insurance and consumer finance services to individuals and businesses. The Company currently has 60 banking locations in 41 communities in Iowa, Illinois, Wisconsin, New Mexico, Arizona, Montana, Colorado and Minnesota. Additional information about Heartland Financial USA, Inc. is available at www.htlf.com.
Safe Harbor Statement
This release, 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 Heartland’s financial condition, results of operations, plans, objectives, future performance and business. 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, (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 Risk Factors section of its Annual Report on Form 10-K and in its other filings with the Securities and Exchange Commission.
