Heartland Financial USA, Inc. Reports 2016 Fourth Quarter and Annual Results

Highlights

• Quarterly net income available to common stockholders of $19.1 million, a 33% increase from the fourth quarter of the prior year
• Record annual net income available to common stockholders of $80.1 million, a 35% increase from the prior year
• Diluted earnings per common share of $0.74 for the quarter, a 10% increase from the fourth quarter of the prior year, and $3.22 for the year, a 14% increase from the prior year
• Net interest margin of 3.96% for the quarter, fully tax-equivalent (non-GAAP)(1) of 4.14%
• Net interest margin of 3.95% for the year, fully tax-equivalent (non-GAAP)(1) of 4.13%
• Return on average common equity of 10.48% for the quarter and 11.80% for the year
• Return on average tangible common equity (non-GAAP)(2) of 13.24% for the quarter and 15.15% for the year
• Completed offering of 1,379,690 shares of common stock with net proceeds of $49.7 million
• Announced agreement to acquire Founders Bancorp of San Luis Obispo, CA
• Declared and paid a special dividend of $0.10 per common share

(1) Refer to the "Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP)" table included in this earnings release.
(2) Refer to the "Reconciliation of Return on Average Common Tangible Equity (non-GAAP)" table included in this earnings release.

DUBUQUE, Iowa, Jan. 30, 2017 (GLOBE NEWSWIRE) -- Heartland Financial USA, Inc. (NASDAQ:HTLF) today reported net income available to common stockholders of $19.1 million, or $0.74 per diluted common share, for the quarter ended December 31, 2016, compared to $14.4 million, or $0.67 per diluted common share, for the fourth quarter of 2015. Return on average common equity was 10.48% and return on average assets was 0.92% for the fourth quarter of 2016, compared to 10.69% and 0.79%, respectively, for the same quarter in 2015.

Net income available to common stockholders for the year 2016 was $80.1 million, or $3.22 per diluted common share, compared to $59.2 million, or $2.83 per diluted common share, recorded during the year 2015. Return on average common equity was 11.80% and return on average assets was 0.98% for the year 2016, compared to 11.92% and 0.88%, respectively, for the same period in 2015.

Commenting on Heartland’s results for 2016, Lynn B. Fuller, Heartland’s chairman and chief executive officer said, "Heartland just completed its best year on record with net income available to common stockholders of $80.1 million, a 35 percent increase over 2015, with earnings per share growing by 14 percent."

On October 29, 2016, Heartland entered into a definitive merger agreement for the acquisition of Founders Bancorp, parent company of Founders Community Bank, based in San Luis Obispo, California. The transaction is valued at approximately $29.1 million, subject to adjustment. Of the merger consideration, 70% will be in the form of shares of Heartland common stock, and 30% will be in cash. As of September 30, 2016, Founders Community Bank had total assets of $198.5 million, which includes gross loans of $106.6 million and total deposits of $180.5 million. The closing of the acquisition is subject to customary closing conditions, including approvals by the Founders Bancorp shareholders and banking regulators, and is expected to occur in the first quarter of 2017. Simultaneous with the close, Founders Community Bank will be merged into Heartland's Premier Valley Bank subsidiary. Heartland expects the acquisition to be accretive to its earnings per share during 2018.

On November 8, 2016, Heartland closed its sale of 1,379,690 shares of the its common stock pursuant to an underwriting agreement with Raymond James & Associates, Inc. as underwriter, providing for the offer and sale of the shares in a firm commitment underwritten public offering. The net proceeds from this offering were approximately $49.7 million. Heartland is using the net proceeds from this offering for general corporate purposes, which may include, among other things, working capital, debt repayment or financing potential acquisitions.

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

Net interest margin, expressed as a percentage of average earning assets, was 3.96% (4.14% on a fully tax-equivalent basis) during the fourth quarter of 2016, compared to 3.97% (4.14% on a fully tax-equivalent basis) during the third quarter of 2016 and 3.82% (3.99% on a fully tax-equivalent basis) during the fourth quarter of 2015.

Fuller said, "Throughout the year, we were pleased to see tax-equivalent net interest margin maintained nicely above the key 4 percent level. Despite continued pressure from a very low interest rate environment, we continue to find opportunities to increase asset yields while reducing our funding costs."

Interest income for the fourth quarter of 2016 was $82.8 million, an increase of $12.6 million or 18%, compared to the $70.2 million recorded in the fourth quarter of 2015. The tax-equivalent adjustment, which accounts for income taxes saved on the interest earned on nontaxable securities and loans, was $3.5 million for the fourth quarter of 2016 and $2.8 million for the fourth quarter of 2015. With these adjustments, interest income on a tax-equivalent basis was $86.3 million for the fourth quarter of 2016, an increase of $13.3 million or 18%, compared to $73.0 million for the fourth quarter of 2015. The increase in interest income in the fourth quarter of 2016, as compared to the fourth quarter of 2015, was primarily due to an increase in average earning assets, which totaled $7.55 billion during the fourth quarter of 2016 compared to $6.51 billion during the fourth quarter of 2015, a $1.04 billion or 16% increase. A majority of this growth was attributable to the acquisition of Premier Valley Bank completed on November 30, 2015, and acquisition of CIC Bancshares, Inc. completed on February 5, 2016.

Interest expense for the fourth quarter of 2016 was $7.6 million, an increase of $160,000 or 2% from $7.5 million in the fourth quarter of 2015. Average interest bearing liabilities increased $424.6 million or 9% for the quarter ended December 31, 2016, from $4.78 billion in the same quarter in 2015, while the average interest rate paid on Heartland's interest bearing deposits and borrowings declined 4 basis points from 0.62% in the fourth quarter of 2015 to 0.58% in the fourth quarter of 2016. The average interest rate paid on savings deposits was 0.21% during the fourth quarter of 2016 compared to 0.20% during the fourth quarter of 2015, and the average interest rate paid on time deposits was 0.77% during the fourth quarter of 2016 compared to 0.82% during the fourth quarter of 2015.

Net interest income increased $12.5 million or 20% to $75.2 million in the fourth quarter of 2016 from the $62.7 million recorded in the fourth quarter of 2015. After the tax-equivalent adjustment discussed above, net interest income on a tax-equivalent basis totaled $78.7 million during the fourth quarter of 2016, an increase of $13.1 million or 20% from the $65.5 million recorded during the fourth quarter of 2015.

Noninterest Income and Noninterest Expenses Increase

Noninterest income totaled $24.5 million during the fourth quarter of 2016 compared to $24.4 million during the fourth quarter of 2015. Service charges and fees totaled $8.1 million during the fourth quarter of 2016 compared to $6.7 million during the fourth quarter of 2015, an increase of $1.5 million or 22%. This increase was primarily attributable to a larger demand deposit customer base, a portion of which is attributable to the acquisitions completed during the last quarter of 2015 and first quarter of 2016. Gains on sale of loans held for sale totaled $5.8 million during the fourth quarter of 2016 compared to $7.1 million during the fourth quarter of 2015, a decrease of $1.2 million or 18%. Net securities gains totaled $1.6 million during the fourth quarter of 2016 compared to $3.9 million during the fourth quarter of 2015, a decrease of $2.3 million or 59%.

For the fourth quarter of 2016, noninterest expenses totaled $69.9 million compared to $66.0 million during the fourth quarter of 2015, an increase of $3.9 million or 6%. The category with the most significant increase was salaries and employee benefits, which increased $5.5 million or 16%. Other categories experiencing increases, primarily attributable to the recent acquisitions, were occupancy, furniture and equipment, professional fees and intangible assets amortization.

Heartland's effective tax rate was 30.38% for the fourth quarter of 2016 compared to 23.03% for the fourth quarter of 2015. Included in Heartland's income taxes for the fourth quarter of 2015 were federal historic rehabilitation tax credits totaling $1.4 million associated with Heartland's ownership interest in a qualifying real estate project. Federal low-income housing tax credits included in the determination of Heartland's income taxes totaled $304,000 during the fourth quarter of 2016 compared to $145,000 during the fourth quarter of 2015. 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 23.69% during the fourth quarter of 2016 compared to 27.70% during the fourth quarter of 2015.

Loans and Deposits Increase

Total assets were $8.25 billion at December 31, 2016, an increase of $552.3 million or 7% from $7.70 billion at year-end 2015. Included in this growth, at fair value, were $772.6 million of assets acquired in the CIC Bancshares, Inc. transaction. Securities represented 26% of total assets at December 31, 2016, compared to 24% at December 31, 2015.

Total loans held to maturity were $5.35 billion at December 31, 2016, compared to $5.00 billion at year-end 2015, an increase of $350.2 million or 7%. This increase includes $581.5 million of total loans held to maturity, at fair value, acquired in the CIC Bancshares, Inc. transaction. Exclusive of this transaction, total loans held to maturity decreased $87.0 million during the fourth quarter of 2016 and decreased $231.2 million during the year 2016.

Total deposits were $6.85 billion as of December 31, 2016, compared to $6.41 billion at year-end 2015, an increase of $441.6 million or 7%. This increase included $648.1 million of deposits, at fair value, acquired in the CIC Bancshares, Inc. acquisition. Exclusive of this transaction, total deposits decreased $65.3 million during the fourth quarter of 2016 and $206.5 million during the year 2016. Demand deposits totaled $2.20 billion at December 31, 2016, an increase of $287.9 million or 15% from $1.91 billion at year-end 2015, with $164.3 million of the increase attributable to the CIC Bancshares, Inc. transaction. Exclusive of this transaction, demand deposits decreased $36.7 million during the fourth quarter of 2016 and increased $123.6 million during the year 2016.

Fuller said, "Though deposit growth has slowed, we continue to be pleased with the favorable shift in deposit mix as non-time deposits represent 87 percent of total deposits."

Nonperforming Assets Increase; Provision for Loan Losses Remains Constant

Nonperforming assets were $74.8 million or 0.91% of total assets at December 31, 2016, compared to $51.7 million or 0.67% of total assets at December 31, 2015. Exclusive of $3.5 million of nonperforming assets, at fair value, acquired in the CIC Bancshares, Inc. transaction, nonperforming assets increased $19.6 million or 38% since year-end 2015. Nonperforming loans were $64.4 million or 1.20% of total loans at December 31, 2016, compared to $39.7 million or 0.79% of total loans at December 31, 2015. Contributing to the increase in nonperforming loans during 2016 were two  loans totaling $20.7 million at Dubuque Bank and Trust Company, both of which are in the process of collection. Based upon the current valuation of the collateral securing each loan relationship, we anticipate no additional provision for loan losses on either of these credits.

The allowance for loan losses at December 31, 2016, was 1.02% of loans and 84.37% of nonperforming loans, compared to 0.97% of loans and 122.77% of nonperforming loans at December 31, 2015. The provision for loan losses was $2.2 million for both the fourth quarter of 2016 and 2015.

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.com at least 15 minutes before start time. A replay will be available until January 29, 2018, by logging on to www.htlf.com.

About Heartland Financial USA, Inc.
Heartland Financial USA, Inc. is a diversified financial services company with assets exceeding $8 billion. The company provides banking, mortgage, private client, investment, insurance and consumer finance services to individuals and businesses. Heartland currently has 108 banking locations serving 85 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 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.

-FINANCIAL TABLES FOLLOW-

CONTACT:
Bryan R. McKeag
Executive Vice President
Chief Financial Officer
(563) 589-1994
bmckeag@htlf.com