HEARTLAND FINANCIAL USA, INC. REPORTS QUARTERLY RESULTS AS OF MARCH 31, 2020

Thursday, April 23, 2020

Call Transcript

Call Audio

Highlights and Developments

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Quarterly net income of $20.0 million or $0.54 per diluted common share in comparison with $31.5 million or $0.91 per diluted common share for the first quarter of the prior year

 

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Net interest margin of 3.81%, fully tax-equivalent net interest margin (non-GAAP)(1) of 3.84%

 

§

Return on average common equity of 4.98% and return on average tangible common equity (non-GAAP)(1) of 8.00%

 

§

Efficiency ratio (non-GAAP)(1) for the first quarter of 2020 of 61.82% compared to 64.93% for the first quarter of 2019

 

§

Tangible common equity ratio (non-GAAP)(1) of 8.29% compared to 8.60% at March 31, 2019

 

§

Total commercial loan growth of $76.5 million and non-time deposit growth of $212.3 million for the first quarter of 2020

 

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Entered into a definitive merger agreement with AIM Bancshares, Inc. 

 

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Adopted ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)"

 

Three Months Ended March 31,

2020

2019

Net income available to common stockholders (in millions)

$

20.0

$

31.5

Diluted earnings per common share

0.54

0.91

Return on average assets

0.61

%

1.13

%

Return on average common equity

4.98

9.56

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

8.00

15.24

Net interest margin

3.81

4.12

Net interest margin, fully tax-equivalent (non-GAAP)(1)

3.84

4.18

Efficiency ratio, fully-tax equivalent (non-GAAP)(1)

61.82

64.93

                   

(1) Refer to "Non-GAAP Measures" in this earnings release for additional information on the usage and presentation of these non-GAAP measures, and refer to the financial tables for reconciliations to the most directly comparable GAAP measures.

"Heartland had a solid first quarter, which included $76.5 million of commercial loan growth, non-time deposit growth of $212.3 million, strong net interest margin, and a significantly improved efficiency ratio compared to the same quarter last year."

Bruce K. Lee, president and chief executive officer, Heartland Financial USA, Inc.

Dubuque, Iowa, Monday, April 27, 2020-Heartland Financial USA, Inc. (NASDAQ: HTLF) today reported the following results:

  • net income available to common stockholders of $20.0 million, or $0.54 per diluted common share, for the quarter ended March 31, 2020, compared to $31.5 million, or $0.91 per diluted common share, for the first quarter of 2019.
  • excluding provision for credit losses and acquisition, integration and restructuring costs (tax-effected), adjusted net income available to common stockholders (non-GAAP) was $38.1 million, or $1.03 of adjusted earnings per diluted common share (non-GAAP) for the first quarter of 2020, compared to $35.6 million (non-GAAP), or $1.03 per adjusted earnings per diluted common share (non-GAAP), for the first quarter of 2019.
  • return on average common equity was 4.98% and return on average assets was 0.61% for the first quarter of 2020, compared to 9.56% and 1.13%, respectively, for the same quarter in 2019.
  • return on average tangible common equity (non-GAAP) of 8.00% and adjusted return on average tangible common equity (non-GAAP) of 14.46% for the first quarter of 2020 compared to 15.24% and 17.11%, respectively, for the first quarter of 2019.

Responses to COVID-19 

Heartland has implemented its pandemic management plan to protect employees and enable business continuity while providing relief and support to customers and communities facing challenges from the impacts of COVID-19, which included the following:

  • enabled approximately 2/3rds of employees to work from home and canceled all in-person events and meetings;
  • expanded time off program and enhanced health care coverage for COVID-19 related testing and treatments;
  • implemented a 20% wage premium for customer-facing and call center employees;
  • closed most bank lobbies and implemented drive-through only for in-person transactions;
  • announced a series of relief programs for consumers and small business customers, which include waiving account maintenance fees, ATM fees and early redemption penalties on CDs, and deferrals on loan payments;
  • provided direct loans to customers via participation in the Small Business Administration's Paycheck Protection Program ("PPP"), and
  • contributed $1.2 million to support non-profit organizations in communities served by Heartland and its subsidiary banks.

"The health and safety of our employees is our top priority. Our customers and communities are relying on us now more than ever, and we are there for them with our full line of products and services to help navigate these unprecedented economic times," Lee said.

The economic disruption resulting from the COVID-19 pandemic will make it difficult for some customers to repay the principal and interest on their loans, and Heartland's subsidiary banks have started working with customers to modify the terms of certain existing loans.

The following table shows the total exposure, which includes loans outstanding and unfunded loan commitments as of March 31, 2020, to customer segment profiles that Heartland believes will be more heavily impacted by COVID-19, dollars in thousands:

Industry

Total Exposure(1)

% of Gross Exposure(1)

Lodging

$

498,596

4.47

%

Multi-family properties

436,931

3.92

Retail real estate

408,506

3.66

Retail trade

367,764

3.30

Restaurants and bars

247,239

2.22

Nursing homes/assisted living

126,267

1.13

Oil and gas

56,302

0.50

Childcare facilities

48,455

0.43

Gaming

34,790

0.31

(1) Total loans outstanding and unfunded commitments

As of April 23, 2020, loan modifications have been made on approximately $556.2 million of loans in Heartland's portfolio. Approximately 69% of these modifications are interest only for 90 days, and the remainder are primarily principal and interest deferments for 90 days. Heartland expects modifications to increase in the near term.

Through April 23, 2020, Heartland's subsidiary banks have processed approximately 3,000 PPP applications and disbursed $1.02 billion of PPP loans. Heartland expects to process approximately $300-$500 million of additional loans due to the announced expansion of the PPP on April 24, 2020.

The ultimate impact of the COVID-19 pandemic on Heartland's financial condition and results of operations will depend on risks and uncertainties, such as the severity and duration of the pandemic, related restrictions on business and consumer activity, and the availability of government programs to alleviate the economic stress of the pandemic. See Heartland's "Safe Harbor Statement" below.

Recent Developments

Adoption of ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)"

On January 1, 2020, Heartland adopted ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)," commonly referred to as "CECL." The impact of Heartland's adoption of CECL ("Day 1") resulted in the following:

  • an increase of $12.1 million to the allowance for credit losses related to loans, which included a reclassification of $6.0 million of purchased credit impaired loan discount on previously acquired loans, and a cumulative-effect adjustment to retained earnings totaling $4.6 million, net of taxes of $1.5 million;
  • an increase of $13.6 million to the allowance for unfunded commitments and a cumulative-effect adjustment to retained earnings totaling $10.2 million, net of taxes of $3.4 million, and
  • established an allowance for credit losses for Heartland's held to maturity debt securities of $158,000 and a cumulative-effect adjustment to retained earnings totaling $118,000, net of taxes of $40,000.

The allowance calculation under CECL is an expected loss model, which encompasses expected losses over the life of the portfolio, including expected losses due to changes in economic conditions and forecasts, such as those caused by the COVID-19 pandemic. Heartland recorded $21.5 million of provision for credit losses in the first quarter of 2020, primarily due to a deteriorating economic outlook resulting in an increase in expected credit losses.

Entered into a Definitive Merger Agreement with AIM Bancshares, Inc.

On February 11, 2020, Heartland entered into a definitive merger agreement to acquire AIM Bancshares, Inc. and its wholly-owned subsidiary, AimBank, headquartered in Levelland, Texas. In the transaction, all issued and outstanding shares of AIM Bancshares stock will be exchanged for shares of Heartland common stock and cash. Shareholders of AIM Bancshares will receive 207.0 shares of Heartland common stock and $685.00 of cash for each share of AIM Bancshares. The transaction value will change due to fluctuations in the price of Heartland common stock and is subject to certain potential adjustments as set forth in the merger agreement. Simultaneous with the closing of the transaction, AimBank will merge with and into Heartland's Lubbock, Texas-based subsidiary, First Bank and Trust. The transaction is expected to close in the third quarter of 2020 with a systems conversion planned for the fourth quarter of 2020. As of March 31, 2020, AimBank had total assets of approximately $1.82 billion, which included $1.16 billion of gross loans outstanding, and approximately $1.58 billion of deposits.

"We continue to move forward with our acquisition of AIM Bancshares, Inc., and we are excited to welcome them to the Heartland family in the third quarter," commented Lynn B. Fuller, Heartland's executive operating chairman.

Net Interest Income Increases and Net Interest Margin Decreases from First Quarter of 2019

Net interest margin, expressed as a percentage of average earning assets, was 3.81% (3.84% on a fully tax-equivalent basis, non-GAAP) during the first quarter of 2020, compared to 3.86% (3.90% on a fully tax-equivalent basis, non-GAAP) during the fourth quarter of 2019 and 4.12% (4.18% on a fully tax-equivalent basis, non-GAAP) during the first quarter of 2019.

Total interest income for the first quarter of 2020 was $131.0 million compared to $120.7 million recorded in the first quarter of 2019, an increase of $10.3 million or 9%. The tax-equivalent adjustment for income taxes saved on the interest earned on nontaxable securities and loans was $1.1 million for the first quarter of 2020 and $1.4 million for the first quarter of 2019. With these adjustments, total interest income on a tax-equivalent basis was $132.2 million for the first quarter of 2020, an increase of $10.0 million or 8%, compared to total interest income on a tax-equivalent basis of $122.1 million for the first quarter of 2019.

Average earning assets of $11.89 billion increased $1.76 billion or 17% from the first quarter of 2019, which was primarily attributable to recent acquisitions. The average rate on earning assets decreased 42 basis points to 4.47% for the first quarter of 2020 compared to 4.89% for the same quarter in 2019, which was primarily due to recent decreases in market interest rates.

Total interest expense for the first quarter of 2020 was $18.5 million, an increase of $772,000 or 4% from $17.8 million in the first quarter of 2019, which was the result of the increase in average interest bearing liabilities. The average interest rate paid on Heartland's interest bearing liabilities decreased to 0.95% for the first quarter of 2020 compared to 1.09% for the first quarter of 2019, which was primarily due to recent decreases in market interest rates.

Average interest bearing deposits increased $1.27 billion or 21% to $7.42 billion for the quarter ended March 31, 2020, from $6.16 billion in the same quarter in 2019, which was primarily attributable to recent acquisitions. The average interest rate paid on Heartland's interest bearing deposits decreased 8 basis points to 0.79% for the first quarter of 2020 compared to 0.87% for the same quarter in 2019.

Average borrowings decreased $48.4 million or 10% to $417.8 million during the first quarter of 2020 from $466.2 million during the same quarter in 2019. The average interest rate paid on Heartland's borrowings was 3.81% for the first quarter of 2020 compared to 3.96% in the first quarter of 2019.

Net interest income was $112.5 million during the first quarter of 2020 compared to $103.0 million during the first quarter of 2019, an increase of $9.6 million or 9%. After the tax-equivalent adjustment discussed above, net interest income on a tax-equivalent basis totaled $113.6 million during the first quarter of 2020 compared to net interest income on a tax-equivalent basis of $104.4 million during the first quarter of 2019, an increase of $9.3 million or 9%.

Noninterest Income Decreases and Noninterest Expense Increases from First Quarter of 2019

Total noninterest income was $25.8 million during the first quarter of 2020 compared to $26.7 million during the first quarter of 2019, a decrease of $900,000 or 3%. Significant changes by noninterest income category were:

  • Loan servicing income totaled $963,000 for the first quarter of 2020 compared to $1.7 million for the first quarter of 2019, which was a decrease of $766,000 or 44%. The decrease was attributable to the sale of the mortgage servicing rights of Dubuque Bank and Trust Company in the second quarter of 2019.
  • Net gains on sale of loans held for sale totaled $4.7 million during the first quarter of 2020 compared to $3.2 million during the same quarter in 2019, which was an increase of $1.5 million or 47%, primarily due to an increase in residential mortgage loan refinancing activity in response to the recent declines in mortgage interest rates.
  • The valuation adjustment on servicing rights increased $976,000 to $1.6 million in the first quarter of 2020 from $589,000 in the first quarter of 2019, primarily due to recent declines in mortgage interest rates.

For the first quarter of 2020, total noninterest expense was $90.9 million compared to $88.2 million during the first quarter of 2019, an increase of $2.6 million or 3%. Significant changes by noninterest expense category were:

  • Professional fees totaled $12.5 million for the first quarter of 2020 compared to $11.0 million for the same quarter of 2019, which was an increase of $1.5 million or 13%, which was primarily due to recent technology upgrades.
  • Net loss on sales/valuations of assets increased $3.0 million as losses totaled $16,000 in the first quarter of 2020 compared to gains of $3.0 million in the first quarter of 2019. The gains recorded in 2019 were primarily attributable to the branch sales at Wisconsin Bank & Trust.
  • Other noninterest expenses totaled $11.8 million for the first quarter of 2020 compared to $10.7 million for the first quarter of 2019, which was an increase of $1.1 million or 10%, which was primarily attributable to recent acquisitions.

Heartland's effective tax rate was 22.77% for the first quarter of 2020 compared to 20.88% for the first quarter of 2019. The following items impacted Heartland's first quarter 2020 and 2019 tax calculations:

  • Solar energy tax credits of $76,000 and $314,000 for the first quarter of 2020 and 2019, respectively.
  • Federal low-income housing tax credits of $195,000 and $281,000 for the first quarter of 2020 and 2019, respectively.
  • New markets tax credits of $75,000 during the first quarter of 2020 compared to $0 in the first quarter of 2019.
  • Tax-exempt interest income as a percentage of pre-tax income increased to 16.40% during the first quarter of 2020 compared to 13.35% for the first quarter of 2019. 
  • Tax expense of $25,000 in the first quarter of 2020 compared to a tax benefit of $336,000 in the first quarter of 2019 resulting from the vesting of restricted stock unit awards.

Total Assets Increase, Total Loans Remain Flat and Deposits Increase Since December 31, 2019

Total assets were $13.29 billion at March 31, 2020, an increase of $84.9 million or 1% from $13.21 billion at year-end 2019. Securities represented 27% and 26% of total assets at March 31, 2020, and December 31, 2019, respectively.

Total loans held to maturity were $8.37 billion at both March 31, 2020, and December 31, 2019. Loan changes by category were:

  • Commercial and business lending, which includes commercial and industrial and owner occupied commercial real estate loans, decreased $22.0 million or 1% to $3.98 billion at March 31, 2020, compared to $4.00 billion at December 31, 2019.
  • Commercial real estate lending, which includes non-owner occupied commercial real estate and construction loans, increased $98.5 million or 4% to $2.62 billion at March 31, 2020 from $2.52 billion at year-end 2019. 
  • Agricultural and agricultural real estate loans totaled $550.1 million at March 31, 2020, compared to $565.8 million at December 31, 2019, which was a decrease of $15.7 million or 3%.
  • Residential mortgage loans decreased $39.7 million or 5% to $792.5 million at March 31, 2020, from $832.3 million at December 31, 2019.
  • Consumer loans decreased $14.8 million or 3% to $428.6 million at March 31, 2020, compared to $443.3 million at December 31, 2019.

Total deposits were $11.17 billion as of March 31, 2020, compared to $11.04 billion at year-end 2019, an increase of $129.7 million or 1%. Deposit changes by category were:

  • Demand deposits increased $153.1 million or 4% to $3.70 billion at March 31, 2020, compared to $3.54 billion at December 31, 2019.
  • Savings deposits increased $59.2 million or 1% to $6.37 billion at March 31, 2020, from $6.31 billion at December 31, 2019. 
  • Time deposits decreased $82.6 million or 7% to $1.11 billion at March 31, 2020 from $1.19 billion at December 31, 2019. 

Provision and Allowance for Credit Losses for Loans Increase Since December 31, 2019

Heartland's allowance for credit losses for loans totaled $82.5 million after adoption of CECL on January 1, 2020, which was an increase of $12.1 million since year-end 2019. Heartland recorded provision for credit losses for loans of $19.9 million in the first quarter of 2020 compared to $1.6 million in the first quarter of 2019.  The allowance for credit losses for loans totaled $97.4 million and $70.4 million at March 31, 2020, and December 31, 2019, respectively.

The allowance for credit losses for loans at March 31, 2020, was 1.16% of loans compared to 0.84% of loans at December 31, 2019. Net charge offs for the first quarter of 2020 totaled $5.0 million compared to $959,000 for the first quarter of 2019, which was a $4.0 million increase. The increase was primarily attributable to a $3.2 million charge off on a commercial and industrial loan for which a full reserve had been previously established.

Heartland's allowance for unfunded commitments totaled $13.9 million after the adoption of CECL on January 1, 2020. Prior to January 1, 2020, the allowance for unfunded commitments was immaterial. Heartland recorded $1.6 million of provision for credit losses related to unfunded loan commitments in the first quarter of 2020. At March 31, 2020, the allowance for unfunded commitments was $15.5 million. At March 31, 2020, Heartland had $2.78 billion of unfunded loan commitments.

The total allowance for credit related lending losses was $112.8 million at March 31, 2020, which was 1.35% of loans as of March 31, 2020.

 

Nonperforming Assets Decrease Since December 31, 2019

Nonperforming assets decreased $2.2 million or 3% to $85.4 million or 0.64% of total assets at March 31, 2020, compared to $87.6 million or 0.66% of total assets at December 31, 2019. Nonperforming loans were $79.3 million or 0.95% of total loans at March 31, 2020, compared to $80.7 million or 0.96% of total loans at December 31, 2019. At March 31, 2020, loans delinquent 30-89 days were 0.38% of total loans compared to 0.33% of total loans at December 31, 2019. Heartland expects that nonperforming assets and delinquent loans will increase through 2020 as customers’ ability to repay loans is adversely impacted by economic disruptions caused by the COVID-19 pandemic.

Non-GAAP Financial Measures

This press release contains references to financial measures which are not defined by generally accepted accounting principles ("GAAP"). Management believes the non-GAAP measures are helpful for investors to analyze and evaluate Heartland's financial condition and operating results. However, these non-GAAP measures have inherent limitations and should not be considered a substitute for operating results determined in accordance with GAAP. Additionally, because non-GAAP measures are not standardized, it may not be possible to compare the non-GAAP measures in this press release with other companies' non-GAAP measures. Reconciliations of each non-GAAP measure to the most directly comparable GAAP measure may be found in the financial tables in this press release.

Below are the non-GAAP measures included in this press release, management's reason for including each measure and the method of calculating each measure:

  • Annualized return on average tangible common equity is net income available to common stockholders plus core deposit and customer relationship intangibles amortization, net of tax, divided by average common equity less goodwill and core deposit and customer relationship intangibles, net. This measure is included as it is considered to be a critical metric to analyze and evaluate use of equity, financial condition and capital strength.
  • Annualized net interest margin, fully tax-equivalent, 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.
  • Efficiency ratio, fully tax equivalent, expresses noninterest expenses as a percentage of fully tax-equivalent net interest income and noninterest income. This efficiency ratio is presented on a tax-equivalent basis which adjusts net interest income and noninterest expenses for the tax favored status of certain loans, securities, and tax credit projects. Management believes the presentation of this non-GAAP measure provides supplemental useful information for proper understanding of the financial results as it enhances the comparability of income and expenses arising from taxable and nontaxable sources and excludes specific items as noted in reconciliation contained in this press release.
  • Tangible book value per common share is total common equity less goodwill and core deposit and customer relationship intangibles, net, divided by common shares outstanding, net of treasury. This measure is included as it is considered to be a critical metric to analyze and evaluate use of equity, financial condition and capital strength.
  • Tangible common equity ratio is total common equity less goodwill and core deposit and customer relationship intangibles, net, divided by total assets less goodwill and core deposit and customer relationship intangibles, net. This measure is included as it is considered to be a critical metric to analyze and evaluate financial condition and capital strength.
  • Adjusted net income and adjusted diluted earnings per share exclude tax-effected provision for credit losses and acquisition, integration and restructuring costs. Management believes the presentation of these non-GAAP measures are useful to compare net income and earnings per share results excluding the variability of credit loss provisions and acquisition, integration and restructuring costs. 
  • Annualized adjusted return on average tangible common equity is adjusted net income excluding intangible amortization calculated as (1) net income excluding (A) tax-effected provision for credit losses, (B) tax-effected acquisition, integration and restructuring costs and (C) tax-effected core deposit and customer relationship intangibles amortization, divided by (2) average common equity less goodwill and core deposit and customer relationship intangibles, net. This measure is included as it is considered to be a critical metric to analyze and evaluate use of equity, financial condition and capital strength.

 

Conference Call Details

Heartland will host a conference call for investors at 5:00 p.m. EDT today. To participate, dial 866-928-9948 at least five minutes before the 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, 2021, 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 $13.29 billion. The company provides banking, mortgage, private client, investment, insurance and consumer finance services to individuals and businesses. Heartland currently has 114 banking locations serving 83 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 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 below and in the risk factors in Heartland's Annual Report on Form 10-K filed with the Securities and Exchange Commission, contained, among others: (i) the strength of the local and national economy, including to the extent that they are affected by the COVID-19 pandemic and related restrictions on business and consumer activities; (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 as they impact the company's general business, including government programs offering relief from the COVID-19 pandemic; (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 and Heartland's ability to successfully integrate acquired banks; (viii) the loss of key executives or employees; (ix) changes in consumer spending, including changes resulting from the COVID-19 pandemic; (x) unexpected outcomes of existing or new litigation involving the company, including claims resulting from our participation in and execution of government programs related to the COVID-19 pandemic; and (xi) changes in accounting policies and practices.

The COVID-19 pandemic is adversely affecting Heartland and its customers, counterparties, employees and third-party service providers. The pandemic’s severity, its duration and the extent of its impact on Heartland’s business, financial condition, results of operations, liquidity and prospects remain uncertain. Continued deterioration in general business and economic conditions or turbulence in domestic or global financial markets could adversely affect Heartland’s net income and the value of its assets and liabilities, reduce the availability of funding to Heartland, lead to a tightening of credit and increase stock price volatility. Some economists and investment banks also predict that a recession or depression may result from the continued spread of COVID-19 and the economic consequences.

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.

-FINANCIAL TABLES FOLLOW-

###

HEARTLAND FINANCIAL USA, INC.

CONSOLIDATED FINANCIAL HIGHLIGHTS (Unaudited)

DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA

For the Three Months Ended
March 31,

2020

2019

Interest Income

Interest and fees on loans

$

106,414

$

100,456

Interest on securities:

Taxable

21,731

15,876

Nontaxable

2,183

3,093

Interest on federal funds sold

4

Interest on deposits with other banks and short-term investments

721

1,292

Total Interest Income

131,049

120,721

Interest Expense

Interest on deposits

14,582

13,213

Interest on short-term borrowings

296

889

Interest on other borrowings

3,660

3,664

Total Interest Expense

18,538

17,766

Net Interest Income

112,511

102,955

Provision for credit losses

21,520

1,635

Net Interest Income After Provision for Credit Losses

90,991

101,320

Noninterest Income

Service charges and fees

12,021

12,794

Loan servicing income

963

1,729

Trust fees

5,022

4,474

Brokerage and insurance commissions

733

734

Securities gains, net

1,658

1,575

Unrealized gain/ (loss) on equity securities, net

(231)

258

Net gains on sale of loans held for sale

4,660

3,176

Valuation adjustment on servicing rights

(1,565)

(589)

Income on bank owned life insurance

498

899

Other noninterest income

2,058

1,667

Total Noninterest Income

25,817

26,717

Noninterest Expense

Salaries and employee benefits

49,957

50,285

Occupancy

6,471

6,607

Furniture and equipment

3,108

2,692

Professional fees

12,473

10,995

Advertising

2,205

2,320

Core deposit and customer relationship intangibles amortization

2,981

2,869

Other real estate and loan collection expenses, net

334

701

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

16

(3,004)

Acquisition, integration and restructuring costs

1,376

3,614

Partnership investment in tax credit projects

184

475

Other noninterest expenses

11,754

10,676

Total Noninterest Expense

90,859

88,230

Income Before Income Taxes

25,949

39,807

Income taxes

5,909

8,310

Net Income

$

20,040

$

31,497

Earnings per common share-diluted

$

0.54

$

0.91

Weighted average shares outstanding-diluted

36,895,591

34,699,839

HEARTLAND FINANCIAL USA, INC.

CONSOLIDATED FINANCIAL HIGHLIGHTS (Unaudited)

DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA

For the Quarter Ended

3/31/2020

12/31/2019

9/30/2019

6/30/2019

3/31/2019

Interest Income

Interest and fees on loans

$

106,414

$

107,566

$

110,566

$

106,027

$

100,456

Interest on securities:

Taxable

21,731

22,581

18,567

16,123

15,876

Nontaxable

2,183

2,102

2,119

2,554

3,093

Interest on federal funds sold

4

Interest on deposits with other banks and short-term investments

721

953

2,151

2,299

1,292

Total Interest Income

131,049

133,202

133,403

127,003

120,721

Interest Expense

Interest on deposits

14,582

16,401

17,982

16,138

13,213

Interest on short-term borrowings

296

271

250

338

889

Interest on other borrowings

3,660

3,785

3,850

3,819

3,664

Total Interest Expense

18,538

20,457

22,082

20,295

17,766

Net Interest Income

112,511

112,745

111,321

106,708

102,955

Provision for credit losses

21,520

4,903

5,201

4,918

1,635

Net Interest Income After Provision for Credit Losses

90,991

107,842

106,120

101,790

101,320

Noninterest Income

Service charges and fees

12,021

12,368

12,366

14,629

12,794

Loan servicing income

963

955

821

1,338

1,729

Trust fees

5,022

5,141

4,959

4,825

4,474

Brokerage and insurance commissions

733

1,062

962

1,028

734

Securities gains, net

1,658

491

2,013

3,580

1,575

Unrealized gain/ (loss) on equity securities, net

(231)

11

144

112

258

Net gains on sale of loans held for sale

4,660

3,363

4,673

4,343

3,176

Valuation adjustment on servicing rights

(1,565)

668

(626)

(364)

(589)

Income on bank owned life insurance

498

1,117

881

888

899

Other noninterest income

2,058

2,854

3,207

1,682

1,667

Total Noninterest Income

25,817

28,030

29,400

32,061

26,717

Noninterest Expense

Salaries and employee benefits

49,957

50,234

49,927

49,895

50,285

Occupancy

6,471

5,802

6,594

6,426

6,607

Furniture and equipment

3,108

3,323

2,862

3,136

2,692

Professional fees

12,473

11,082

11,276

14,344

10,995

Advertising

2,205

2,274

2,622

2,609

2,320

Core deposit and customer relationship intangibles amortization

2,981

2,918

2,899

3,313

2,869

Other real estate and loan collection expenses, net

334

261

(89)

162

701

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

16

1,512

356

(18,286)

(3,004)

Acquisition, integration and restructuring costs

1,376

537

1,500

929

3,614

Partnership investment in tax credit projects

184

3,038

3,052

1,465

475

Other noninterest expenses

11,754

11,885

11,968

11,105

10,676

Total Noninterest Expense

90,859

92,866

92,967

75,098

88,230

Income Before Income Taxes

25,949

43,006

42,553

58,753

39,807

Income taxes

5,909

5,155

7,941

13,584

8,310

Net Income

$

20,040

$

37,851

$

34,612

$

45,169

$

31,497

Earnings per common share-diluted

$

0.54

$

1.03

$

0.94

$

1.26

$

0.91

Weighted average shares outstanding-diluted

36,895,591

36,840,519

36,835,191

35,879,259

34,699,839

HEARTLAND FINANCIAL USA, INC.

CONSOLIDATED FINANCIAL HIGHLIGHTS (Unaudited)

DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA

As of

3/31/2020

12/31/2019

9/30/2019

6/30/2019

3/31/2019

Assets

Cash and due from banks

$

175,587

$

206,607

$

243,395

$

198,664

$

174,198

Interest bearing deposits with other banks and short-term investments

64,156

172,127

204,372

443,475

318,303

Cash and cash equivalents

239,743

378,734

447,767

642,139

492,501

Time deposits in other financial institutions

3,568

3,564

3,711

4,430

4,675

Securities:

Carried at fair value

3,488,621

3,312,796

3,020,568

2,561,887

2,400,460

Held to maturity, at cost, less allowance for credit losses

91,875

91,324

87,965

88,166

88,089

Other investments, at cost

35,370

31,321

29,042

31,366

27,506

Loans held for sale

22,957

26,748

35,427

34,575

69,716

Loans:

Held to maturity

8,374,236

8,367,917

7,971,608

7,853,051

7,331,544

 Allowance for credit losses

(97,350)

(70,395)

(66,222)

(63,850)

(62,639)

Loans, net

8,276,886

8,297,522

7,905,386

7,789,201

7,268,905

Premises, furniture and equipment, net

200,960

200,525

199,235

198,329

190,215

Goodwill

446,345

446,345

427,097

427,097

391,668

Core deposit and customer relationship intangibles, net

45,707

48,688

49,819

52,718

44,637

Servicing rights, net

5,220

6,736

6,271

7,180

28,968

Cash surrender value on life insurance

172,140

171,625

171,471

170,421

163,764

Other real estate, net

6,074

6,914

6,425

6,646

5,391

Other assets

259,043

186,755

179,078

146,135

136,000

Total Assets

$

13,294,509

$

13,209,597

$

12,569,262

$

12,160,290

$

11,312,495

Liabilities and Equity

Liabilities

Deposits:

 Demand

$

3,696,974

$

3,543,863

$

3,581,127

$

3,426,758

$

3,118,909

 Savings

6,366,610

6,307,425

5,770,754

5,533,503

5,145,929

 Time

1,110,441

1,193,043

1,117,975

1,148,296

1,088,104

Total deposits

11,174,025

11,044,331

10,469,856

10,108,557

9,352,942

Deposits held for sale

118,564

Short-term borrowings

121,442

182,626

107,853

107,260

104,314

Other borrowings

276,150

275,773

278,417

282,863

268,312

Accrued expenses and other liabilities

169,178

128,730

149,293

139,823

96,261

Total Liabilities

11,740,795

11,631,460

11,005,419

10,638,503

9,940,393

Stockholders' Equity

Common stock

36,807

36,704

36,696

36,690

34,604

Capital surplus

842,780

839,857

838,543

837,150

745,596

Retained earnings

700,298

702,502

670,816

642,808

603,506

Accumulated other comprehensive income/(loss)

(26,171)

(926)

17,788

5,139

(11,604)

Total Equity

1,553,714

1,578,137

1,563,843

1,521,787

1,372,102

Total Liabilities and Equity

$

13,294,509

$

13,209,597

$

12,569,262

$

12,160,290

$

11,312,495

HEARTLAND FINANCIAL USA, INC.

CONSOLIDATED FINANCIAL HIGHLIGHTS (Unaudited)

DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND FULL TIME EQUIVALENT EMPLOYEE DATA

For the Quarter Ended

3/31/2020

12/31/2019

9/30/2019

6/30/2019

3/31/2019

Average Balances

Assets

$

13,148,173

$

12,798,770

$

12,293,332

$

11,708,538

$

11,267,214

Loans, net of unearned

8,364,220

8,090,476

7,883,678

7,648,562

7,412,855

Deposits

10,971,193

10,704,643

10,253,643

9,790,756

9,356,204

Earning assets

11,891,455

11,580,295

11,102,581

10,552,166

10,129,957

Interest bearing liabilities

7,841,941

7,513,701

7,174,944

6,872,449

6,622,149

Common equity

1,619,682

1,570,258

1,541,369

1,442,388

1,336,250

Tangible common equity (non-GAAP)

1,125,705

1,087,495

1,062,568

981,878

898,092

Key Performance Ratios

Annualized return on average assets

0.61

%

1.17

%

1.12

%

1.55

%

1.13

%

Annualized return on average common equity (GAAP)

4.98

9.56

8.91

12.56

9.56

Annualized return on average tangible common equity (non-GAAP)(1)

8.00

14.65

13.78

19.52

15.24

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

14.46

%

16.22

%

15.76

%

21.41

%

17.11

%

Annualized ratio of net charge-offs to average loans

0.24

0.04

0.14

0.19

0.05

Annualized net interest margin (GAAP)

3.81

3.86

3.98

4.06

4.12

Annualized net interest margin, fully tax-equivalent (non-GAAP)(1)

3.84

3.90

4.02

4.10

4.18

Efficiency ratio, fully tax-equivalent (non-GAAP)(1)

61.82

60.31

60.85

64.13

64.93

As of and for the Quarter Ended

3/31/2020

12/31/2019

9/30/2019

6/30/2019

3/31/2019

Common Share Data

Book value per common share

$

42.21

$

43.00

$

42.62

$

41.48

$

39.65

Tangible book value per common share (non-GAAP)(1)

$

28.84

$

29.51

$

29.62

$

28.40

$

27.04

Common shares outstanding, net of treasury stock

36,807,217

36,704,278

36,696,190

36,690,061

34,603,611

Tangible common equity ratio (non-GAAP)(1)

8.29

%

8.52

%

8.99

%

8.92

%

8.60

%

Other Selected Trend Information

Effective tax rate

22.77

%

11.99

%

18.66

%

23.12

%

20.88

%

Full time equivalent employees

1,817

1,908

1,962

2,040

1,976

Loans Held to Maturity(2)

Commercial and industrial

$

2,550,490

$

2,530,809

$

2,388,861

$

2,325,025

$

2,158,085

Owner occupied commercial real estate

1,431,038

1,472,704

1,392,415

1,354,996

1,278,181

Commercial and business lending

3,981,528

4,003,513

3,781,276

3,680,021

3,436,266

Non-owner occupied commercial real estate

1,551,787

1,495,877

1,378,020

1,372,343

1,233,525

Real estate construction

1,069,700

1,027,081

980,298

943,109

850,844

Commercial real estate lending

2,621,487

2,522,958

2,358,318

2,315,452

2,084,369

Total commercial lending

6,603,015

6,526,471

6,139,594

5,995,473

5,520,635

Agricultural and agricultural real estate

550,107

565,837

571,596

559,054

558,090

Residential mortgage

792,540

832,277

823,056

849,576

850,845

Consumer

428,574

443,332

437,362

448,948

401,974

Total loans held to maturity

$

8,374,236

$

8,367,917

$

7,971,608

$

7,853,051

$

7,331,544

Total unfunded loan commitments

$

2,782,679

$

2,973,732

$

2,659,729

$

2,530,946

$

2,332,174

(1) Refer to "Non-GAAP Measures" in this earnings release for additional information on the usage and presentation of these non-GAAP measures, and refer to these financial tables for the reconciliations to the most directly comparable GAAP measures.

(2) In conjunction with the adoption of ASU 2016-13, Heartland reclassified loan balances to more closely align with FDIC codes. All prior period balances have been adjusted.

HEARTLAND FINANCIAL USA, INC.

CONSOLIDATED FINANCIAL HIGHLIGHTS (Unaudited)

DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA

As of and for the Quarter Ended

3/31/2020

12/31/2019

9/30/2019

6/30/2019

3/31/2019

Allowance for Credit Losses-Loans

Balance, beginning of period

$

70,395

$

66,222

$

63,850

$

62,639

$

61,963

Impact of ASU 2016-13 adoption

12,071

Provision for credit losses

19,865

4,903

5,201

4,918

1,635

Charge-offs

(6,301)

(2,018)

(4,842)

(4,780)

(1,950)

Recoveries

1,320

1,288

2,013

1,073

991

Balance, end of period

$

97,350

$

70,395

$

66,222

$

63,850

$

62,639

Allowance for Unfunded Commitments(1)

Balance, beginning of period

$

248

$

$

$

$

Impact of ASU 2016-13 adoption

13,604

Provision for credit losses

1,616

Balance, end of period

$

15,468

$

$

$

$

Allowance for lending related credit losses

$

112,818

$

70,395

$

66,222

$

63,850

$

62,639

Provision for Credit Losses

Provision for credit losses-loans

$

19,865

$

4,903