Heartland Financial USA(HTLF) - 2023 Q4 - Annual Report

Part I Business HTLF is a diversified bank holding company with $19.41 billion in assets, operating through HTLF Bank across 12 states, offering comprehensive banking and wealth management services - Key Financial Metrics as of December 31, 2023 | Metric | Amount (Billions) | | :--- | :--- | | Total Assets | $19.41 | | Total Loans Held to Maturity | $12.07 | | Total Deposits | $16.20 | | Total Stockholders' Equity | $1.93 | - HTLF operates through multiple independently branded divisions of HTLF Bank across 12 states with a total of 117 banking locations[16][17] - The company's operating philosophy combines a community-focused banking model with centralized back-office functions to enhance efficiency and customer experience[23][25] - In 2023, HTLF completed strategic divestitures, including the sale of its Retirement Plan Services' recordkeeping and administration business and its mortgage servicing rights portfolio[30] - Subsequent to year-end, in February 2024, HTLF agreed to sell its nine Rocky Mountain Bank division branches, including approximately $589 million in deposits and $366 million in loans[31] General Description HTLF provides a full range of commercial and consumer banking, wealth management, and retirement services, supported by centralized operations - The company's primary business involves making loans and accepting deposits, with a focus on commercial and consumer banking, supported by strong community relationships and centralized back-office operations[19][23][25] - HTLF's commercial banking strategy emphasizes a consultative, customer-centric approach, offering a comprehensive suite of products including treasury management services and specialized industry lending expertise[35][36][38] - Agricultural loans constituted approximately 8% of the total loan portfolio at year-end 2023, with a focus on financing farm operations and capital improvements in rural markets[43][44] - In 2023, HTLF significantly scaled back its residential mortgage origination activities after selling its mortgage servicing rights portfolio, which consisted of approximately 4,500 loans with an unpaid principal balance of around $700 million[47] - Wealth management and retirement plan services are a key offering, with total trust assets under management reaching $3.92 billion as of December 31, 2023[50] Market Areas HTLF operates across 12 states in the Midwest, West, and Southwest, with $14.57 billion in customer deposits Total Deposits by State/Bank Division (as of Dec 31, 2023) | State | Bank Division | Total Deposits ($ thousands) | | :--- | :--- | :--- | | NM | New Mexico Bank & Trust | $2,329,633 | | TX | First Bank & Trust | $1,849,325 | | CO | Citywide Banks | $1,811,729 | | AZ | Arizona Bank & Trust | $1,506,466 | | IL | Illinois Bank & Trust | $1,419,844 | | IA | Dubuque Bank & Trust | $1,306,044 | | WI | Wisconsin Bank & Trust | $1,265,926 | | CA | Premier Valley Bank | $981,860 | | KS | Bank of Blue Valley | $965,522 | | MT | Rocky Mountain Bank | $579,182 | | MN | Minnesota Bank & Trust | $554,401 | Competition HTLF faces intense competition from diverse financial institutions, including fintech firms, competing on service, expertise, and technology - The company faces intense competition from a diverse set of players, including traditional banks, credit unions, and increasingly, fintech firms and technology companies that are not subject to the same extensive federal regulations[56][57] - HTLF's competitive strategy relies on providing high-touch, customer-centric service, building long-lasting relationships, and offering a broad suite of products to compete effectively against larger competitors[58][59] Human Capital HTLF prioritizes human capital, employing 1,970 FTEs, focusing on retention, development, and diversity with an 18.1% voluntary turnover - As of December 31, 2023, HTLF employed 1,970 full-time equivalent employees[60] - In 2023, the company's net voluntary turnover was 18.1%, and it filled 558 positions, with 26.5% of them filled internally[61] - HTLF is committed to diversity and inclusion, with a Chief Diversity & Inclusion Officer and a Diversity Advisory Council overseeing a business-driven strategy[66][68] Supervision and Regulation HTLF and HTLF Bank are extensively regulated by federal and state authorities, adhering to Basel III capital requirements and exceeding all regulatory ratios - HTLF is regulated by the Federal Reserve, while its subsidiary, HTLF Bank, is regulated by the FDIC and the Colorado Division of Banking[70] Regulatory Capital Ratio Requirements | Ratio | Minimum Regulatory Capital Ratio % | Minimum Ratio + Capital Buffer % | Well-Capitalized Minimum % (Bank) | | :--- | :--- | :--- | :--- | | CET 1 risk-based capital | 4.50 | 7.00 | 6.50 | | Tier 1 risk-based capital | 6.00 | 8.50 | 8.00 | | Total risk-based capital | 8.00 | 10.50 | 10.00 | | Tier 1 leverage ratio | 4.00 | N/A | 5.00 | - As of December 31, 2023, HTLF and HTLF Bank were considered "well-capitalized" under all regulatory definitions[90][99] - In response to bank failures in March 2023, the FDIC imposed a special assessment on uninsured deposits. HTLF Bank recorded an $8.145 million additional FDIC assessment expense in the fourth quarter of 2023, representing the full amount of the special assessment[96][97] - HTLF Bank is subject to supervision by the Consumer Financial Protection Bureau (CFPB), which has broad rulemaking and enforcement authority over federal consumer protection laws[121] Risk Factors This section outlines material risks to HTLF's business, including economic, credit, liquidity, operational, strategic, legal, and stock ownership factors Economic and Overall Market Condition Risks HTLF's performance is sensitive to economic conditions, including inflation, interest rates, market volatility, goodwill impairment, and climate change impacts - Business performance is highly sensitive to economic conditions such as inflation and recession, which can affect loan demand, repayment ability, and funding costs[148][149] - As of December 31, 2023, the company had goodwill of $576.0 million, representing approximately 30% of stockholders' equity, which is subject to impairment risk if fair value declines[155] - Climate change presents both physical risks (e.g., natural disasters affecting collateral) and transition risks (e.g., policy changes impacting customers), which could adversely affect operations and financial condition[161][162][163] Credit Risks HTLF faces significant credit risk from lending activities, particularly in commercial real estate and agricultural loans, with potential for insufficient loss allowance - A large concentration of commercial real estate loans exposes the company to risks from volatile cash flows and collateral values, particularly with the decreased demand for physical office space[170] - The allowance for credit losses, which was 1.02% of total loans at December 31, 2023, may prove insufficient to absorb future losses, which are susceptible to changes in economic conditions[176] Liquidity and Interest Rate Risks HTLF's financial results are sensitive to interest rate fluctuations and liquidity risks, including reliance on potentially unstable wholesale funding - Net interest income is highly sensitive to interest rate changes due to mismatches in the repricing characteristics of assets and liabilities[177] - The company relies on wholesale and institutional deposits, including $1.16 billion in brokered deposits at December 31, 2023, which may be unstable or more expensive sources of funding[182] - The investment securities portfolio, representing 29% of total assets at year-end 2023, is subject to value fluctuations from interest rate volatility and potential credit deterioration[184] Operational Risks HTLF faces operational risks from technology reliance, third-party vendors, and key personnel, including cybersecurity threats, business interruption, and internal control failures - The company is exposed to significant risk from security breaches and cyber-attacks on its own or its vendors' systems, which could lead to theft of customer information, reputational harm, and significant financial exposure[192][193] - HTLF's success depends heavily on its management team, and the unexpected loss of key managers could adversely affect operations[200] Strategic and External Risks Strategic risks include growth management challenges, intense competition from less regulated fintechs, and systemic risks from other financial institutions - The company's growth strategy, which includes acquisitions, involves risks such as integration difficulties, potential exposure to unknown liabilities, and the inability to realize expected synergies[205] - HTLF faces intense competition from traditional banks as well as fintech firms and technology companies, which are often not subject to the same regulatory requirements and can offer services at more favorable rates[208] Legal, Compliance and Reputational Risks HTLF faces legal, compliance, and reputational risks from extensive and evolving regulations, including capital, consumer protection, data privacy, and potential litigation - The company operates under a comprehensive system of federal and state banking regulations that affect nearly all aspects of its business, with increasing scope and intensity of supervision in recent years[211][212] - As the company's assets increase, it becomes subject to additional regulatory requirements, such as supervision by the Consumer Financial Protection Bureau (CFPB), which adds complexity and cost[217] - Evolving data privacy and cybersecurity laws at both federal and state levels (e.g., GLBA, CCPA) increase compliance costs and potential liability for any mishandling of personal information[219][221] Risks of Owning Stock in HTLF Investing in HTLF stock carries risks of price volatility, dilution from future offerings, and potential anti-takeover effects from banking laws - The company's stock price can be volatile and is influenced by a variety of factors, including operating results, analyst recommendations, and broader market and economic conditions[228] - Future equity offerings or acquisitions could result in dilution for existing stockholders[229] Unresolved Staff Comments As of December 31, 2023, HTLF had no unresolved comments from the SEC staff - The company reports no unresolved staff comments as of the end of the fiscal year[231] Cybersecurity HTLF manages cybersecurity risk via a NIST-aligned program with a three-lines-of-defense framework, overseen by the CISO and Board Risk Committee - HTLF's cybersecurity risk management program is structured around a three-lines-of-defense model and aligns with the NIST Cybersecurity Framework[232][234] - Governance includes oversight by the CISO, the CRO, an Operational Risk Committee, the Executive Risk Management Committee, and the HTLF Board's Risk Committee[239] - The company has not been materially affected by any cybersecurity incidents to date but acknowledges the evolving nature of these threats[240] Properties HTLF's corporate office is in Denver, with 119 bank locations, and major support functions in Dubuque, Iowa Principal Operating Facilities (as of Dec 31, 2023) | Name | Main Facility Address | Owned or Leased | Number of Locations | | :--- | :--- | :--- | :--- | | Heartland Financial USA, Inc. | 1800 Larimer Street, Denver, CO | Leased | 2 | | HTLF Bank | 1800 Larimer Street, Denver, CO | Leased | 119 | Legal Proceedings As of December 31, 2023, HTLF was not party to any material legal proceedings beyond routine litigation - The company is not involved in any material legal proceedings outside of ordinary routine litigation[243] Mine Safety Disclosures This item is not applicable to HTLF - Not applicable[244] Information About Our Executive Officers This section provides professional backgrounds and positions of HTLF's executive officers, including the CEO and CFO Executive Officers of HTLF | Name | Age | Position | | :--- | :--- | :--- | | Bruce K. Lee | 63 | Chief Executive Officer, President and Director | | Kevin L. Thompson | 50 | Executive Vice President and Chief Financial Officer | | Janet M. Quick | 58 | Executive Vice President, Deputy Chief Financial Officer, and Principal Accounting Officer | | Deborah K. Deters | 59 | Executive Vice President and Chief Human Resources Officer | | Mark E. Frank | 64 | Executive Vice President and Chief Operating Officer | | Nathan R. Jones | 51 | Executive Vice President and Chief Credit Officer | | Robert S. Kahn | 55 | Executive Vice President and Chief Strategy Officer | | Jay L. Kim | 60 | Executive Vice President, Chief Administrative Officer, Corporate Secretary and General Counsel | | Tamina L. O'Neill | 54 | Executive Vice President and Chief Risk Officer | | David A. Prince | 53 | Executive Vice President and Head of Commercial Banking | | Kevin G. Quinn | 63 | Executive Vice President and Chief Banking Officer | Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities HTLF common stock trades on Nasdaq, with a $91.1 million share repurchase authorization and a five-year performance graph - HTLF's common stock (HTLF) and Series E Preferred Stock (HTLFP) are traded on The Nasdaq Global Select Market[2][255] - The company has a board authorization to repurchase up to 5% of its capital ($91.1 million as of Dec 31, 2023) but made no common stock purchases during the fourth quarter of 2023[256] Five-Year Cumulative Total Return Performance (assuming $100 invested on Dec 31, 2018) | Year | Heartland Financial USA, Inc. | Nasdaq Composite Index | KBW Nasdaq Bank Index | S&P U.S. BMI Banks Index | | :--- | :--- | :--- | :--- | :--- | | 2018 | $100.00 | $100.00 | $100.00 | $100.00 | | 2019 | $114.87 | $136.69 | $136.13 | $137.36 | | 2020 | $95.37 | $198.10 | $122.09 | $119.83 | | 2021 | $121.93 | $242.03 | $168.88 | $162.92 | | 2022 | $114.95 | $163.28 | $132.75 | $135.13 | | 2023 | $96.25 | $236.17 | $131.57 | $147.41 | Management's Discussion and Analysis of Financial Condition and Results of Operations This section discusses HTLF's 2023 financial performance, noting decreased net income due to a balance sheet repositioning, asset and deposit changes, and strategic initiatives 2023 vs. 2022 Financial Performance | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net Income Available to Common Stockholders | $71.9 million | $204.1 million | | Diluted EPS | $1.68 | $4.79 | | Adjusted Diluted EPS (non-GAAP) | $4.53 | $4.91 | | Total Assets (Year-End) | $19.41 billion | $20.24 billion | | Total Loans Held to Maturity (Year-End) | $12.07 billion | $11.43 billion | | Total Deposits (Year-End) | $16.20 billion | $17.51 billion | - In Q4 2023, HTLF executed a balance sheet repositioning, selling $865.4 million in lower-yielding investment securities at a loss of $140.0 million to pay down higher-cost wholesale funding, which is expected to benefit future net interest income[292][293] - The company successfully completed the consolidation of its 11 bank charters into a single charter (HTLF Bank) in 2023, incurring $7.3 million in related restructuring costs during the year[295] - HTLF launched a new strategic plan, HTLF 3.0, in Q4 2023, focusing on banker expansion, treasury management growth, digital platform enhancement, and facility optimization[296] Critical Accounting Estimates Critical accounting estimates include the Allowance for Credit Losses, business combinations, goodwill, and core deposit intangibles, all requiring significant judgment - The Allowance for Credit Losses is a critical estimate, calculated using a model based on historical loss experience over a 16-year look-back period, adjusted for qualitative factors and an economic forecast overlay[264][265] - Key economic indices used in the ACL calculation include the national unemployment rate and GDP, which are considered highly sensitive and impactful to all loan pools[269] - Accounting for business combinations requires significant estimates to determine the fair value of acquired assets and liabilities, including loans and core deposit intangibles, using discounted cash flow methodologies[273][274] Results of Operations In 2023, net interest income was stable, but noninterest income became a loss due to securities sales, and noninterest expenses increased Net Interest Income and Margin | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net Interest Income | $601.2M | $598.2M | | Net Interest Margin (GAAP) | 3.29% | 3.32% | | Net Interest Margin (FTE, non-GAAP) | 3.33% | 3.37% | - The provision for credit losses increased to $21.7 million in 2023 from $15.4 million in 2022, influenced by loan growth, an increase in nonperforming loans, and net charge-offs of $12.4 million[335] - Noninterest income swung to a loss of $20.9 million in 2023 from income of $128.3 million in 2022, primarily due to a $141.5 million net loss on the sale of securities[339] - Noninterest expense rose by 4% to $461.8 million in 2023, driven by a one-time FDIC special assessment of $8.1 million and increased acquisition, integration, and restructuring costs[354][357] Financial Condition As of December 31, 2023, HTLF's assets decreased, loans grew, deposits declined due to wholesale funding reduction, and equity increased Loan Portfolio Composition (as of Dec 31, 2023) | Loan Category | Amount ($ millions) | % of Total | | :--- | :--- | :--- | | Commercial and industrial | $3,652.0 | 30.26% | | Owner occupied commercial real estate | $2,638.2 | 21.86% | | Non-owner occupied commercial real estate | $2,553.7 | 21.16% | | Real estate construction | $1,011.7 | 8.38% | | Agricultural and agricultural real estate | $919.2 | 7.62% | | Residential real estate | $797.8 | 6.61% | | Consumer | $493.2 | 4.09% | | Total Loans | $12,068.6 | 100.00% | - Nonperforming loans increased to $97.9 million, or 0.81% of total loans, at year-end 2023, up from $58.5 million, or 0.51% of total loans, at year-end 2022[416][418] - The securities portfolio decreased to $5.58 billion (29% of total assets) from $7.05 billion (35% of total assets) at the end of 2022, largely due to the strategic balance sheet repositioning[422] - Total deposits decreased by $1.31 billion, driven by a $944 million reduction in wholesale and institutional deposits and a $1.20 billion decrease in customer demand deposits, partially offset by a $1.09 billion increase in customer time deposits[431][433] Consolidated Capital Ratios (as of Dec 31, 2023) | Ratio | Actual % | Well Capitalized Requirement % | | :--- | :--- | :--- | | Total Capital (to Risk-Weighted Assets) | 14.53% | 10.00% | | Tier 1 Capital (to Risk-Weighted Assets) | 11.69% | 8.00% | | Common Equity Tier 1 (to Risk-Weighted Assets) | 10.97% | 6.50% | | Tier 1 Capital (to Average Assets) | 9.44% | 5.00% | Quantitative and Qualitative Disclosures About Market Risk HTLF manages interest rate risk through NII simulation, showing asset sensitivity where NII increases in rising rate environments and decreases in falling ones - The company's primary market risk is interest rate risk, which is managed through an interest rate management process overseen by the Asset/Liability Committee and the Board of Directors[478][479] Net Interest Income Sensitivity Analysis (as of Dec 31, 2023) | Interest Rate Scenario | Year 1 % Change From Base | Year 2 % Change From Base | | :--- | :--- | :--- | | Up 200 Basis Points | +12.92% | +19.65% | | Up 100 Basis Points | +6.57% | +14.46% | | Base | -- | -- | | Down 100 Basis Points | -7.37% | +0.10% | | Down 200 Basis Points | -15.68% | -9.88% | Financial Statements and Supplementary Data This section presents HTLF's audited consolidated financial statements for 2021-2023, including notes on accounting policies, and an unqualified auditor's opinion - The report includes audited consolidated financial statements for the years ended December 31, 2023, 2022, and 2021[490] - KPMG LLP, the independent registered public accounting firm, issued an unqualified opinion on both the consolidated financial statements and the effectiveness of the company's internal control over financial reporting as of December 31, 2023[740][741] - The critical audit matter identified by the auditor was the assessment of the allowance for credit losses for loans and unfunded loan commitments that are collectively evaluated, due to the high degree of subjective and complex judgment involved[746][747] Note 1. Summary of Significant Accounting Policies This note details significant accounting policies, including consolidation, estimates for credit losses, business combinations, securities, loans, and new accounting standard adoption - The allowance for credit losses is estimated using historical loss experience adjusted for current conditions and reasonable forecasts. For certain commercial loans, a probability of default/loss given default model is used, while other loans use a lifetime average historical loss rate[522][523] - Effective January 1, 2023, the company adopted ASU 2022-02, which eliminated the recognition and measurement guidance for Troubled Debt Restructurings (TDRs) and enhanced disclosure requirements for loan modifications to borrowers experiencing financial difficulty[533][565] Note 3. Securities This note details the $5.58 billion securities portfolio, including available-for-sale and held-to-maturity, with $453.9 million in unrealized losses Securities Portfolio Composition (as of Dec 31, 2023) | Security Type | Fair Value ($ thousands) | | :--- | :--- | | Available for Sale | $4,646,891 | | U.S. treasuries | $32,118 | | Obligations of states and political subdivisions | $741,245 | | Mortgage-backed securities (Agency & Non-agency) | $2,922,757 | | Other | $950,771 | | Held to Maturity | $816,399 | | Obligations of states and political subdivisions | $816,399 | | Other Investments (at cost) | $91,277 | - The available-for-sale portfolio had gross unrealized losses of $453.9 million and gross unrealized gains of $0.4 million as of December 31, 2023. These unrealized losses are primarily attributed to changes in interest rates, not credit quality[570][580] Note 4. Loans This note details the $12.07 billion diversified loan portfolio, including risk categories and disclosures on loan modifications - As of December 31, 2023, nonpass loans (rated watch, substandard, doubtful, or loss) totaled $676.3 million, or 6% of total loans, an increase from $533.3 million (5% of total loans) at year-end 2022[414] - During 2023, the company modified loans with an amortized cost basis of $11.8 million for borrowers experiencing financial difficulty, primarily through term extensions or temporary interest-only payments[589][590] Note 5. Allowance for Credit Losses This note details the ACL for loans, which increased to $122.6 million at year-end 2023 due to a $25.4 million provision Allowance for Credit Losses - Loans Roll-Forward (Year Ended Dec 31, 2023) | Component | Amount ($ thousands) | | :--- | :--- | | Balance at beginning of year | $109,483 | | Provision for credit losses | $25,435 | | Charge-offs on loans | ($19,614) | | Recoveries on loans previously charged-off | $7,262 | | Balance at end of year | $122,566 | Note 11. Derivative Financial Instruments This note details HTLF's use of derivatives for interest rate risk management, including fair value hedges on loans and securities, and customer loan swaps - In 2023, HTLF entered into fair value hedges on $2.5 billion of its loan portfolio and $838.1 million of its investment portfolio to manage interest rate risk[633] - The company facilitates back-to-back loan swaps for customers, with a total notional amount of $1.67 billion as of December 31, 2023[639] - In Q1 2023, HTLF terminated its cash flow hedges that were converting $500.0 million of variable-rate loans to fixed-rate loans[628] Note 17. Regulatory Capital Requirements This note details HTLF and HTLF Bank's Basel III capital requirements, confirming both entities are "well capitalized" as of year-end 2023 HTLF Consolidated Capital Ratios (as of Dec 31, 2023) | Ratio | Actual | Minimum Requirement | To Be Well Capitalized | | :--- | :--- | :--- | :--- | | Total Capital (to Risk-Weighted Assets) | 14.53% | 8.00% | 10.00% | | Tier 1 Capital (to Risk-Weighted Assets) | 11.69% | 6.00% | 8.00% (Bank) | | Common Equity Tier 1 (to Risk-Weighted Assets) | 10.97% | 4.50% | 6.50% (Bank) | | Tier 1 Capital (to Average Assets) | 9.44% | 4.00% | 5.00% (Bank) | - As of December 31, 2023, HTLF Bank had approximately $436.9 million in retained earnings available for dividends to the parent company while maintaining its "well-capitalized" status[677] Controls and Procedures Management and KPMG LLP concluded that HTLF's disclosure controls and internal control over financial reporting were effective as of December 31, 2023 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[752] - Management's assessment concluded that internal control over financial reporting was effective as of December 31, 2023. This assessment was audited by KPMG LLP, which also issued an unqualified opinion[753][754] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2024 Proxy Statement - Required information is incorporated by reference from the 2024 Proxy Statement[765] Executive Compensation Information on executive compensation is incorporated by reference from the 2024 Proxy Statement - Required information is incorporated by reference from the 2024 Proxy Statement[766] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership and equity compensation plans is incorporated by reference from the 2024 Proxy Statement - Required information is incorporated by reference from the 2024 Proxy Statement[767] Certain Relationships and Related Transactions, and Director Independence Information on related person transactions and director independence is incorporated by reference from the 2024 Proxy Statement - Required information is incorporated by reference from the 2024 Proxy Statement[768] Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the 2024 Proxy Statement - Required information is incorporated by reference from the 2024 Proxy Statement[769] Part IV Exhibits and Financial Statement Schedules This section confirms consolidated financial statements are in Item 8 and provides an index of all filed exhibits - The consolidated financial statements are located in Item 8 of the report[770] - An index of exhibits required by Item 601 of Regulation S-K is provided, listing documents such as articles of incorporation, bylaws, material contracts, and certifications[770][773] Form 10-K Summary No summary is provided under this item - None[771]