Heartland Financial Inc recently issued the following announcement.

Recorded Q4-2019 Earnings Call

Q4-2019 Call Transcript

Highlights

Record annual net income available to common stockholders of $149.1 million, an increase of $32.2 million or 28% from $117.0 million for 2018

Quarterly net income available to common stockholders of $37.9 million or $1.03 per diluted common share in comparison with $32.1 million or $0.93 per diluted common share for the fourth quarter of the prior year

Net interest margin of 3.86%, fully tax-equivalent (non-GAAP)(1) of 3.90% for the fourth quarter of 2019

Return on average common equity of 9.56% and return on average tangible common equity (non-GAAP)(1) of 14.65% for the fourth quarter of 2019

Efficiency ratio (non-GAAP)(1) for the fourth quarter of 2019 of 60.69%

Tangible common equity ratio (non-GAAP)(1) of 8.52% at December 31, 2019

Organic commercial and commercial real estate loan growth of $96.8 million and organic non-time deposit growth of $225.0 million for the fourth quarter of 2019

Completed the acquisition of substantially all of the assets and deposits and certain other liabilities of Rockford Bank and Trust Company

Quarter Ended

December 31,

Year Ended December 31,

2019

2018

2019

2018

Net income available to common stockholders (in millions)

$

37.9

$

32.1

$

149.1

$

117.0

Diluted earnings per common share

1.03

0.93

4.14

3.52

Return on average assets

1.17

%

1.12

%

1.24

%

1.09

%

Return on average common equity

9.56

9.88

10.12

9.93

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

14.65

15.96

15.73

15.72

Net interest margin

3.86

4.28

4.00

4.26

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

3.90

4.34

4.04

4.32

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

60.69

59.35

63.11

63.54

(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 completed a record year with net income available to common stockholders of $149.1 million, which was an increase of $32.2 million or 28 percent over the prior year. Diluted earnings per share for 2019 increased $0.62 or 18 percent to $4.14 from $3.52 for 2018."

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

Dubuque, Iowa, Monday, January 27, 2020-Heartland Financial USA, Inc. (NASDAQ: HTLF) today reported net income available to common stockholders of $37.9 million, or $1.03 per diluted common share, for the quarter ended December 31, 2019, compared to $32.1 million, or $0.93 per diluted common share, for the fourth quarter of 2018. Return on average common equity was 9.56% and return on average assets was 1.17% for the fourth quarter of 2019, compared to 9.88% and 1.12%, respectively, for the same quarter in 2018.

Net income available to common stockholders for the year ended December 31, 2019, was $149.1 million or $4.14 per diluted common share, compared to $117.0 million or $3.52 per diluted common share for the year ended December 31, 2018. Return on average common equity was 10.12% and return on average assets was 1.24% for the year 2019, compared to 9.93% and 1.09% for the same period in 2018.

Commenting on Heartland’s 2019 results, Bruce K. Lee, Heartland’s president and chief executive officer, said, "Heartland completed a record year with net income available to common stockholders of $149.1 million, which was an increase of $32.2 million or 28 percent over the prior year. Diluted earnings per share for 2019 increased $0.62 or 18 percent to $4.14 from $3.52 for 2018."

Strategic Developments in 2019

In keeping with its focus on core businesses and execution of strategic priorities, Heartland completed the following transactions:

• In the first quarter of 2019, two branch locations of Wisconsin Bank & Trust and the consumer finance loan portfolios totaling approximately $67 million of Citizens’ Finance Company were sold. During the second quarter of 2019, Heartland completed the sale of two branches of Dubuque Bank and Trust Company, two branches of Illinois Bank & Trust and one branch of Citywide Banks. On April 30, 2019, Dubuque Bank and Trust Company closed on the sale of substantially all its mortgage servicing rights to PNC Bank, N.A. Heartland is utilizing a portion of the net gains from these sales transactions, which totaled approximately $24.5 million, to invest in several new technology and process improvement projects. These projects include system upgrades, process automation, and expansion of online and mobile banking capabilities.

• On May 10, 2019, Heartland completed the acquisition of Blue Valley Ban Corp. ("BVBC") and its wholly-owned subsidiary, Bank of Blue Valley, headquartered in Overland Park, Kansas. Based on Heartland's closing common stock price of $44.78 per share on May 10, 2019, the aggregate consideration paid to BVBC common shareholders was $92.3 million, which was paid by delivery of Heartland common stock. Immediately following the closing of the transaction, Bank of Blue Valley was merged with and into Heartland's wholly-owned Kansas subsidiary, Morrill & Janes Bank and Trust Company, and the combined entity operates under the Bank of Blue Valley brand. As of the closing date, BVBC had, at fair value, total assets of $766.2 million, total loans held to maturity of $542.0 million, and total deposits of $617.1 million. Heartland also assumed, at fair value, $16.1 million of trust preferred debt. The systems conversion for this transaction was completed on August 23, 2019.

• On November 30, 2019, Heartland's Illinois Bank & Trust subsidiary completed its acquisition of substantially all of the assets and substantially all of the deposits and certain other liabilities of Rockford Bank and Trust Company ("RB&T"), headquartered in Rockford, Illinois. RB&T is a wholly-owned subsidiary of Moline, Illinois-based QCR Holdings, Inc. As of the closing date, RB&T had, at fair value, total assets of $495.7 million, which included $354.0 million of gross loans held to maturity, and $430.3 million of deposits. RB&T serves the Rockford market from two full-service banking locations. The systems conversion is expected to occur in the first quarter of 2020.

“We are pleased that we have advanced our goal to have two additional charters over $1 billion dollars in assets with the acquisitions in 2019 of Bank of Blue Valley and Rockford Bank & Trust," commented Lynn B. Fuller, Heartland's executive operating chairman.

Net Interest Income Increases, Net Interest Margin Decreases, from Fourth Quarter of 2018

Net interest margin, expressed as a percentage of average earning assets, was 3.86% (3.90% on a fully tax-equivalent basis, non-GAAP) during the fourth quarter of 2019, compared to 3.98% (4.02% on a fully tax-equivalent basis, non-GAAP) during the third quarter of 2019 and 4.28% (4.34% on a fully tax-equivalent basis, non-GAAP) during the fourth quarter of 2018.

Total interest income for the fourth quarter of 2019 was $133.2 million compared to $126.3 million recorded in the fourth quarter of 2018, an increase of $6.9 million or 5%. The tax-equivalent adjustment for income taxes saved on the interest earned on nontaxable securities and loans was $1.1 million for the fourth quarter of 2019 and $1.6 million for the fourth quarter of 2018. With these adjustments, total interest income on a tax-equivalent basis was $134.3 million for the fourth quarter of 2019, an increase of $6.4 million or 5%, compared to total interest income on a tax-equivalent basis of $127.9 million for the fourth quarter of 2018.

Average earning assets of $11.58 billion increased $1.35 billion or 13% from the fourth quarter of 2018, which was primarily attributable to recent acquisitions. The average rate on earning assets decreased 36 basis points to 4.60% for the fourth quarter of 2019 compared to 4.96% for the same quarter in 2018. In the first quarter of 2019, Heartland sold its higher yielding consumer loan portfolios, which accounted for 10 basis points of margin in the fourth quarter of 2018.

Total interest expense for the fourth quarter of 2019 was $20.5 million, an increase of $4.4 million or 28% from $16.0 million in the fourth quarter of 2018. The average interest rate paid on Heartland's interest bearing liabilities increased to 1.08% for the fourth quarter of 2019 compared to 0.97% for the fourth quarter of 2018.

Average interest bearing deposits increased $961.3 million or 16% to $7.12 billion for the quarter ended December 31, 2019, from $6.16 billion in the same quarter in 2018, which was primarily attributable to recent acquisitions. The average interest rate paid on Heartland's interest bearing deposits increased 15 basis points to 0.91% for the fourth quarter of 2019 compared to 0.76% for the same quarter in 2018.

Average borrowings decreased $4.8 million or 1% to $392.7 million during the fourth quarter of 2019 from $397.5 million during the same quarter in 2018. The average interest rate paid on Heartland's borrowings was 4.10% for the fourth quarter of 2019 compared to 4.19% in the fourth quarter of 2018.

Net interest income was $112.7 million during the fourth quarter of 2019 compared to $110.3 million during the fourth quarter of 2018, an increase of $2.5 million or 2%. After the tax-equivalent adjustment discussed above, net interest income on a tax-equivalent basis totaled $113.9 million during the fourth quarter of 2019 compared to net interest income on a tax-equivalent basis of $111.8 million during the fourth quarter of 2018, an increase of $2.0 million or 2%.

"While our net interest margin declined during the fourth quarter of 2019, we were able to lower our non-time deposit costs by 16 basis points. The current interest rate environment is very competitive, however, we are actively working to maintain our yield on loans while lowering our funding costs," Lee said.

Noninterest Income and Noninterest Expense Increase from Fourth Quarter of 2018

Total noninterest income was $28.0 million during the fourth quarter of 2019 compared to $27.0 million during the fourth quarter of 2018, an increase of $985,000 or 4%. Significant changes by noninterest income category were:

• Service charges and fees decreased $1.3 million or 9% to $12.4 million for the fourth quarter of 2019 compared to $13.7 million for the fourth quarter of 2018. Debit card income for the fourth quarter of 2019 totaled $1.6 million compared to $3.7 million for the same quarter in 2018, which was a decrease of $2.2 million or 58%, primarily due to the impact of the Durbin Amendment, which was effective for Heartland on July 1, 2019.

• Loan servicing income totaled $955,000 for the fourth quarter of 2019 compared to $2.1 million for the fourth quarter of 2018, which was a decrease of $1.1 million or 54%. The decrease was primarily due to the sale of the mortgage servicing rights of Dubuque Bank and Trust Company in the second quarter of 2019.

• Other noninterest income totaled $2.9 million for the fourth quarter of 2019 compared to $1.2 million for the fourth quarter of 2018, which was an increase of $1.6 million or 133%. Included in other noninterest income for the fourth quarter of 2019 was $891,000 related to proceeds on life insurance policies.

Total noninterest expense for the fourth quarter of 2019 was $92.9 million compared to $88.8 million for the same quarter of 2018, which was an increase of $4.0 million or 5%. Significant changes by noninterest expense category were:

• Salaries and employee benefits totaled $50.2 million for the fourth quarter of 2019 compared to $46.7 million for the same quarter of 2018, which is an increase of $3.5 million or 8%, which was primarily attributable to higher incentive compensation costs.

• Professional fees increased $914,000 or 9% to $11.5 million for the fourth quarter of 2019 compared to $10.6 million for the fourth quarter of 2018. This increase was primarily attributable to higher consulting fees related to process improvement and model validations. Consulting fees increased $759,000 or 150% to $1.3 million in the fourth quarter of 2019 from $507,000 in the same quarter of 2018.

• Net losses on assets totaled $1.5 million for the fourth quarter of 2019 compared to net gains of $35,000 for the fourth quarter of 2018, which was an increase of $1.5 million. Write-downs on fixed assets and buildings held for sale totaling $2.4 million were recorded in the fourth quarter of 2019. An additional gain of $1.2 million was recorded associated with the mortgage servicing rights sale due to the re-evaluation of any remaining contingencies.

Heartland's effective tax rate was 11.99% for the fourth quarter of 2019 compared to 17.22% for the fourth quarter of 2018. The following items impacted Heartland's fourth quarter 2019 and 2018 tax calculations:

• Solar energy tax credits of $764,000 and $2.6 million for the fourth quarter of 2019 and 2018, respectively.

• Federal low-income housing tax credits of $281,000 and $307,000 for the fourth quarter of 2019 and 2018, respectively.

• Tax-exempt interest income as a percentage of pre-tax income declined to 9.79% during the fourth quarter of 2019 from 15.16% during the fourth quarter of 2018.

• Historic rehabilitation tax credits totaled $1.8 million for the fourth quarter of 2019 compared to $0 for the same quarter of 2018.

• Included in the fourth quarter 2019 tax calculation were $1.9 million of tax benefits related to the release of valuation allowances on deferred tax assets.

For the years ended December 31, 2019 and 2018, Heartland's effective tax rate was 19.00% and 19.43%, respectively.

Loans and Deposits Increase Since December 31, 2018

Total assets were $13.21 billion at December 31, 2019, an increase of $1.80 billion or 16% from $11.41 billion at year-end 2018. Excluding $766.2 million of assets acquired at fair value in the BVBC transaction and $495.7 million of assets acquired at fair value in the RB&T transaction, total assets increased $539.7 million or 5% since year-end 2018. Securities represented 26% and 24% of total assets at December 31, 2019, and December 31, 2018, respectively.

Total loans held to maturity were $8.37 billion at December 31, 2019, compared to $7.41 billion at year-end 2018, an increase of $960.2 million or 13%. This change includes $896.0 million of total loans held to maturity acquired at fair value in the BVBC and RB&T transactions. During the first quarter of 2019, Heartland classified $32.1 million of loans as held for sale in conjunction with the branch sales. Excluding the reclassification of loans to held for sale and the BVBC and RB&T transactions, total loans held to maturity organically grew $96.3 million or 1% since December 31, 2018. Loan changes by category were:

• Commercial and commercial real estate loans totaled $6.79 billion at December 31, 2019, compared to $5.73 billion at December 31, 2018, which was an increase of $1.06 billion or 18%. Excluding $14.9 million of commercial and commercial real estate loans classified as held for sale during the first quarter of 2019 and $780.3 million of loans acquired in the BVBC and RB&T transactions, commercial and commercial real estate loans organically grew $293.4 million or 5% December 31, 2018.

• Agricultural and agricultural real estate loans totaled $533.1 million at December 31, 2019, compared to $565.4 million at December 31, 2018, which was a decrease of $32.3 million or 6%. Excluding $6.6 million of agricultural and agricultural real estate loans classified as held for sale during the first quarter of 2019 and $1.8 million of loans acquired in the BVBC transaction, agricultural and agricultural real estate loans organically decreased $27.5 million or 5% since December 31, 2018.

• Residential mortgage loans decreased $75.9 million or 11% to $597.7 million at December 31, 2019, from $673.6 million at December 31, 2018. Excluding $2.0 million of residential mortgage loans classified as held for sale during the first quarter of 2019 and $59.3 million of loans acquired in the BVBC and RB&T transactions, residential mortgage loans organically decreased $133.2 million or 20% since December 31, 2018.

• Consumer loans increased $12.1 million or 3% to $452.2 million at December 31, 2019, compared to $440.2 million at December 31, 2018. Excluding $8.6 million of loans classified as held for sale during the first quarter of 2019 and $54.7 million of loans acquired in the BVBC and RB&T transactions, consumer loans organically decreased $33.9 million or 8% since December 31, 2018.

"We had outstanding organic commercial and commercial real estate loan growth in the fourth quarter of 2019 of $96.8 million and $293.4 million for the year, and we expect this growth to continue in 2020," said Lee.

Total deposits were $11.04 billion as of December 31, 2019, compared to $9.40 billion at year-end, which was an increase of $1.65 billion or 18%. This increase includes $1.05 billion of deposits acquired at fair value in the BVBC and RB&T transactions. During the first quarter of 2019, Heartland classified $77.0 million of deposits as held for sale in conjunction with the branch sales. Exclusive of the reclassification of deposits to held for sale and the deposits acquired at fair value in the BVBC and RB&T transactions, total deposits organically increased $677.5 million or 7% since December 31, 2018. Deposit changes by category were:

• Demand deposits increased $279.1 million or 9% to $3.54 billion at December 31, 2019, compared to $3.26 billion at December 31, 2018. Excluding $235.5 million of demand deposits acquired in the BVBC and RB&T transactions and $17.3 million of demand deposits classified as held for sale in the first quarter of 2019, demand deposits organically increased $60.9 million or 2% since year-end 2018.

• Savings deposits increased $1.20 billion or 23% to $6.31 billion at December 31, 2019, from $5.11 billion at December 31, 2018. Excluding savings deposits of $550.0 million acquired in the BVBC and RB&T transactions and $47.8 million of savings deposits classified as held for sale in the first quarter of 2019, savings deposits organically increased $697.3 million or 14% since year-end 2018.

• Time deposits increased $169.3 million or 17% to $1.19 billion at December 31, 2019 from $1.02 billion at December 31, 2018. Excluding time deposits of $261.9 million acquired in the BVBC and RB&T transactions and $11.9 million of time deposits classified as held for sale in the first quarter of 2019, time deposits organically decreased $80.8 million or 8% since year-end 2018.

"We had impressive organic non-time deposit growth of $225.0 million for the fourth quarter of 2019 and $758.2 million for the year. Non-time deposits represented 89 percent of total deposits at December 31, 2019," Lee stated.

Nonperforming Assets Increase Since December 31, 2018

Nonperforming assets increased $8.3 million or 10% to $87.6 million or 0.66% of total assets at December 31, 2019, compared to $79.3 million or 0.69% of total assets at December 31, 2018. Excluding $3.5 million of nonperforming assets acquired in the BVBC and RB&T transactions, nonperforming assets increased $4.8 million or 6%. Nonperforming loans were $80.7 million or 0.96% of total loans at December 31, 2019, compared to $72.7 million or 0.98% of total loans at December 31, 2018. Nonperforming loans past due 90 days or more increased $3.4 million to $4.1 million at December 31, 2019 compared to $726,000 at December 31, 2018, which was primarily attributable to one $2.7 million commercial relationship that has been paid off since December 31, 2019. At December 31, 2019, loans delinquent 30-89 days were 0.33% of total loans compared to 0.21% of total loans at December 31, 2018.

The allowance for loan losses at December 31, 2019, was 0.84% of loans at December 31, 2019, and December 31, 2018. The allowance for loan losses as a percentage of nonperforming loans was 87.28% and 85.27% at December 31, 2019 and December 31, 2018, respectively. Provision expense for the fourth quarter of 2019 was $4.9 million compared to $9.7 million for the fourth quarter of 2018, which was a decrease of $4.8 million or 49%. Provision expense in the fourth quarter of 2018 included $4.0 million of provision expense due to two impaired commercial loans from acquired portfolios.

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, except that organic loan and deposit growth are reconciled to total loan and deposit growth in the preceding narrative discussion.

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 stockholders' 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 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.

• Organic deposit growth is exclusive of deposits obtained through acquisitions and the reclassification of deposits that are held for sale. Management believes that this measure provides a more complete understanding of underlying trends in deposit growth notwithstanding dispositions and acquisitions.

• Organic loan growth is exclusive of loans obtained through acquisitions and the reclassification of loans that are held for sale. Management believes that this measure provides a more complete understanding of underlying trends in loan growth notwithstanding dispositions and acquisitions.

• Tangible book value per common share is total common stockholders' 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 stockholders' 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 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 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 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 $13.21 billion. The company provides banking, mortgage, private client, investment, insurance and consumer finance services to individuals and businesses. Heartland currently has 115 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 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; (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; (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; (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.

Original source: https://www.htlf.com/heartland-financial-usa-inc-reports-record-annual-earnings-and-strong-fourth-quarter-results