Whitehall, OH – July 24, 2023 – Heartland BancCorp (“Heartland” and “the Company”) (OTCQX: HLAN), parent company of Heartland Bank (“Bank”), today reported net income increased 23.1% to $4.8 million, or $2.39 per diluted share, in the second quarter of 2023, compared to $3.9 million, or $1.94 per diluted share, in the second quarter of 2022, and increased 8.9% compared to $4.5 million, or $2.19 per diluted share, in the preceding quarter.  In the first six months of 2023, net income increased 16.6% to $9.3 million, or $4.58 per diluted share, compared to $8.0 million, or $3.93 per diluted share, in the first six months of 2022.

The company also announced that its board of directors declared a quarterly cash dividend of $0.759 per share.  The dividend will be payable October 10, 2023, to shareholders of record as of September 25, 2023.  Heartland has paid regular quarterly cash dividends since 1993.  

“Our second quarter and year to date operating results were solid, highlighted by higher operating income, stable balance sheet growth and pristine credit quality,” stated G. Scott McComb, Chairman, President and Chief Executive Officer.  “Due to the current rate environment, we made changes at the beginning of the second quarter to pull back the growth rate of loans to an annualized target range between 8-12%.  While implementing this strategy, we remained selective on the loans we added during the quarter, as well as adhering to disciplined loan pricing.  The result was more muted loan growth during the quarter of 2.5%, or 10% annualized, and new loans had an average rate of 7.59%, up approximately 70 basis points from the prior quarter.  Additionally, we continue to focus on building out the Cincinnati market that we entered just a year ago.  Our brand of community banking is gaining momentum in Cincinnati, just as it’s been in all the markets that we serve.  We will continue to look for ways to come out ahead as we navigate through this challenging operating environment.”

Second Quarter 2023 Financial Highlights (at or for the three months ended June 30, 2023)

• Net income was $4.8 million, or $2.39 per diluted share, compared to $3.9 million, or $1.94 per diluted share, in the second quarter of 2022.
• Provision for credit losses was $800,000, compared to $480,000 for the second quarter a year ago.
• Net interest margin was 3.61%, compared to 3.87% in the preceding quarter and 3.92% in the second quarter a year ago.
• Second quarter revenues (net interest income plus noninterest income) increased 13.9% to $18.4 million, compared to $16.2 million in the second quarter a year ago.
• Annualized return on average assets was 1.10%, unchanged compared to the second quarter of 2022.
• Annualized return on average tangible common equity was 14.19%, compared to 11.97% in the second quarter a year ago.
• Net loans increased $36.1 million during the quarter, or 2.5%, to $1.49 billion at June 30, 2023, compared to $1.45 billion three months earlier.
• Total deposits decreased $9.9 million during the quarter, or less than 1%, to $1.56 billion at June 30, 2023, compared to $1.57 billion three months earlier.  
• Credit quality remains pristine, with nonperforming loans to gross loans of 0.14% and nonperforming assets to total assets of 0.12%, at June 30, 2023.
• Tangible book value was $68.54 per share, compared to $64.06 per share a year ago.
• Declared a quarterly cash dividend of $0.759 per share.

Liquidity

Heartland had ample sources of available liquidity as of June 30, 2023, including a $220 million line of credit at the FHLB, as well as additional credit lines of $85 million.  Nearly 68% of Heartland’s client deposit balances were FDIC insured or collateralized as of June 30, 2023.

Balance Sheet Review

Assets

Total assets increased 20.7% to $1.81 billion at June 30, 2023, compared to $1.50 billion a year earlier, and increased 2.3% compared to $1.77 billion three months earlier.  Heartland’s loan-to-deposit ratio was 95.5% at June 30, 2023, compared to 92.6% at March 31, 2023, and 91.8% at June 30, 2022.

Interest bearing deposits in other banks was $20.0 million at June 30, 2023, compared to $35.6 million a year earlier and $37.3 million three months earlier.

Average earning assets increased to $1.67 billion in the second quarter of 2023, compared to $1.61 billion in the first quarter of 2023, and $1.35 billion in the second quarter a year ago.  The average yield on interest-earning assets was 5.39% in the second quarter of 2023, up 21 basis points from 5.18% in the preceding quarter, and up 122 basis points from 4.17% in the second quarter a year ago.

Loan Portfolio

“Loan growth was strong during the quarter, increasing 2.5%, over the prior quarter end, or 10% annualized, with good activity in most loan segments,” said Ben Babcanec, EVP and Chief Operating Officer.  “We continue to moderate the growth rate of loans through remaining very disciplined with loan pricing.”

Net loans were $1.49 billion at June 30, 2023, which was a 2.5% increase compared to $1.45 billion at March 31, 2023, and a 24.5% increase compared to $1.20 billion at June 30, 2022.  Commercial loans increased 32.0% from year ago levels to $177.0 million, and comprise 11.8% of the total loan portfolio at June 30, 2023.  Owner occupied commercial real estate loans (CRE) decreased 10.8% to $273.5 million at June 30, 2023, compared to a year ago, and comprise 18.2% of the total loan portfolio.  Non-owner occupied CRE loans increased 41.5% to $490.9 million, compared to a year ago, and comprise 32.6% of the total loan portfolio at June 30, 2023.  1-4 family residential real estate loans increased 33.8% from year ago levels to $495.6 million and represent 32.9% of total loans.  Home equity loans increased 28.6% from year ago levels to $48.5 million and represent 3.2% of total loans, while consumer loans increased 29.4% from year ago levels to $19.8 million and represent 1.3% of the total loan portfolio at June 30, 2023.

Deposits

Total deposits were $1.56 billion at June 30, 2023, a modest decrease compared to $1.57 billion at March 31, 2023, and a $255.8 million, or 19.6% increase, compared to $1.30 billion at June 30, 2022.  “Total deposit balances contracted modestly during the second quarter due to a surge of deposit gathering near the end of the first quarter of 2023. However, average deposits increased $65.7 million to $1.55 billion in the second quarter of 2023 compared to the preceding quarter, with the growth primarily in money market and CD accounts,” said Babcanec.  “While we are able to maintain strong deposit balances, some of the DDA runoff during the quarter was due to more insurance-sensitive clients reallocating some DDA balances to insured deposit products as well as rate sensitive clients reallocating to interest bearing accounts.”  At June 30, 2023, noninterest bearing demand deposit accounts decreased 5.5% compared to a year ago and represented 29.7% of total deposits; savings, NOW and money market accounts increased 11.8% compared to a year ago and represented 43.5% of total deposits, and CDs increased 102.3% compared to a year ago and comprised 26.8% of total deposits.  The average cost of deposits was 1.76% in the second quarter of 2023, compared to 1.24% in the first quarter of 2023, and 0.16% in the second quarter of 2022.  

Shareholders’ Equity

Shareholders’ equity increased to $151.1 million at June 30, 2023, compared to $148.1 million three months earlier and $141.9 million a year earlier.  At June 30, 2023, Heartland’s tangible book value increased to $68.54 per share, compared to $67.09 at March 31, 2023, and $64.06 at June 30, 2022.

Heartland continues to maintain capital levels in excess of the requirements to be categorized as “well-capitalized” with tangible equity to tangible assets of 7.70% at June 30, 2023, compared to 7.71% at March 31, 2023, and 8.68% at June 30, 2022.

Operating Results

In the second quarter of 2023, Heartland generated a ROAA of 1.10% and a ROATCE of 14.19%, compared to 1.06% and 13.36%, respectively, in the first quarter of 2023 and 1.10% and 11.97%, respectively, in the second quarter a year ago.

Net Interest Income/Net Interest Margin

Net interest income, before the provision for credit losses, increased 14.3% to $15.0 million in the second quarter of 2023, compared to $13.2 million in the second quarter a year ago, and decreased 2.0% compared to $15.3 million in the preceding quarter.  In the first six months of 2023, net interest income increased 17.1% to $30.4 million, compared to $26.0 million in the first six months of 2022.

Total revenues (net interest income, before the provision for credit losses, plus noninterest income) was $18.4 million in the second quarter of 2023, a 13.9% increase compared to $16.2 million in the second quarter a year ago, and a 2.7% increase compared to $17.9 million in the preceding quarter.  Year-to-date, total revenues increased 12.8% to $36.4 million, compared to $32.2 million in the same period a year earlier.

Heartland’s net interest margin was 3.61% in the second quarter of 2023, compared to 3.87% in the preceding quarter and 3.92% in the second quarter of 2022.  “The unprecedented rise in funding costs that is affecting the entire banking industry impacted our net interest margin during the quarter.  While we anticipate deposit pricing pressures and stiff competition in our markets to continue in the near term, we continue to benefit from repricing loans at higher rates,” said Carrie Almendinger, EVP and Chief Financial Officer. 

Heartland’s net interest margin continues to remain above the peer average posted by the Dow Jones U.S. MicroCap Bank Index with total market capitalization under $250 million as of March 31, 2023.^*

Provision for Credit Losses

Heartland recorded an $800,000 provision for credit losses in the second quarter of 2023, compared to a $750,000 provision for credit losses in the first quarter of 2023, and a $480,000 provision for credit losses in the second quarter of 2022.  “We continue to make additions to the allowance for credit losses to reflect the steady level of new loan growth,” said McComb.  “Overall credit quality remains very stable, and we are seeing minimal signs of stress in the loan portfolio.”

Noninterest Income

Noninterest income increased 12.5% to $3.4 million in the second quarter of 2023, compared to $3.0 million in the second quarter a year ago, and increased 30.3% compared to $2.6 million in the preceding quarter.  Gains on sale of loans and originated mortgage servicing rights increased 63.3% to $704,000 in the second quarter of 2023, compared to $431,000 in the second quarter a year ago, and increased 211.5% compared to $226,000 in the preceding quarter.  In the first six months of 2023, noninterest income decreased 4.6% to $6.0 million, compared to $6.3 million in the first six months of 2022.

“We saw increased secondary loan activity during the quarter, and we have been more successful with executing on swaps, with just over $300,000 in swap referral fee income during the second quarter.  Also impacting noninterest income was an increase in title insurance income during the quarter,” said Almendinger. 

Noninterest Expense

Noninterest expenses were $11.7 million during the second quarter of 2023, a slight decrease compared to $11.8 million in the preceding quarter, and an 8.0% increase compared to $10.8 million in the second quarter a year ago.  Salary and employee benefit expenses, the largest component of noninterest expense, were $7.3 million in the second quarter of 2023, compared to $7.5 million in the first quarter of 2023, and $6.8 million in the second quarter of 2022.  Occupancy expense increased 9.9% compared to the year ago quarter due to the expansion into the permanent office space in Cincinnati.  Year-to-date, noninterest expense totaled $23.4 million, compared to $21.4 million in the first six months of 2022.

“We are making a concerted effort to keep operating expenses in check, and as a result, salary and employee benefit expense decreased compared to the preceding quarter, partly due to lower incentive compensation.  As we look to grow the team, our focus remains selective, as we are primarily looking to add new associates in revenue producing roles,” said Almendinger.

The efficiency ratio for the second quarter of 2023 was 63.5%, compared to 65.5% for the preceding quarter and 66.9% for the second quarter of 2022.  

Income Tax Provision

In the second quarter of 2023, Heartland recorded $1.1 million in state and federal income tax expense for an effective tax rate of 18.3%, compared to $992,000, or 18.2%, in the first quarter of 2023 and $933,000, or 19.2%, in the second quarter a year ago. 

Credit Quality

Beginning January 1, 2023, Heartland began accounting for credit losses under CECL which replaced the former “incurred loss” model for recognizing credit losses with an “expected loss” model.

At June 30, 2023, the allowance for credit losses plus unfunded commitment liability (ACL + UCL) was $18.7 million, or 1.24% of total loans, compared to $18.0 million, or 1.22% of total loans, at March 31, 2023, and $15.9 million, or 1.32% of total loans, a year ago.  As of June 30, 2023, the ACL represented 789% of nonaccrual loans, compared to 1,460% three months earlier and 1,678% one year earlier. 

Nonaccrual loans were $2.2 million at June 30, 2023, compared to $1.1 million at March 31, 2023, and $949,000 at June 30, 2022.  At June 30, 2023, nonaccrual loans totaled 13 loans with an average balance of approximately $166,000.  There were zero loans past due 90 days and still accruing at June 30, 2023, compared to $111,000 at March 31, 2023, and $245,000 at June 30, 2022.  Net loan charge-offs totaled $43,000 at June 30, 2023, compared to $19,000 in net loan charge-offs at March 31, 2023, and $5,000 in net loan charge-offs at June 30, 2022.

Heartland had zero performing restructured loans that were not included in nonaccrual loans at June 30, 2023, and at March 31, 2023.  This compared to $4.5 million in performing restructured loans at June 30, 2022.  Borrowers who are in financail difficulty and who have been granted concessions including interest rate reductions, term extensions or payment alterations, are categorized as restsructured loans.

There was $5,000 in other real estate owned and other non-performing assets on the books at June 30, 2023, unchanged from three months earlier and one year earlier.  Non-performing assets (NPAs), consisting of non-performing loans and loans past due 90 days or more, were $2.2 million, or 0.12% of total assets, at June 30, 2023, compared to $1.3 million, or 0.07% of total assets, at March 31, 2023, and $1.5 million, or 0.10% of total assets a year ago.  

About Heartland BancCorp

Heartland BancCorp is a registered Ohio bank holding company and the parent of Heartland Bank, which operates 19 full-service banking offices and TransCounty Title Agency, LLC.  Heartland Bank, founded in 1911, provides full-service commercial, small business, and consumer banking services; professional financial planning services; and other financial products and services.  Heartland Bank is a member of the Federal Reserve, a member of the FDIC, and an Equal Housing Lender.  Heartland BancCorp is currently quoted on the OTC Markets (OTCQX) under the symbol HLAN.  Learn more about Heartland Bank at Heartland.Bank.

In June of 2023, Heartland was ranked #119 on the American Banker Magazine’s list of Top 200 Publicly Traded Community Banks and Thrifts based on three-year average return on equity as of December 31, 2022. 

During the first quarter of 2023, Heartland was ranked 36^th on the OTCQX’s Best 50 list for 2023.  The OTCQX Best 50 is an annual ranking of the top 50 U.S. and international companies traded on the OTCQX Best Market, based on an equal weighting of one-year total return and average daily dollar volume growth.  Companies in the 2023 OTCQX Best 50 were ranked based on their performance during the 2022 calendar year.

Safe Harbor Statement

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about (i) the benefits of a merger between Heartland Bank and Victory Community Bank, including future financial and operating results, cost savings enhancements to revenue and accretion to reported earnings that may be realized from the merger; (ii) Heartland’s plans, objectives, expectations and intentions and other statements contained in this press release that are not historical facts; and (iii) other statements identified by words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “targets,” “projects,” or words of similar meaning generally intended to identify forward-looking statements. These forward-looking statements are based upon the current beliefs and expectations of Heartland’s management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the control of Heartland. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Actual results may differ materially from the anticipated results discussed in these forward-looking statements because of the following factors, among others: (1) the assumptions and estimates used by Heartland’s management include both assumptions as to certain business decisions that are subject to change and, in many respects, subjective judgment, and thus is susceptible to multiple interpretations and periodic revisions based on actual experience and business developments, and thus, may not be realized; (2) legislative or regulatory changes, including changes in accounting standards, may adversely affect the businesses in which Heartland is engaged; (3) changes in the interest rate environment may adversely affect net interest income; (4) results may be adversely affected by continued diversification of assets and adverse changes to credit quality; (5) competition from other financial services companies in Heartland’s markets could adversely affect operations; (6) the impact of the coronavirus (COVID-19) pandemic on the employees and clients of Heartland, as well as the resulting effect on the business, financial condition and results of operations on Heartland; and (7) the current economic slowdown could adversely affect credit quality and loan originations.

Heartland cautions that the foregoing list of factors is not exclusive. All subsequent written and oral forward-looking statements are expressly qualified in their entirety by the cautionary statements above. Heartland does not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date the forward-looking statements are made, except as required by law.