HTLFP - Heartland Financial USA Inc. (HTLF) Reports Quarterly and Year to Date Results as of June 30 2022

Highlights and Developments

• Quarterly loan growth of $551.9 million or 5%, exclusive of Paycheck Protection Program ("PPP") loans
  
• Quarterly net income available to common stockholders of $49.9 million
  
• Efficiency ratio of 57.66%
  
• Diluted earnings per common share of $1.17
  
• Quarterly net charge-offs of $714,000 and 30-89 day loan delinquencies were 0.06% of total loans
  
• Citywide Banks is now operating as a division of HTLF Bank, completing the first stage of charter consolidation

(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.

DUBUQUE, Iowa, July 25, 2022 (GLOBE NEWSWIRE) -- Heartland Financial USA, Inc. (NASDAQ: HTLF) today reported the following results for the quarter ended June 30, 2022 compared to the quarter ended June 30, 2021:

• Net income available to common stockholders of $49.9 million compared to $59.6 million, a decrease of $9.7 million or 16%.
• Earnings per diluted common share of $1.17 compared to $1.41, a decrease of $0.24 or 17%.
• Net interest income of $142.5 million compared to $141.2 million, an increase of $1.2 million or 1%.
• Return on average common equity was 11.55% compared to 12.07%, and return on average assets was 1.06% compared to 1.35%.
• Return on average tangible common equity (non-GAAP) was 18.35% compared to 18.05%.
  

"HTLF's second quarter results were excellent and exceeded our expectations. Our tremendous loan growth, solid credit metrics and an improved efficiency ratio are attributable to the continued execution of our growth strategies and provide strong momentum going into the third quarter," said Bruce K. Lee, president and chief executive officer of HTLF.

HTLF reported the following results for the six months ended June 30, 2022 compared to the six months ended June 30, 2021:

• Net income available to common stockholders of $90.9 million compared to $110.4 million, a decrease of $19.5 million or 18%.
• Earnings per diluted common share of $2.14 compared to $2.61, a decrease of $0.47 or 18%.
• Net interest income of $277.1 million compared to $280.8 million, a decrease of $3.7 million or 1%.
• Return on average common equity was 9.82% compared to 11.29%, and return on average assets was 0.99% compared to 1.27%.
• Return on average tangible common equity (non-GAAP) was 15.08% compared to 16.99%.
  

Charter Consolidation Update
During the second quarter of 2022, the consolidation of HTLF’s 11 separate bank charters advanced from planning to execution. Citywide Banks is now operating as a division of HTLF Bank, completing the first stage of charter consolidation. Each of the remaining charters will be consolidated into HTLF Bank in the following 10 stages of the project, using a template that retains their current brands, local leadership and local decision making. The final stage is expected to be completed by the end of 2023. Consolidation restructuring costs are projected to be $19-20 million, with approximately $14-15 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 and current and future growth. The resulting efficiencies and expansion in capacity are projected to generate financial benefits of approximately $20.0 million annually when the project is completed.

Net Interest Income and Net Interest Margin

Net interest margin, expressed as a percentage of average earning assets, was 3.18% (3.22% on a fully tax-equivalent basis, non-GAAP) for the second quarter of 2022 compared to 3.37% (3.41% on a fully tax-equivalent basis, non-GAAP) for the second quarter of 2021.

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

• Total interest income was $152.9 million compared to $148.1 million, which was an increase of $4.8 million or 3% and primarily attributable to an increase in average earning assets partially offset by lower yields and a reduction of PPP loan interest income. PPP loan interest income totaled $1.8 million compared to $11.2 million, which was a decrease of $9.4 million or 84%.
• Total interest income on a tax-equivalent basis (non-GAAP) was $154.9 million, which was an increase of $5.0 million or 3% from $149.8 million.
• Average earning assets increased $1.17 billion or 7% to $17.99 billion compared to $16.82 billion.
• The average rate on earning assets decreased 12 basis points to 3.45% compared to 3.57%, which was primarily due to a shift in earning asset mix. Total average securities were 41% of total average earning assets compared to 39%.

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

• Total interest expense was $10.4 million, an increase of $3.6 million or 52% from $6.9 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 0.36% compared to 0.28%.
• Average interest bearing deposits increased $1.68 billion or 18% to $11.08 billion from $9.41 billion.
• The average interest rate paid on interest bearing deposits increased 8 basis points to 0.24% compared to 0.16%.
• Average borrowings increased $25.2 million or 5% to $491.1 million from $465.9 million, and the average interest rate paid on borrowings was 3.18% compared to 2.65%.
  

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

• Net interest income totaled $142.5 million compared to $141.2 million, which was an increase of $1.2 million or 1%. PPP loan interest income totaled $1.8 million compared to $11.2 million, which was a decrease of $9.4 million or 84%.
• Net interest income on a tax-equivalent basis (non-GAAP) totaled $144.4 million compared to $143.0 million, which was an increase of $1.5 million or 1%.

Noninterest Income and Noninterest Expense

Total noninterest income was $34.5 million during the second quarter of 2022 compared to $33.2 million during the second quarter of 2021, an increase of $1.4 million or 4%. Significant changes within the noninterest income category for the second quarter of 2022 compared to the second quarter of 2021 were:

• Service charges and fees increased $2.9 million or 19% to $18.1 million from $15.1 million. Credit card revenue was $5.8 million compared to $4.3 million, which was an increase of $1.5 million or 35%.
• Net security losses totaled $2.1 million compared to net gains of $2.8 million.
• Net gains on sales of loans held for sale totaled $2.9 million compared to $4.8 million, which was a decrease of $1.9 million or 39% and was primarily attributable to a decrease of loans sold to the secondary market.
• Other noninterest income totaled $7.9 million compared to $2.2 million, which was an increase of $5.7 million. The following items impacted other noninterest income for the second quarter of 2022 compared to the second quarter of 2021:
  • Commercial swap fees and syndication income totaled $4.9 million compared to $193,000.
  • Gains on the sale of VISA B shares totaled $1.9 million compared to $0.

Total noninterest expense was $106.5 million during the second quarter of 2022 compared to $103.4 million during the second quarter of 2021, which was an increase of $3.1 million or 3%. Significant changes within the noninterest expense category for the second quarter of 2022 compared to the second quarter of 2021 were:

• Salaries and employee benefits totaled $64.0 million compared to $57.3 million, which was an increase of $6.7 million or 12%. The increase was primarily attributable to higher salary expenses due to inflationary wage pressures and increased health care expenses due to normalized health care usage.
• Net gains on sales/valuations of assets totaled $3.2 million compared to net losses of $183,000, and the change was primarily attributable to a gain of $3.0 million associated with the sale of two branches in Illinois and a gain of $413,000 associated with the sale of an insurance subsidiary.
• Acquisition, integration and restructuring costs totaled $2.4 million compared to $210,000, an increase of $2.2 million due to the progression of the charter consolidation project.
  

The effective tax rate was 22.89% for the second quarter of 2022 compared to 21.11% for the second quarter of 2021. The following items impacted the second quarter 2022 and 2021 tax calculations:

• Solar energy tax credits of $702,000 compared to $1.3 million.
• Federal low-income housing tax credits of $135,000 in each quarterly calculation.
• New markets tax credits of $75,000 in each quarterly calculation.
• Historic rehabilitation tax credits of $63,000 compared to $123,000.
• Tax-exempt interest income as a percentage of pre-tax income of 11.05% compared to 8.49%.
• Tax expense of $43,000 compared to a tax benefit of $150,000 resulting from the vesting of restricted stock units.

Total Assets, Total Loans and Total Deposits

Total assets were $19.66 billion at June 30, 2022, an increase of $383.9 million or 2% from $19.27 billion at year-end 2021. Securities represented 37% and 40% of total assets at June 30, 2022, and December 31, 2021, respectively.

Total loans held to maturity were $10.68 billion at June 30, 2022, compared to $9.95 billion at December 31, 2021, which was an increase of $723.6 million or 7%. Excluding total PPP loans, loans increased $551.9 million or 5% since March 31, 2022 and $900.5 million or 9% since December 31, 2021.

Significant changes by loan category at June 30, 2022 compared to March 31, 2022 included:

• Commercial and business lending, which includes commercial and industrial, PPP and owner occupied commercial real estate loans, increased $210.7 million or 4% to $5.37 billion compared to $5.15 billion.
  • PPP loans originated in 2020 ("PPP I") decreased $2.9 million or 51%. PPP loans originated in 2021 ("PPP II") decreased $48.1 million or 70%.
  • Excluding total PPP loans, commercial and business lending increased $261.8 million or 5% to $5.34 billion from $5.08 billion.
• Commercial real estate lending, which includes non-owner occupied commercial real estate and construction loans, increased $162.5 million or 5% to $3.17 billion compared to $3.00 billion.
• Agricultural and agricultural real estate loans increased $70.3 million or 9% to $836.7 million compared to $766.4 million.
• Consumer loans increased $37.3 million or 9% to $464.1 million from $426.8 million.

Significant changes by loan category at June 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 $280.1 million or 6% to $5.37 billion compared to $5.09 billion.
  • PPP I loans decreased $24.3 million or 90%. PPP II loans decreased $152.5 million or 88%.
  • Excluding total PPP loans, commercial and business lending increased $456.9 million or 9% to $5.34 billion from $4.89 billion.
• Commercial real estate lending, which includes non-owner occupied commercial real estate and construction loans, increased $300.1 million or 10% to $3.17 billion compared to $2.87 billion.
• Agricultural and agricultural real estate loans increased $83.0 million or 11% to $836.7 million compared to $753.8 million.
• Consumer loans increased $44.6 million or 11% to $464.1 million from $419.5 million.

Total deposits were $17.23 billion as of June 30, 2022, compared to $16.42 billion at December 31, 2021. Significant deposit changes by category at June 30, 2022 compared to December 31, 2021 included:

• Demand deposits decreased $408.0 million or 6% to $6.09 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 second quarter of 2022 was $1.5 million, which was an increase of $8.0 million from a provision benefit of $6.5 million recorded in the second quarter of 2021. The provision expense for the second quarter of 2022 compared to the second quarter of 2021 was impacted by several factors, including:

• loan growth exclusive of PPP loans totaling $551.9 million compared to $287.7 million,
• decrease in nonperforming loans of $22.4 million to $63.0 million or 0.59% of total loans compared to $85.4 million or 0.85% of total loans at June 30, 2021,
• nonpass loans declined to 5.8% of total loans compared to 10.4% of total loans at June 30, 2021, and
• loans delinquent 30-89 days as a percent of total loans fell to 0.06% compared to 0.17% at June 30, 2021.

The allowance for credit losses for loans totaled $101.4 million and $110.1 million at June 30, 2022, and December 31, 2021, respectively. The following items impacted the allowance for credit losses for loans for the six months ended June 30, 2022:

• Provision expense for the six months ended June 30, 2022, totaled $4.2 million.
• Net charge offs of $12.9 million were recorded for the first six months of 2022.

Provision and Allowance for Credit Losses for Unfunded Commitments
The allowance for unfunded commitments totaled $17.8 million at June 30, 2022, which was an increase of $2.3 million from $15.5 million at December 31, 2021. Unfunded commitments increased $628.7 million to $4.46 billion at June 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 $3.2 million for the second quarter of 2022 compared to provision benefit of $7.1 million for the second quarter of 2021. The total allowance for lending related credit losses was $119.1 million or 1.12% of total loans at June 30, 2022, compared to $125.6 million or 1.26% of total loans as of December 31, 2021.

Nonperforming Assets

Nonperforming assets decreased $4.4 million or 6% to $67.5 million or 0.34% of total assets at June 30, 2022, compared to $71.9 million or 0.37% of total assets at December 31, 2021. Nonperforming loans were $63.0 million or 0.59% of total loans at June 30, 2022, compared to $69.9 million or 0.70% of total loans at December 31, 2021. At June 30, 2022, loans delinquent 30-89 days were 0.06% 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.

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 July 23, 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 $19.66 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) contains, 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-