Heartland Financial USA, Inc. Announces Record 2018 Annual Net Income And Solid Fourth Quarter Results

Monday, January 28, 2019

Highlights

§

Quarterly net income available to common stockholders of $32.1 million, an increase of $18.5 million or 135% from the fourth quarter of 2017

§

Annual net income available to common stockholders of $117.0 million, an increase of $41.7 million or 55% from 2017

§

Diluted earnings per common share of $0.93 for the quarter, an increase of $0.48 per share or 107% from the fourth quarter of 2017

§

Diluted earnings per common share of $3.52 for the year, an increase of $0.87 per share or 33% from 2017

§

Return on average common equity of 9.88% for the quarter and 9.93% for the year

§

Return on average tangible common equity (non-GAAP)(1) of 15.00% for the quarter and 14.79% for the year

§

Efficiency ratio, fully tax-equivalent (non-GAAP)(2) of 59.37% for the quarter and 63.54% for the year

§

Declared and paid a special dividend of $0.05 per common share in December 2018

§

Announced agreement to acquire Blue Valley Ban Corp. on January 16, 2019

 

Quarter Ended

December 31,

Year Ended

December 31,

2018

2017

2018

2017

Net income available to common stockholders (in millions)

$

32.1

$

13.7

$

117.0

$

75.2

Diluted earnings per common share

0.93

0.45

3.52

2.65

Return on average assets

1.12

%

0.55

%

1.09

%

0.83

%

Return on average common equity

9.88

5.50

9.93

8.63

Return on average tangible common equity (non-GAAP)(1)

15.00

7.60

14.79

11.45

Net interest margin

4.28

4.14

4.26

4.04

Net interest margin, fully tax-equivalent (non-GAAP)(3)

4.34

4.30

4.32

4.22

Efficiency ratio, fully tax-equivalent (non-GAAP)(2)

59.37

62.26

63.54

65.40

"Heartland had record earnings again in 2018. Net income available to common stockholders was $117.0 million, a 55 percent increase over 2017, and diluted earnings per common share increased 33 percent."

Lynn B. Fuller, executive operating chairman, Heartland Financial USA, Inc.

(1) Refer to the "Reconciliation of Return on Average Tangible Common Equity (non-GAAP)" table included in this earnings release.

(2) Refer to the "Reconciliation of Non-GAAP measure-Efficiency Ratio" table included in this earnings release.

(3) Refer to the "Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP)" table included in this earnings release.

 

Dubuque, Iowa, Monday, January 28, 2019-Heartland Financial USA, Inc. (NASDAQ: HTLF) today reported net income available to common stockholders of $32.1 million for the quarter ended December 31, 2018, compared to $13.7 million for the fourth quarter of 2017, which was an increase of $18.5 million or 135%. Earnings per diluted common share were $0.93 for the fourth quarter of 2018, which was an increase of $0.48 or 107% from $0.45 per diluted common share for the same quarter of 2017. Return on average common equity was 9.88% and return on average assets was 1.12% for the fourth quarter of 2018, compared to 5.50% and 0.55%, respectively, for the same quarter in 2017.

 

Net income available to common stockholders for the year 2018 was $117.0 million, an increase of $41.7 million or 55% from $75.2 million recorded for 2017. Earnings per diluted common share for the year ended December 31, 2018, were $3.52 compared to $2.65 per diluted common share for the year 2017, which was an increase of $0.87 or 33%. Return on average common equity was 9.93% and return on average assets was 1.09% for the year 2018, compared to 8.63% and 0.83%, respectively, for the same period in 2017.

 

Commenting on Heartland’s fourth quarter and annual results, Lynn B. Fuller, Heartland’s executive operating chairman, said, "Heartland had record earnings again in 2018. Net income available to common stockholders was $117.0 million, a 55 percent increase over 2017, and diluted earnings per common share increased 33 percent."

 

During the fourth quarter of 2018, Heartland entered into an agreement to sell the loan portfolios of its consumer finance subsidiaries, Citizens Finance Co. and Citizens Finance of Illinois Co. (collectively, "Citizens"). The loan portfolios had a fair value of $67.2 million and were classified as held for sale as of December 31, 2018. The transaction closed on January 11, 2019.

 

Heartland continued its branch optimization strategy in the fourth quarter of 2018 with the announcement of two branch sales, which resulted in the reclassification of $13.7 million of loans and $50.6 million of deposits as held for sale. These transactions, in addition to the branch sale announced in the third quarter of 2018, are expected to close in the first half of 2019.

 

During the fourth quarter of 2018, Heartland entered into arrangements to fully outsource its legacy residential mortgage lending business and has partnered with third party providers to offer residential mortgage loans to customers in many of its markets. PrimeWest Mortgage Corporation, a wholly-owned subsidiary of First Bank & Trust, continues to provide mortgage loans to customers in Texas and has expanded to serve other customers in Heartland's Southwestern markets.

 

Bruce K. Lee, Heartland's president and chief executive officer, stated, "The decisions to exit the consumer finance business and alter our approach to providing residential mortgage loans were in response to changes in the competitive landscape in these markets. These actions, in addition to our branch optimization strategy, will allow us to focus our resources in areas with higher growth and earnings potential."

 

On January 16, 2019, Heartland entered into a definitive merger agreement to acquire Blue Valley Ban Corp., and its wholly-owned subsidiary, Bank of Blue Valley, headquartered in Overland Park, Kansas. As of the announcement date, the transaction, in which all of the issued and outstanding shares of the Bank of Blue Valley stock will be exchanged for shares of Heartland common stock, was valued at approximately $93.9 million. Simultaneous with the closing of the transaction, Bank of Blue Valley will merge into Heartland's Kansas-based subsidiary, Morrill & Janes Bank and Trust Company, and the combined entity will operate as Bank of Blue Valley. The transaction is subject to certain potential adjustments and customary closing conditions. The transaction is expected to close in the second quarter of 2019 with a systems conversion planned for the third quarter of 2019. As of September 30, 2018, Bank of Blue Valley had total assets of approximately $725 million, which included approximately $527 million of net loans outstanding, and approximately $608 million of deposits.

 

Net Interest Margin Increases from Fourth Quarter 2017

Net interest margin, expressed as a percentage of average earning assets, was 4.28% (4.34% on a fully tax-equivalent basis) during the fourth quarter of 2018, compared to 4.32% (4.38% on a fully tax-equivalent basis) during the third quarter of 2018 and 4.14% (4.30% on a fully tax-equivalent basis) during the fourth quarter of 2017.

 

Lee said, “During this recent period of rising interest rates, we were pleased to see our net interest margin on a fully tax-equivalent basis remain strong at 4.34% for the quarter and 4.32% for the year."

 

Interest income for the fourth quarter of 2018 was $126.3 million, an increase of $24.2 million or 24%, compared to the $102.1 million recorded in the fourth quarter of 2017. The tax-equivalent adjustment, which accounts for income taxes saved on the interest earned on nontaxable securities and loans, was $1.6 million for the fourth quarter of 2018 and $3.6 million for the fourth quarter of 2017. With these adjustments, interest income on a tax-equivalent basis was $127.9 million for the fourth quarter of 2018, an increase of $22.2 million or 21%, compared to $105.6 million for the fourth quarter of 2017. The increase in interest income on a tax-equivalent basis was primarily due to the increase in average earning assets and the recent increases in market interest rates. Average earning assets totaled $10.23 billion during the fourth quarter of 2018 compared to $8.89 billion during the fourth quarter of 2017, which was a $1.33 billion or 15% increase. The average rate on earning assets increased 25 basis points to 4.96% for the fourth quarter of 2018 compared to 4.71% for the same quarter in 2017.

 

Interest expense for the fourth quarter of 2018 was $16.0 million, an increase of $6.8 million or 74% from $9.2 million in the fourth quarter of 2017. Average interest bearing deposits for the quarter ended December 31, 2018, totaled $6.16 billion, an increase of $953.1 million or 18% from $5.21 billion in the same quarter in 2017. The average interest rate paid on Heartland's interest bearing deposits increased 36 basis points to 0.76% for the fourth quarter of 2018 compared to 0.40% for the same quarter of 2017. Heartland's average borrowings decreased $59.7 million or 13% to $397.5 million for the fourth quarter of 2018 compared to $457.2 million for the fourth quarter of 2017. The average rate paid on Heartland's average borrowings was 4.19% and 3.38% for the fourth quarter of 2018 and 2017, respectively. The increase of 32 basis points in the average interest rate paid on Heartland's interest bearing liabilities was primarily due to recent increases in market interest rates.

 

Net interest income increased $17.4 million or 19% to $110.3 million in the fourth quarter of 2018 from the $92.9 million recorded in the fourth quarter of 2017. After the tax-equivalent adjustment discussed above, net interest income on a tax-equivalent basis totaled $111.8 million during the fourth quarter of 2018, an increase of $15.4 million or 16% from the $96.4 million recorded during the fourth quarter of 2017.

 

Noninterest Income and Noninterest Expenses Increase from Fourth Quarter 2017

Noninterest income totaled $27.0 million during the fourth quarter of 2018 compared to $25.5 million during the fourth quarter of 2017, an increase of $1.5 million or 6%. Service charges and fees totaled $13.7 million during the fourth quarter of 2018 compared to $9.9 million during the fourth quarter of 2017, an increase of $3.8 million or 38%. Service charges related to credit card income totaled $3.5 million for the fourth quarter of 2018, an increase of $1.5 million or 76% from $2.0 million for the fourth quarter of 2017. The remainder of the increase was primarily attributable to a larger customer base as a result of recent acquisitions. Securities gains, net, totaled $48,000 for the fourth quarter of 2018 compared to $1.4 million for the same quarter of 2017, which was a decrease of $1.4 million or 97%. Gains on sale of loans held for sale totaled $3.2 million during the fourth quarter of 2018 compared to $4.3 million during the fourth quarter of 2017, a decrease of $1.1 million or 26%.

 

For the fourth quarter of 2018, noninterest expenses totaled $88.8 million compared to $77.9 million during the fourth quarter of 2017, an increase of $10.9 million or 14%. Salaries and employee benefits totaled $46.7 million for the fourth quarter of 2018, which was an increase of $3.4 million or 8% from $43.3 million for the fourth quarter of 2017. Full time equivalent employees totaled 2,045 as of December 31, 2018, compared to 2,008 as of December 31, 2017. Other noninterest expenses increased $5.3 million or 50% to $15.9 million for the fourth quarter of 2018 compared to $10.6 million for the fourth quarter of 2017. Included in other noninterest expenses for the fourth quarter of 2018 were $3.9 million of write-downs on partnership investments that qualify for tax credits.

 

Heartland's effective tax rate was 17.22% for the fourth quarter of 2018 compared to 61.13% for the fourth quarter of 2017. Exclusive of the increase to income tax expense of $10.4 million recorded as a result of the passage of the Tax Cuts and Jobs Act in December 2017, Heartland's effective tax rate was 31.58% for the fourth quarter of 2017. Federal low-income housing tax credits included in the determination of Heartland's income taxes totaled $307,000 during both the fourth quarter of 2018 and 2017. Additionally, Heartland's income tax calculation included solar energy tax credits of $2.6 million and $179,000 for the fourth quarter of 2018 and 2017, respectively.

 

Loans and Deposits Increase Since December 31, 2017

Total assets were $11.41 billion at December 31, 2018, an increase of $1.60 billion or 16% from $9.81 billion at year-end 2017.  Excluding $427.1 million of assets acquired at fair value in the Signature Bancshares, Inc. ("Signature") transaction and $1.12 billion of assets acquired at fair value in the First Bank Lubbock Bancshares, Inc. ("FBLB") transaction, total assets increased $52.8 million or 1% since December 31, 2017. Securities represented 24% of total assets at December 31, 2018, compared to 25% at December 31, 2017.

 

Total loans held to maturity were $7.41 billion at December 31, 2018, compared to $6.39 billion at year-end 2017, an increase of $1.02 billion or 16%. Excluding $96.0 million of loans that were classified as held for sale in conjunction with the pending branch sales and the Citizens transaction and $1.01 billion of loans acquired in 2018, total loans held to maturity increased $106.7 million or 2% since year-end 2017.

 

Total deposits were $9.40 billion as of December 31, 2018, compared to $8.15 billion at year-end 2017, an increase of $1.25 billion or 15%. This increase included $1.25 billion of deposits, at fair value, acquired in the Signature and FBLB transactions. As of December 31, 2018, Heartland had $106.4 million of deposits classified as held for sale in conjunction with the pending branch sales. Exclusive of these transactions, total deposits increased $104.8 million or 1% since year-end 2017.

 

Demand deposits totaled $3.26 billion at December 31, 2018, an increase of $281.6 million or 9% from $2.98 billion at year-end 2017. Excluding $299.0 million of demand deposits acquired in 2018 and $25.5 million of demand deposits classified as held for sale, demand deposits increased $8.1 million or less than 1% since December 31, 2017.

 

Savings deposits increased $867.6 million or 20% to $5.11 billion at December 31, 2018 from $4.24 billion at year-end 2017. Excluding $619.0 million of savings deposits acquired in 2018 and $70.1 million of savings deposits classified as held for sale, savings deposits increased $318.7 million or 8% since year-end 2017.

 

Time deposits totaled $1.02 billion at December 31, 2018, which was an increase of $100.3 million or 11% from $923.5 billion at December 31, 2017. Excluding $333.1 million of time deposits acquired in 2018 and $10.9 million of time deposits classified as held for sale, time deposits decreased $222.0 million or 24% since December 31, 2017.

 

Nonperforming Assets and Provision for Loan Losses Increase Since December 31, 2017

Nonperforming assets were $79.3 million at December 31, 2018, compared to $74.6 million at December 31, 2017. Exclusive of $10.4 million of nonperforming assets, at fair value, acquired in 2018, nonperforming assets decreased $5.8 million or 8% since year-end 2017. Nonperforming loans were $72.7 million or 0.98% of total loans at December 31, 2018, compared to $63.4 million or 0.99% of total loans at December 31, 2017.

 

The allowance for loan losses at December 31, 2018, was 0.84% of loans and 85.27% of nonperforming loans compared to 0.87% of loans and 87.82% of nonperforming loans at December 31, 2017. The provision for loan losses was $9.7 million and $5.3 million for the fourth quarter of 2018 and 2017, respectively. The increased provision expense in the fourth quarter of 2018 significantly impacted Heartland's net income for the quarter. The increase was primarily due to two impaired commercial loans from acquired portfolios totaling $5.8 million for which provision expense of $4.0 million was required. Net charge-offs for the fourth quarter of 2018 totaled $8.9 million compared to $4.5 million for the fourth quarter of 2017, which was an increase of $4.4 million or 97%. The Citizens' loan portfolios were required to be recorded at fair value due to the held for sale classification, which resulted in a charge-off of $3.1 million in the fourth quarter of 2018.

 

Conference Call Details

Heartland will host a conference call for investors at 5:00 p.m. EDT today. To participate, dial 866-682-6100 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 January 27, 2020, by logging on to www.htlf.com.

 

About Heartland Financial USA, Inc.

Heartland Financial USA, Inc. is a diversified financial services company with assets of $11.4 billion. The company provides banking, mortgage, private client, investment and insurance services to individuals and businesses. Heartland currently has 121 banking locations serving 89 communities in Iowa, Illinois, Wisconsin, New Mexico, Arizona, Montana, Colorado, Minnesota, Kansas, Missouri, Texas and California. Additional information about Heartland Financial USA, Inc. is available at www.htlf.com.

 

Safe Harbor Statement

This press 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 the projected results in Heartland's forward-looking statements. These factors, which are detailed in the risk factors in Heartland's Annual Report on Form 10-K filed with the Securities and Exchange Commission, consist of the following: (i) the strength of the national economy and the economies of local communities in which Heartland conducts business; (ii) the economic impact of past and any future terrorist threats and attacks and any acts of war; (iii) changes in state and federal banking laws and regulations and governmental policies relating to financial institutions; (iv) changes in interest rates and prepayment rates of Heartland's assets; (v) increased competition in the financial services sector and the inability of Heartland to attract new customers; (vi) changes in technology and Heartland's ability to develop and maintain secure and reliable electronic systems; (vii) the potential impact of acquisitions and Heartland's ability to successfully integrate acquired banks; (viii) the loss of key executives or employees; (ix) changes in consumer spending; (x) unexpected outcomes of existing or new litigation involving Heartland; and (xi) changes in accounting policies and practices. All statements in this press 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.

 

-FINANCIAL TABLES FOLLOW-

 

HEARTLAND FINANCIAL USA, INC.

CONSOLIDATED FINANCIAL HIGHLIGHTS (Unaudited)

DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA

For the Quarter Ended

For the Year Ended

December 31,

December 31,

2018

2017

2018

2017

Interest Income

Interest and fees on loans

$

105,700

$

86,108

$

393,871

$

304,006

Interest on securities:

Taxable

15,851

11,119

54,131

38,365

Nontaxable

3,467

4,401

14,120

19,698

Interest on federal funds sold

5

42

Interest bearing deposits with the Federal Reserve Bank and other banks and other short-term investments

1,285

435

3,698

1,547

Total Interest Income

126,303

102,068

465,820

363,658

Interest Expense

Interest on deposits

11,826

5,313

35,667

18,279

Interest on short-term borrowings

417

180

1,696

678

Interest on other borrowings

3,777

3,719

14,503

14,393

Total Interest Expense

16,020

9,212

51,866

33,350

Net Interest Income

110,283

92,856

413,954

330,308

Provision for loan losses

9,681

5,328

24,013

15,563

Net Interest Income After Provision for Loan Losses

100,602

87,528

389,941

314,745

Noninterest Income

Service charges and fees

13,660

9,892

48,706

39,183

Loan servicing income

2,061

1,400

7,292

5,636

Trust fees

4,599

4,336

18,393

15,818

Brokerage and insurance commissions

1,618

1,071

4,513

4,033

Securities gains/(losses), net

48

1,420

1,085

6,973

Unrealized gain/(loss) on equity securities, net

115

212

Gains on sale of loans held for sale

3,189

4,290

21,450

22,251

Valuation adjustment on servicing rights

(58

)

(8

)

(46

)

21

Income on bank owned life insurance

587

733

2,793

2,772

Other noninterest income

1,226

2,394

4,762

5,335

Total Noninterest Income

27,045

25,528

109,160

102,022

Noninterest Expense

Salaries and employee benefits

46,729

43,289

196,118

171,407

Occupancy

6,622

5,892

25,328

22,244

Furniture and equipment

3,126

3,148

12,529

11,061

Professional fees

9,723

8,537

39,811

32,879

FDIC insurance assessments

907

985

3,699

3,595

Advertising

2,726

2,088

9,565

7,229

Core deposit intangibles and customer relationship intangibles amortization

2,592

1,825

9,355

6,077

Other real estate and loan collection expenses

574

687

3,038

2,461

(Gain)/loss on sales/valuations of assets, net

(35

)

833

2,208

2,475

Restructuring expenses

2,564

Other noninterest expenses

15,857

10,594

49,673

38,247

Total Noninterest Expense

88,821

77,878

353,888

297,675

Income Before Income Taxes

38,826

35,178

145,213

119,092

Income taxes

6,685

21,506

28,215

43,820

Net Income

32,141

13,672

116,998

75,272

Preferred dividends

(13

)

(39

)

(58

)

Interest expense on convertible debt

12

Net Income Available to Common Stockholders

$

32,141

$

13,659

$

116,959

$

75,226

Earnings per common share-diluted

$

0.93

$

0.45

$

3.52

$

2.65

Weighted average shares outstanding-diluted

34,670,180

30,209,043

33,213,148

28,425,652

HEARTLAND FINANCIAL USA, INC.

CONSOLIDATED FINANCIAL HIGHLIGHTS (Unaudited)

DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA

For the Quarter Ended

12/31/2018

9/30/2018

6/30/2018

3/31/2018

12/31/2017

Interest Income

Interest and fees on loans

$

105,700

$

105,733

$

96,787

$

85,651

$

86,108

Interest on securities:

Taxable

15,851

14,433

12,270

11,577

11,119

Nontaxable

3,467

3,490

3,584

3,579

4,401

Interest on federal funds sold

5

Interest bearing deposits with the Federal Reserve Bank and other banks and other short-term investments

1,285

1,238

768

407

435

Total Interest Income

126,303

124,894

113,409

101,214

102,068

Interest Expense

Interest on deposits

11,826

10,092

7,983

5,766

5,313

Interest on short-term borrowings

417

464

547

268

180

Interest on other borrowings

3,777

3,660

3,470

3,596

3,719

Total Interest Expense

16,020

14,216

12,000

9,630

9,212

Net Interest Income

110,283

110,678

101,409

91,584

92,856

Provision for loan losses

9,681

5,238

4,831

4,263

5,328

Net Interest Income After Provision for Loan Losses

100,602

105,440

96,578

87,321

87,528

Noninterest Income

Service charges and fees

13,660

12,895

12,072

10,079

9,892

Loan servicing income

2,061

1,670

1,807

1,754

1,400

Trust fees

4,599

4,499

4,615

4,680

4,336

Brokerage and insurance commissions

1,618

1,111

877

907

1,071

Securities gains/(losses), net

48

(145

)

(259

)

1,441

1,420

Unrealized gain/(loss) on equity securities, net

115

54

71

(28

)

Net gains on sale of loans held for sale

3,189

7,410

6,800

4,051

4,290

Valuation adjustment on servicing rights

(58

)

230

(216

)

(2

)

(8

)

Income on bank owned life insurance

587

892

700

614

733

Other noninterest income

1,226

1,149

1,167

1,220

2,394

Total Noninterest Income

27,045

29,765

27,634

24,716

25,528

Noninterest Expense

Salaries and employee benefits

46,729

49,921

50,758

48,710

43,289

Occupancy

6,622

6,348

6,315

6,043

5,892

Furniture and equipment

3,126

3,470

3,184

2,749

3,148

Professional fees

9,723

11,681

9,948

8,459

8,537

FDIC insurance assessments

907

1,119

684

989

985

Advertising

2,726

2,754

2,145

1,940

2,088

Core deposit intangibles and customer relationship intangibles  amortization

2,592

2,626

2,274

1,863

1,825

Other real estate and loan collection expenses

574

784

948

732

687

(Gain)/loss on sales/valuations of assets, net

(35

)

912

1,528

(197

)

833

Restructuring expenses

2,564

Other noninterest expenses

15,857

12,924

11,098

9,794

10,594

Total Noninterest Expense

88,821

92,539

88,882

83,646

77,878

Income Before Income Taxes

38,826

42,666

35,330

28,391

35,178

Income taxes

6,685

8,956

7,451

5,123

21,506

Net Income

32,141

33,710

27,879

23,268

13,672

Preferred dividends

(13

)

(13

)

(13

)

(13

)

Interest expense on convertible debt

Net Income Available to Common Stockholders

$

32,141

$

33,697

$

27,866

$

23,255

$

13,659

Earnings per common share-diluted

$

0.93

$

0.97

$

0.85

$

0.76

$

0.45

Weighted average shares outstanding-diluted

34,670,180

34,644,187

32,830,751

30,645,212

30,209,043

HEARTLAND FINANCIAL USA, INC.

CONSOLIDATED FINANCIAL HIGHLIGHTS (Unaudited)

DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA

As Of

12/31/2018

9/30/2018

6/30/2018

3/31/2018

12/31/2017

Assets

Cash and due from banks

$

223,135

$

196,847

$

193,069

$

143,071

$

168,723

Interest bearing deposits with the Federal Reserve Bank and other banks and other short-term investments

50,495

240,528

194,937

123,275

27,280

Cash and cash equivalents

273,630

437,375

388,006

266,346

196,003

Time deposits in other financial institutions

4,672

5,836

6,803

6,297

9,820

Securities:

Carried at fair value

2,450,709

2,274,215

2,197,117

2,027,665

2,216,753

Held to maturity, at cost

236,283

239,908

244,271

249,766

253,550

Other investments, at cost

28,396

26,656

26,725

22,982

22,563

Loans held for sale

119,801

77,727

55,684

24,376

44,560

Loans:

Held to maturity

7,407,697

7,365,493

7,477,697

6,746,015

6,391,464

 Allowance for loan losses

(61,963

)

(61,221

)

(61,324

)

(58,656

)

(55,686

)

Loans, net

7,345,734

7,304,272

7,416,373

6,687,359

6,335,778

Premises, furniture and equipment, net

194,676

198,224

199,959

172,862

174,301

Goodwill

391,668

391,668

391,668

270,305

236,615

Core deposit intangibles and customer relationship intangibles, net

47,479

50,071

52,698

41,063

35,203

Servicing rights, net

31,072

32,039

31,996

25,471

25,857

Cash surrender value on life insurance

162,892

162,216

159,302

143,444

142,818

Other real estate, net

6,153

11,908

11,074

11,801

10,777

Other assets

114,841

123,017

120,244

106,126

106,141

Total Assets

$

11,408,006

$

11,335,132

$

11,301,920

$

10,055,863

$

9,810,739

Liabilities and Equity

Liabilities

Deposits:

 Demand

$

3,264,737

$

3,427,819

$

3,399,598

$

3,094,457

$

2,983,128

 Savings

5,107,962

4,958,430

4,864,773

4,536,106

4,240,328

 Time

1,023,730

1,125,914

1,224,773

910,977

923,453

Total deposits

9,396,429

9,512,163

9,489,144

8,541,540

8,146,909

Deposits held for sale

106,409

50,312

Short-term borrowings

227,010

131,139

229,890

131,240

324,691

Other borrowings

274,905

277,563

258,708

276,118

285,011

Accrued expenses and other liabilities

78,078

83,562

68,431

55,460

62,671

Total Liabilities

10,082,831

10,054,739

10,046,173

9,004,358

8,819,282

Stockholders' Equity

Preferred equity

938

938

938

Common stockholders' equity

1,325,175

1,280,393

1,254,809

1,050,567

990,519

Total Equity

1,325,175

1,280,393

1,255,747

1,051,505

991,457

Total Liabilities and Equity

$

11,408,006

$

11,335,132

$

11,301,920

$

10,055,863

$

9,810,739

HEARTLAND FINANCIAL USA, INC

CONSOLIDATED FINANCIAL HIGHLIGHTS (Unaudited)

DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA

For the Quarter Ended

For the Year Ended

December 31,

December 31,

2018

2017

2018

2017

Average Balances

Assets

$

11,371,247

$

9,807,621

$

10,772,297

$

9,009,625

Loans, net of unearned

7,436,497

6,343,923

7,140,239

5,847,061

Deposits

9,596,807

8,293,006

9,104,278

7,590,232

Earning assets

10,225,409

8,891,432

9,718,106

8,181,914

Interest bearing liabilities

6,557,185

5,663,816

6,253,586

5,426,725

Common stockholders' equity

1,290,691

986,026

1,177,346

871,683

Total stockholders' equity

1,290,691

986,964

1,177,955

872,707

Tangible common stockholders' equity(1)

849,851

713,018

790,788

657,020

Key Performance Ratios

Annualized return on average assets

1.12

%

0.55

%

1.09

%

0.83

%

Annualized return on average common equity (GAAP)

9.88

%

5.50

%

9.93

%

8.63

%

Annualized return on average tangible common equity (non-GAAP)(2)

15.00

%

7.60

%

14.79

%

11.45

%

Annualized ratio of net charge-offs to average loans

0.48

%

0.28

%

0.25

%

0.24

%

Annualized net interest margin (GAAP)

4.28

%

4.14

%

4.26

%

4.04

%

Annualized net interest margin, fully tax-equivalent (non-GAAP)(3)

4.34

%

4.30

%

4.32

%

4.22

%

Efficiency ratio, fully tax-equivalent (4)

59.37

%

62.26

%

63.54

%

65.40

%

Reconciliation of Return on Average Tangible Common Equity (non-GAAP)(5)

Net income available to common shareholders (GAAP)

$

32,141

$

13,659

$

116,959

$

75,226

Average common stockholders' equity (GAAP)

$

1,290,691

$

986,026

$

1,177,346

$

871,683

    Less average goodwill

391,668

236,615

340,352

184,554

    Less average core deposit intangibles and customer relationship

intangibles, net

49,172

36,393

46,206

30,109

Average tangible common equity (non-GAAP)

$

849,851

$

713,018

$

790,788

$

657,020

Annualized return on average common equity (GAAP)

9.88

%

5.50

%

9.93

%

8.63

%

Annualized return on average tangible common equity (non-GAAP)

15.00

%

7.60

%

14.79

%

11.45

%

Reconciliation of Annualized Net Interest Margin,
Fully Tax-Equivalent (non-GAAP)(6)

Net Interest Income (GAAP)

$

110,283

$

92,856

$

413,954

$

330,308

    Plus tax-equivalent adjustment(7)

1,565

3,558

6,228

15,139

Net interest income - tax-equivalent (non-GAAP)
 

$

111,848

$

96,414

$

420,182

$

345,447

Average earning assets

$

10,225,409

$

8,891,432

$

9,718,106

$

8,181,914

Annualized net interest margin (GAAP)

4.28

%

4.14

%

4.26

%

4.04

%

Annualized net interest margin, fully tax-equivalent (non-GAAP)
 

4.34

%

4.30

%

4.32

%

4.22

%

(1) Calculated as common stockholders' equity less goodwill and core deposit intangibles and customer relationship intangibles, net.

(2) Refer to the "Reconciliation of Return on Average Tangible Common Equity (non-GAAP)" table.

(3) Refer to the "Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP)" table.

(4) Refer to the "Reconciliation of Non-GAAP Measure-Efficiency Ratio" table that follows for details of this non-GAAP measure.

(5) Return on average tangible common equity is net income available to common stockholders divided by average common stockholders' equity less goodwill and core deposit intangibles and customer deposit intangibles, net. This financial measure is included as it is considered to be a critical metric to analyze and evaluate financial condition and capital strength. This measure should not be considered a substitute for operating results determined in accordance with GAAP.

(6) Annualized net interest margin, fully tax-equivalent is a non-GAAP measure, which adjusts net interest income for the tax-favored status of certain loans and securities. Management believes this measure enhances the comparability of net interest income arising from taxable and tax-exempt sources. This measure should not be considered a substitute for operating results determined in accordance with GAAP.

(7) Computed on a tax-equivalent basis using an effective tax rate of 21% beginning January 1, 2018, and 35% for all prior periods.

HEARTLAND FINANCIAL USA, INC.

CONSOLIDATED FINANCIAL HIGHLIGHTS (Unaudited)

DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA

For the Quarter Ended

12/31/2018

9/30/2018

6/30/2018

3/31/2018

12/31/2017

Average Balances

Assets

$

11,371,247

$

11,291,289

$

10,643,306

$

9,759,936

$

9,807,621

Loans, net of unearned

7,436,497

7,462,176

7,123,182

6,525,553

6,343,923

Deposits

9,596,807

9,530,743

9,018,945

8,251,140

8,293,006

Earning assets

10,225,409

10,154,591

9,614,800

8,857,801

8,891,432

Interest bearing liabilities

6,557,185

6,544,949

6,205,187

5,694,337

5,663,816

Common stockholders' equity

1,290,691

1,263,226

1,139,876

1,011,580

986,026

Total stockholders' equity

1,290,691

1,263,795

1,140,814

1,012,518

986,964

Tangible common stockholders' equity(1)

849,851

819,966

767,732

723,898

713,018

Key Performance Ratios

Annualized return on average assets

1.12

%

1.18

%

1.05

%

0.97

%

0.55

%

Annualized return on average common equity (GAAP)

9.88

%

10.58

%

9.81

%

9.32

%

5.50

%

Annualized return on average tangible common equity (non-GAAP)(2)

15.00

%

16.30

%

14.56

%

13.03

%

7.60

%

Annualized ratio of net charge-offs to average loans

0.48

%

0.28

%

0.12

%

0.08

%

0.28

%

Annualized net interest margin (GAAP)

4.28

%

4.32

%

4.23

%

4.19

%

4.14

%

Annualized net interest margin, fully tax-equivalent (non-GAAP)(3)

4.34

%

4.38

%

4.30

%

4.26

%

4.30

%

Efficiency ratio, fully tax-equivalent(4)

59.37

%

62.40

%

65.04

%

68.21

%

62.26

%

Reconciliation of Return on Average Tangible Common Equity (non-GAAP)(5)

Net income available to common shareholders (GAAP)

$

32,141

$

33,697

$

27,866

$

23,255

$

13,659

Average common stockholders' equity (GAAP)

$

1,290,691

$

1,263,226

$

1,139,876

$

1,011,580

$

986,026

    Less average goodwill

391,668

391,668

325,781

250,172

236,615

    Less average core deposit intangibles and customer relationship

intangibles, net

49,172

51,592

46,363

37,510

36,393

Average tangible common equity (non-GAAP)

$

849,851

$

819,966

$

767,732

$

723,898

$

713,018

Annualized return on average common equity (GAAP)

9.88

%

10.58

%

9.81

%

9.32

%

5.50

%

Annualized return on average tangible common equity (non-GAAP)

15.00

%

16.30

%

14.56

%

13.03

%

7.60

%

Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP)(6)

Net Interest Income (GAAP)

$

110,283

$

110,678

$

101,409

$

91,584

$

92,856

    Plus tax-equivalent adjustment(7)

1,565

1,544

1,575

1,544

3,558

Net interest income, fully tax-equivalent (non-GAAP)

$

111,848

$

112,222

$

102,984

$

93,128

$

96,414

Average earning assets

$

10,225,409

$

10,154,591

$

9,614,800

$

8,857,801

$

8,891,432

Annualized net interest margin (GAAP)

4.28

%

4.32

%

4.23

%

4.19

%

4.14

%

Annualized net interest margin, fully tax-equivalent (non-GAAP)

4.34

%

4.38

%

4.30

%

4.26

%

4.30

%

(1) Calculated as common stockholders' equity less goodwill and core deposit intangibles and customer relationship intangibles, net.

(2) Refer to the "Reconciliation of Return on Average Tangible Common Equity (non-GAAP)" table.

(3) Refer to the "Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP)" table.

(4) Refer to the "Reconciliation of Non-GAAP Measure-Efficiency Ratio" table that follows for details of this non-GAAP measure.

(5) Return on average tangible common equity is net income available to common stockholders divided by average common stockholders' equity less goodwill and core deposit intangibles and customer deposit intangibles, net. This financial measure is included as it is considered to be a critical metric to analyze and evaluate financial condition and capital strength. This measure should not be considered a substitute for operating results determined in accordance with GAAP.

(6) Annualized net interest margin, fully tax-equivalent is a non-GAAP measure, which adjusts net interest income for the tax-favored status of certain loans and securities. Management believes this measure enhances the comparability of net interest income arising from taxable and tax-exempt sources. This measure should not be considered a substitute for operating results determined in accordance with GAAP.

(7) Computed on a tax-equivalent basis using an effective tax rate of 21% beginning January 1, 2018, and 35% for all prior periods.

HEARTLAND FINANCIAL USA, INC.

CONSOLIDATED FINANCIAL HIGHLIGHTS (Unaudited)

DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA

For the Quarter Ended

For the Year Ended

December 31,

December 31,

Reconciliation of Non-GAAP Measure-Efficiency Ratio(1)

2018

2017

2018

2017

Net interest income

$

110,283

$

92,856

$

413,954

$

330,308

Tax-equivalent adjustment(2)

1,565

3,558

6,228

15,139

Fully tax-equivalent net interest income

111,848

96,414

420,182

345,447

Noninterest income

27,045

25,528

109,160

102,022

Securities gains, net

(48

)

(1,420

)

(1,085

)

(6,973

)

Unrealized gain/loss on equity securities, net

(115

)

(212

)

Gain on extinguishment of debt

(1,280

)

(1,280

)

Adjusted income

$

138,730

$

119,242

$

528,045

$

439,216

Total noninterest expenses

$

88,821

$

77,878

$

353,888

$

297,675

Less:

Core deposit intangibles and customer relationship intangibles amortization

2,592

1,825

9,355

6,077

Partnership investment in tax credit projects

3,895

984

4,233

1,860

(Gain)/loss on sales/valuations of assets, net

(35

)

833

2,208

2,475

  Restructuring expenses

2,564

Adjusted noninterest expenses

$

82,369

$

74,236

$

335,528

$

287,263

Efficiency ratio, fully tax-equivalent (non-GAAP)

59.37

%

62.26

%

63.54

%

65.40

%

Reconciliation of Non-GAAP Measure-Efficiency Ratio(1)

For the Quarter Ended

12/31/2018

9/30/2018

6/30/2018

3/31/2018

12/31/2017

Net interest income

$

110,283

</