Heartland Financial USA, Inc.

Greetings and welcome to HTLF's 2023 second quarter conference call. This afternoon, HTLF announced its second quarter financial results and hopefully you've had a chance to review the earnings release that is available on HTLF's website at htlf.com. With us today from management are Bruce Lee, President and CEO, Brian McCaig, Chief Financial Officer, and Nathan Jones, 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 Our forward-looking statements and actual results could differ materially from those projected. Additional 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's websites. I will now turn the call over to Mr. Bruce Lee, HTLF President and CEO. Please go ahead, Mr. Lee.

Thank you, Abigail. Good afternoon, everyone. This is Bruce Lee, President and CEO. Welcome to HTLF's 2023 Second Quarter Earnings Conference Call. I appreciate you joining us today as we discuss our solid performance and momentum heading into the second half of the year. For the next few minutes, I'll discuss HTLF's highlights for the quarter, then turn the call over to Brian McKegg, Chief Financial Officer, for more details on our performance financials also joining us today is Nathan Jones chief credit officer who can answer questions regarding the stable credit quality across our portfolios the HTLF Board of Directors approved a quarterly cash dividend of 30 cents per share on the company's common stock payable on August 25th 2023 the board also approved a dividend of of $175 for Series E preferred stock, which results in a dividend of 43.75 cents per depository share, payable on October 16th, 2023. For more than 40 years, HTLF has increased or maintained our common stock dividend each quarter. This reflects our strength and stability and confidence in our strategies and performance. In the second quarter, HTLF's strength and diverse geography enabled us to continue executing our strategies despite recent industry challenges. We delivered strong loan growth and new customer relationships, and our stable deposit base and growth strategies give us momentum heading into the second half of the year. For the quarter, net income available to common stockholders was $47.4 million in EPS of $1.11. These numbers were negatively impacted by two items, a charge-off of $5.3 million related to a previously disclosed overdraft the result of a fraud incident impacting the account of a single long-time customer, and $1.5 million of premium write-offs related to an unusually high level of purchased SBA loan payoffs that were processed during the quarter. These were partially offset by the $4.3 million gain from the sale and transfer of the recordkeeping and administration services component of our retirement business to July business services. We view these as notable items this quarter. Together, they decreased pre-tax income by $2.5 million and EPS by 5 cents. Our growth strategies are delivering results. In the second quarter, HTLF added new customers, delivered solid loan growth, and significantly increased fee income. From the linked quarter, we added 1,300 net new commercial accounts and more than 1,400 net new consumer accounts. Commercial and ag loans grew 224 million, or 2%, and loan yields increased 44 basis points on newly originated loans. Service charges and fees increased 2.5 million, or 15%, including an annual Visa incentive of $1.6 million, and capital markets fees increased $1.6 million, or 65%. Customer deposits were flat, and expenses were slightly elevated, including a $1.1 million increase in advertising spending. We continued to strengthen our balance sheet, and increased borrowing capacity by more than $500 million to a total of $3.3 billion, with less than $1 million outstanding. Our capital ratios, including all unrealized gains and losses as of June 30th, exceeded all well-capitalized regulatory ratios. Brian will go into more details. Let's start with deposits. HTLF's banks have a diverse and granular deposit base. As a result of our strategic diversification, our customer deposits are diversified by both geography and industry, with no industry concentration higher than 10% across our portfolios. Overall, total deposits for the quarter were flat from the linked quarter at $17.7 billion. and 66% of total balances are insured or collateralized. Total customer deposits were also flat from the linked quarter. While we maintain a favorable deposit mix, customer demand accounts decreased from 35% to 34%, which reflects the ongoing transition to interest-bearing accounts. We've launched a commercial deposit campaign with enhanced customer outreach and product offerings in small business and commercial. The campaign drove new commercial deposit balances in the second quarter, and positive trends have continued in July. With increased marketing spend resulting in additional customer contact and accounts open, We've also continued our consumer deposit campaign that launched late in the first quarter. Turning to loans, in the second quarter, we saw continued strength across our commercial loan portfolios. From the linked quarter, commercial and industrial increased 92 million, or 3%. Owner-occupied real estate increased 86 million, or 4%. Non-owner-occupied real estate increased $109 million, or 5%. Construction decreased $89 million, or 8%. And our ag portfolio increased $30 million, or 4%. In total, commercial and ag loans grew $224 million, an increase of 2% from the linked quarter and in line with our guidance. 58% of loan production was commercial and industrial and owner-occupied real estate. We delivered loan production across all of our regions with particular strength in the West, Mountain West, and Southwest. In the second quarter, we added more than 300 new commercial relationships, representing $214 million in funded loans, and $48 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 81% of these loans have variable rate structures, an increase from 75% in the first quarter. Our commercial pipeline remains strong at over $1 billion, with 60% in commercial and industrial and owner-occupied real estate. Loans are distributed across all regions. Our consumer loan portfolio increased $11 million, or 2%, from the linked quarter, while residential mortgage decreased 13 million, or 2%. We expect total loan growth of 150 to $200 million in the third quarter, which we expect to substantially fund through customer deposit growth. Turning to key credit metrics, our disciplined credit approach is delivering stable credit quality across our portfolios. Delinquency ratio remains low at 12 basis points. Non-performing assets as a percentage of total assets remains flat at 33 basis points. Non-pass-rated loans increased slightly from the linked quarter to 4.8%. And excluding the previously disclosed $5.3 million overdraft, remaining net charge-offs were $4 million. most of which had been previously reserved in the prior quarters. Market conditions have been applying additional pressure on the commercial real estate office market across the country. We feel good that our office exposure is 3.5% of our total portfolio. We continue to place emphasis on targeted reviews of our portfolios and recently conducted in-depth reviews of each office credit over $1 million. We believe our portfolio is well constructed, granular, and generally situated outside of central business districts. We continue to enhance our ongoing portfolio management and surveillance and refine how we screen new opportunities for underwriting. For more on our CRE office exposure, please see page 21 in the investor deck. HTLF is executing our strategies and delivering new customers, new deposit relationships, strong loan growth, increased fee income, stable credit quality, and we're driving long-term efficiency. Bank charter consolidation continues on budget and on schedule. We started at the beginning of 2021, and we expect to finish early in the fourth quarter. We've successfully consolidated nine of our 11 banks to date, demonstrating we can consolidate charters to drive greater internal efficiency while delivering external growth. We also enhanced the products and services offered by our retirement plan services business through our partnership with July Business Services. HTLF sold the recordkeeping and administration services business to July and retained investment management oversight and participant education and support business. The transaction was completed and record keeping services were transitioned in the second quarter. Both firms are stronger together as July's technology enhances the customer experience. Our strategies and accomplishments continue to be recognized locally and nationally Nielsen Report ranked HTLF among the top US commercial credit card issuers for the eighth year in a row. We continue to demonstrate consistent strength in the commercial payment space as HTLF saw a 30% increase in purchase volume growth in 2022. Last year, HTLF surpassed $1 billion in annual purchase volume as a commercial credit card issuer, and we continue to be one of the fastest growing Visa commercial card issuers. HTLF earns this recognition each year through our employees' dedication and commitment to serving our customers, communities, shareholders, and each other. We consistently deliver strength, insight and growth during good and challenging times. Together, we are HTLF. I'll now turn the call over to Brian McKay, Chief Financial Officer, for more details on our performance and financials.

Thanks, Bruce, and good afternoon. As Bruce described, we continued to move forward in a challenging environment this quarter. reporting earnings per share of $1.11, loan growth of over $220 million, and a stable, albeit more costly, deposit base. In addition to the items Bruce mentioned in his comments, I would mention two other items this quarter, the Charter Consolidation Restruction Cost of $1.9 million and the $300,000 of loss on sales securities. Before I go into more detail, I want to remind everyone that our second quarter earnings release and investor presentation are both available in the IR section of HTLF's website. I'll start my comments with the provision for credit losses, which totaled $5.4 million, or $2.3 million higher than last quarter. This quarter, the provision, consistent with last quarter, incorporates an economic outlook that anticipates a moderate recession developing over the next 12 months. Net charge-offs increased this quarter to $9.3 million, $5.3 million of which is related to the previously mentioned customer overdraft and directly impacted the provision. Most of the remaining $4 million had previously been reserved for in prior quarters and as such did not impact the provision. At the end of the quarter, Total allowance for lending-related credit losses, which includes both the allowance for credit losses on loans and unfunded commitments, decreased $4 million to $129.8 million, or 1.1% of total loans, compared to 1.16 last quarter. Moving to the balance sheet, Bruce already discussed loans and deposits, so I'll start with investments. Investments declined almost $300 million to $6.7 billion, representing 33% of assets, with a tax equivalent yield of 3.87%, and will generate cash flows of nearly $1.3 billion over the next 12 months, with approximately $250 million next quarter. The unrealized loss on the AFS portfolio worsened by $43 million this quarter to $618 million. Our relatively small HTM portfolio of $835 million or 12% of investments has an unrecorded negative fair value mark of $28 million. We utilized nearly $250 million of cash flow this quarter from the investment portfolio to fund loan growth and pay down borrowings. Moving on to borrowings. Total borrowings declined $48 million to $417 million, or 2.1% of total assets. The reduction was primarily in customer repos, and we had less than $1 million of Fed advances outstanding at quarter end. To summarize our liquidity profile at quarter end, we have $1.3 billion of cash flow coming off our securities portfolio over the next 12 months, with $250 million next quarter. We have a low level of outstanding borrowings and $3.3 billion of available capacity at the Fed and FHLB. We have several Fed fund borrowing lines and broker deposit sources that remain open and available. Our customer deposit base is granular and well diversified, with over 66% of balances either secured or collateralized. Our loan-to-deposit ratio is 66%, And when removing wholesale deposits, it remains low at 80%. We have cash and unpledged available securities totaling over $4.1 billion. And lastly, the holding company cash position stands at $268 million, or 3.5 times our current annualized interest and dividend payments. In addition, our dividend payout rate is relatively low at 27% of current EPS. With regards to capital, regulatory capital ratios remain strong with common equity tier one at just over 11.3% and total risk-based capital of nearly 15%. Adjusted for unrealized losses on our investments, the ratios remain above well-capitalized level at approximately 7.4% and 11%. The tangible common equity ratio increased 14 basis points to 5.86% at quarter end. The decline in market values of investments was partially offset by an increase in fair value swaps this quarter, resulting in a net decrease of six basis points from accumulated other comprehensive income, or AOCI. Moving to the income statement, starting with revenue, Net interest income totaled $147.1 million this quarter, which was $5.1 million lower than the prior quarter. And the net interest margin on a tax equivalent basis fell 16 basis points this quarter to 3.24%. The main drivers of the decrease were $1.5 million of premium write-offs related to a higher level of purchased SBA loan payoffs that were received and processed during the quarter which reduced NIM net interest margin by three basis points, and a continued shift in deposit balances from lower costing non-maturity deposits to much higher costing time deposits reduced net interest income by nearly $2.5 million and decreased net interest margin by five basis points. Non-interest income of $32.5 million this quarter was up $2.5 million from the prior quarter. Excluding security losses, core non-interest income was up 1.9 million to 3.8 million, which exceeded our expectation of 30 to 31 million. Strong capital markets fees were primarily the driver again this quarter. Shifting to expenses, non-interest expenses totaled 109.5 million this quarter. That's down 1.6 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 110.8 million, coming in higher than our forecasted 108 to 109 million. The increase was driven by $1.1 million higher deposit-related advertising costs and a $2.4 million increase in professional fees due to several items, most notably higher legal costs for credit issues and an increased consulting activity level compared to last quarter. Looking ahead to the rest of 2023, HTLF expects to see loan growth of $150 to $200 million, or 2% per quarter, and consumer and customer deposit growth of $100 to $150 million, or 1% per quarter. Achieving these loan and deposit growth expectations would enable the bulk of investment cash flows to be available to decrease wholesale deposits. The net interest margin is expected to stabilize near our June run rate in the low to mid 320s on a tax equivalent basis. Provisions for credit losses are projected to range from $3 to $5 million per quarter. Obviously, any declines in market conditions and projections could impact future provisions if a worse than moderate recession develops or credit quality metrics decline significantly. Core net interest in non-interest income that is excluding investment gains and losses is expected to be 31 to 32 million per quarter. Recurring operating expenses are expected to be in the 109 to 110 million range per quarter. Our charter consolidation restructuring costs are forecasted to be between $2.5 and $3 million per quarter for the next two quarters. And finally, we believe a tax rate in the 23% to 24% range, excluding new tax credits, is a reasonable run rate. And with that, I'll turn the call over to Bruce.