I’m delighted to be able to begin this letter by sharing the great news that the year 2015 was the best year ever for Heartland Financial USA, Inc. Despite low interest rates, geopolitical turmoil and a tepid U.S. economy, we achieved outstanding growth in earnings and assets, made strategically important additions to our geographical footprint, enhanced our portfolio of banking services and made excellent progress in improving our operational efficiency. As a result, we delivered tangible benefits to our customers and shareholders. 
 
Success, of course, is something to be proud of. But it’s important to take a look at how that success was achieved. We do not try to reach our goals by swinging for the fences; we rely on a proven, repeatable and risk-averse strategy. The key to our accomplishments, as you’ll notice in the theme of this report, is balancing profit and growth. We don’t bulk up by making heedless acquisitions; we don’t inflate profits by cutting expenses too close to the bone. 
 
You’ll find a complete account of our consolidated financials elsewhere in this report, but let me mention a few metrics I’m particularly proud of. Our net income in 2015 reached a record $60 million. That’s an astounding 43 percent increase over 2014. Equally important to our shareholders, earnings per share grew by 29 percent over the prior year. We also achieved a 27 percent increase in assets, ending the year at a record $7.69 billion. Taken altogether, these achievements paint a vivid picture of how we’ve arrived at the sweet spot between profit and growth. 
 
Let’s take a closer look at the growth side of the equation. As you probably know, our growth strategy is to make astute, strategically sensible acquisitions and balance this expansion with internal, organic improvement. Growth is important because it allows us to spread our fixed costs over a wider base. With our internal efforts focused on development of scalable systems and processes, we can accommodate new customers (or offer new products to existing customers) with minimal strain on existing resources. The recent acquisition of Premier Valley Bank, based in Fresno, California, is a perfect example of the way we expand our geographical reach. This highly respected community bank becomes our 10th independent state-chartered bank subsidiary and gives us a foothold in the strategically important California marketplace. As with all our banks, Premier Valley Bank will continue to operate under its current management team. Why? Because we know from long experience that the key to maintaining our competitive edge is to give our bankers all the back-office support they need while freeing them up to serve local communities and customers as only they know how. 
 
Our merger and acquisition strategy also focuses on expanding our footprint in areas where we already have a presence. A good example here is our acquisition of Community Bank in Santa Fe, New Mexico, which we’ve merged into New Mexico Bank & Trust, our existing bank. With this union we fill in a key piece of the statewide geographic puzzle and gain expanded access to a high-growth market that represents fertile territory for our community banking business model. 
 
When it comes to mergers and acquisitions, I think it’s fair to say that we are unusually skilled in preventing customer erosion that typically occurs when a bank changes hands. Big banks can expect to lose up to 20 percent of their acquired deposits following a merger. By contrast, with the four systems conversions Heartland completed in 2015, we retained 95 percent of the deposits. Why? 
Because, as seasoned acquirers, we know how to reassure new customers, build relationships quickly and provide access to an expanded menu of banking solutions. And, thanks to our long history of successfully assimilating new organizations, we’re very good at integrating IT systems, retaining key talent and harmonizing product offerings – all of which ensure a swift and smooth transition. 
 
While we enjoy our reputation as seasoned acquirers, we’re equally focused on generating growth from within our current base. To make this point, let’s look at two metrics – among many others – that illustrate our success in achieving organic growth. In 2015 our deposits (exclusive of acquisitions) grew by eight 
percent, while loans grew at about five percent for the year. These increases – which compare quite favorably with industry averages – indicate that we’re finding new ways to serve our existing clients while also attracting new ones. 
 
Currently, Heartland has 108 banking centers serving 85 communities across 12 states in the Midwest and Western United States. While this makes for an enviable business territory, it’s important to note that we manage our geographic presence not to create a pretty scattergram, but to maximize profits and reduce risk. We make a point to serve diverse regions, industry groups and clients, and we’re careful not to put our capital at risk by overcommitting to a given territory or sector. That’s one of the reasons why we weathered the Great Recession without incurring any annual losses and why we’re confident in our ability to face future challenges. 
 
When it comes to balancing profit and growth, a key goal is to have at least $1 billion in assets in every state where we have a presence. As I write, three of our 10 banks have reached the $1 billion threshold and four more are within shouting 
distance of that mark. The $1 billion goal is not an arbitrary figure; as we reach this size at the state level, we become large enough to compete with our larger banking competitors while also spreading our operating costs and offering a rich menu of centrally managed products and services. At the same time, with our focus on one-to-one customer relationships, we can provide the personalized 
service associated with smaller local banks. “Big bank punch, community bank touch” – that’s the formula that separates us from competitors across the banking spectrum. 
 
One of our most noteworthy achievements in 2015 was improving the balance between interest income and fee-based income. Last year our net interest margin (which measures the difference between what we earn on loans and what we pay on deposits) held steady at close to four percent. That’s better than most of our peers and quite an achievement in today’s low-interest environment. However, while the revenue we earn from loans and deposits will always be important, we’ve made tremendous strides in building a suite of fee-based services that enables us to maintain profitability while helping our clients meet their financial needs. On the commercial side, we’ve had great success with our 
treasury management, fraud protection and employee retirement plan services. For our retail clients, we’re building momentum with value-added services like 
mortgage lending. And with large numbers of workers moving toward their retirement years, our Private Client Services business line offers financial planning, investment management, trust services, brokerage services and retirement plan services for employers. Fee-based services like these currently generate about 
30 percent of our total revenue, which puts us well on the way to reaching our ultimate goal of a 50-50 split. This healthy mix helps us stay profitable when, like 
today, the interest-rate environment is troublesome. 
 
Another way to maintain a healthy balance between profit and growth is to boost efficiency. Our goal, toward which we’re making excellent progress, is to reach an efficiency ratio of 65 percent, which would mean that it takes 65 cents of overhead to generate a dollar of income. How do we improve efficiency? The simple answer is that we streamline our programs and processes – all with an eye toward better serving our clients and turning them into customers for life. Our portfolio of outstanding products and services gives us an edge here, but the real secret to balancing profit and growth is our consultative sales approach. Our bankers don’t simply pitch products; they ask questions, anticipate problems, provide answers and create solutions. 
 
I’d like to conclude this letter by expressing my deep appreciation for the people of Heartland, all of whom played a big role in helping us reach new heights in 2015. And, as always, I want to thank our customers and shareholders for their loyalty and support. On their behalf, we’re going to continue balancing profit 
and growth by sticking to what we do best as we prepare to meet new challenges in 2016 and beyond. 
 
Lynn B. Fuller 
Chairman of the Board 
Chief Executive Officer 
 


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