Tuesday, April 24, 2012

FIRST QUARTER 2012 RESULTS OF HEARTLAND FINANCIAL USA. INC.

Heartland Financial USA, Inc.  reported net income of $12.8 million for the quarter ended March 31, 2012, which was an increase from the $4.2 million recorded for the first quarter of 2011. Net income available to common stockholders was $11.8 million, or $0.71 per diluted common share, for the quarter ended March 31, 2012, compared to $2.9 million, or $0.18 per diluted common share, for the first quarter of 2011. Return on average common equity was 17.27 percent and return on average assets was 1.12 percent for the first quarter of 2012, compared to 4.67 percent and 0.29 percent, respectively, for the same quarter in 2011.

Earnings for the first quarter of 2012, in comparison to the first quarter of 2011, were positively affected by increases in net interest income, gains on sale of loans, securities gains and other noninterest income along with a lower provision for loan and lease losses. The effect of these improvements was mitigated by a significant increase in salaries and employee benefits due to the continued expansion of mortgage operations in both new and existing markets.
Commenting on Heartland's first quarter results, Lynn B. Fuller, Heartland's chairman, president and chief executive officer said, "Heartland's first quarter was, quite simply, our best quarter ever. Net income of $12.8 million was more than triple last year's first quarter earnings. The company's exceptional performance is the result of a combination of factors including a remarkable net interest margin of 4.23 percent, a sharp drop in provision for loan losses and solid gains on sale of loans."

Net interest margin, expressed as a percentage of average earning assets, was 4.23 percent during the first quarter of 2012 compared to 4.19 percent for the first quarter of 2011. The ability to maintain a net interest margin above 4.00 percent has been a direct result of Heartland's price discipline. Also positively affecting net interest margin was improvement in the level of nonperforming loans not covered under loss share agreements, which had balances of $49.9 million or 1.97 percent of total loans and leases at March 31, 2012, and $91.0 million or 3.86 percent of total loans and leases at March 31, 2011.

Fuller said, "Our net interest margin for the first quarter was exceptional, increasing by 15 basis points over the previous quarter from 4.08 percent to 4.23 percent, and matching the best margin we have seen in recent years. Our strong margin is the result of loan growth, increased yields in our security portfolio and continued improvement in funding costs. We've now maintained our margin above 4.00 percent for eleven consecutive quarters."

On a tax-equivalent basis, interest income in the first quarter of 2012 was $49.9 million compared to $49.2 million in the first quarter of 2011, an increase of $637,000 or 1 percent. The $200.8 million or 6 percent growth in average earning assets during the first quarter of 2012, compared to the same period in 2011, more than compensated for the decrease in the average interest rate earned on these assets which was 5.30 percent during the first quarter of 2012 compared to 5.57 percent during the first quarter of 2011. The average interest rate earned in the securities portfolio was 3.59 percent during the first quarter of 2012 compared to 3.95 percent during the first quarter of 2011 and the average interest rate earned in the loan portfolio was 6.15 percent during the first quarter of 2012 compared to 6.42 percent during the first quarter of 2011.

Interest expense for the first quarter of 2012 was $10.0 million, a decrease of $2.2 million or 18 percent from $12.2 million in the first quarter of 2011. Even though average interest bearing liabilities increased $70.7 million or 2 percent for the quarter ended March 31, 2012, as compared to the same quarter in 2011, the average interest rate paid on Heartland's interest bearing deposits and borrowings declined 34 basis points to 1.31 percent in the first quarter of 2012 from 1.65 percent in the first quarter of 2011. Contributing to this improvement in interest expense was a change in the mix of deposits as average savings balances, the lowest cost interest-bearing deposits, as a percentage of total average interest bearing deposits increased to 68 percent during the first quarter of 2012 compared to 64 percent during the first quarter of 2011. Additionally, the average interest rate paid on savings deposits was 0.40 percent during the first quarter of 2012 compared to 0.67 percent during the first quarter of 2011 and the average interest rate paid on time deposits was 2.12 percent during the first quarter of 2012 compared to 2.49 percent during the first quarter of 2011.

Net interest income on a tax-equivalent basis totaled $39.8 million during the first quarter of 2012, an increase of $2.8 million or 8 percent from the $37.0 million recorded during the first quarter of 2011.

Noninterest income was $23.4 million during the first quarter of 2012 compared to $12.6 million during the first quarter of 2011, an increase of $10.8 million or 86 percent. The categories contributing most significantly to the improvement in noninterest income were gains on sale of loans, securities gains and other noninterest income. Gains on sale of loans totaled $8.5 million during the first quarter of 2012 compared to $1.4 million during the first quarter of 2011. The volume of loans sold totaled $243.8 million during the first quarter of 2012, more than three times the $81.0 million sold during the first quarter of 2011. Pricing received on the sale of fixed rate residential mortgage loans into the secondary market improved through a bulk delivery method that was implemented during the second quarter of 2011, instead of an individual delivery method that had been used previously. At the same time, secondary market pricing began to be matched with origination pricing through the use of a software tool that assists in hedging the locked rate pipeline position. Securities gains totaled $3.9 million during the first quarter of 2012 compared to $2.1 million during the first quarter of 2011, as volatility in the bond market continued to provide opportunities to swap securities from one sector of the portfolio to another without significantly changing the duration of the portfolio. Offsetting, in part, the securities gains was an impairment loss on securities totaling $981 thousand recorded during the first quarter of 2012. Other noninterest income totaled $2.6 million during the first quarter of 2012 compared to $261,000 during the first quarter of 2011.

Included in the other noninterest income during the first quarter of 2012 was $2.0 million in equity earnings which resulted from the sale of two low-income housing projects within partnerships in which Dubuque Bank and Trust Company was a member.
Loan servicing income increased $211,000 or 14 percent for the first quarter of 2012 as compared to the first quarter of 2011. Two components of loan servicing income, mortgage servicing rights and amortization of mortgage servicing rights, are dependent upon the level of loans Heartland originates and sells into the secondary market, which in turn is highly influenced by market interest rates for home mortgage loans. Mortgage servicing rights income was $2.0 million during the first quarter of 2012 compared to $984,000 during the first quarter of 2011. Loan servicing income also includes the fees collected for the servicing of mortgage loans for others, which is dependent upon the aggregate outstanding balance of these loans, rather than quarterly production and sale of mortgage loans. Fees collected for the servicing of mortgage loans for others were $967,000 during the first quarter of 2012 compared to $873,000 during the first quarter of 2011. The portfolio of mortgage loans serviced for others by Heartland totaled $1.63 billion at March 31, 2012, compared to $1.44 billion at March 31, 2011. The following table summarizes Heartland's residential mortgage loan activity during the most recent five quarters:


For the first quarter of 2012, noninterest expense totaled $40.1 million, an increase of $7.3 million or 22 percent from the same quarter of 2011. The primary contributor to this increase was the $5.8 million or 32 percent increase in salaries and employee benefits, a large portion of which resulted from the expansion of residential loan origination and the addition of personnel in the Heartland Mortgage and National Residential Mortgage unit. Full-time equivalent employees totaled 1,253 on March 31, 2012, compared to 1,076 on March 31, 2011.
Heartland's effective tax rate was 32.82 percent for the first quarter of 2012 compared to 22.24 percent for the first quarter of 2011. Federal low-income housing tax credits included in Heartland's effective tax rate totaled $200,000 during the first quarter of 2012 compared to $138,000 during the first quarter of 2011. 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 15.93 percent during the first quarter of 2012 compared to 44.39 percent during the first quarter of 2011. The tax-equivalent adjustment for this tax-exempt interest income was $2.3 million during the first quarter of 2012 compared to $1.3 million during the first quarter of 2011.

The allowance for loan and lease losses at March 31, 2012, was 1.55 percent of loans and leases and 78.82 percent of nonperforming loans compared to 1.48 percent of loans and leases and 64.09 percent of nonperforming loans at December 31, 2011. The provision for loan losses was $2.4 million for the first quarter of 2012 compared to $10.0 million for the first quarter of 2011, a $7.6 million or 76 percent decrease.

Nonperforming loans, exclusive of those covered under the loss sharing agreements, were $49.9 million or 1.97 percent of total loans and leases at March 31, 2012, compared to $57.4 million or 2.31 percent of total loans and leases at December 31, 2011. Approximately 54 percent, or $26.6 million, of Heartland's nonperforming loans have individual loan balances exceeding $1.0 million. These nonperforming loans, to an aggregate of 13 borrowers, are primarily concentrated in Heartland's banks serving the Western states, with $8.2 million originated by New Mexico Bank & Trust, $6.8 million originated by Arizona Bank & Trust, $4.4 million originated by Rocky Mountain Bank, $4.4 million originated by Wisconsin Community Bank and $2.8 million originated by Galena State Bank and Trust Company. The portion of Heartland's nonperforming loans covered by government guarantees was $2.4 million at March 31, 2012. The industry breakdown for nonperforming loans with individual balances exceeding $1.0 million, as identified using the North American Industry Classification System (NAICS), was $8.4 million for lot and land development and $6.7 million for construction and development. The remaining $11.5 million was distributed among seven other industry categories.

Other real estate owned was $38.9 million at March 31, 2012, compared to $44.4 million at December 31, 2011. Liquidation strategies have been identified for all the assets held in other real estate owned. Management continues to market these properties through an orderly liquidation process instead of a quick liquidation process in order to avoid discounts greater than the projected carrying costs. During the first quarter of 2012, $11.7 million of other real estate owned was sold.

During the first quarter of 2012, recoveries on loans exceeded charge-offs on loans by $200,000 compared to net charge-offs of $15.2 million during the fourth quarter of 2011. Included in the fourth quarter 2011 net charge-offs was a $6.1 million charge-off on one credit relationship in the Midwest, which had been identified as impaired and fully reserved for in the third quarter of 2011.

 

Comments

Name
URL
Email
Email address is not published
Remember Me
Comments

CAPTCHA Reload
Write the characters in the image above