Heartland Financial USA, Inc. ("HTLF") Reports Quarterly and Year to Date Results as of September 30, 2022

DUBUQUE, Iowa, Oct. 31, 2022 (GLOBE NEWSWIRE) -- Heartland Financial USA, Inc. (NASDAQ: HTLF) today reported the following results for the quarter ended September 30, 2022 compared to the quarter ended September 30, 2021:

• Net income available to common stockholders of $54.6 million compared to $53.9 million, an increase of $640,000 or 1%.
• Earnings per diluted common share of $1.28 compared to $1.27, an increase of $0.01 or 1%.
• Net interest income of $155.9 million compared to $142.6 million, an increase of $13.3 million or 9%.
• Return on average assets was 1.13% compared to 1.19%.
• Return on average common equity was 12.93% compared to 10.32%.
• Return on average tangible common equity (non-GAAP) was 20.76% compared to 15.14%.

"HTLF completed another successful quarter as we continue to execute on our growth and efficiency strategies. Our third quarter results were highlighted by an improved efficiency ratio, solid loan growth and clean credit metrics," said Bruce K. Lee, president and chief executive officer of HTLF.

HTLF reported the following results for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021:

• Net income available to common stockholders of $145.5 million compared to $164.3 million, a decrease of $18.8 million or 11%.
• Earnings per diluted common share of $3.42 compared to $3.88, a decrease of $0.46 or 12%.
• Net interest income of $433.0 million compared to $423.4 million, an increase of $9.7 million or 2%.
• Return on average assets was 1.04% compared to 1.25%.
• Return on average common equity was 10.80% compared to 10.95%.
• Return on average tangible common equity (non-GAAP) was 16.79% compared to 16.34%.

Charter Consolidation Update

During the third quarter of 2022, the charters of Premier Valley Bank and Minnesota Bank & Trust were consolidated into HTLF Bank. Subsequent to September 30, 2022, the Arizona Bank & Trust charter was consolidated into HTLF Bank. Citywide Banks, Premier Valley Bank, Minnesota Bank & Trust and Arizona Bank & Trust are now operating as divisions of HTLF Bank. During the fourth quarter of 2022, one additional charter consolidation is expected to be completed, and the remaining six charters are expected to be consolidated by the end of 2023. Charter consolidation follows a template that retains the current brands, local leadership and local decision making.

Consolidation restructuring costs are projected to be $19-$20 million with approximately $12-$13 million of expenses remaining to be incurred through 2023. Charter consolidation is designed to eliminate redundancies and improve HTLF’s operating efficiency and capacity to support ongoing product and service enhancements, as well as current and future growth. HTLF realized some operating efficiency and financial benefits in the third quarter of 2022 with the completion of two charter consolidations, and total benefits are estimated to be approximately $20.0 million annually after the project is completed.

Net Interest Income and Net Interest Margin

Net interest margin, expressed as a percentage of average earning assets, was 3.41% (3.45% on a fully tax-equivalent basis, non-GAAP) for the third quarter of 2022 compared to 3.30% (3.34% on a fully tax-equivalent basis, non-GAAP) for the third quarter of 2021.

Total interest income and average earning asset changes for the third quarter of 2022 compared to the third quarter of 2021 were:

• Total interest income was $175.8 million compared to $149.2 million, which was an increase of $26.6 million or 18% and primarily attributable to an increase in average earning assets and higher yields partially offset by a reduction of PPP loan interest income. PPP loan interest income totaled $363,000 compared to $11.2 million, which was a decrease of $10.8 million or 97%.
• Total interest income on a tax-equivalent basis (non-GAAP) was $178.0 million, which was an increase of $27.1 million or 18% from $150.9 million.
• Average earning assets increased $1.03 billion or 6% to $18.16 billion compared to $17.12 billion.
• The average rate on earning assets increased 39 basis points to 3.89% compared to 3.50%, which was primarily due to recent interest rate increases.

Total interest expense and average interest bearing liability changes for the third quarter of 2022 compared to the third quarter of 2021 were:

• Total interest expense was $19.9 million, an increase of $13.3 million from $6.6 million, based on an increase in the average interest rate paid and an increase in average interest bearing liabilities.
• The average interest rate paid on interest bearing liabilities increased to 0.67% compared to 0.27%.
• Average interest bearing deposits increased $1.76 billion or 19% to $11.22 billion from $9.46 billion.
• The average interest rate paid on interest bearing deposits increased 40 basis points to 0.54% compared to 0.14%.
• Average borrowings increased $86.6 million or 21% to $506.5 million from $419.9 million, and the average interest rate paid on borrowings was 3.74% compared to 3.02%.
  

Net interest income changes for the third quarter of 2022 compared to the third quarter of 2021 were:

• Net interest income totaled $155.9 million compared to $142.5 million, which was an increase of $13.3 million or 9%.
• Net interest income on a tax-equivalent basis (non-GAAP) totaled $158.0 million compared to $144.3 million, which was an increase of $13.8 million or 10%.

Noninterest Income and Noninterest Expense

Total noninterest income was $29.2 million during the third quarter of 2022 compared to $32.7 million during the third quarter of 2021, a decrease of $3.5 million or 11%. Significant changes within the noninterest income category for the third quarter of 2022 compared to the third quarter of 2021 were:

• Service charges and fees increased $1.7 million or 11% to $17.3 million from $15.1 million, which was primarily attributable to an increase of $1.2 million or 25% in credit card revenue to $6.2 million compared to $5.0 million.
• Net security losses totaled $1.1 million compared to net gains of $1.5 million.
• Net gains on sales of loans held for sale totaled $1.8 million compared to $5.3 million, which was a decrease of $3.4 million or 65% and was primarily attributable to a decrease of loans sold to the secondary market.
• Other noninterest income totaled $3.8 million compared to $1.2 million, which was an increase of $2.5 million and was primarily attributable to an increase in commercial swap fees and syndication income to $1.8 million from $131,000.

Total noninterest expense was $108.9 million during the third quarter of 2022 compared to $110.6 million during the third quarter of 2021, which was a decrease of $1.7 million or 2%. Significant changes within the noninterest expense category for the third quarter of 2022 compared to the third quarter of 2021 were:

• Salaries and employee benefits totaled $62.7 million compared to $60.7 million, which was an increase of $2.0 million or 3%. The increase was primarily attributable to higher incentive compensation expenses.
• Acquisition, integration and restructuring costs totaled $2.2 million compared to $204,000, an increase of $2.0 million due to the progression of the charter consolidation project.
• Partnership investment in tax credit projects decreased $1.4 million or 59% to $979,000 from $2.4 million.
• Occupancy expense decreased $572,000 or 8% to $6.8 million from $7.4 million, and furniture and equipment expense decreased $437,000 or 13% to $2.9 million from $3.4 million. These decreases are primarily attributable to the reduction in branch locations. Branch locations totaled 121 at September 30, 2022, compared to 131 at September 30, 2021.

The effective tax rate was 19.97% for the third quarter of 2022 compared to 19.15% for the third quarter of 2021. The following items impacted the third quarter 2022 and 2021 tax calculations:

• Solar energy tax credits of $1.1 million compared to $2.1 million.
• Federal low-income housing tax credits of $519,000 compared to $135,000.
• New markets tax credits of $75,000 in each quarterly calculation.
• Historic rehabilitation tax credits of $63,000 compared to $327,000.
• Tax-exempt interest income as a percentage of pre-tax income of 11.45% compared to 9.32%.
  

Total Assets, Total Loans and Total Deposits

Total assets were $19.68 billion at September 30, 2022, an increase of $408.4 million or 2% from $19.27 billion at year-end 2021. Securities represented 35% and 40% of total assets at September 30, 2022, and December 31, 2021, respectively.

During the third quarter of 2022, HTLF transferred taxable municipal bonds with a book value of $934.5 million and a fair value of $748.3 million from the available for sale portfolio to the held to maturity portfolio.

Total loans held to maturity were $10.92 billion at September 30, 2022, compared to $9.95 billion at December 31, 2021, which was an increase of $969.0 million or 10%. Excluding total PPP loans, loans increased $254.8 million or 2% since June 30, 2022 and $1.16 billion or 12% since December 31, 2021.

Significant changes by loan category at September 30, 2022 compared to June 30, 2022 included:

• Commercial and business lending, which includes commercial and industrial, PPP and owner occupied commercial real estate loans, increased $212.8 million or 4% to $5.58 billion compared to $5.37 billion.
  • PPP loans originated in 2020 ("PPP I") decreased $883,000 or 32%. PPP loans originated in 2021 ("PPP II") decreased $8.6 million or 43%.
  • Excluding total PPP loans, commercial and business lending increased $222.3 million or 4% to $5.56 billion from $5.34 billion.
• Commercial real estate lending, which includes non-owner occupied commercial real estate and construction loans, increased $48.8 million or 2% to $3.22 billion compared to $3.17 billion.
• Agricultural and agricultural real estate loans decreased $55.3 million or 7% to $781.4 million compared to $836.7 million.
• Consumer loans increased $31.4 million or 7% to $495.5 million from $464.1 million.

Significant changes by loan category at September 30, 2022 compared to December 31, 2021 included:

• Commercial and business lending, which includes commercial and industrial, PPP and owner occupied commercial real estate loans, increased $492.9 million or 10% to $5.58 billion compared to $5.09 billion.
  • PPP I loans decreased $25.2 million or 93%. PPP II loans decreased $161.1 million or 93%.
  • Excluding total PPP loans, commercial and business lending increased $679.3 million or 14% to $5.56 billion from $4.89 billion.
• Commercial real estate lending, which includes non-owner occupied commercial real estate and construction loans, increased $348.8 million or 12% to $3.22 billion compared to $2.87 billion.
• Agricultural and agricultural real estate loans increased $27.6 million or 4% to $781.4 million compared to $753.8 million.
• Consumer loans increased $76.0 million or 18% to $495.5 million from $419.5 million.

Total deposits were $17.27 billion as of September 30, 2022, compared to $16.42 billion at December 31, 2021. Significant deposit changes by category at September 30, 2022 compared to December 31, 2021 included:

• Demand deposits decreased $411.8 million or 6% to $6.08 billion compared to $6.50 billion.
• Savings deposits increased $1.16 billion or 13% to $10.06 billion from $8.90 billion.

Provision and Allowance

Provision and Allowance for Credit Losses for Loans
Provision for credit losses for loans for the third quarter of 2022 was $4.4 million, which was an increase of $8.8 million from a provision benefit of $4.4 million recorded in the third quarter of 2021. The provision expense for the third quarter of 2022 reflects a stable credit environment with a deteriorating economic outlook due to the long-term impact of rising interest rates and record high inflation. The provision benefit recorded in the third quarter of 2021 reflected an improving credit environment coming off elevated COVID reserving levels with an improving economic outlook due to waning COVID concerns.

The allowance for credit losses for loans totaled $105.7 million and $110.1 million at September 30, 2022, and December 31, 2021, respectively. The following items impacted the allowance for credit losses for loans at September 30, 2022:

• Provision expense for the nine months ended September 30, 2022, totaled $8.6 million.
• Net charge offs of $12.9 million were recorded for the first nine months of 2022.
• Nonpass loans declined to 5.3% of total loans compared to 7.4% of total loans at December 31, 2021.
  

Provision and Allowance for Credit Losses for Unfunded Commitments
The allowance for unfunded commitments totaled $18.9 million at September 30, 2022, which was an increase of $3.4 million from $15.5 million at December 31, 2021. Unfunded commitments increased $834.2 million to $4.66 billion at September 30, 2022 compared to $3.83 billion at December 31, 2021.

Total Provision and Allowance for Lending Related Credit Losses
The total provision expense for lending related credit losses was $5.5 million for the third quarter of 2022 compared to provision benefit of $4.5 million for the third quarter of 2021. The total allowance for lending related credit losses was $124.6 million or 1.14% of total loans at September 30, 2022, compared to $125.6 million or 1.26% of total loans as of December 31, 2021.

Nonperforming Assets

Nonperforming assets increased $1.4 million or 2% to $73.3 million or 0.37% of total assets at September 30, 2022, compared to $71.9 million or 0.37% of total assets at December 31, 2021. Nonperforming loans were $65.2 million or 0.60% of total loans at September 30, 2022, compared to $69.9 million or 0.70% of total loans at December 31, 2021. At September 30, 2022, loans delinquent 30-89 days were 0.10% of total loans compared to 0.07% of total loans at December 31, 2021.

Non-GAAP Financial Measures
This earnings 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 the company'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 earnings 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 earnings release.

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

• 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 earnings release.
• Net interest income, fully tax equivalent, is net income adjusted 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.
• 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.
• Annualized return on average tangible common equity is net income excluding intangible amortization calculated as (1) net income excluding 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.
• Annualized ratio of core expenses to average assets adjusts noninterest expenses to exclude specific items noted in the reconciliation. Management includes this measure as it is considered to be a critical metric to analyze and evaluate controllable expenses related to primary business operations.
  

Conference Call Details
HTLF will host a conference call for shareholders, analysts and other interested parties at 5:00 p.m. EDT today. To join via webcast, please visit https://ir.htlf.com/news-and-events/event-calendar/default.aspx 10 minutes prior to the call. A replay will be available until October 30, 2023, by logging on to www.htlf.com.

About HTLF
Heartland Financial USA, Inc., operating under the brand name HTLF, is a financial services company with assets of $19.68 billion. HTLF has banks serving communities in Arizona, California, Colorado, Illinois, Iowa, Kansas, Minnesota, Missouri, Montana, New Mexico, Texas and Wisconsin. HTLF is committed to its core commercial business, supported by a strong retail operation, and provides a diversified line of financial services including treasury management, wealth management, investments and residential mortgage. Additional information is available at www.htlf.com.

Safe Harbor Statement
This release (including any information incorporated herein by reference) and future oral and written statements of HTLF and its management, may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, with respect to the business, financial condition, results of operations, plans, objectives and future performance of HTLF.

Any statements about HTLF's expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. Forward-looking statements may include information about possible or assumed future results of HTLF's operations or performance, and may be based upon beliefs, expectations and assumptions of HTLF's management. These forward-looking statements are generally identified by the use of the words such as "believe", "expect", "anticipate", "plan", "intend", "estimate", "project", "may", "will", "would", "could", "should", "may", "view", "opportunity", "potential", or similar or negative expressions of these words or phrases that are used in this release, and future oral and written statements of HTLF and its management. Although HTLF may make these statements based on management’s experience, beliefs, expectations, assumptions and best estimate of future events, the ability of HTLF to predict results or the actual effect or outcomes of plans or strategies is inherently uncertain, and there may be events or factors that management has not anticipated. Therefore, the accuracy and achievement of such forward-looking statements and estimates are subject to a number of risks, 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 HTLF currently believes could have a material effect on its operations and future prospects, are detailed below and in the risk factors in HTLF's reports filed with the Securities and Exchange Commission ("SEC"), including the "Risk Factors" section under Item 1A of Part I of HTLF’s Annual Report on Form 10-K for the year ended December 31, 2021, include, among others:

• Coronavirus Disease 2019 ("COVID-19") Pandemic Risks, including risks related to the ongoing COVID-19 pandemic and measures enacted by the U.S. federal and state governments and adopted by private businesses in response to the COVID-19 pandemic;
• Economic and Market Conditions Risks, including risks related to changes in the U.S. economy in general and in the local economies in which HTLF conducts its operations and future civil unrest, natural disasters, terrorist threats or acts of war;
• Credit Risks, including risks of increasing credit losses due to deterioration in the financial condition of HTLF's borrowers, changes in asset and collateral values and climate and other borrower industry risks which may impact the provision for credit losses and net charge-offs;
• Liquidity and Interest Rate Risks, including the impact of capital market conditions and changes in monetary policy on our borrowings and net interest income;
• Operational Risks, including processing, information systems, cybersecurity, vendor, business interruption, and fraud risks;
• Strategic and External Risks, including economic, political and competitive forces impacting our business;
• Legal, Compliance and Reputational Risks, including regulatory and litigation risks; and
• Risks of Owning Stock in HTLF, including stock price volatility and dilution as a result of future equity offerings and acquisitions.

There can be no assurance that other factors not currently anticipated by HTLF will not materially and adversely affect HTLF's business, financial condition and results of operations. In addition, many of these risks and uncertainties are currently amplified by and may continue to be amplified by the COVID-19 pandemic and the impact of varying governmental responses that affect HTLF’s customers and the economies where they operate. Additionally, all statements in this release, including forward-looking statements speak only as of the date they are made. HTLF does not undertake and specifically disclaims any obligation to publicly release the results of any revisions which may be made to any forward-looking statement to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events or to otherwise update any statement in light of new information or future events. Further information concerning HTLF and its business, including additional factors that could materially affect HTLF’s financial results, is included in HTLF's filings with the SEC.

-FINANCIAL TABLES FOLLOW-