Heartland Financial USA, Inc.

Greetings and welcome to HTLF's 2022 fourth quarter conference call. This afternoon, HTLF announced its fourth quarter earnings and hopefully you had a chance to review the results. The earnings release is available on HTLF's website at htlf.com. With us today for management are Bruce Lee, President and CEO, Brian McKay, Executive Vice President and Chief Financial Officer, and Nathan Jones, Executive Vice President and Chief Credit Officer. Management will provide a summary of the quarter and then we will open the call to your questions. Before we begin the presentation, I would like to remind everyone that some of the information provided today falls under the guidelines of forward-looking statements as defined by the Securities and Exchange Commission. As part of these guidelines, any statements made during this presentation concerning the company's hopes, beliefs, expectations, and predictions of the future or forward-looking statements and actual results could differ materially from those projected. Additionally, information on these factors is included from time to time in the company's 10-K and 10-Q filings, which may be obtained on the company's or the SEC website. I will now turn the call over to Mr. Bruce Lee, HTLF President and CEO. Sir, you may begin.

Thank you, Tawanda. Good afternoon, everyone. This is Bruce Lee, President and CEO. Welcome to HTLF's 2022 Fourth Quarter Earnings Conference Call. I appreciate you joining us today as we discuss our continued strong performance in ongoing momentum. For the next few minutes, I'll discuss HTLF's highlights for the fourth quarter and year, then turn the call over to Brian McCaig, Chief Financial Officer, for more on our results. Also joining us today is Nathan Jones, Chief Credit Officer, who can answer questions regarding the excellent credit quality across our portfolios. HTLF had tremendous success and significant growth in 2022. We are driving momentum, executing our strategy, and delivering strong results that exceed expectations. This month, our Board of Directors approved a record quarterly cash dividend of $0.30 per share on the company's common stock, a 7% increase from the previous quarter. The dividend is payable on February 28, 2023. This increase reflects our strong performance for the quarter and year and our confidence in our strategies and ongoing results. In 2022, revenue was a record $726 million, an increase of $37 million or 5% for the year. Total revenue increased $10 million or 5% from the linked quarter. For the year, we delivered net income available to common stockholders of $204.1 million and EPS of $4.79. For the quarter, net income available to common stockholders was $58.6 million and EPS of $1.37. For the quarter, we saw notable expansion of our net interest margin on a tax equivalent basis, rising 20 basis points to 3.65%. Our efficiency ratio decreased 15% from a year ago to 54.33%. For the year, we reduced our number of employees by 11%. We're driving efficiency while investing for growth. And total assets grew to a record $20.2 billion up $970 million, or 5%, from a year ago. Assets increased $561 million, or 3%, from the linked quarter. Asset growth was driven by strong momentum in commercial and consumer loans, and we continue to see growth in deposits and service fees. Let's start with loan growth highlights. In 2022, we saw a tremendous loan growth of $1.6 billion, or 17%, excluding PPP, across our portfolios. In the fourth quarter, loans grew $505 million, an increase of 5% from the linked quarter and greatly exceeding our guidance for the quarter. This includes approximately $105 million in increased credit line utilization, primarily in agribusiness, and approximately $100 million of loan growth, which we previously expected to close in the first quarter. This was an exceptional quarter, and our commercial loan pipeline remained strong at over $1 billion. We expect total loan growth of $150 to $200 million in the first quarter. In the fourth quarter, we saw significant strength across our commercial portfolios. From the linked quarter, commercial and industrial increased 185 million, or 6%. Owner-occupied real estate decreased 20 million, or 1%. Non-owner-occupied real estate increased 111 million, or 5%. Construction increased 80 million, or 8%. in our ag portfolio increased 139 million or 18%. Seasonal line utilizations were up and we expect this to normalize in the first quarter. For more on line utilization, please see page 24 in the investor deck. In the fourth quarter, we saw commercial loan growth in eight of our 11 bank markets. we added 303 new commercial relationships representing $296 million in funded loans and $229 million of new deposits. On average, new originations were of higher credit quality than the overall portfolio as measured by risk ratings and credit scores. And 79% of these loans have variable rate structures compared to 69 percent last quarter. The depth and breadth of our products and services is expanding relationships and developing new ones. We have made strategic investments in specialized industry verticals and capital markets expertise, including loan syndications, interest rate derivatives, trade finance, and foreign exchange. and were driving business in fee generating products. Service charges and fees increased 2.1 million or 14% for the year and 1% for the quarter, driven primarily by our growing credit card business. In 2022, HTLF reached a significant milestone, surpassing $1 billion in purchase volume as a commercial card issuer. HTLF continues to be one of the fastest-growing Visa commercial card issuers. For more on the growth of our commercial non-interest income, please see page 20 in the investor deck. Our consumer loan portfolio saw significant growth in 2022, increasing $87 million, or 21%. Consumer loans grew $11 million, or 2%, from the linked quarter. residential mortgage increased 24 million or 3% for the year and was flat from the linked quarter. Turning to deposits, non-time deposits increased 302 million or 2% for the year. Non-time deposits decreased 448 million or 3% from the linked quarter, mostly due to balance declines that occurred in our commercial operational accounts for seasonal needs and year-end distributions and not as a result of account attrition. We expect these account balances to rebuild over time. Time deposits increased 793 million or 77% for the year and 694 million or 62% from the linked quarter. The increase in time deposits for both the year and the quarter was primarily driven by an increase in wholesale time deposits. Overall, total deposits grew to a record $17.5 billion, an increase of $1.1 billion or 7% for the year and $245 million from the linked quarter. We maintain our favorable deposit mix 90% of deposits are in non-time accounts. 36% of total deposits are in non-interest-bearing accounts. And our deposit pricing strategy continues to serve us well. In the fourth quarter, core deposit costs were 44 basis points and total deposit costs 74 basis points. For detail on our deposit beta, please see page 23 of the investor deck. Turning to key credit metrics, our disciplined credit approach is delivering excellent credit quality across our portfolios. Delinquency ratio is at a historic low of four basis points. Non-performing loans represented 51 basis points of total loans. Non-performing assets as a percentage of total assets remained low at 33 basis points. Non-pass rated loans decreased to 44.7% from 5.3% in the linked quarter. Lastly, in the fourth quarter, we had net loan recoveries of 1.7 million. We continue to take a conservative credit approach given concerns around the current economic environment. Despite some headwinds, we've sustained momentum, we're executing our strategies, and we're delivering record revenue, record organic loan growth, record customer acquisition, improved credit quality, expanded net interest margin, and a lower efficiency ratio. We're doing all this while consolidating our bank charters. In 2022, we successfully executed five bank charter consolidations, with our banks in Arizona, California, Colorado, Illinois, and Minnesota becoming divisions of HTLF Bank. Transitions have been smooth, and the project continues on schedule and on budget. We expect to finish charter consolidation early in the fourth quarter of 2023 and deliver $20 million of annual savings and capacity after the project is complete. Brian will share more details in his comments. We also continue to optimize our branch network. In 2022, we reduced our number of total branches by 8% to 119 total locations. In alignment with HTLF Bank's Colorado charter, as of January 1st, HTLF's corporate headquarters is now in Denver. Geographic diversity is a strength of HTLF. We have 11 markets in 12 states, with Denver as our largest market. HTLF's corporate headquarters in Denver reinforces our presence in and commitment to growth markets. We are committed to our strong and sizable presence in Dubuque, Iowa, where 17% of our employees are located. HTLF operational and administrative functions will continue to be largely staffed and run from Dubuque. As I look back on 2022, it was a year of significant growth and tremendous accomplishment for HTLF. We continue to execute our strategies, grow our business, operate more efficiently, deliver strong results, and most importantly, serve our customers and communities. This is all the result of the hard work and dedication of HTLF's employees. I want to recognize and thank them for their continued commitment to delivering strength, insight, and growth to our customers, communities, investors, and each other. We move forward together because together we are HTLF. I'll now turn the call over to Brian McKegg, Chief Financial Officer, for more details on our performance and financials.

Thanks, Bruce, and good afternoon. As Bruce just outlined, this was another strong quarter for HTLF with earnings per share of $1.37, loan growth of just over $500 million, revenue growth this quarter of over $10 million, and stable, clean credit performance. Included in this quarter's results were three large notable items. First, $2.4 million of losses on the sale or write-down of assets, which were primarily facilities related. Second, charter consolidation restructure costs, $2.4 million. And third, shareholder dispute resolution costs of over $1 million. Together, these items decreased pre-tax net income by more than $5.8 million and earnings per share by $0.11. Before I go into more detail, I want to remind everyone that our fourth quarter earnings release and investor presentations are both available in the IR section of HTLF's website. So I'll start my comments with the provision for credit losses, which totaled $3.4 million. That's a $2.1 million decrease over last quarter. This quarter, the provision reflects our strong loan growth, continued stable, healthy credit performance, and an economic outlook that anticipates a moderate recession developing over the next 12 months. In addition, the provision benefited from $1.7 million of net loan loss recoveries. At quarter end, the allowance for related for lending-related credit losses, which includes both the allowance for credit losses on loans and unfunded commitments, increased $5.1 million to $129.7 million, or 1.13% of total loans. In addition, at quarter end, unamortized purchase loan valuations on the balance sheet totaled just over $10 million, or nine basis points of loans. Moving to investments. Investments remain flat at $7 billion, representing 35% of assets with a tax equivalent yield of 3.45%, and will generate cash flows exceeding $1 billion over the next 12 months. We continued to actively manage the portfolio by taking several actions during the quarter. First, we utilized nearly $65 million of cash flow this quarter to fund loan growth, and second, We took advantage of some mid-quarter market disruption and reinvested $115 million of cash flow into a AAA-rated security with a purchase yield of nearly 9% and a duration of less than a year. With regards to capital, regulatory capital ratios remain strong with common equity tier one at just over 11% and total risk-based just over 14.75%. The tangible common equity ratio reversed a several-quarter decline, increasing 27 basis points to 5.21 percent at quarter end. The rise in market value of investments this quarter contributed 15 basis points of the increase. Moving to the income statement, starting with revenue, net interest income totaled $165.2 million this quarter, which was $9.3 million higher than the prior quarter. And the net interest margin on a tax-equivalent basis rose 20 basis points this quarter to 3.65%. The main drivers of the increase are strong loan growth, an asset-sensitive balance sheet, and the Fed's short-term interest rate increases. This quarter, the net interest margin includes three basis points of purchase accounting accretion, which is unchanged from the prior quarter. Non-interest income of $30 million this quarter was $800,000 higher than the prior quarter. Excluding security losses, core non-interest income was $30.1 million, which was at the high end of our $29 to $30 million forecast. So in total, quarterly revenue grew $10 million, or 5%, and exceeded expectations. Shifting to expenses. Non-interest expense totaled $117.2 million this quarter. That's up $8.3 million from last quarter. Excluding restructuring, tax credit costs, and asset gains and losses, the run rate of recurring operating expenses increased $3.1 million to $109.1 million compared to $106 million last quarter and exceeded our forecast of $105 to $106 million. Operating expenses were higher than anticipated in Q4, primarily due to legal and other cost reimbursements related to the resolution of a shareholder group dispute and higher incentive compensation accruals due to stronger than expected quarterly revenue and loan growth. As a result of the strong revenue growth this quarter, the fourth quarter efficiency ratio improved to 54.33% from 55.26% last quarter. Now looking ahead to 2023, HTLF expects to see continued success and improvement, highlighted by expected loan growth of 6% to 8% next year, with $150 to $200 million expected next quarter. Deposit growth is expected to be 3% to 5% next year, with Q1 expected to show nominal growth. Investment cash flow will be utilized to fund the gap between loan growth and deposit growth. Net interest income for Q1 will be down versus Q4 due to two fewer days in the quarter. Full year, net interest income will be much higher than 2022. That reflects our higher net interest margin and larger balance sheet. However, the magnitude of the increase will be dependent upon future Fed rate moves and deposit pricing, which are difficult to predict at this time. Provision for credit losses are projected to range from $4 to $6 million per quarter given projected loan growth and assuming credit trends begin to normalize from their current levels. However, declines in economic conditions and projections could significantly impact future provisions if a worse than moderate recession develops. Corn on interest income, that is excluding investment gains and losses, is expected to be $28 to $29 million next quarter and is projected to raise 4% to 5% on a full year basis as persistently weaker mortgage revenue is offset by growth in other income categories, primarily commercial fees. Recurring operating expenses are expected to be $108 to $109 million next quarter and show a 2% to 3% increase on a full year basis. This includes the impact of an increase in FDIC costs of $3 to $4 million for the full year. Charter consolidation restructuring costs are expected to be $2 to $2.5 million next quarter. In total, we estimate the remaining cost to complete the project will approach $10 million over the next four quarters. And finally, we believe a tax rate of 22 to 23%, excluding new tax credits, is a reasonable run rate. So with that, I'll turn the call back over to Bruce for questions and answers.