News Column

Heartland Financial USA Posts 4th Quarter 2013 Financial Results

February 2, 2014

Heartland Financial USA, Inc. reported net income available to common stockholders of $7.7 million , or $0.42 per diluted common share, for the quarter ended Dec. 31, 2013 , compared to $9.0 million , or $0.54 per diluted common share, for the fourth quarter of 2012. In a release on Jan. 27 , Heartland Financial said return on average common equity was 8.79 percent and return on average assets was 0.55 percent for the fourth quarter of 2013, compared to 11.33 percent and 0.76 percent, respectively, for the same quarter in 2012. Net income for the fourth quarter of 2013 was $1.6 million lower than the fourth quarter of 2012, primarily as a result of an $11.1 million decrease in gains on sale of loans, offset by an $8.4 million increase in net interest income and a$1.3 million decrease in the provision for loan and lease losses. Loan growth, exclusive of acquisitions, was $178.6 million or 6 percent during the fourth quarter of 2013. Commenting on Heartland's results for 2013, Lynn B. Fuller , Heartland's chairman, president and chief executive officer, said, "We are pleased to report that 2013 was Heartland's second best in its 33-year history. Though the company fell short of matching the exceptional year experienced in 2012, Heartland's net income of $35.7 million and return on average equity of 10.87 percent demonstrate the excellent potential in the company's core operations." Net income available to common stockholders was $35.7 million , or $2.04 per diluted common share, for the year ended Dec. 31, 2013 , compared to $46.4 million , or $2.77 per diluted common share, earned during the prior year. Return on average common equity was 10.87 percent and return on average assets was 0.70 percent for 2013, compared to 15.78 percent and 1.04 percent, respectively, for 2012. Earnings for 2013, in comparison to 2012, were most positively affected by increases in net interest income, loan servicing income and service charges and fees, combined with decreases in net loss on repossessed assets and other noninterest expenses. In addition to a decline in gains on sale of loans during 2013, reduced securities gains and significant increases in salaries and employee benefits, occupancy and furniture and equipment expenses more than offset the improvements discussed above. On Oct. 18, 2013 , Heartland completed a merger transaction with Morrill Bancshares, Inc. , the holding company for Morrill & Janes Bank and Trust Company , based in Merriam, Kansas . On the date of merger, Morrill & Janes Bank and Trust Company had total loans valued at $383.1 million and total deposits valued at $664.8 million . After the merger, Morrill & Janes Bank and Trust Company became Heartland's tenth independent, state-chartered, bank subsidiary and continues to operate under its current name and management team. The aggregate purchase price, which was based on the tangible book value of Morrill Bancshares, Inc. , was approximately $55.4 million , $16.6 million or 30 percent of which was paid in cash, and $38.8 million or 70 percent of which was paid by delivery of 1,402,431 shares of Heartland common stock. On Nov. 22, 2013 , Heartland acquired Freedom Bank in Sterling, Illinois , from its parent company, River Valley Bancorp, Inc. , a Davenport, Iowa -based bank holding company. The acquisition of Freedom Bank was arranged through a negotiated transfer of ownership with Heartland's flagship bank, Dubuque Bank and Trust Company . On the date of acquisition, Freedom Bank had total loans valued at $38.9 million and total deposits valued at $54.1 million . Freedom Bank will operate independently as a subsidiary of Dubuque Bank and Trust Company under its current name, staff and systems until at least the first quarter of 2014 when Heartland intends to consolidate Freedom with Riverside Community Bank , Heartland's Rockford, Illinois -based bank. Net Interest Margin Percentage Remains Stable; Net Interest Income Increases Net interest margin, expressed as a percentage of average earning assets, was 3.82 percent during the fourth quarter of 2013 compared to 3.81 percent during the third quarter of 2013 and 3.81 percent for the fourth quarter of 2012. For the full year of 2013, net interest margin was 3.78 percent compared to 3.98 percent during 2012. Fuller said, "Compared to the previous quarter, we are pleased to see net interest margin increase slightly to 3.82 percent in the fourth quarter. Margin has been maintained through loan growth, a slowing in the decrease in asset yields and some improvement in our funding cost." On a tax-equivalent basis, interest income was $58.0 million in the fourth quarter of 2013 compared to $49.5 million in the fourth quarter of 2012, an increase of $8.5 million or 17 percent. For the full year of 2013, interest income on a tax-equivalent basis was $209.0 million compared to $196.7 million during 2012, an increase of $12.3 million or 6 percent. Average earning assets increased $890.3 million or 21 percent during the fourth quarter of 2013 compared to the fourth quarter of 2012, with approximately $680.1 million of the growth attributable to the acquisitions completed during the fourth quarter of 2013. For the full year, average earning assets increased $620.0 million or 16 percent during 2013 compared to 2012, with approximately $171.4 million of the growth attributable to the acquisitions completed during the fourth quarter of 2013. The average interest rate earned on total average earning assets was 4.55 percent during the fourth quarter of 2013 compared to 4.72 percent during the fourth quarter of 2012. For the full year, the average interest rate earned on these assets was 4.56 percent during 2013 compared to 4.97 percent during 2012. Interest expense was $9.3 million for the fourth quarter of 2013, a decrease of $270,000 or 3 percent from $9.5 million in the fourth quarter of 2012. On an annual comparative basis, interest expense decreased $3.5 million or 9 percent. Even though average interest bearing liabilities increased $591.7 million or 18 percent for the quarter ended December 31, 2013 , as compared to the same quarter in 2012, and $348.5 million or 11 percent for the full year of 2013, as compared to the full year of 2012, the average interest rate paid on Heartland's deposits and borrowings declined 20 basis points during the comparable quarterly period and 22 basis points during the comparable yearly period. Contributing to this improvement in interest expense was a continued change in the mix of deposits. Average savings balances, the lowest cost interest bearing deposits, as a percentage of total average interest bearing deposits, were 74 percent during the fourth quarter of 2013 and 71 percent during the full year of 2013 compared to 69 percent for both the fourth quarter and full year of 2012. Additionally, the average interest rate paid on savings deposits was 0.33 percent during the fourth quarter of 2013 and 0.32 percent during the full year of 2013 compared to 0.35 percent during the fourth quarter of 2012 and 0.38 percent during the full year of 2012. Net interest income on a tax-equivalent basis totaled $48.8 million during the fourth quarter of 2013, an increase of $8.8 million or 22 percent from the $40.0 million recorded during the fourth quarter of 2012. For the full year of 2013, net interest income on a tax-equivalent basis was $173.3 million , an increase of $15.7 million or 10 percent from the $157.6 million recorded during the full year of 2012. Decrease in Noninterest Income; Decrease in Noninterest Expenses Over Fourth Quarter 2012 Noninterest income was $17.6 million during the fourth quarter of 2013 compared to $27.2 million during the fourth quarter of 2012, a decrease of $9.6 million or 35 percent. For the full year, noninterest income was $89.6 million in 2013 compared to $108.7 million in 2012, a decrease of $19.1 million or 18 percent. Although noninterest income was negatively affected by decreased gains on sale of loans in both the quarterly and yearly comparative periods, these decreases were partially offset by increases in other fee income categories. In particular, Heartland experienced solid growth in service charges and fees, which increased $883,000 or 22 percent for the quarter and $2.4 million or 16 percent for the full year; trust fees, which increased $406,000 or 16 percent for the quarter and $1.2 million or 12 percent for the full year; and brokerage and insurance commissions, which increased $301,000 or 32 percent for the quarter and $859,000 or 23 percent for the full year. Also negatively affecting noninterest income for the yearly comparative period were securities gains which totaled $7.1 million during 2013 compared to $14.0 million during 2012. On a sequential quarterly basis, residential mortgage loan originations and the gains on sale of residential mortgage loans and the mortgage servicing rights income they create, decreased during 2013. Gains on sale of loans totaled $3.2 million during the fourth quarter of 2013 compared to $14.3 million during the fourth quarter of 2012, a decrease of $11.1 million or 78 percent. During the full year of 2013, gains on sale of loans totaled $27.4 million compared to $49.2 million during the full year of 2012, a $21.8 million or 44 percent decrease. Gains on sale of loans result primarily from the gain or loss on sales of mortgage loans into the secondary market, related fees and fair value marks on the associated derivatives. The volume of residential mortgage loans sold totaled $214.3 million during the fourth quarter of 2013 compared to $478.3 million during the fourth quarter of 2012, and totaled $1.42 billion during the full year of 2013 compared to $1.53 billion during the full year of 2012. For the fourth quarter of 2013, refinancing activity represented 35 percent of total mortgage loan originations compared to 34 percent during the third quarter of 2013 and 71 percent during the fourth quarter of 2012. Loan servicing income decreased $516,000 or 15 percent for the fourth quarter of 2013 as compared to the fourth quarter of 2012. On an annual comparative basis, loan servicing income increased $3.1 million or 28 percent for 2013 as compared to 2012. Included in loan servicing income are the fees collected for the servicing of mortgage loans for others, which are 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 $2.0 million during the fourth quarter of 2013 compared to $1.3 million during the fourth quarter of 2012, an increase of $647,000 or 50 percent. For the year, fees collected for the servicing of mortgage loans for others was $6.9 million for 2013 compared to $4.4 million during 2012, an increase of $2.5 million or 56 percent. The portfolio of mortgage loans serviced for others by Heartland totaled $3.05 billion at Dec. 31, 2013 , compared to $2.20 billion at Dec. 31, 2012 . Fuller noted, "The mortgage business changed considerably during 2013, creating challenges to our goals. Originations of $1.5 billion in 2013 came close to matching the previous year's production of $1.6 billion . We remain committed to this business line and continue to look for opportunities to expand into markets with strong residential growth potential." For the fourth quarter of 2013, noninterest expense totaled $53.9 million compared to $54.6 million during the fourth quarter of 2012, a decrease of $722,000 or 1 percent. For the full year, noninterest expense totaled $196.6 million in 2013 compared to $183.4 million in 2012, a $13.2 million or 7 percent increase. Included in other noninterest expenses during the fourth quarter of both years were writedowns on investments in commercial and residential real estate projects which qualified for historic rehabilitation tax credits. These writedowns were $596,000 in 2013 and $5.3 million in 2012. The largest component of noninterest expense, salaries and employee benefits, increased $838,000 or 3 percent during the fourth quarter of 2013 as compared to the same quarter in 2012, and $12.5 million or 12 percent for the full year of 2013 as compared to the full year of 2012. Full-time equivalent employees totaled 1,676 on Dec. 31, 2013 , compared to 1,498 on Dec. 31, 2012 . The acquisitions completed in the fourth quarter of 2013 added 133 full-time equivalent employees representing 75 percent of this increase. Heartland's effective tax rate was 21.90 percent for 2013 compared to 25.86 percent for 2012. Heartland's income taxes included federal historic rehabilitation tax credits totaling $914,000 for 2013 and $5.8 million in 2012. Federal low-income housing tax credits included in Heartland's income taxes totaled $798,000 during both 2013 and 2012. 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 37.26 percent during 2013 compared to 20.43 percent during 2012. The tax-equivalent adjustment for this tax-exempt interest income was $9.5 million during 2013 compared to $7.4 million during 2012. Solid Growth in Loans; Increase in Demand Deposits Total assets were $5.92 billion at December 31, 2013 , an increase of $927.5 million or 19 percent since December 31, 2012 . Total assets at acquisition date were $809.2 million for the Morrill & Janes merger and $67.1 million for the Freedom acquisition. Securities represented 32 percent of Heartland's total assets at Dec. 31, 2013 , compared to 31 percent at year-end 2012. Total loans and leases held to maturity were $3.50 billion at Dec. 31, 2013 , compared to $2.82 billion at year-end 2012, an increase of $675.4 million or 24 percent, with $595.2 million occurring during the fourth quarter. Included in the loan growth for the fourth quarter of 2013 were $377.4 million acquired in the Morrill & Janes merger and $39.3 million acquired in the Freedom acquisition. Excluding these acquisitions, loan growth totaled $178.9 million or 6 percent for the fourth quarter of 2013 and $258.7 million or 9 percent for the full year of 2013. Commercial and commercial real estate loans, which totaled $2.48 billion at Dec. 31, 2013 , increased $478.6 million or 24 percent since year- end 2012, with $295.6 million attributable to the acquisitions. Residential mortgage loans, which totaled $349.3 million at Dec. 31, 2013 , increased $99.7 million or 40 percent since year-end 2012, with $56.6 million attributable to the acquisitions. Agricultural and agricultural real estate loans, which totaled $376.7 million at Dec. 31, 2013 , increased $48.4 million or 15 percent since year-end 2012, with $49.4 million attributable to the acquisitions. Consumer loans, which totaled $294.1 million at Dec. 31, 2013 , increased $48.5 million or 20 percent since year-end 2012, with $15.0 million attributable to the acquisitions. "After a slow start in early 2013, Heartland experienced excellent loan growth in the second, third and fourth quarters of the year. Adjusting for acquisitions, total loans grew by 9 percent, balanced nicely among commercial and consumer business lines," added Fuller. Total deposits were $4.67 billion at December 31, 2013 , compared to $3.85 billion at year-end 2012, an increase of $820.8 million or 21 percent, with $665.3 million attributable to the Morrill & Janes merger and $54.1 million attributable to the Freedom acquisition. Demand deposits totaled $1.24 billion at December 31, 2013 , an increase of $264.3 million or 27 percent since year-end 2012, with $91.6 million attributable to the acquisitions. Exclusive of $543.6 million acquired, savings deposits decreased $12.8 million or 1 percent since year-end 2012. Certificates of deposit decreased $58.5 million or 7 percent when excluding $84.2 million in acquired certificates of deposit. The composition of Heartland's deposits continued its positive trend as no-cost demand deposits as a percentage of total deposits were 27 percent at December 31, 2013 , compared to 25 percent at December 31, 2012 , while higher-cost certificates of deposit as a percentage of total deposits were 19 percent at December 31, 2013 , compared to 23 percent at December 31, 2012 . Fuller said, "Adjusting for acquisitions, deposits increased by 3 percent in 2013. We continue to experience a very favorable shift in deposit mix, with demand deposits growing at an 18 percent rate." Common stockholders' equity was $357.8 million at December 31, 2013 , compared to $314.9 million at September 30, 2013 , and $320.1 million at year-end 2012. Book value per common share was $19.44 at December 31, 2013 , compared to $18.58 at September 30, 2013 , and $19.02 at year-end 2012. Changes in common stockholders' equity and book value per common share are the result of earnings, dividends paid, stock transactions and mark-to-market adjustment for unrealized gains and losses on securities available for sale. As a result of increases in market interest rates on many debt securities during the last three quarters of 2013, Heartland's unrealized gains and losses on securities available for sale, net of applicable taxes, were at an unrealized loss of $15.1 million at December 31, 2013 , and $11.2 million at September 30, 2013 , compared to an unrealized gain of $20.5 million at December 31, 2012 . Decrease in Provision for Loan Losses for the Year; Decrease in Nonperforming Loans During the Quarter The allowance for loan and lease losses at December 31, 2013 , was 1.19 percent of loans and leases and 98.27 percent of nonperforming loans compared to 1.37 percent of loans and leases and 89.71 percent of nonperforming loans at December 31, 2012 . The provision for loan losses was $2.0 million for the fourth quarter of 2013 compared to $3.4 million for the fourth quarter of 2012. For the full year of 2013, provision for loan losses was $9.7 million compared to $8.2 million for 2012. Nonperforming loans, exclusive of those covered under loss sharing agreements, were $42.4 million or 1.21 percent of total loans and leases at December 31, 2013 , compared to $47.1 million or 1.62 percent of total loans and leases at September 30, 2013 , and $43.2 million or 1.53 percent of total loans and leases at December 31, 2012 . Approximately 63 percent, or $27.3 million , of Heartland's nonperforming loans have individual loan balances exceeding $1.0 million , the largest of which is $6.8 million . These nonperforming loans, to an aggregate of 8 borrowers, are primarily located in the Midwestern states and are spread over 6 different industry classifications. Delinquencies in each of the loan portfolios continue to be well- managed. Loans delinquent 30 to 89 days as a percent of total loans were 0.29 percent at December 31, 2013 , compared to 0.67 percent at September 30, 2013 , and 0.32 percent at December 31, 2012 . The increase in delinquencies during the third quarter of 2013 was primarily associated with a single credit that was renewed after quarter end. Had this renewal occurred prior to quarter end, loans delinquent 30 to 89 days would have been at 0.37 percent at September 30, 2013 . Other real estate owned was $29.9 million at December 31, 2013 , compared to $33.0 million at September 30, 2013 , and $35.8 million at December 31, 2012 . 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 2013, $6.0 million of other real estate owned was sold during the fourth quarter, $2.7 million during the third quarter, $5.3 million during the second quarter and $3.3 million during the first quarter. Net charge-offs on loans during the fourth quarter of 2013 were $1.7 million compared to $5.0 during the fourth quarter of 2012. For the full year, net charge-offs were $6.7 million during 2013 compared to $6.3 million during 2012. "For both the fourth quarter and the year 2013, we made excellent progress in the reduction of nonperforming loans. Total nonperforming loans ended the quarter at 1.21 percent of total loans, a decrease from 1.62 percent for the third quarter of 2013 and from 1.53 percent at year-end 2012. Maintaining excellent quality in our loan portfolio will always be one of our highest priorities," Fuller concluded. Heartland Financial USA is a $5.9 billion diversified financial services company providing banking, mortgage, wealth management, investment, insurance and consumer finance services to individuals and businesses. Heartland currently has 80 banking locations in 60 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 . More information: www.htlf.com ((Comments on this story may be sent to newsdesk@closeupmedia.com ))


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