Heartland Financial USA : Reports First Quarter 2015 Results

Heartland Financial USA, Inc. (NASDAQ:HTLF):

Heartland Financial USA, Inc. (NASDAQ:HTLF) today reported net income available to common stockholders of $15.5 million, or $0.76 per diluted common share, for the quarter ended March 31, 2015, compared to $6.7 million, or $0.36 per diluted common share, for the first quarter of 2014. Return on average common equity was 13.58% and return on average assets was 0.97% for the first quarter of 2015, compared to 7.41% and 0.47%, respectively, for the same quarter in 2014.

Positively affecting net income for the quarter were increases in net interest income, securities gains and gains on sale of loans held for sale and a reduction in provision for loan and lease losses. These improvements were partially offset by increases in the noninterest expense categories of salaries and employee benefits, professional fees and other noninterest expenses.

Commenting on Heartland’s first quarter 2015 results, Lynn B. Fuller, Heartland’s chairman and chief executive officer said, “Heartland’s first quarter earnings of $0.76 per diluted common share clearly surpassed expectations. Quarterly net income available to common stockholders of $15.5 million was more than double our net income of $6.7 million in the first quarter last year.”

On January 16, 2015, Heartland completed the acquisition of Community Banc-Corp of Sheboygan, Inc., parent company of Community Bank & Trust in Sheboygan, Wisconsin, in an all stock transaction. Simultaneous with the closing, Community Bank & Trust was merged into Heartland's Wisconsin Bank & Trust subsidiary. As of the close date, the transaction included, at fair value, total assets of $525.3 million, total loans of $395.0 million and total deposits of $434.0 million.

Subsequent to the quarter-end, Heartland announced it had entered into a definitive merger agreement with Community Bancorporation of New Mexico, Inc., parent company of Community Bank in Santa Fe, New Mexico. Under the terms of the agreement, which has been unanimously approved by the boards of directors of both companies, Heartland will acquire Community Bancorporation of New Mexico, Inc. in an all cash transaction valued at approximately $11.3 million. Simultaneous with closing of the transaction, Community Bank will be merged into Heartland’s New Mexico Bank & Trust subsidiary. The transaction is subject to approvals by Community Bancorporation of New Mexico, Inc. shareholders and bank regulatory authorities, and is expected to close during the third quarter of 2015.

Fuller commented, “Expansion of our banking franchise through M&A remains a high priority for Heartland. In the first quarter, we completed the acquisition of Community Banc-Corp of Sheboygan, Inc., a $525 million commercial banking company in Sheboygan, Wisconsin. And on April 16, we announced the proposed acquisition of Community Bancorporation of Santa Fe, Inc., a New Mexico - based holding company with assets of approximately $181 million.”

Net Interest Margin Increases in Dollars; Net Interest Margin as a Percentage of Average Earning Assets Remains Steady

Net interest margin, expressed as a percentage of average earning assets, was 3.90% during the first quarter of 2015 compared to 3.94% during the fourth quarter of 2014 and 3.92% during the first quarter of 2014.

Fuller said, "We continue to enjoy a strong net interest margin, which held up nicely at 3.90%. Our success in maintaining net interest margin above many of our peers is the result of continuous price discipline on both sides of the balance sheet. Net interest income in dollars has also increased steadily for each of the last six quarters."

Interest income increased $5.8 million or 10% to $63.1 million in the first quarter of 2015 from the $57.3 million recorded in the first quarter of 2014. After adjustment to add $2.4 million for both the first quarter of 2015 and the first quarter of 2014 for income taxes saved on the interest earned on nontaxable securities and loans, on a tax-equivalent basis, interest income in the first quarter of 2015 was $65.5 million compared to $59.6 million in the first quarter of 2014. The increase in interest income in the first quarter of 2015, as compared to the first quarter of 2014, was primarily due to an increase in average earning assets, which increased $578.9 million or 11% during the first quarter of 2015 compared to the first quarter of 2014, with approximately $375.0 million attributable to the acquisition completed during the first quarter of 2015 and the remainder attributable primarily to loan growth experienced during the last three quarters of 2014. Also contributing to the increase in interest income during the first quarter of 2015 compared to the first quarter of 2014 was a change in the composition of average earning assets from lower-yielding investments to higher-yielding loans. The percentage of average net loans and leases to total earning assets was 72% during the first quarter of 2015 compared to 67% during the first quarter of 2014.

Interest expense for the first quarter of 2015 was $9.2 million, an increase of $510,000 or 6% from $8.7 million in the first quarter of 2014. Average interest bearing liabilities increased $308.5 million or 8% for the quarter ended March 31, 2015, as compared to the same quarter in 2014, while the average interest rate paid on Heartland's interest bearing deposits and borrowings declined 1 basis point from 0.86% in the first quarter of 2014 to 0.85% in the first quarter of 2015. The average interest rate paid on savings deposits was 0.26% during the first quarter of 2015 compared to 0.33% during the first quarter of 2014 and the average interest rate paid on time deposits was 1.09% during the first quarter of 2015 compared to 1.21% during the first quarter of 2014.

Net interest income increased $5.3 million or 11% to $53.9 million in the first quarter of 2015 from the $48.6 million recorded in the first quarter of 2014. Net interest income on a tax-equivalent basis totaled $56.3 million during the first quarter of 2015, an increase of $5.3 million or 10% from the $51.0 million recorded during the first quarter of 2014.

Noninterest Income Increases; Noninterest Expense Increases

Noninterest income totaled $30.7 million during the first quarter of 2015 compared to $18.9 million during the first quarter of 2014, an increase of $11.8 million or 63%. Net securities gains totaled $4.4 million during the first quarter of 2015 compared to $781,000 during the first quarter of 2014, an increase of $3.6 million or 457%. Gains on sale of loans held for sale totaled $13.7 million during the first quarter of 2015 compared to $6.4 million during the first quarter of 2014, an increase of $7.3 million or 115%. The Community Bank & Trust acquisition completed during the first quarter of 2015 contributed approximately $1.5 million to noninterest income.

Fuller commented, “A renewed wave of residential refinancing activity in the first quarter resulted in a significant increase in gains on sale of loans compared to the prior year’s quarter. Our Heartland Mortgage unit remains a key area of emphasis for Heartland; we are making diligent efforts to increase loan production while seeking efficiencies in the back office.”

For the first quarter of 2015, noninterest expenses totaled $59.6 million compared to $52.5 million during the first quarter of 2014, an increase of $7.1 million or 13%, with approximately $4.4 million attributable to the Community Bank & Trust acquisition. The largest contributor to this increase was salaries and employee benefits, which increased $4.3 million or 13%, with $2.2 million attributable to the acquisition. Salaries and employee benefits was also affected by increases in incentive plan accruals and higher compensation in the mortgage segment during the first quarter of 2015. The other noninterest expense categories with significant increases during the first quarter of 2015 in comparison with the first quarter of 2014 were professional fees, which increased $1.5 million or 34%, and other noninterest expenses, which increased $1.2 million or 21%. The acquisition was responsible for $1.0 million of the increase in professional fees and $312,000 of the increase in other noninterest expenses.

Heartland's effective tax rate was 32.60% for the first quarter of 2015 compared to 19.82% for the first quarter of 2014. Federal low-income housing tax credits included in Heartland's income taxes totaled $145,000 during the first quarter of 2015 compared to $200,000 during the first quarter of 2014. Heartland's effective tax rate was also affected by the level of tax-exempt interest income which, as a percentage of pre-tax income, was 19.07% during the first quarter of 2015 compared to 51.28% during the first quarter of 2014. The tax-equivalent adjustment for this tax-exempt interest income was $2.4 million during both the first quarter of 2015 and the first quarter of 2014.

Exclusive of Acquisition, Loans Decline Slightly and Deposits Increase

Total assets were $6.51 billion at March 31, 2015, an increase of $454.5 million or 7% since year-end 2014. Total assets of Community Banc-Corp of Sheboygan, Inc. at acquisition date were $525.3 million. Securities represented 25% of total assets at March 31, 2015, compared to 28% at year-end 2014.

Total loans and leases held to maturity were $4.24 billion at March 31, 2015, compared to $3.88 billion at year-end 2014, an increase of $366.9 million or 9%. Included in the loan growth for the first quarter of 2015 were $395.0 million acquired in the Community Bank & Trust merger. Exclusive of this acquisition, total loans and leases held to maturity decreased $28.1 million or 1%.

Total deposits were $5.27 billion as of March 31, 2015, compared to $4.77 billion at year-end 2014, an increase of $498.4 million or 10%, with $434.0 million attributable to the Community Bank & Trust acquisition. Demand deposits totaled $1.52 billion at March 31, 2015, an increase of $219.8 million or 17% since year-end 2014, with $117.1 million attributable to the acquisition. Exclusive of $127.9 million acquired, certificates of deposits decreased $25.6 million or 3%.

Fuller said, “We continue to experience a favorable change in our deposit mix, with sustained growth in no-cost demand deposits, which now represent 29 percent of total deposits. Non-time categories now account for 83 percent of total deposits.”

Increase in Nonperforming Assets; Decrease in Provision for Loan Losses

Nonperforming loans, excluding those covered under loss sharing agreements, were $27.0 million or 0.64% of total loans and leases at March 31, 2015, compared to $25.1 million or 0.63% of total loans and leases at December 31, 2014. Exclusive of $6.1 million of nonperforming assets acquired in the acquisition of Community Bank & Trust, nonperforming assets decreased $4.4 million or 9.8% since year-end 2014.

The allowance for loan and lease losses at March 31, 2015, was 0.99% of loans and leases and 154.83% of nonperforming loans compared to 1.07% of loans and leases and 168.58% of nonperforming loans at December 31, 2014. The provision for loan losses was $1.7 million for the first quarter of 2015 compared to $6.3 million for the first quarter of 2014, which included approximately $4.5 million to compensate for a charge off on a single large credit.

Net charge-offs on loans during the first quarter of 2015 were $1.3 million compared to $9.4 million during the first quarter of 2014. The higher amount during the first quarter of 2014 was primarily due to a $6.8 million credit which was fully charged off.

“With nonperforming loans currently at 0.64 percent of total loans, Heartland’s credit quality can be described as exceptional. Looking back several years, we are proud to see this ratio approaching pre-recession levels,” Fuller concluded.

Conference Call Details

Heartland will host a conference call for investors at 5:00 p.m. EDT today. To participate, dial 877-407-0782 at least five minutes before start time. To listen to the live webcast, log on to www.htlf.com at least 15 minutes before start time. A replay will be available until April 26, 2016, by logging on to www.htlf.com.

About Heartland Financial USA, Inc.

Heartland Financial USA, Inc. is a diversified financial services company providing banking, mortgage, wealth management, investment, insurance and consumer finance services to individuals and businesses. Heartland currently has 86 banking locations in 63 communities in Iowa, Illinois, Wisconsin, New Mexico, Arizona, Montana, Colorado, Minnesota, Kansas and Missouri, and loan production offices in California, Nevada, Wyoming, Idaho, North Dakota, Oregon, Washington and Nebraska. 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 Heartland and its management, may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 about Heartland's financial condition, results of operations, plans, objectives, future performance and business. Although these forward-looking statements are based upon the beliefs, expectations and assumptions of Heartland's management, there are a number of factors, many of which are beyond the ability of management to control or predict, that could cause actual results to differ materially from those in its forward-looking statements. These factors, which are detailed in the risk factors included in Heartland's Annual Report on Form 10-K filed with the Securities and Exchange Commission, include, among others: (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 potential impact of acquisitions, (viii) the loss of key executives or employees; (ix) changes in consumer spending; (x) unexpected outcomes of existing or new litigation involving the Company; and (xi) changes in accounting policies and practices. All statements in this release, including forward-looking statements, speak only as of the date they are made, and Heartland undertakes no obligation to update any statement in light of new information or future events.