Heartland Financial USA(HTLF) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Comprehensive financial data for Heartland Financial USA, Inc., including statements, notes, and management's analysis of performance and condition ITEM 1. FINANCIAL STATEMENTS This section presents Heartland Financial USA, Inc.'s (HTLF) unaudited consolidated financial statements, including balance sheets, income statements, comprehensive income, cash flows, and changes in equity, along with detailed notes covering accounting policies, securities, loans, credit losses, intangible assets, derivatives, fair value measurements, and stock compensation for the periods ended June 30, 2023, and December 31, 2022 Consolidated Balance Sheets Presents the company's financial position, detailing assets, liabilities, and equity at specific points in time Consolidated Balance Sheet Highlights (Dollars in billions) | Metric | June 30, 2023 | December 31, 2022 | | :----------------------------------- | :------------ | :---------------- | | Total Assets | $20.22 | $20.24 | | Cash and cash equivalents | $0.40 | $0.36 | | Securities (at fair value) | $5.80 | $6.15 | | Loans receivable, net | $11.61 | $11.32 | | Total Deposits | $17.66 | $17.51 | | Total Liabilities | $18.37 | $18.51 | | Total Stockholders' Equity | $1.86 | $1.74 | - Total assets slightly decreased by $19.5 million (less than 1%) from December 31, 2022, to June 30, 2023[8][153][154][155][244][248] - Securities decreased by $349.1 million (6%), while net loans receivable increased by $287.9 million (2.5%)[8][153][154][155][244][248] - Total deposits increased by $150.5 million (1%), and total stockholders' equity increased by $123.9 million (7.1%)[8][153][154][155][244][248] Consolidated Statements of Income Details the company's revenues, expenses, and net income over specific reporting periods Consolidated Statements of Income Highlights (Dollars in millions, except per share data) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total Interest Income | $235.50 | $152.89 | $452.48 | $294.15 | | Total Interest Expense | $88.37 | $10.43 | $153.13 | $17.01 | | Net Interest Income | $147.13 | $142.46 | $299.34 | $277.14 | | Provision for Credit Losses | $5.38 | $3.25 | $8.45 | $6.49 | | Total Noninterest Income | $32.49 | $34.54 | $62.49 | $69.11 | | Total Noninterest Expenses | $109.45 | $106.48 | $220.49 | $217.28 | | Net Income | $49.42 | $51.87 | $102.19 | $94.96 | | Net Income Available to Common Stockholders | $47.40 | $49.86 | $98.17 | $90.94 | | Basic EPS | $1.11 | $1.17 | $2.30 | $2.14 | | Diluted EPS | $1.11 | $1.17 | $2.30 | $2.14 | | Cash Dividends Declared Per Common Share | $0.30 | $0.27 | $0.60 | $0.54 | - For the three months ended June 30, 2023, net income available to common stockholders decreased by 5% year-over-year, primarily due to a significant increase in interest expense (up 747%) despite a 54% rise in total interest income[10][148][157] - Diluted EPS also decreased by 5% for the three months ended June 30, 2023[10][148][157] - For the six months ended June 30, 2023, net income available to common stockholders increased by 8% year-over-year, with diluted EPS up 7%[10][148][157] Consolidated Statements of Comprehensive Income Reports net income and other comprehensive income, reflecting all changes in equity from non-owner sources Consolidated Statements of Comprehensive Income Highlights (Dollars in millions) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net Income | $49.42 | $51.87 | $102.19 | $94.96 | | Other Comprehensive Income (Loss) | $(8.32) | $(199.99) | $44.77 | $(481.17) | | Total Comprehensive Income (Loss) | $41.10 | $(148.12) | $146.96 | $(386.20) | - Total comprehensive income significantly improved for the three and six months ended June 30, 2023, compared to the prior year periods[11] - This was primarily driven by a substantial reduction in other comprehensive loss, mainly due to a smaller net change in unrealized loss on available-for-sale securities and positive reclassification adjustments[11] Consolidated Statements of Cash Flows Summarizes cash inflows and outflows from operating, investing, and financing activities over a period Consolidated Statements of Cash Flows Highlights (Six Months Ended June 30, Dollars in millions) | Cash Flow Activity | 2023 | 2022 | | :----------------- | :---------- | :------------ | | Operating Activities | $184.73 | $188.49 | | Investing Activities | $61.73 | $(1,052.22) | | Financing Activities | $(209.36) | $812.93 | | Net increase (decrease) in cash and cash equivalents | $37.10 | $(50.81) | | Cash and cash equivalents at end of period | $400.19 | $384.79 | - For the six months ended June 30, 2023, net cash provided by operating activities remained stable[12][13] - A significant shift occurred in investing activities, moving from a net cash outflow of over $1 billion in 2022 to a net inflow of $61.7 million in 2023, largely due to reduced purchases of available-for-sale securities and a smaller net increase in loans[12][13] - Financing activities saw a substantial change from net cash provided to net cash used, driven by a decrease in savings deposits and short-term borrowings, offset by a large increase in time deposits[12][13] Consolidated Statements of Changes in Equity Illustrates changes in each component of stockholders' equity over a period, including net income and dividends Consolidated Statements of Changes in Equity Highlights (Dollars in millions) | Metric | Balance at June 30, 2023 | Balance at December 31, 2022 | Balance at June 30, 2022 | | :----------------------------------- | :----------------------- | :--------------------------- | :----------------------- | | Preferred Stock | $110.71 | $110.71 | $110.71 | | Common Stock | $42.65 | $42.47 | $42.44 | | Capital Surplus | $1,087.36 | $1,080.96 | $1,076.77 | | Retained Earnings | $1,193.52 | $1,120.93 | $1,031.08 | | Accumulated Other Comprehensive Loss | $(575.24) | $(620.01) | $(486.92) | | Total Equity | $1,858.99 | $1,735.06 | $1,774.07 | - Total stockholders' equity increased by $123.9 million from December 31, 2022, to June 30, 2023, primarily driven by net income and a reduction in accumulated other comprehensive loss[14] - Common stock and capital surplus also saw increases due to the issuance of common stock and stock-based compensation[14] Notes to Consolidated Financial Statements Provides detailed explanations and additional information supporting the consolidated financial statements NOTE 1: BASIS OF PRESENTATION Outlines the accounting principles, reclassifications, and significant accounting policies applied in the financial statements - HTLF reclassified 'capital markets fees' from other noninterest income and 'FDIC insurance premiums' to FDIC insurance assessments on the consolidated statements of income, with all prior periods adjusted for comparability[18][19] - HTLF amended its Certificate of Incorporation in Q2 2023, returning Series A, B, C, and D preferred stock to authorized but unissued status, increasing total authorized preferred shares to 188,500[20][21] Earnings Per Common Share (Dollars in millions and shares in thousands, except per share data) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income available to common stockholders | $47.40 | $49.86 | $98.17 | $90.94 | | Basic EPS | $1.11 | $1.17 | $2.30 | $2.14 | | Diluted EPS | $1.11 | $1.17 | $2.30 | $2.14 | | Weighted average common shares outstanding for basic EPS | 42,696 | 42,475 | 42,655 | 42,418 | - HTLF adopted ASU 2022-01 (Derivatives and Hedging) and ASU 2022-02 (Financial Instruments-Credit Losses) on January 1, 2023, applying them prospectively[23][24][25][26] - ASU 2023-02 (Investments-Equity Method and Joint Ventures) is effective January 1, 2024, and is not expected to have a material impact[23][24][25][26] NOTE 2: SECURITIES Details the composition, fair value, and unrealized gains/losses of the company's investment securities portfolio Debt Securities Available for Sale and Equity Securities (Fair Value, Dollars in billions) | Category | June 30, 2023 | December 31, 2022 | | :----------------------------------- | :------------ | :---------------- | | Total debt securities | $5.78 | $6.13 | | Equity securities with a readily determinable fair value | $0.02 | $0.02 | | Total | $5.80 | $6.15 | Held to Maturity Securities (Fair Value, Dollars in millions) | Category | June 30, 2023 | December 31, 2022 | | :----------------------------------- | :------------ | :---------------- | | Obligations of states and political subdivisions | $806.94 | $776.56 | | Total | $806.94 | $776.56 | - Total debt securities available for sale decreased by $349.5 million from December 31, 2022, to June 30, 2023[27][34][36][37] - Unrealized losses on debt securities available for sale were $617.6 million at June 30, 2023, compared to $643.1 million at December 31, 2022[27][34][36][37] - These losses are primarily due to changes in market interest rates or widening market spreads, not credit quality, and HTLF intends and has the ability to hold these investments to maturity[27][34][36][37] - Securities with a carrying value of $2.88 billion were pledged at June 30, 2023, up from $1.49 billion at December 31, 2022, to secure public and trust deposits, short-term borrowings, and other purposes[31][245] NOTE 3: LOANS Provides a detailed breakdown of the loan portfolio, including categories, credit quality, and nonaccrual status Loans Receivable Held to Maturity (Dollars in billions) | Loan Category | June 30, 2023 | December 31, 2022 | Change (YoY) | | :----------------------------------- | :------------ | :---------------- | :----------- | | Commercial and industrial | $3.59 | $3.46 | +$0.13 | | Owner occupied commercial real estate | $2.40 | $2.27 | +$0.13 | | Non-owner occupied commercial real estate | $2.53 | $2.33 | +$0.20 | | Real estate construction | $1.01 | $1.08 | -$0.06 | | Agricultural and agricultural real estate | $0.84 | $0.92 | -$0.08 | | Total loans receivable held to maturity | $11.72 | $11.43 | +$0.29 | | Allowance for credit losses | $(0.11) | $(0.11) | | | Loans receivable, net | $11.61 | $11.32 | | - Total loans held to maturity increased by $289.6 million (3%) from December 31, 2022, to June 30, 2023, driven by growth in commercial and commercial real estate loans, partially offset by decreases in real estate construction and agricultural loans[40][227][228][230] - Nonpass loans (watch, substandard) totaled $568.2 million (4.8% of total loans) at June 30, 2023, up from $533.3 million (4.7%) at December 31, 2022[240] - Approximately 11% of nonpass loans were on nonaccrual status[240] Accruing and Nonaccrual Loans (Dollars in billions) | Loan Status | June 30, 2023 | December 31, 2022 | | :----------------------------------- | :------------ | :---------------- | | Total Past Due (30-89 days) | $0.01 | $0.00 | | Total Past Due (90+ days) | $0.00 | $0.00 | | Total Accruing Loans | $11.64 | $11.37 | | Nonaccrual Loans | $0.06 | $0.06 | | Total Gross Loans Receivable Held to Maturity | $11.72 | $11.43 | NOTE 4: ALLOWANCE FOR CREDIT LOSSES Details the allowance for credit losses on loans and unfunded commitments, reflecting management's estimate of expected credit losses Allowance for Credit Losses on Loans (Dollars in millions) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Balance at beginning of period | $112.71 | $100.52 | $109.48 | $110.09 | | Provision for credit losses | $7.83 | $1.55 | $10.01 | $4.17 | | Recoveries on loans previously charged off | $0.28 | $0.76 | $3.47 | $1.78 | | Charge-offs on loans | $(9.61) | $(1.47) | $(11.76) | $(14.69) | | Balance at end of period | $111.20 | $101.35 | $111.20 | $101.35 | | Allowance for credit losses for loans as a percent of loans | 0.95% | 0.95% | 0.95% | 0.95% | - The allowance for credit losses for loans increased to $111.2 million at June 30, 2023, from $109.5 million at December 31, 2022[58][190][193][237][239] - The provision for credit losses for loans increased significantly to $7.8 million in Q2 2023 from $1.5 million in Q2 2022, primarily due to a $5.3 million charge-off from a fraud incident and loan growth[58][190][193][237][239] - Net charge-offs for the six months ended June 30, 2023, decreased to $8.3 million from $12.9 million in the prior year, despite the fraud-related charge-off[58][190][193][237][239] Allowance for Unfunded Commitments (Dollars in millions) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Balance at beginning of period | $21.09 | $16.08 | $20.20 | $15.46 | | Provision (benefit) for credit losses | $(2.45) | $1.70 | $(1.56) | $2.32 | | Balance at end of period | $18.64 | $17.78 | $18.64 | $17.78 | - The allowance for unfunded commitments decreased to $18.6 million at June 30, 2023, from $20.2 million at December 31, 2022, mainly due to a $164.2 million reduction in unfunded commitments for construction loans, which carry the highest loss rate[237] NOTE 5: GOODWILL, CORE DEPOSIT PREMIUM AND OTHER INTANGIBLE ASSETS Reports the carrying amounts of goodwill and other intangible assets, including core deposit intangibles and mortgage servicing rights - Goodwill remained stable at $576.0 million at June 30, 2023, and December 31, 2022[61][62] - Despite a sustained decline in HTLF's stock price triggering a quantitative impairment test in Q2 2023, management concluded that no goodwill was impaired[61][62] Other Intangible Assets (Net Carrying Amount, Dollars in millions) | Intangible Asset | June 30, 2023 | December 31, 2022 | | :----------------------------------- | :------------ | :---------------- | | Core deposit intangibles | $21.65 | $25.15 | | Mortgage servicing rights | $0.00 | $7.84 | | Total | $21.65 | $32.99 | - Mortgage servicing rights (MSRs) were de-recognized to $0 at June 30, 2023, following the sale of the MSR portfolio on March 31, 2023, which generated approximately $6.7 million in cash and an estimated loss of $193,000[63][65][98] NOTE 6: DERIVATIVE FINANCIAL INSTRUMENTS Describes the company's use of derivative instruments to manage interest rate risk and their impact on financial statements - HTLF uses derivative financial instruments, including interest rate swaps, to manage interest rate risk and add stability to its net interest margin[67][68] - The company minimizes credit risk by contracting with counterparties meeting its credit standards and utilizing collateral provisions[67][68] - In Q1 2023, HTLF terminated an interest rate swap agreement that converted $500.0 million of variable-rate loans to fixed-rate, with estimated reclassification to interest expense of $985,000 over the next 12 months[71][72] - No derivative instruments were designated as cash flow hedges at June 30, 2023[71][72] - In Q2 2023, HTLF entered into $838.1 million in fair value hedges (interest rate swaps) to protect against unrealized securities losses from higher interest rates and a $500.0 million swap to convert fixed-rate loans to floating rates, both using the portfolio layer method[76] Fair Value of Fair Value Hedges (Dollars in millions) | Derivative Type | June 30, 2023 | December 31, 2022 | | :----------------------------------- | :------------ | :---------------- | | Interest rate swaps-loans receivable held to maturity | $13.64 | $0.05 | | Interest rate swaps-securities carried at fair value | $31.05 | $0.00 | Back-to-Back Loan Swaps (Fair Value, Dollars in billions) | Category | Notional Amount (June 30, 2023) | Fair Value (June 30, 2023) | Fair Value (December 31, 2022) | | :----------------------------------- | :------------------------------ | :------------------------- | :----------------------------- | | Customer interest rate swaps (assets) | $1.33 | $0.05 | $0.05 | | Customer interest rate swaps (liabilities) | $1.33 | $(0.05) | $(0.05) | NOTE 7: FAIR VALUE Explains the methodologies and hierarchy used to measure the fair value of financial and non-financial assets and liabilities - HTLF categorizes assets and liabilities measured at fair value into a three-level hierarchy based on the observability of valuation inputs[88][89][92][100] - Most recurring fair value measurements for securities and derivatives fall into Level 2, utilizing observable market-based inputs[88][89][92][100] Assets Measured at Fair Value on a Recurring Basis (Dollars in billions) | Asset Category | Total Fair Value (June 30, 2023) | Level 1 | Level 2 | Level 3 | | :----------------------------------- | :------------------------------- | :------ | :------ | :------ | | Securities available for sale | $5.78 | $0.03 | $5.75 | $0.00 | | Equity securities with a readily determinable fair value | $0.02 | $0.00 | $0.02 | $0.00 | | Derivative financial instruments | $0.10 | $0.00 | $0.10 | $0.00 | | Interest rate lock commitments | $0.00 | $0.00 | $0.00 | $0.00 | | Forward commitments | $0.00 | $0.00 | $0.00 | $0.00 | | Total assets at fair value | $5.90 | $0.03 | $5.86 | $0.00 | Assets Measured at Fair Value on a Nonrecurring Basis (Level 3, Dollars in millions) | Asset Category | Total Fair Value (June 30, 2023) | Year-to-Date (Gains) Losses | | :----------------------------------- | :------------------------------- | :-------------------------- | | Collateral dependent individually assessed loans | $39.65 | $6.11 | | Loans held for sale | $14.35 | $(0.27) | | Other real estate owned | $2.68 | $0.74 | | Premises, furniture and equipment held for sale | $3.74 | $0.76 | - Interest rate lock commitments are classified as Level 3 due to reliance on internally developed, unobservable inputs like the closing ratio[101][103][104][108][109] - Other real estate owned (OREO) and premises/furniture/equipment held for sale are also Level 3, valued using modified appraisals and appraisal discounts[101][103][104][108][109] NOTE 8: STOCK COMPENSATION Details the company's stock-based compensation plans, including restricted stock units and stock options, and their associated costs - HTLF's 2020 Long-Term Incentive Plan authorizes 1,460,000 shares for various equity awards, with 757,105 shares available for future issuance as of June 30, 2023[130] Restricted Stock Units (RSUs) Activity (Shares in thousands and Dollars per share) | Metric | Shares (June 30, 2023) | Weighted-Average Grant Date Fair Value (June 30, 2023) | | :----------------------------------- | :--------------------- | :----------------------------------------------------- | | Outstanding at January 1 | 424.09 | $46.15 | | Granted | 241.35 | $47.30 | | Vested | (166.85) | $42.22 | | Forfeited | (28.61) | $44.27 | | Outstanding at June 30 | 469.98 | $48.25 | - Total compensation costs for RSUs were $6.7 million for the six months ended June 30, 2023, with $12.9 million in unrecognized costs expected through 2026[136] - Most RSUs granted after March 2023 accrue dividends upon vesting[136] Stock Options Activity (Shares in thousands and Dollars per share) | Metric | Shares (June 30, 2023) | Weighted Average Exercise Price (June 30, 2023) | | :----------------------------------- | :--------------------- | :---------------------------------------------- | | Outstanding January 1 | 64.52 | $48.79 | | Forfeited | (6.45) | $48.79 | | Outstanding at June 30 | 58.07 | $48.79 | - Total compensation costs for stock options were $109,000 for the six months ended June 30, 2023, with $602,000 in unrecognized costs expected through 2026[139] - No options were exercisable or had intrinsic value at June 30, 2023[139] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on HTLF's financial condition and results of operations, highlighting key performance drivers, recent developments, and responses to industry disruptions. It includes an overview of financial performance, detailed analysis of net interest income, noninterest income and expenses, credit quality, and capital and liquidity management Safe Harbor Statement Warns that forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially - This report contains forward-looking statements regarding HTLF's business, financial condition, and future performance, which are subject to various risks and uncertainties that could cause actual results to differ materially[140] - Key risk factors include economic and market conditions (e.g., inflation, interest rates, recession), credit risks, liquidity and interest rate risks, operational risks (e.g., cybersecurity), strategic and external risks, legal/compliance/reputational risks, and risks of owning HTLF stock[140][143] Critical Accounting Estimates Discusses key accounting estimates and judgments that significantly impact the financial statements - The preparation of financial statements involves estimates and judgments, particularly for carrying values of assets and liabilities[142][144] - No significant changes in critical accounting estimates or assumptions have occurred since December 31, 2022[142][144] Overview Provides a high-level summary of HTLF's business, strategic responses to market conditions, and key financial performance indicators - HTLF operates as a bank holding company with four banks under 11 local brands across 12 states, offering diversified financial services including commercial business, retail operations, treasury management, wealth management, and residential mortgages[145] - In response to recent banking industry disruptions, HTLF is actively helping customers with FDIC insurance, monitoring deposit pricing, maintaining $3.30 billion in borrowing capacity through federal programs (undrawn), and conducting deposit campaigns that resulted in over 2,700 net new commercial and retail accounts in Q2 2023[147][148] - HTLF's exposure to non-owner occupied office space loans is $408.4 million (3.5% of total loans), with no nonaccrual loans in this category[147][148] - 66% of HTLF's deposits are insured or collateralized, and capital ratios substantially exceed well-capitalized thresholds[147][148] Key Financial Results (Dollars in millions, except per share data) | Metric | Q2 2023 | Q2 2022 | YTD Q2 2023 | YTD Q2 2022 | | :----------------------------------- | :------ | :------ | :---------- | :---------- | | Net income available to common stockholders | $47.40 | $49.86 | $98.17 | $90.94 | | Diluted EPS | $1.11 | $1.17 | $2.30 | $2.14 | | Net interest income | $147.13 | $142.46 | $299.34 | $277.14 | | Total revenue | $179.63 | $177.00 | $361.84 | $346.25 | | Return on average assets | 0.98% | 1.06% | 1.02% | 0.99% | | Return on average common equity | 11.01% | 11.55% | 11.70% | 9.82% | | Return on average tangible common equity (non-GAAP) | 17.33% | 18.35% | 18.63% | 15.08% | 2023 Developments Highlights significant events and strategic initiatives undertaken by HTLF during the current reporting period - HTLF's subsidiary, Dubuque Bank & Trust, sold its Retirement Plan Services recordkeeping and administration business to July Business Services in Q2 2023, resulting in a $4.3 million gain[158] - First Bank & Trust sold its mortgage servicing rights portfolio on March 31, 2023, for approximately $6.7 million in cash, leading to the de-recognition of $7.7 million in MSRs[159] - Goodwill impairment testing was performed in Q2 2023 due to a decline in stock price, but no impairment was found[160] - HTLF entered into $838.1 million in fair value hedges to protect against unrealized securities losses and a $500.0 million fair value hedge to convert fixed-rate loans to floating rates in Q2 2023[161] - Eight bank charters have been consolidated into HTLF Bank by Q2 2023, with one more post-June 30, 2023, and the remaining two expected by year-end 2023[162][163] - This project aims for $20 million in annual benefits and core operating expenses of 2.10% or less of average assets, with $12.9 million in costs incurred to date[162][163] Financial Highlights Presents key financial ratios and balance sheet data, offering a quick overview of the company's performance and position Key Performance Ratios | Metric | Q2 2023 | Q2 2022 | YTD Q2 2023 | YTD Q2 2022 | | :----------------------------------- | :------ | :------ | :---------- | :---------- | | Annualized return on average assets | 0.98% | 1.06% | 1.02% | 0.99% | | Annualized return on average common equity (GAAP) | 11.01% | 11.55% | 11.70% | 9.82% | | Annualized return on average tangible common equity (non-GAAP) | 17.33% | 18.35% | 18.63% | 15.08% | | Annualized ratio of net charge-offs/(recoveries) to average loans | 0.32 | 0.03 | 0.15 | 0.25 | | Annualized net interest margin (GAAP) | 3.19% | 3.18% | 3.27% | 3.13% | | Annualized net interest margin, fully tax-equivalent (non-GAAP) | 3.24% | 3.22% | 3.32% | 3.17% | | Efficiency ratio (GAAP) | 60.93% | 60.16% | 60.94% | 62.75% | | Adjusted efficiency ratio, fully tax-equivalent (non-GAAP) | 59.82% | 57.66% | 58.48% | 61.02% | Balance Sheet and Common Share Data (Dollars in billions, except per share data) | Metric | June 30, 2023 | December 31, 2022 | | :----------------------------------- | :------------ | :---------------- | | Investments | $6.71 | $7.05 | | Loans receivable held to maturity | $11.72 | $11.43 | | Total assets | $20.22 | $20.24 | | Total deposits | $17.66 | $17.51 | | Common equity | $1.75 | $1.62 | | Book value per common share (GAAP) | $41.00 | $38.25 | | Tangible book value per common share (non-GAAP) | $26.98 | $24.09 | | Common shares outstanding | 42,644,544 | 42,467,394 | | Tangible common equity ratio (non-GAAP) | 5.86% | 5.21% | | Adjusted tangible common equity ratio (non-GAAP) | 8.79% | 8.37% | Non-GAAP Reconciliations Provides reconciliations of non-GAAP financial measures to their most directly comparable GAAP measures, enhancing transparency - HTLF provides reconciliations for non-GAAP financial measures such as Tangible Book Value Per Common Share, Tangible Common Equity Ratio, Adjusted Tangible Common Equity Ratio, Annualized Return on Average Tangible Common Equity, Annualized Net Interest Margin (fully tax-equivalent), Adjusted Efficiency Ratio (fully tax-equivalent), and Annualized Ratio of Core Expenses to Average Assets[166][167][168][169][170] - These measures are used to enhance comparability and provide supplemental information for investors[166][167][168][169][170] Results of Operations Analyzes the company's financial performance over the reporting period, focusing on revenue, expenses, and profitability Net Interest Margin and Net Interest Income Examines the components of net interest income and the factors influencing the company's net interest margin - Net interest margin (GAAP) was 3.19% in Q2 2023, slightly up from 3.18% in Q2 2022[151][173][174] - On a fully tax-equivalent basis (non-GAAP), it was 3.24% in Q2 2023, compared to 3.22% in Q2 2022[151][173][174] - For the first six months of 2023, net interest margin (GAAP) was 3.27%, up from 3.13% in the prior year[151][173][174] - Total interest income increased by $82.6 million (54%) in Q2 2023 year-over-year, primarily due to higher average earning assets and increased yields (average rate up 170 bps to 5.15%)[176] - Total interest expense surged by $77.9 million due to higher average interest rates paid (up 232 bps to 2.68%) and increased interest-bearing liabilities, particularly wholesale and institutional deposits[176] - Net interest income increased by $4.7 million (3%) in Q2 2023 year-over-year[148][157][176] - For the first six months of 2023, net interest income increased by $22.2 million (8%) to $299.3 million[148][157][176] Changes in Interest Income and Expense (Three Months Ended June 30, 2023 vs. 2022, Dollars in millions) | Category | Change Due to Volume | Change Due to Rate | Net Change | | :----------------------------------- | :------------------- | :----------------- | :--------- | | Total earning assets interest income | $(7.35) | $90.30 | $82.95 | | Total interest bearing liabilities interest expense | $4.39 | $73.55 | $77.94 | | Net interest income | $(11.74) | $16.75 | $5.01 | Provision For Credit Losses Analyzes the provision for credit losses, reflecting changes in loan quality and economic forecasts Provision for Credit Losses (Dollars in millions) | Metric | Q2 2023 | Q2 2022 | YTD Q2 2023 | YTD Q2 2022 | | :----------------------------------- | :------ | :------ | :---------- | :---------- | | Provision expense for credit losses-loans | $7.83 | $1.55 | $10.01 | $4.17 | | Provision (benefit) expense for credit losses-unfunded commitments | $(2.45) | $1.70 | $(1.56) | $2.32 | | Total provision expense | $5.38 | $3.25 | $8.45 | $6.49 | - Total provision for credit losses increased to $5.4 million in Q2 2023 from $3.2 million in Q2 2022[190][193] - This was primarily driven by a $7.8 million provision for loan losses, which included a $5.3 million charge-off related to a fraud incident, partially offset by a benefit from unfunded commitments[190][193] - For the first six months of 2023, total provision expense was $8.5 million, up from $6.5 million in the prior year[190][193][237] - This included $10.0 million for loan losses, impacted by the $5.3 million fraud charge-off, and a $1.6 million benefit for unfunded commitments due to a reduction in construction loan commitments[190][193][237] Noninterest Income Details income generated from sources other than interest, such as service charges, fees, and gains on asset sales Noninterest Income (Dollars in millions) | Metric | Q2 2023 | Q2 2022 | YTD Q2 2023 | YTD Q2 2022 | | :----------------------------------- | :------ | :------ | :---------- | :---------- | | Service charges and fees | $19.63 | $18.07 | $36.76 | $33.32 | | Loan servicing income | $0.41 | $0.83 | $1.13 | $1.12 | | Capital markets fees | $4.04 | $4.87 | $6.49 | $7.91 | | Securities losses, net | $(0.31) | $(2.09) | $(1.42) | $0.78 | | Net gains on sale of loans held for sale | $1.05 | $2.90 | $2.88 | $6.31 | | Income on bank owned life insurance | $1.22 | $0.52 | $2.18 | $1.05 | | Other noninterest income | $0.41 | $3.04 | $1.87 | $3.90 | | Total noninterest income | $32.49 | $34.54 | $62.49 | $69.11 | - Total noninterest income decreased by $2.0 million (6%) in Q2 2023 year-over-year and by $6.6 million (10%) for the first six months of 2023[194][198][202][207] - This was primarily due to lower net gains on sale of loans held for sale (down 64% in Q2), reduced capital markets fees (down 17% in Q2), and a decrease in other noninterest income (down 87% in Q2) due to prior year gains on VISA Class B shares[194][198][202][207] - Service charges and fees increased by 9% in Q2 2023, driven by a larger customer base and increased commercial credit card utilization[195][206] - Income on bank-owned life insurance increased by 133% in Q2 2023 due to market value changes[195][206] Noninterest Expenses Outlines expenses not related to interest, including salaries, benefits, and other operating costs Noninterest Expenses (Dollars in millions) | Metric | Q2 2023 | Q2 2022 | YTD Q2 2023 | YTD Q2 2022 | | :----------------------------------- | :------ | :------ | :---------- | :---------- | | Salaries and employee benefits | $62.10 | $64.03 | $124.25 | $130.21 | | FDIC insurance assessments | $3.04 | $1.53 | $6.31 | $3.15 | | Advertising | $3.05 | $1.28 | $5.04 | $2.84 | | Acquisition, integration and restructuring costs | $1.89 | $2.41 | $3.57 | $2.99 | | Other noninterest expenses | $15.58 | $12.97 | $31.02 | $27.05 | | Total noninterest expenses | $109.45 | $106.48 | $220.49 | $217.28 | - Total noninterest expenses increased by $3.0 million (3%) in Q2 2023 year-over-year and by $3.2 million (1%) for the first six months of 2023[208][210][212][217][218] - This was primarily driven by a 98% increase in FDIC insurance assessments due to rate changes, a 138% increase in advertising for deposit acquisition campaigns, and a 20% increase in other noninterest expenses, including credit card processing and fraud losses[208][210][212][217][218] - Salaries and employee benefits decreased by 3% in Q2 2023 and 5% for the first six months, attributable to a reduction in full-time equivalent employees and lower incentive compensation[209][216] - Acquisition, integration, and restructuring costs decreased by 22% in Q2 but increased by 19% for the first six months due to the progression of the charter consolidation project[209][216] - HTLF recorded a $4.3 million gain from the sale of its Retirement Plan Services business in Q2 2023, partially offset by losses on other repossessed real estate properties[214] Efficiency Ratio Analyzes the company's efficiency in managing operating expenses relative to revenue generation - The GAAP efficiency ratio was 60.93% in Q2 2023, up from 60.16% in Q2 2022[152][219][220] - The adjusted fully tax-equivalent efficiency ratio (non-GAAP) was 59.82% in Q2 2023, compared to 57.66% in Q2 2022[152][219][220] - For the first six months of 2023, the adjusted efficiency ratio improved to 58.48% from 61.02% in the prior year[152][219][220] - HTLF continues to pursue strategies to improve operational efficiency, including the consolidation of bank charters, which is projected to generate $20 million annually in benefits and reduce core operating expenses to 2.10% or less of average assets upon completion by year-end 2023[163][221][222] Income Taxes Reports the effective tax rate and factors influencing the company's income tax expense - The effective tax rate was 23.74% for Q2 2023, up from 22.89% in Q2 2022[224] - For the first six months of 2023, the effective tax rate was 23.10%, compared to 22.47% in the prior year[224] - Tax calculations were impacted by federal low-income housing tax credits ($311,000 in Q2 2023), new markets tax credits, historic rehabilitation tax credits, and disallowed interest expense related to tax-exempt loans and securities[225] Financial Condition Assesses the company's financial health, including asset quality, liquidity, and capital adequacy Lending Activities Details the composition and growth of the company's loan portfolio across various categories Loan Portfolio Composition (Dollars in billions) | Loan Category | June 30, 2023 | Percent | December 31, 2022 | Percent | | :----------------------------------- | :------------ | :------ | :---------------- | :------ | | Commercial and industrial | $3.59 | 30.63% | $3.46 | 30.31% | | Owner occupied commercial real estate | $2.40 | 20.47% | $2.27 | 19.82% | | Non-owner occupied commercial real estate | $2.53 | 21.60% | $2.33 | 20.40% | | Real estate construction | $1.01 | 8.65% | $1.08 | 9.42% | | Agricultural and agricultural real estate | $0.84 | 7.17% | $0.92 | 8.05% | | Residential mortgage | $0.83 | 7.07% | $0.85 | 7.47% | | Consumer | $0.51 | 4.37% | $0.51 | 4.43% | | Total gross loans held to maturity | $11.72 | 100.00% | $11.43 | 100.00% | - Total loans held to maturity increased by $289.6 million (3%) to $11.72 billion at June 30, 2023, from $11.43 billion at December 31, 2022[226][228][230] - This growth was primarily in commercial and commercial real estate loans, reflecting an emphasis on organic growth and market penetration, offset by decreases in real estate construction and agricultural loans[226][228][230] Allowance for Credit Losses Examines the allowance for credit losses, its components, and the methodology used for its calculation - The total allowance for lending-related credit losses was $129.8 million (1.11% of loans) at June 30, 2023, compared to $129.7 million (1.13% of loans) at December 31, 2022[154][232] Components of Allowance for Lending Related Credit Losses (Dollars in millions) | Component | June 30, 2023 | % of Allowance | December 31, 2022 | % of Allowance | | :----------------------------------- | :------------ | :------------- | :---------------- | :------------- | | Quantitative | $82.42 | 63.48% | $84.41 | 65.09% | | Qualitative/Economic Forecast | $47.42 | 36.52% | $45.27 | 34.91% | | Total | $129.83 | 100.00% | $129.68 | 100.00% | - The quantitative allowance decreased by $2.0 million (2%), while the qualitative allowance increased by $2.1 million (4.7%)[233][234][235] - Management utilized Moody's June 5, 2023, baseline forecast, considering a moderate recession scenario, for the allowance calculation[233][234][235] Credit Quality and Nonperforming Assets Assesses the quality of the loan portfolio and the levels of nonperforming assets, including nonaccrual loans - Nonpass loans (watch, substandard) increased to $568.2 million (4.8% of total loans) at June 30, 2023, from $533.3 million (4.7%) at December 31, 2022[240] - Substandard loans constituted 53% of nonpass loans at June 30, 2023[240] Nonperforming Assets (Dollars in millions) | Metric | June 30, 2023 | December 31, 2022 | | :----------------------------------- | :------------ | :---------------- | | Nonaccrual loans | $61.96 | $58.23 | | Loans contractually past due 90 days or more | $1.46 | $0.27 | | Total nonperforming loans | $63.42 | $58.50 | | Other real estate | $2.68 | $8.40 | | Other repossessed assets | $0.01 | $0.03 | | Total nonperforming assets | $66.10 | $66.93 | | Nonperforming loans to total loans | 0.54% | 0.51% | | Nonperforming assets to total assets | 0.33% | 0.33% | - Total nonperforming assets decreased by $834,000 (1%) to $66.1 million (0.33% of total assets) at June 30, 2023[243] - Nonperforming loans increased to $63.4 million (0.54% of total loans) from $58.5 million (0.51%) at December 31, 2022[243] - Approximately 64% of nonperforming loans at June 30, 2023, were individual balances exceeding $1.0 million[243] Securities Reviews the composition and value of the company's investment securities portfolio - Securities represented 33% of total assets at June 30, 2023, down from 35% at December 31, 2022[153][244] - Total securities carried at fair value decreased by $349.1 million (6%) to $5.80 billion[153][244] Securities Portfolio Composition (Dollars in billions) | Category | June 30, 2023 | Percent | December 31, 2022 | Percent | | :----------------------------------- | :------------ | :------ | :---------------- | :------ | | Obligations of states and political subdivisions | $1.68 | 25.11% | $1.71 | 24.24% | | Mortgage-backed securities - agency | $1.69 | 25.16% | $1.77 | 25.13% | | Mortgage-backed securities - non-agency | $2.00 | 29.76% | $2.18 | 30.94% | | Total securities | $6.71 | 100.00% | $7.05 | 100.00% | - The securities portfolio had an expected modified duration of 6.20 years at June 30, 2023, consistent with 6.19 years at December 31, 2022[246][245] - Approximately $3.73 billion of securities remained available to pledge at June 30, 2023[246][245] Deposits Analyzes the composition and changes in the company's deposit base, including customer and wholesale deposits - Total deposits increased by $150.5 million (1%) to $17.66 billion at June 30, 2023, from $17.51 billion at December 31, 2022[154][248] - 66% of HTLF's deposits were insured or collateralized[154][248] Deposit Balances by Type (Dollars in billions) | Deposit Type | June 30, 2023 | December 31, 2022 | Change | | :----------------------------------- | :------------ | :---------------- | :----- | | Demand-customer | $4.90 | $5.70 | $(0.80) | | Savings-customer | $8.15 | $8.67 | $(0.52) | | Savings-wholesale and institutional | $0.62 | $1.32 | $(0.70) | | Time-customer | $1.60 | $0.85 | $0.75 | | Time-wholesale | $2.40 | $0.97 | $1.43 | | Total deposits | $17.66 | $17.51 | $0.15 | - Customer demand and savings deposits decreased significantly, while time deposits, particularly wholesale time deposits, saw substantial increases[249] - Wholesale and institutional deposits grew by $729.0 million (32%) to $3.02 billion[249] Short-Term Borrowings Details the company's short-term funding sources, including repurchase agreements and advances from federal programs Short-Term Borrowings (Dollars in millions) | Borrowing Type | June 30, 2023 | December 31, 2022 | Change | | :----------------------------------- | :------------ | :---------------- | :----- | | Securities sold under agreement to repurchase | $35.91 | $95.30 | $(59.39) | | Advances from the FHLB | $0.00 | $50.00 | $(50.00) | | Advances from the federal discount window | $0.00 | $224.00 | $(224.00) | | Total | $44.36 | $376.12 | $(331.75) | - Short-term borrowings decreased significantly by $331.8 million (88%) to $44.4 million at June 30, 2023, from $376.1 million at December 31, 2022[251] - This reduction was primarily due to the paydown of FHLB advances and federal discount window borrowings[251] - HTLF had $630.4 million in borrowing capacity pledged to the Federal Reserve's Bank Term Funding Program (BTFP) at June 30, 2023, with no advances drawn[252][254] - The company also renewed a $100.0 million revolving credit line, with no outstanding balance[252][254] Other Borrowings Reports long-term debt instruments, such as trust preferred securities and subordinated notes Other Borrowings (Dollars in millions) | Borrowing Type | June 30, 2023 | December 31, 2022 | Change | | :----------------------------------- | :------------ | :---------------- | :----- | | Trust preferred securities | $148.81 | $148.28 | $0.52 | | Subordinated notes | $222.84 | $222.65 | $0.19 | | Total | $372.40 | $371.75 | $0.65 | - Other borrowings, defined as maturities over one year, remained stable at $372.4 million at June 30, 2023, compared to $371.8 million at December 31, 2022[255] - The effective weighted average interest rate for trust preferred securities was 8.17% at June 30, 2023[255] Capital Requirements Outlines the company's regulatory capital ratios and its compliance with well-capitalized thresholds - HTLF and its Banks are categorized as well-capitalized under regulatory frameworks[257][260] - Management believes current capital ratio buffers would withstand regulatory changes requiring inclusion of unrealized losses in the total investment portfolio[257][260] Capital Ratios (Percent) | Capital Ratio | June 30, 2023 | December 31, 2022 | Minimum Capital Requirement | Well Capitalized Requirement | | :----------------------------------- | :------------ | :---------------- | :-------------------------- | :--------------------------- | | Total Capital (to Risk-Weighted Assets) | 14.93% | 14.76% | 8.00% | 10.00% | | Tier 1 Capital (to Risk-Weighted Assets) | 12.05% | 11.81% | 6.00% | 8.00% | | Common Equity Tier 1 (to Risk-Weighted Assets) | 11.33% | 11.07% | 4.50% | 6.50% | | Tier 1 Capital (to Average Assets) | 9.40% | 9.13% | 4.00% | 5.00% | - Retained earnings available for dividends from its banks to HTLF totaled $788.5 million at June 30, 2023, under the most restrictive minimum capital requirements, and $482.8 million to remain well-capitalized[259] - HTLF has a universal shelf registration statement effective until August 2025, providing flexibility to raise debt or equity capital as needed[261][262] Commitments and Contractual Obligations Details off-balance sheet commitments, including credit extensions and standby letters of credit - Commitments to extend credit totaled $4.91 billion at June 30, 2023, up from $4.73 billion at December 31, 2022[263] - Standby letters of credit increased to $72.8 million from $55.1 million[263] - HTLF's banks had $878.3 million in standby letters of credit with the FHLB to secure public funds and municipal deposits at June 30, 2023[264] - No material changes to contractual obligations have occurred since the 2022 Annual Report on Form 10-K[264] Liquidity Assesses the company's ability to meet its financial obligations, including cash on hand, securities, and borrowing capacity - At June 30, 2023, HTLF had $400.2 million in cash and cash equivalents and $5.80 billion in securities carried at fair value[269][273] - The securities portfolio is expected to generate approximately $1.3 billion in cash flow over the next twelve months[269][273] - HTLF shifted from overnight borrowings to brokered CDs in the first six months of 2023 to enhance immediate funding availability[273] - Pledged securities totaled $2.88 billion, with $3.73 billion remaining available to pledge[273] Funding Sources and Available Borrowing Capacity (As of June 30, 2023, Dollars in billions) | Source | Outstanding | Available | | :----------------------------------- | :---------- | :-------- | | Federal Reserve Discount Window | $0.00 | $1.49 | | Bank Term Funding Program | $0.00 | $0.63 | | Federal Home Loan Bank | $0.00 | $1.18 | | Federal Funds | $0.00 | $0.27 | | Wholesale deposits/brokered CDs | $2.89 | $1.18 | | Total | $2.89 | $4.75 | - Management believes cash on hand, cash flows from operations, and existing borrowing programs will be sufficient to meet operating cash needs in 2023[273][278] - HTLF is focused on funding loan growth with less expensive deposits, securities sales, or borrowings, and actively pursuing deposit acquisition campaigns[273][278] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section details HTLF's exposure to market risk, primarily interest rate risk, and its strategies for measurement and management. It includes interest rate sensitivity analyses and information on derivative financial instruments used to mitigate risk - HTLF's primary market risk is interest rate risk, managed through balance sheet strategies and regular reviews by asset/liability committees and the board of directors[279][280] - Interest rate sensitivity analyses simulate net interest income changes under various rate scenarios[279][280] Net Interest Margin Sensitivity Analysis (Dollars in millions) | Scenario | Year 1 Net Interest Margin (2023) | Year 1 % Change From Base (2023) | Year 2 Net Interest Margin (2023) | Year 2 % Change From Base (2023) | | :----------------------------------- | :-------------------------------- | :------------------------------- | :-------------------------------- | :------------------------------- | | Down 100 Basis Points | $610.23 | (1.00)% | $614.57 | (0.30)% | | Base | $616.42 | — | $637.16 | 3.36 | | Up 200 Basis Points | $627.22 | 1.75 | $650.26 | 5.49 | - HTLF uses derivative financial instruments to manage interest rate risk, primarily with large, stable financial institutions to minimize credit-related losses[263][282] - Off-balance sheet financial instruments, such as commitments to extend credit ($4.91 billion) and standby letters of credit ($72.8 million), also involve credit and interest rate risk[263][282] ITEM 4. CONTROLS AND PROCEDURES Management, including the CEO and CFO, concluded that HTLF's disclosure controls and procedures were effective as of June 30, 2023. No material changes in internal controls over financial reporting occurred during the period - HTLF's disclosure controls and procedures were effective as of June 30, 2023[284] - No material changes in internal controls over financial reporting occurred during the three months ended June 30, 2023[284] PART II. OTHER INFORMATION Additional disclosures including legal proceedings, risk factors, equity sales, defaults, and other relevant information ITEM 1. LEGAL PROCEEDINGS This section states that HTLF and its subsidiaries are involved in ordinary routine litigation incidental to business as of June 30, 2023 - HTLF and its subsidiaries are currently involved in ordinary routine litigation incidental to business as of June 30, 2023[265][286] ITEM 1A. RISK FACTORS This section confirms that there have been no material changes to the risk factors previously disclosed in HTLF's 2022 Annual Report on Form 10-K - No material changes have occurred in the risk factors applicable to HTLF since those disclosed in the 2022 Annual Report on Form 10-K[287] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This section reports that HTLF made no purchases of its common stock during the quarter ended June 30, 2023, despite authorization to acquire up to 5% of capital - HTLF did not purchase any of its common stock during the quarter ended June 30, 2023, despite board authorization to acquire up to 5% of capital ($87.4 million as of June 30, 2023)[288] ITEM 3. DEFAULTS UPON SENIOR SECURITIES This section states that there were no defaults upon senior securities during the reporting period - There were no defaults upon senior securities[289] ITEM 4. MINE SAFETY DISCLOSURES This section indicates that mine safety disclosures are not applicable to HTLF - Mine safety disclosures are not applicable to HTLF[289] ITEM 5. OTHER INFORMATION This section discloses that a director, Marty Schmitz, entered into a 10b5-1 Plan on May 26, 2023, to sell up to 17,800 shares of HTLF's common stock - Marty Schmitz, a Director of HTLF, adopted a 10b5-1 Plan on May 26, 2023, to sell up to 17,800 shares of HTLF's common stock, commencing no earlier than 90 days after the adoption date and terminating on June 15, 2024[289] ITEM 6. EXHIBITS This section lists all exhibits filed with the Form 10-Q, including amended organizational documents, compensation plans, and certifications from executive officers - Exhibits include Amended and Restated Bylaws and Certificate of Incorporation, Directors Deferred Compensation Plan, an amendment to an agreement with Fiserv Solutions LLC, and certifications from the Chief Executive Officer and Chief Financial Officer[290] SIGNATURES Formal declaration by authorized officers confirming the accuracy and completeness of the report - The report was duly signed on behalf of Heartland Financial USA, Inc. by Bruce K. Lee (President and CEO), Bryan R. McKeag (EVP and CFO), and Janet M. Quick (EVP and Deputy CFO) on August 4, 2023[292][293]