Heartland Financial USA, Inc. (NASDAQ: HTLF) is a bank holding company operating under the brand name "HTLF" with a diverse portfolio of financial services and a strong presence across the Midwest and Southwest regions. The company has demonstrated resilience and strategic foresight, as evidenced by its recent financial performance and the implementation of its transformative HTLF 3.0 initiative.
Financials
In the fiscal year 2023, HTLF reported annual net income of $79.92 million and annual revenue of $932.87 million. The company's annual operating cash flow stood at $256.34 million, while its annual free cash flow reached $248.96 million. These figures showcase HTLF's financial strength and its ability to generate consistent cash flows to support its operations and strategic initiatives.
During the fourth quarter of 2023, HTLF reported a net loss available to common stockholders of $72.38 million, or $1.69 per diluted share. This loss was primarily driven by a pre-tax loss of $140 million related to the sale of investment securities, as the company strategically repositioned its balance sheet to improve liquidity and net interest margin. Adjusting for this one-time loss and other non-recurring items, HTLF's adjusted earnings available to common stockholders for the quarter were $45.58 million, or $1.06 per diluted share.
For the full year 2023, HTLF reported net income available to common stockholders of $71.92 million, or $1.68 per diluted share. The company's adjusted earnings available to common stockholders for the year were $193.92 million, or $4.53 per diluted share, excluding the impact of the balance sheet repositioning, asset sales, and other non-recurring expenses.
Business Overview
HTLF's strategic transformation, known as HTLF 3.0, is a key driver of the company's future growth and profitability. This initiative focuses on enhancing efficiency, expanding revenue streams, and optimizing capital allocation. Some of the key components of HTLF 3.0 include:
1. Balance Sheet Repositioning
: In the fourth quarter of 2023, HTLF sold $865 million in investment securities, using the proceeds to pay down high-cost wholesale deposits and borrowings. This move improved the company's liquidity profile and is expected to result in approximately $6 million in improved net interest income per quarter going forward.2. Retail Delivery Optimization
: HTLF is centralizing its retail structure, reducing the number of retail leaders and increasing their span of control, as well as reviewing its current footprint to maximize return on capital and reduce real estate expenses through branch rationalization.3. Talent Acquisition and Expansion
: The company is investing in growth by expanding its middle market banking presence and adding talent in key markets, such as California's Central Valley, Denver, Kansas City, Milwaukee, Minneapolis, and Phoenix.4. Treasury Management and Digital Capabilities
: HTLF is expanding its treasury management products and capabilities and creating a digital platform to better serve its consumer and small business customers.These strategic initiatives are expected to drive efficiency, enhance earnings per share (EPS) growth, deliver a higher return on assets, and enable more efficient use of capital.
HTLF's geographic diversification is another strength, with its banks serving communities in Arizona, California, Colorado, Illinois, Iowa, Kansas, Minnesota, Missouri, New Mexico, Texas, and Wisconsin. This broad footprint provides the company with exposure to various economic environments and growth opportunities.
In terms of revenue breakdown, HTLF's primary revenue streams include net interest income, service charges and fees, trust fees, brokerage and insurance commissions, and capital markets fees. During the fourth quarter of 2023, the company reported a 7% increase in net interest income compared to the linked quarter, driven by the balance sheet repositioning and expansion of the net interest margin.
Outlook
Looking ahead, HTLF has provided guidance for 2024, anticipating loan growth of 6% to 8%, primarily in the commercial portfolio, and a 5% to 7% increase in deposits to fund loan growth. The company expects a stable net interest margin of around 3.5%, assuming a stable interest rate environment. HTLF also expects a modest increase in the full-year provision for credit losses and a flat core noninterest income, with growth in treasury management and card fees offsetting lower consumer and small business fees, as well as lower mortgage fees.
On the expense front, HTLF expects core noninterest expenses to decrease by approximately 2% in 2024, with lower occupancy, marketing, legal, and operational expenses, partially offset by increased performance compensation and technology investments. The company's effective tax rate is expected to be around 24%, excluding discrete items such as new tax credits.
Liquidity
HTLF's capital position remains strong, with a Common Equity Tier 1 (CET1) ratio of 11% as of the end of 2023, even after the securities loss and other restructuring expenses. The company's tangible common equity ratio increased to 6.53%, benefiting from the increase in the market value of its investments and the reduction in assets as part of the balance sheet repositioning.
Conclusion
In conclusion, HTLF is undergoing a transformative period, with its HTLF 3.0 initiative driving strategic changes across its operations. The company's focus on improving efficiency, expanding revenue streams, and optimizing capital allocation positions it well for future growth and profitability. HTLF's geographic diversification, strong capital position, and disciplined approach to credit risk management further enhance its long-term prospects. As the company continues to execute on its strategic plan, investors should closely monitor HTLF's progress in delivering on its ambitious goals.