Heartland Financial USA(HTLF) - 2019 Q1 - Quarterly Report

Part I - Financial Information Financial Statements This section presents the unaudited consolidated financial statements for Heartland Financial USA, Inc. as of March 31, 2019, including balance sheets, income statements, and detailed notes on accounting policies and acquisitions Consolidated Balance Sheets As of March 31, 2019, total assets were $11.31 billion, a slight decrease from year-end 2018, with total liabilities also decreasing and stockholders' equity increasing to $1.37 billion Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2019 (Unaudited) | December 31, 2018 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $492,501 | $273,630 | | Securities | $2,488,549 | $2,686,992 | | Loans receivable, net | $7,268,905 | $7,345,734 | | Goodwill | $391,668 | $391,668 | | Total Assets | $11,312,495 | $11,408,006 | | Liabilities & Equity | | | | Total deposits | $9,352,942 | $9,396,429 | | Total borrowings | $372,626 | $501,915 | | Total Liabilities | $9,940,393 | $10,082,831 | | Total Stockholders' Equity | $1,372,102 | $1,325,175 | Consolidated Statements of Income Net income available to common stockholders increased to $31.5 million for Q1 2019, driven by a 12.4% rise in net interest income, resulting in diluted EPS of $0.91 Q1 2019 vs Q1 2018 Income Statement (in thousands, except per share data) | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net Interest Income | $102,955 | $91,584 | | Provision for loan losses | $1,635 | $4,263 | | Total Noninterest Income | $26,717 | $24,716 | | Total Noninterest Expenses | $88,230 | $83,646 | | Net Income | $31,497 | $23,268 | | Net Income Available to Common Stockholders | $31,497 | $23,255 | | Earnings Per Common Share - Diluted | $0.91 | $0.76 | Notes to Consolidated Financial Statements This section provides detailed disclosures supporting the consolidated financial statements, covering accounting standards, acquisitions, loan portfolios, and fair value measurements - Adopted ASU 2016-02 "Leases" on January 1, 2019, recognizing right-of-use (ROU) assets of approximately $25.9 million and lease liabilities of $27.6 million on the balance sheet[21][22] - On January 16, 2019, Heartland entered a definitive merger agreement to acquire Blue Valley Ban Corp. for approximately $93.9 million in stock, expected to close in Q2 2019[29] - Dubuque Bank and Trust Company sold its mortgage servicing rights portfolio, with a book value of $21.0 million and an unpaid principal balance of $3.35 billion, for approximately $37.0 million in April 2019[69] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2019 financial performance, highlighting a net income of $31.5 million and covering drivers of net interest income, credit quality, and strategic developments Q1 2019 Key Performance Ratios | Metric | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Net Income Available to Common Stockholders | $31.5 million | $23.3 million | | Diluted EPS | $0.91 | $0.76 | | Return on Average Assets (ROA) | 1.13% | 0.97% | | Return on Average Common Equity (ROE) | 9.56% | 9.32% | | Net Interest Margin (Tax-Equivalent) | 4.18% | 4.26% | | Efficiency Ratio (Tax-Equivalent) | 65.23% | 68.21% | - Total assets decreased by $95.5 million (1%) to $11.31 billion since year-end 2018, while total loans held to maturity decreased by $76.2 million (1%) to $7.33 billion[173][174] - The company is focused on improving its efficiency ratio, which decreased to 65.23% in Q1 2019 from 68.21% in Q1 2018, through restructuring and optimization efforts[220] Results of Operations Net interest income grew 12% to $103.0 million, despite slight net interest margin compression, while noninterest income rose 8% and noninterest expense increased 5% - Net interest margin was 4.12% (4.18% tax-equivalent) in Q1 2019, down from 4.19% (4.26% tax-equivalent) in Q1 2018, including 16 basis points of purchase accounting discount amortization[189] - Provision for loan losses decreased by $2.6 million to $1.6 million for Q1 2019, compared to $4.3 million in Q1 2018[200] - Noninterest income increased by $2.0 million (8%) year-over-year, driven by a 27% increase in service charges and fees, partially offset by a 22% decrease in net gains on sale of loans[205] - Noninterest expense increased by $4.6 million (5%) year-over-year, largely due to a $1.9 million (20%) rise in professional fees and a $2.8 million increase in net gain on sales/valuations of assets[214][216][218] Financial Condition Total assets were $11.31 billion as of March 31, 2019, with a slight decrease in the loan portfolio and total deposits, while nonperforming loans increased to 1.08% - Nonperforming loans increased to $79.0 million (1.08% of total loans) at March 31, 2019, from $72.7 million (0.98% of total loans) at December 31, 2018, primarily due to two agribusiness relationships[234] - The allowance for loan losses was 0.85% of total loans and covered 79.29% of nonperforming loans as of March 31, 2019[236] - Total deposits decreased by $43.5 million to $9.35 billion since year-end 2018, though excluding deposits held for sale, total deposits increased by $33.5 million[242] Capital Requirements Heartland and its bank subsidiaries remained well-capitalized as of March 31, 2019, with key capital ratios significantly exceeding minimum regulatory requirements Capital Ratios as of March 31, 2019 | Ratio | Heartland's Ratio | Well Capitalized Requirement | | :--- | :--- | :--- | | Common Equity Tier 1 (CET1) | 11.24% | 6.50% | | Tier 1 Capital | 12.77% | 8.00% | | Total Capital | 14.37% | 10.00% | | Tier 1 Leverage | 10.08% | 5.00% | Quantitative and Qualitative Disclosures About Market Risk Heartland's primary market risk is interest rate risk, with simulation analysis projecting net interest income changes under various rate scenarios Net Interest Income Sensitivity Analysis (as of March 31, 2019) | Interest Rate Scenario | Year 1 % Change from Base | Year 2 % Change from Base | | :--- | :--- | :--- | | Up 200 Basis Points | +5.61% | +12.00% | | Down 100 Basis Points | -3.30% | -7.80% | Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2019, with no material changes to internal controls over financial reporting - The CEO and CFO certified that disclosure controls and procedures were effective as of the end of the period[281] - No material changes in internal controls over financial reporting were identified during the quarter ended March 31, 2019[281] Part II - Other Information Legal Proceedings The company is not a party to any material pending legal proceedings beyond ordinary routine litigation incidental to its business - There are no material pending legal proceedings against Heartland or its subsidiaries outside of ordinary routine litigation[283] Risk Factors No material changes to the risk factors applicable to Heartland have been reported since its 2018 Annual Report on Form 10-K - No material changes to risk factors were reported since the 2018 Form 10-K[284] Unregistered Sales of Equity Securities and Use of Proceeds Heartland and its affiliated purchasers made no purchases of its common stock during the quarter ended March 31, 2019 - The company did not repurchase any of its common stock during the first quarter of 2019[285] Exhibits This section lists the exhibits filed with the Form 10-Q, including the merger agreement with Blue Valley Ban Corp. and certifications by the CEO and CFO