Heartland Financial USA, Inc. Reports 2015 Fourth Quarter and Annual Results

Heartland Financial USA, Inc. (NASDAQ: HTLF):

Highlights

• Record annual net income of $60.0 million, a 43% increase from the prior year
• Diluted earnings per common share of $0.67 for the quarter and $2.83 for the year
• Return on average tangible common equity of 12.78% for the quarter and 13.90% for the year
• Net interest margin of 3.99% for the quarter and 3.97% for the year
• Deposits, exclusive of acquisitions, increased $367.8 million or 8% for the year
• Loans held to maturity, exclusive of acquisitions, increased $185.7 million or 5% for the year
• Completed acquisition of Premier Valley Bank in Fresno, California during the quarter
• Completed systems conversion of Community Bank in Santa Fe, New Mexico during the quarter

Heartland Financial USA, Inc. (NASDAQ: HTLF) today reported net income available to common stockholders of $14.4 million, or $0.67 per diluted common share, for the quarter ended December 31, 2015, compared to $12.1 million, or $0.64 per diluted common share, for the fourth quarter of 2014. Return on average common equity was 10.69% and return on average assets was 0.79% for the fourth quarter of 2015, compared to 11.77% and 0.80%, respectively, for the same quarter in 2014.

Commenting on Heartland’s results for 2015, Lynn B. Fuller, Heartland’s chairman and chief executive officer said, “The year 2015 was Heartland’s best year on record with net income of $60 million. Net income increased by 43 percent over 2014, with earnings per share growing by 29 percent.”

Net income available to common stockholders for the year 2015 was $59.2 million, or $2.83 per diluted common share, compared to $41.1 million, or $2.19 per diluted common share, recorded during the year 2014. Return on average common equity was 11.92% and return on average assets was 0.88% for the year 2015, compared to 10.62% and 0.70%, respectively, for the same period in 2014.

On January 16, 2015, Heartland completed the acquisition of Community Banc-Corp of Sheboygan, Inc., parent company of Community Bank & Trust in Sheboygan, Wisconsin, in an all stock transaction valued at approximately $53.1 million. Simultaneous with the closing, Community Bank & Trust was merged into Heartland's Wisconsin Bank & Trust subsidiary. As of the close date, the transaction included, at fair value, total assets of $525.3 million, total loans of $395.0 million and total deposits of $434.0 million. The systems conversion for this transaction was completed on May 15, 2015.

On August 21, 2015, Heartland completed the acquisition of Community Bancorporation of New Mexico, Inc., parent company of Community Bank in Santa Fe, New Mexico, in an all cash transaction valued at approximately $11.1 million. Simultaneous with closing of the transaction, Community Bank merged into Heartland’s New Mexico Bank & Trust subsidiary. As of the close date, the transaction included, at fair value, total assets of $166.5 million, total loans of $99.5 million and total deposits of $147.4 million. The systems conversion for this transaction was completed on November 6, 2015.

On September 11, 2015, Heartland completed the acquisition of First Scottsdale Bank, N.A. in Scottsdale, Arizona, in an all cash transaction valued at approximately $17.7 million. Simultaneous with the close, First Scottsdale Bank was merged into Heartland’s Arizona Bank & Trust subsidiary. As of the close date, the transaction included, at fair value, total assets of $83.7 million, total loans of $54.7 million and total deposits of $65.9 million. The systems conversion for this transaction was completed simultaneous with the closing.

On November 30, 2015, Heartland completed the acquisition of Premier Valley Bank, a community bank based in Fresno, California. Simultaneous with the close, Premier Valley became a wholly-owned subsidiary of Heartland. Premier Valley shareholders received $95.0 million or $7.73 per share of Premier Valley common stock in the merger, and elected to receive this payment in shares of Heartland common stock or in cash, subject to proration so that 70% of the total payment was in Heartland common stock and 30% in cash. As of the close date, the transaction included, at fair value, total assets of $733.7 million, total loans of $389.8 million and total deposits of $622.7 million. The systems conversion for this transaction is expected to occur during the first quarter of 2016.

On October 22, 2015, Heartland entered into a merger agreement with CIC Bancshares, Inc., parent company of Centennial Bank, headquartered in Denver, Colorado. Under the agreement, Heartland will acquire CIC Bancshares, Inc. in a transaction valued at approximately $83.5 million, of which approximately 20 percent would be payable in cash and approximately 80 percent would be payable by issuance of Heartland common stock. Simultaneous with closing of the transaction, Centennial Bank will be merged into Heartland’s Summit Bank & Trust subsidiary, with the resulting institution operating under the name, Centennial Bank and Trust. Centennial Bank had total assets of approximately $730.0 million as of September 30, 2015. The transaction has received regulatory approval, but is subject to approval by shareholders of CIC Bancshares, Inc., and is expected to close during the first quarter of 2016.

Net Interest Margin As a Percentage of Average Earning Assets and In Dollars Increases

Net interest margin, expressed as a percentage of average earning assets, was 3.99% during the fourth quarter of 2015, compared to 4.01% during the third quarter of 2015 and 3.94% during the fourth quarter of 2014.

Fuller said, “Throughout the year, we were pleased to see net interest margin hold steady in the 4 percent range. Despite continued pressure from a very low interest rate environment, we continue to find opportunities to maintain asset yields while managing down our funding costs.”

Interest income for the fourth quarter of 2015 was $70.2 million, an increase of $9.8 million or 16%, compared to the $60.4 million recorded in the fourth quarter of 2014. The tax-equivalent adjustment for income taxes saved on the interest earned on nontaxable securities and loans was $2.8 million for the fourth quarter of 2015 and $2.6 million for the fourth quarter of 2014. With these adjustments, interest income on a tax-equivalent basis was $73.0 million for the fourth quarter of 2015, an increase of $10.1 million or 16%, compared to $62.9 million for the fourth quarter of 2014. The increase in interest income in the fourth quarter of 2015, as compared to the fourth quarter of 2014, was primarily due to an increase in average earning assets, which increased $1.00 billion or 18% during the fourth quarter of 2015 compared to the fourth quarter of 2014, with approximately $626.3 million attributable to the acquisitions completed during 2015 and the remainder attributable primarily to loan growth experienced during the last half of 2014 and first half of 2015. Also contributing to the increase in interest income during the fourth quarter of 2015 compared to the fourth quarter of 2014 was a change in the composition of average earning assets from lower-yielding investments to higher-yielding loans. The percentage of average net loans and leases to total earning assets was 73% during the fourth quarter of 2015 compared to 70% during the fourth quarter of 2014.

Interest expense for the fourth quarter of 2015 was $7.5 million, a decrease of $763,000 or 9% from $8.2 million in the fourth quarter of 2014. Average interest bearing liabilities increased $658.3 million or 16% for the quarter ended December 31, 2015, as compared to the same quarter in 2014, while the average interest rate paid on Heartland's interest bearing deposits and borrowings declined 17 basis points from 0.79% in the fourth quarter of 2014 to 0.62% in the fourth quarter of 2015. The average interest rate paid on savings deposits was 0.20% during the fourth quarter of 2015 compared to 0.28% during the fourth quarter of 2014 and the average interest rate paid on time deposits was 0.82% during the fourth quarter of 2015 compared to 1.09% during the fourth quarter of 2014.

Net interest income increased $10.5 million or 20% to $62.7 million in the fourth quarter of 2015 from the $52.2 million recorded in the fourth quarter of 2014. Net interest income on a tax-equivalent basis totaled $65.5 million during the fourth quarter of 2015, an increase of $10.8 million or 20% from the $54.7 million recorded during the fourth quarter of 2014.

Noninterest Income and Noninterest Expenses Increase

Noninterest income totaled $24.4 million during the fourth quarter of 2015 compared to $21.2 million during the fourth quarter of 2014, an increase of $3.1 million or 15%. Service charges and fees totaled $6.7 million during the fourth quarter of 2015 compared to $5.1 million during the fourth quarter of 2014, an increase of $1.6 million or 31%. This increase was primarily attributable to a larger demand deposit customer base, a portion of which is attributable to the acquisitions. Net securities gains totaled $3.9 million during the fourth quarter of 2015 compared to $1.2 million during the fourth quarter of 2014, an increase of $2.7 million or 224%.

For the fourth quarter of 2015, noninterest expenses totaled $66.0 million compared to $53.9 million during the fourth quarter of 2014, an increase of $12.0 million or 22%. Salaries and employee benefits increased $2.2 million or 7%, primarily attributable to acquisitions. Losses on sales/valuations of assets, net, totaled $4.2 million during the fourth quarter of 2015 compared to $116,000 during the fourth quarter of 2014, an increase of $4.1 million, primarily attributable to the writedown on one property. Other noninterest expenses increased $2.9 million or 36%, primarily as a result of one-time costs associated with the acquisitions and additional investments in technology.

Heartland's effective tax rate was 23.03% for the fourth quarter of 2015 compared to 26.08% for the fourth quarter of 2014. Included in the determination of Heartland's income taxes for the fourth quarters of both 2015 and 2014 were federal historic rehabilitation tax credits associated with Heartland's ownership interest in qualifying real estate projects totaling $1.4 million in 2015 and $1.3 million in 2014. Federal low-income housing tax credits included in the determination of Heartland's income taxes totaled $145,000 during the fourth quarter of 2015 compared to $189,000 during the fourth quarter of 2014. Heartland's effective tax rate was also affected by the level of tax-exempt interest income which, as a percentage of pre-tax income, was 27.70% during the fourth quarter of 2015 compared to 28.54% during the fourth quarter of 2014.

Loans and Deposits Increase

Total assets were $7.70 billion at December 31, 2015, an increase of $1.65 billion or 27% since year-end 2014. Total assets of the entities acquired during 2015 were $1.51 billion at acquisition date. Securities represented 24% of total assets at December 31, 2015, compared to 28% at year-end 2014.

Total loans and leases held to maturity were $5.00 billion at December 31, 2015, compared to $3.88 billion at year-end 2014, an increase of $1.12 billion or 29%. This increase includes $939.0 million of total loans and leases held to maturity acquired in the 2015 acquisitions. Exclusive of these acquisitions, total loans and leases held to maturity increased $185.7 million or 5% since year-end 2014.

“After a very strong second quarter, loan demand moderated during the second half of the year. That said, organic loan growth of $186 million represents an increase of 5 percent which is respectable. And for 2016, we remain cautiously optimistic as quality loan growth is our second highest priority," added Fuller.

Total deposits were $6.41 billion as of December 31, 2015, compared to $4.77 billion at year-end 2014, an increase of $1.64 billion or 34%. Of this increase, $1.27 billion was attributable to the acquisitions completed during 2015. Exclusive of these acquisitions, total deposits increased $367.8 million or 8% since year-end 2014. Demand deposits totaled $1.91 billion at December 31, 2015, an increase of $618.9 million or 48% since year-end 2014, with $414.5 million of the increase attributable to the acquisitions. Included in the deposit growth during 2015 was a $89.3 million increase in brokered time deposits, the majority of which were issued to replace higher cost long-term FHLB advances and wholesale repurchase agreements that matured during the year.

Fuller said, “We were very pleased to see excellent deposit growth in 2015, especially in the fourth quarter. Excluding acquisitions, deposits increased by $368 million, or 8 percent over year-end 2014. We have experienced a very favorable shift in our deposit mix through the growth of demand deposits, which now represent 30 percent of total deposits.”

Nonperforming Assets Increase; Provision for Loan Losses Decrease

Nonperforming assets were $51.7 million or 0.67% of total assets at December 31, 2015, compared to $44.5 million or 0.73% of total assets at December 31, 2014. Exclusive of $16.4 million of nonperforming assets acquired in the acquisitions, nonperforming assets decreased $9.5 million or 21% since year-end 2014. Nonperforming loans, excluding those covered under loss sharing agreements, were $39.7 million or 0.79% of total loans and leases at December 31, 2015, compared to $25.1 million or 0.63% of total loans and leases at December 31, 2014.

The allowance for loan and lease losses at December 31, 2015, was 0.97% of loans and leases and 122.77% of nonperforming loans compared to 1.07% of loans and leases and 165.33% of nonperforming loans at December 31, 2014. The provision for loan losses was $2.2 million for the fourth quarter of 2015 compared to $2.9 million for the fourth quarter of 2014.

Conference Call Details
Heartland will host a conference call for investors at 5:00 p.m. EST today. To participate, dial 877-407-0782 at least five minutes before start time. To listen to the live webcast, log on to www.htlf.comat least 15 minutes before start time. A replay will be available until January 24, 2017, by logging on to www.htlf.com.

About Heartland Financial USA, Inc.
Heartland Financial USA, Inc. is a $7.7 billion diversified financial services company providing banking, mortgage, wealth management, investment, insurance and consumer finance services to individuals and businesses. Heartland currently has 94 banking locations serving 71 communities in Iowa, Illinois, Wisconsin, New Mexico, Arizona, Montana, Colorado, Minnesota, Kansas, Missouri, Texas and California, with mortgage loan production offices in California, Nevada and Idaho. 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 in the risk factors included in Heartland's Annual Report on Form 10-K filed with the Securities and Exchange Commission, include, among others: (i) the strength of the local and national economy; (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 concerning the Company's general business; (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, (viii) the loss of key executives or employees; (ix) changes in consumer spending; (x) unexpected outcomes of existing or new litigation involving the Company; and (xi) changes in accounting policies and practices. 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.

(1) Computed on a tax equivalent basis using an effective tax rate of 35%.
(2) Efficiency ratio, fully taxable equivalent, expresses noninterest expenses as a percentage of fully taxable 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 historic rehabilitation tax credits. 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, such as securities gains, net and losses on sales/valuations of assets, net. This measure should not be considered a substitute for operating results determined in accordance with GAAP.

(1) Total common stockholders' equity less goodwill and intangible assets (excluding servicing rights) divided by common shares outstanding, net of treasury. This is a non-GAAP financial measure but has been included as it is considered to be a critical metric with which to analyze and evaluate financial condition and capital strength.
(2) Total common stockholders' equity less goodwill and intangible assets (excluding servicing rights) divided by total assets less intangible assets (excluding mortgage servicing rights). This is a non-GAAP financial measure but has been included as it is considered to be a critical metric with which to analyze and evaluate financial condition and capital strength.

(1) Includes principal reductions and transfers to performing status

(1) Computed on a tax equivalent basis using an effective tax rate of 35%
(2) Nonaccrual loans are included in average loans outstanding.

(1) Computed on a tax equivalent basis using an effective tax rate of 35%
(2) Nonaccrual loans are included in the average loans outstanding.