Heartland Financial USA(HTLF) - 2021 Q2 - Quarterly Report

Part I - Financial Information Financial Statements This section presents Heartland Financial USA, Inc.'s unaudited consolidated financial statements, including balance sheets, income, cash flows, and equity changes, with detailed notes on key disclosures Consolidated Financial Statements Overview Total assets grew to $18.37 billion by June 30, 2021, with net income available to common stockholders significantly increasing to $59.6 million due to higher net interest income and a provision benefit Consolidated Balance Sheet Highlights (Unaudited, in thousands) | (In thousands) | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $18,371,006 | $17,908,339 | | Total Loans Receivable, net | $9,891,288 | $9,891,445 | | Total Securities | $6,629,417 | $6,216,814 | | Total Deposits | $15,615,118 | $14,979,905 | | Total Liabilities | $16,211,220 | $15,829,108 | | Total Stockholders' Equity | $2,159,786 | $2,079,231 | Consolidated Income Statement Highlights (Unaudited, in thousands, except per share data) | (In thousands, except per share data) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $141,218 | $124,146 | $280,823 | $236,657 | | Provision (benefit) for credit losses | $(7,080) | $26,796 | $(7,728) | $48,316 | | Noninterest Income | $33,164 | $30,637 | $63,481 | $56,454 | | Noninterest Expenses | $103,376 | $90,439 | $205,799 | $181,298 | | Net Income | $61,605 | $30,131 | $114,419 | $50,171 | | Net Income Available to Common Stockholders | $59,593 | $30,131 | $110,394 | $50,171 | | Earnings Per Common Share - Diluted | $1.41 | $0.82 | $2.61 | $1.36 | Consolidated Cash Flow Highlights (Unaudited, in thousands) | (In thousands) | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $153,581 | $31,055 | | Net Cash Used by Investing Activities | $(454,858) | $(1,653,630) | | Net Cash Provided by Financing Activities | $412,502 | $1,697,419 | | Net Increase in Cash and Cash Equivalents | $111,225 | $74,844 | Note 2: Acquisitions This note details two December 2020 acquisitions, including Johnson Bank's Arizona operations and AIM Bancshares, Inc., significantly increasing assets and deposits - On December 4, 2020, HTLF's subsidiary Arizona Bank & Trust acquired Johnson Bank's Arizona operations, including four banking centers, total assets of $419.7 million, and deposits of $415.5 million[23] - On December 4, 2020, HTLF completed the acquisition of AIM Bancshares, Inc. and its subsidiary AimBank for approximately $264.5 million, adding $1.97 billion in assets, including $1.09 billion in loans and $1.67 billion in deposits[24] Note 3: Securities The securities portfolio grew to $6.54 billion, primarily comprising government and mortgage-backed securities, with unrealized losses attributed to interest rate changes, not credit quality Composition of Securities Carried at Fair Value (in thousands) | Security Type | Fair Value at June 30, 2021 | Fair Value at Dec 31, 2020 | | :--- | :--- | :--- | | Obligations of states and political subdivisions | $1,871,786 | $1,635,227 | | Mortgage-backed securities - agency | $1,740,675 | $1,355,270 | | Mortgage-backed securities - non-agency | $1,363,292 | $1,449,116 | | Asset-backed securities | $846,987 | $1,069,266 | | Other Debt & Equity Securities | $693,318 | $618,147 | | Total | $6,543,978 | $6,127,975 | - As of June 30, 2021, securities with a carrying value of $1.87 billion were pledged to secure public and trust deposits and other borrowings, a decrease from $2.12 billion at year-end 2020[28] - The company determined that unrealized losses in its debt securities portfolio, totaling $38.0 million as of June 30, 2021, were temporary and primarily due to changes in interest rates and market spreads, not credit quality issues, thus no credit losses were recognized[33][35] Note 4: Loans Total loans held to maturity remained stable at approximately $10.0 billion, with a diversified portfolio and a decrease in PPP loans, while nonpass loans represented 10.37% of total loans Loan Portfolio Composition (in thousands) | Loan Category | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Commercial and industrial | $2,518,908 | $2,534,799 | | Paycheck Protection Program (PPP) | $829,175 | $957,785 | | Owner occupied commercial real estate | $1,940,134 | $1,776,406 | | Non-owner occupied commercial real estate | $1,987,369 | $1,921,481 | | Real estate construction | $854,295 | $863,220 | | Agricultural and agricultural real estate | $679,608 | $714,526 | | Residential real estate | $800,884 | $840,442 | | Consumer | $401,641 | $414,392 | | Total loans receivable held to maturity | $10,012,014 | $10,023,051 | - Nonaccrual loans decreased to $85.3 million at June 30, 2021, from $87.4 million at December 31, 2020[53] - Nonpass loans (rated watch or substandard) totaled $1.04 billion at June 30, 2021, down from $1.08 billion at year-end 2020, including $91.8 million in 100% government guaranteed nonpass-rated PPP loans with no allowance[49][50][51] Note 5: Allowance for Credit Losses The allowance for credit losses on loans decreased to $120.7 million due to a $6.5 million provision benefit, reflecting improved economic forecasts and credit quality trends Changes in Allowance for Credit Losses - Loans (in thousands) | | Six Months Ended June 30, 2021 | | :--- | :--- | | Balance at December 31, 2020 | $131,606 | | Charge-offs | $(5,623) | | Recoveries | $1,193 | | Provision (benefit) | $(6,450) | | Balance at June 30, 2021 | $120,726 | - The allowance for credit losses on unfunded commitments decreased from $15.3 million at year-end 2020 to $14.0 million at June 30, 2021, following a provision benefit of $1.3 million for the six-month period[58] Note 6: Goodwill, Core Deposit Premium and Other Intangible Assets Goodwill remained stable at $576.0 million, while total amortizing intangible assets decreased to $43.7 million due to amortization, with no goodwill impairment recorded - Goodwill was stable at $576.0 million at both June 30, 2021, and December 31, 2020, with no impairment found in an interim Q2 2020 assessment[59] Intangible Assets (in thousands) | Intangible Asset Type | Net Carrying Amount at June 30, 2021 | Net Carrying Amount at Dec 31, 2020 | | :--- | :--- | :--- | | Core deposit intangibles | $37,302 | $42,215 | | Customer relationship intangibles | $150 | $168 | | Mortgage servicing rights | $5,559 | $5,189 | | Commercial servicing rights | $642 | $863 | | Total | $43,653 | $48,435 | Note 7: Derivative Financial Instruments HTLF uses derivative instruments, primarily interest rate swaps, to manage interest rate risk, holding $61.3 million in cash flow hedges and $438.4 million in back-to-back loan swaps - The company uses interest rate swaps, caps, floors, and other derivatives as part of its interest rate risk management strategy to add stability to its net interest margin[70] Key Derivative Positions by Notional Amount (in thousands) | Derivative Type | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Cash Flow Hedges (Interest Rate Swaps) | $61,250 | $118,417 | | Fair Value Hedges | $16,901 | $20,841 | | Back-to-Back Loan Swaps | $438,415 | $440,719 | | Interest Rate Lock Commitments (Mortgage) | $39,922 | $42,078 | Note 8: Fair Value This note details fair value measurements, with $6.58 billion in recurring fair value assets, mostly Level 2, and the loan portfolio's fair value estimated at $9.84 billion - HTLF uses a three-level hierarchy for fair value measurements: Level 1 (quoted prices), Level 2 (observable inputs), and Level 3 (unobservable inputs)[87][88][89] Assets and Liabilities at Fair Value on a Recurring Basis (in thousands) | | Total Fair Value at June 30, 2021 | Level 1 | Level 2 | Level 3 | | :--- | :--- | :--- | :--- | :--- | | Assets | | | | | | Securities available for sale | $6,543,978 | $1,016 | $6,542,962 | $— | | Derivative financial instruments | $29,891 | $— | $29,891 | $— | | Interest rate lock commitments | $1,425 | $— | $— | $1,425 | | Liabilities | | | | | | Derivative financial instruments | $35,268 | $— | $35,268 | $— | - The estimated fair value of the total loan portfolio was $9.84 billion as of June 30, 2021, compared to a carrying amount of $9.89 billion[115] Note 10: Stock Compensation HTLF granted 208,513 Restricted Stock Units under its 2020 Long-Term Incentive Plan, incurring $4.6 million in compensation cost with $11.3 million unrecognized - HTLF's 2020 Long-Term Incentive Plan authorizes the issuance of up to 1,460,000 shares of common stock, with 1,200,807 shares available for future awards as of June 30, 2021[139] Restricted Stock Unit (RSU) Activity (shares) | | Six Months Ended June 30, 2021 | | :--- | :--- | | Outstanding at January 1 | 348,275 shares | | Granted | 208,513 shares | | Vested | (146,381) shares | | Forfeited | (18,861) shares | | Outstanding at June 30 | 391,546 shares | - Total compensation cost for RSUs was $4.6 million for the first six months of 2021, with $11.3 million of unrecognized cost expected to be recognized through 2024[147] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses HTLF's strong financial performance in Q2 and H1 2021, highlighting growth in assets, deposits, and net income, alongside improved credit quality, capital, and liquidity positions Overview and 2021 Developments HTLF reported strong Q2 2021 performance with net income of $59.6 million and total assets of $18.37 billion, driven by AimBank integration, PPP loan origination, and strategic branch optimization Q2 2021 Performance Highlights vs. Q2 2020 (in millions, except ratios and per share data) | Metric | Q2 2021 | Q2 2020 | | :--- | :--- | :--- | | Net income available to common stockholders | $59.6 million | $30.1 million | | Earnings per diluted common share | $1.41 | $0.82 | | Return on average assets | 1.35% | 0.84% | | Return on average tangible common equity (non-GAAP) | 18.05% | 11.97% | - Key strategic activities in 2021 included: - Successful systems conversion of AimBank in February - Origination of $473.9 million in second-round PPP loans - Consolidation of nine bank branches as part of an ongoing optimization strategy - A corporate branding change from Heartland Financial to HTLF - A 14% increase in the quarterly common stock dividend to $0.25 per share, effective after Q2[162][163][164][165][166] Results of Operations Analysis Net interest income increased 14% to $141.2 million in Q2 2021, driven by earning asset growth, while a $7.1 million provision benefit for credit losses reflected improved economic conditions - Q2 2021 net interest margin was 3.37% (3.41% tax-equivalent), down from 3.81% (3.85% tax-equivalent) in Q2 2020, primarily due to lower market interest rates and a shift in earning asset mix towards lower-yielding securities[179][181] - A provision benefit for credit losses of $7.1 million was recorded in Q2 2021, compared to a $26.8 million expense in Q2 2020, driven by improved macroeconomic factors and better credit quality trends[193][195] - Noninterest income increased by $2.5 million (8%) in Q2 2021 versus Q2 2020, led by a 38% rise in service charges and fees, partially offset by a 40% decrease in net gains on sale of loans[196] - Noninterest expenses rose by $12.9 million (14%) in Q2 2021 versus Q2 2020, primarily due to a $7.2 million increase in salaries and benefits and a $2.6 million increase in professional fees, both related to recent acquisitions[205] Financial Condition Analysis Total assets reached $18.37 billion with a stable loan portfolio of $10.01 billion, while nonperforming assets decreased and deposits grew, maintaining a well-capitalized position with a 11.45% Common Equity Tier 1 ratio - Excluding PPP loans, total loans held to maturity grew by $117.6 million (1.30%) since year-end 2020, with owner-occupied commercial real estate loans showing strong growth of 9%[227][228][229] - The total allowance for lending related credit losses was $134.7 million, or 1.35% of total loans (1.47% excluding PPP loans), down from 1.47% at year-end 2020[159][232] - Total nonperforming assets decreased by $3.2 million since year-end 2020 to $91.7 million, representing 0.50% of total assets[247] Capital Ratios (%) | Ratio | June 30, 2021 | Minimum Requirement | | :--- | :--- | :--- | | Common Equity Tier 1 | 11.45% | 4.50% | | Tier 1 Capital | 12.36% | 6.00% | | Total Capital | 15.04% | 8.00% | | Tier 1 Leverage | 8.50% | 4.00% | Quantitative and Qualitative Disclosures About Market Risk This section details HTLF's management of market risk, primarily interest rate risk, using simulation analysis to assess the impact of rate changes on net interest income, indicating a slightly asset-sensitive position Net Interest Income Sensitivity Analysis (Year 1, in thousands) | Interest Rate Scenario | Estimated Net Interest Margin | % Change From Base | | :--- | :--- | :--- | | Down 100 Basis Points | $500,955 | (1.95)% | | Base | $510,916 | — | | Up 200 Basis Points | $534,488 | 4.61% | - The company's primary market risk is interest rate risk from its core banking activities, managed through asset/liability committees and detailed quarterly reviews, including simulations[285][286] Controls and Procedures Management concluded that HTLF's disclosure controls and procedures were effective as of June 30, 2021, with no material changes in internal controls over financial reporting during Q2 2021 - Based on an evaluation as of June 30, 2021, the CEO and CFO concluded that HTLF's disclosure controls and procedures were effective[289] - No changes in internal controls over financial reporting occurred during the three months ended June 30, 2021, that have materially affected, or are reasonably likely to materially affect, these controls[289] Part II - Other Information Legal Proceedings As of June 30, 2021, HTLF and its subsidiaries are involved in ordinary legal proceedings incidental to their business operations - The company is subject to ordinary routine litigation incidental to its business, with no specific material proceedings highlighted[291] Risk Factors No material changes to HTLF's risk factors have occurred since those disclosed in its 2020 Annual Report on Form 10-K - No material changes in risk factors have occurred since the company's 2020 Annual Report on Form 10-K[292] Unregistered Sales of Equity Securities and Use of Proceeds HTLF has board authorization to repurchase up to 5% of its capital, but made no common stock purchases during the quarter ended June 30, 2021 - HTLF and its affiliated purchasers made no purchases of its common stock during the quarter ended June 30, 2021[293] Exhibits This section lists exhibits filed with the Form 10-Q, including management compensation agreements, a master agreement with Fiserv Solutions LLC, and required CEO/CFO certifications - Key exhibits filed include a Master Agreement with Fiserv Solutions LLC dated July 1, 2021, and certifications by the CEO and CFO pursuant to Sarbanes-Oxley[295]