HEARTLAND FINANCIAL USA INC MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)
SAFE HARBOR STATEMENT
This Quarterly Report on Form 10-Q (including any information incorporated
herein by reference) and future oral and written statements of
Financial USA, Inc.
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
with respect to the business, financial condition, results of operations, plans,
objectives and future performance of HTLF.
Any statements about HTLF’s expectations, beliefs, plans, objectives,
assumptions or future events or performance are not historical facts and may be
forward-looking. These forward-looking statements are generally identified by
the use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,”
“estimate,” “project,” “may,” “will,” “would,” “could,” “should,” “opportunity,”
“potential” or other similar or negative expressions of these words or phrases.
Although HTLF has made these statements based on management’s experience,
beliefs, expectations, assumptions and best estimate of future events, the
ability of the company to predict results or the actual effect or outcomes of
plans or strategies is inherently uncertain, and there may be events or factors
that management has not anticipated. Therefore, the accuracy and achievement of
such forward-looking statements and estimates are subject to a number of risks,
many of which are beyond the ability of management to control or predict, that
could cause actual results to differ materially from those in its
forward-looking statements. These factors, which the company currently believes
could have a material effect on its operations and future prospects include,
among others, those described below and in the risk factors in HTLF’s reports
filed with the
Factors” section under Item 1A of Part I of the company’s Annual Report on Form
10-K for the year ended
•COVID-19 Pandemic Risks, including risks related to the ongoing COVID-19
pandemic and measures enacted by the
adopted by private businesses in response to the COVID-19 pandemic;
•Economic and Market Conditions Risks, including risks related to changes in the
operations and future civil unrest, natural disasters, terrorist threats or acts
of war;
•Credit Risks, including risks of increasing credit losses due to deterioration
in the financial condition of HTLF’s borrowers, changes in asset and collateral
values and climate and other borrower industry risks which may impact the
provision for credit losses and net charge-offs;
•Liquidity and Interest Rate Risks, including the impact of capital market
conditions and changes in monetary policy on our borrowings and net interest
income;
•Operational Risks, including processing, information systems, cybersecurity,
vendor, business interruption, and fraud risks;
•Strategic and External Risks, including competitive forces impacting our
business and strategic acquisition risks;
•Legal, Compliance and Reputational Risks, including regulatory and litigation
risks; and
•Risks of Owning Stock in HTLF, including stock price volatility and dilution as
a result of future equity offerings and acquisitions.
These risks and uncertainties should be considered in evaluating forward-looking
statements made by HTLF or on its behalf, and undue reliance should not be
placed on these statements. There can be no assurance that other factors not
currently anticipated by HTLF will not materially and adversely affect the
company’s business, financial condition and results of operations. In addition,
many of these risks and uncertainties are currently amplified by and may
continue to be amplified by the COVID-19 pandemic and the impact of varying
governmental responses that affect HTLF’s employees, customers and the economies
where they operate. All statements in this Quarterly Report on Form 10-Q,
including forward-looking statements, speak only as of the date they are made.
HTLF does not undertake and specifically disclaims any obligation to publicly
release the results of any revisions which may be made or to correct or update
any forward-looking statement to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events or to otherwise update any statement in light of new information or
future events. Further information concerning HTLF and its business, including
additional factors that could materially affect HTLF’s financial results, is
included in the company’s filings with the
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CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, income
and expenses. These estimates are based upon historical experience and on
various other assumptions that management believes are reasonable under the
circumstances. Among other things, the estimates form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The estimates and judgments
that management believes have the most effect on HTLF’s reported financial
position and results of operations are described as critical accounting policies
in the company’s Annual Report on Form 10-K for the year ended
2021
estimates or the assumptions and judgments utilized in applying these estimates
since
OVERVIEW
the brand name “HTLF”. HTLF’s independently branded and chartered banks serve
communities in
core commercial business supported by a strong retail operation and provides a
diversified line of financial services and products including treasury
management, commercial credit cards, wealth management, investments and
residential mortgages. As of
subsidiaries operating under 11 local bank brands through a total of 121
locations.
HTLF’s results of operations depend primarily on net interest income, which is
the difference between interest income from interest earning assets and interest
expense on interest bearing liabilities. Noninterest income, which includes
service charges and fees, loan servicing income, trust fees, brokerage and
insurance commissions, net securities gains/(losses), net gains on sale of loans
held for sale, and income on bank owned life insurance, also affects the results
of operations. HTLF’s principal operating expenses, aside from interest expense,
consist of the provision for credit losses, salaries and employee benefits,
occupancy and equipment costs, professional fees, advertising, core deposit and
customer relationship intangibles amortization and other real estate and loan
collection expenses.
HTLF reported the following results for the quarter ended
compared to the quarter ended
•net income available to common stockholders of
million
•earnings per diluted common share of
•net interest income of
of
•return on average assets was 1.13% compared to 1.19%,
•return on average common equity was 12.93% compared to 10.32%, and
•return on average tangible common equity (non-GAAP) was 20.76% compared to
15.14%.
HTLF reported the following results for the nine months ended
2022
•net income available to common stockholders of
•earnings per diluted common share of
•net interest income of
of
•return on average assets was 1.04% compared to 1.25%,
•return on average common equity was 10.80% compared to 10.95%, and
•return on average tangible common equity (non-GAAP) was 16.79% compared to
16.34%,
For the third quarter of 2022, net interest margin was 3.41% (3.45% on a fully
tax-equivalent basis, non-GAAP), which compares to 3.30% (3.34% on a fully
tax-equivalent basis, non-GAAP) for the third quarter of 2021. For the first
nine months of 2022, net interest margin was 3.22% (3.27% on a fully
tax-equivalent basis, non-GAAP) which compares to 3.37% (3.41% on a fully tax
equivalent basis, non-GAAP) for the first nine months of 2021.
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The efficiency ratio on a fully tax-equivalent basis (non-GAAP) was 55.26% for
the third quarter of 2022 compared to 60.38% for the same quarter of 2021. For
the first nine months of 2022, the efficiency ratio on a fully tax-equivalent
basis (non-GAAP) was 58.99% compared to 58.05% for the first nine months of
2021.
Total assets were
million
assets at
Total loans held to maturity were
to
or 10%. Excluding total Paycheck Protection Program (“PPP”) loans, total loans
held to maturity increased
The total allowance for lending related credit losses was
1.14% of total loans at
of total loans at
Total deposits were
billion
Total equity was
at
2022
available for sale, net of applicable taxes, was
2022
at
Refer to “Non-GAAP Financial Measures” for additional information on the usage
and presentation of the foregoing non-GAAP measures, and refer to the financial
tables under “Financial Highlights” for the reconciliations to the most directly
comparable GAAP measures.
2022 Developments
Charter Consolidation Update
In the second quarter of 2022, the consolidation of HTLF’s eleven separate bank
charters advanced from planning to execution with
division of
Valley Bank
Subsequent to
consolidated into
& Trust
During the fourth quarter of 2022, one additional charter consolidation is
expected to be completed, and the remaining six charters are expected to be
consolidated by the end of 2023. Charter consolidation follows a template that
retains the current brands, local leadership and local decision making.
Consolidation restructuring costs are projected to be
approximately
Total costs incurred since the project started in the fourth quarter of 2021
through
incurred in the third quarter of 2022. For the nine months ended
2022
Charter consolidation is designed to eliminate redundancies and improve HTLF’s
operating efficiency and capacity to support ongoing product and service
enhancements, as well as current and future growth. HTLF realized some operating
efficiency and financial benefits in the third quarter of 2022 with the
completion of two additional charter consolidations. The resulting efficiencies
and expansion in capacity are projected to generate benefits of approximately
expenses expected to decline to 2.10% or less of average assets.
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