UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For quarterly period ended September 30, 20162017
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o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For transition period __________ to __________
Commission File Number: 001-15393
HEARTLAND FINANCIAL USA, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
42-1405748
(I.R.S. employer identification number)
1398 Central Avenue, Dubuque, Iowa 52001
(Address of principal executive offices)(Zip Code)
(563) 589-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “accelerated filer,” “large accelerated filer” and, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer ¨x | | | Accelerated Filer x¨ | | |
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| Non-accelerated filer ¨ | (Do not check if a smaller reporting company) |
| Smaller reporting company ¨ | | Emerging growth company ¨ | |
(Do not check if a smaller reporting company) |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the Securities Exchange Act of 1934). Yes o No x
Indicate the number of shares outstanding of each of the classes of Registrant's common stock as of the latest practicable date: As of November 8, 2016,6, 2017, the Registrant had outstanding 26,062,54129,949,070 shares of common stock, $1.00 par value per share.
HEARTLAND FINANCIAL USA, INC.
Form 10-Q Quarterly Report
Table of Contents
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Part I |
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Part II |
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| 101 Financial statements formatted in Extensible Business Reporting Language: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Changes in Equity, and (vi) the Notes to Consolidated Financial Statements. |
PART I
ITEM 1. FINANCIAL STATEMENTS
| | HEARTLAND FINANCIAL USA, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data) | | | | | | |
| September 30, 2016 (Unaudited) | | December 31, 2015 | September 30, 2017 (Unaudited) | | December 31, 2016 |
ASSETS | | | | | | |
Cash and due from banks | $ | 196,234 |
| | $ | 237,841 |
| $ | 180,751 |
| | $ | 151,290 |
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Federal funds sold and other short-term investments | 5,855 |
| | 20,958 |
| |
Interest bearing deposits with the Federal Reserve Bank and other banks and other short-term investments | | 70,985 |
| | 7,434 |
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Cash and cash equivalents | 202,089 |
| | 258,799 |
| 251,736 |
| | 158,724 |
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Time deposits in other financial institutions | 2,105 |
| | 2,355 |
| 19,793 |
| | 2,105 |
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Securities: | | |
| | |
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Available for sale, at fair value (cost of $1,652,938 at September 30, 2016, and $1,584,703 at December 31, 2015) | 1,655,696 |
| | 1,578,434 |
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Held to maturity, at cost (fair value of $284,948 at September 30, 2016, and $294,513 at December 31, 2015) | 265,302 |
| | 279,117 |
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Available for sale, at fair value (cost of $2,124,232 at September 30, 2017, and $1,893,947 at December 31, 2016) | | 2,093,385 |
| | 1,845,864 |
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Held to maturity, at cost (fair value of $270,386 at September 30, 2017, and $274,799 at December 31, 2016) | | 256,355 |
| | 263,662 |
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Other investments, at cost | 22,082 |
| | 21,443 |
| 23,176 |
| | 21,560 |
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Loans held for sale | 78,317 |
| | 74,783 |
| 35,795 |
| | 61,261 |
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Loans receivable: | | |
| | |
|
Held to maturity | 5,438,715 |
| | 5,001,486 |
| 6,373,415 |
| | 5,351,719 |
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Allowance for loan losses | (54,653 | ) | | (48,685 | ) | (54,885 | ) | | (54,324 | ) |
Loans receivable, net | 5,384,062 |
| | 4,952,801 |
| 6,318,530 |
| | 5,297,395 |
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Premises, furniture and equipment, net | 162,207 |
| | 146,259 |
| 174,533 |
| | 163,614 |
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Premises, furniture and equipment held for sale | 3,634 |
| | 3,889 |
| 4,428 |
| | 414 |
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Other real estate, net | 10,740 |
| | 11,524 |
| 13,226 |
| | 9,744 |
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Goodwill | 127,699 |
| | 97,852 |
| 236,615 |
| | 127,699 |
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Core deposit intangibles, net | 23,922 |
| | 22,019 |
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Servicing assets, net | 35,906 |
| | 34,926 |
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Core deposit intangibles and customer relationship intangibles, net | | 37,028 |
| | 22,775 |
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Servicing rights, net | | 26,599 |
| | 35,778 |
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Cash surrender value on life insurance | 112,060 |
| | 110,297 |
| 142,073 |
| | 112,615 |
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Other assets | 116,394 |
| | 100,256 |
| 122,355 |
| | 123,869 |
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TOTAL ASSETS | $ | 8,202,215 |
| | $ | 7,694,754 |
| $ | 9,755,627 |
| | $ | 8,247,079 |
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LIABILITIES AND EQUITY | | | | | | |
LIABILITIES: | | | | | | |
Deposits: | | | | | | |
Demand | $ | 2,238,736 |
| | $ | 1,914,141 |
| $ | 3,009,940 |
| | $ | 2,202,036 |
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Savings | 3,753,300 |
| | 3,367,479 |
| 4,227,340 |
| | 3,788,089 |
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Time | 920,657 |
| | 1,124,203 |
| 994,604 |
| | 857,286 |
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Total deposits | 6,912,693 |
| | 6,405,823 |
| 8,231,884 |
| | 6,847,411 |
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Short-term borrowings | 214,105 |
| | 293,898 |
| 171,871 |
| | 306,459 |
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Other borrowings | 294,493 |
| | 263,214 |
| 301,473 |
| | 288,534 |
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Accrued expenses and other liabilities | 76,536 |
| | 68,646 |
| 68,715 |
| | 63,759 |
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TOTAL LIABILITIES | 7,497,827 |
| | 7,031,581 |
| 8,773,943 |
| | 7,506,163 |
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STOCKHOLDERS' EQUITY: | | | | | | |
Series C Senior Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 0 shares and 81,698 shares outstanding at September 30, 2016, and December 31, 2015, respectively) | — |
| | 81,698 |
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Series D Senior Non-Cumulative Perpetual Convertible Preferred Stock (par value $1 per share; 3,000 shares authorized and 1,078 shares issued and outstanding at September 30, 2016; 0 shares authorized, issued and outstanding at December 31, 2015) | 1,357 |
| | — |
| |
Common stock (par value $1 per share; 30,000,000 shares authorized at both September 30, 2016, and December 31, 2015; issued 24,683,277 shares at September 30, 2016, and 22,435,693 shares at December 31, 2015) | 24,683 |
| | 22,436 |
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Preferred stock (par value $1 per share; authorized 17,604 shares; none issued or outstanding at both September 30, 2017, and December 31, 2016) | | — |
| | — |
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Series A Junior Participating preferred stock (par value $1 per share; authorized 16,000 shares; none issued or outstanding at both September 30, 2017, and December 31, 2016) | | — |
| | — |
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Series C Senior Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares authorized at both September 30, 2017, and December 31, 2016, none issued or outstanding at both September 30, 2017, and December 31, 2016) | | — |
| | — |
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Series D Senior Non-Cumulative Perpetual Convertible Preferred Stock (par value $1 per share; 3,000 shares authorized at both September 30, 2017, and December 31, 2016; 745 shares issued and outstanding at September 30, 2017, and 1,078 shares issued and outstanding at December 31, 2016) | | 938 |
| | 1,357 |
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Common stock (par value $1 per share; 40,000,000 shares authorized at September 30, 2017, and 30,000,000 shares authorized at December 31, 2016; issued 29,946,069 shares at September 30, 2017, and 26,119,929 shares at December 31, 2016) | | 29,946 |
| | 26,120 |
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Capital surplus | 279,316 |
| | 216,436 |
| 503,262 |
| | 328,376 |
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Retained earnings | 402,179 |
| | 348,630 |
| 468,556 |
| | 416,109 |
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Accumulated other comprehensive income (loss) | (3,079 | ) | | (6,027 | ) | |
Treasury stock at cost (1,897 shares at September 30, 2016, and 0 shares at December 31, 2015) | (68 | ) | | — |
| |
Accumulated other comprehensive loss | | (21,018 | ) | | (31,046 | ) |
Treasury stock at cost (0 shares at both September 30, 2017, and December 31, 2016) | | — |
| | — |
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TOTAL STOCKHOLDERS' EQUITY | 704,388 |
| | 663,173 |
| 981,684 |
| | 740,916 |
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TOTAL LIABILITIES AND EQUITY | $ | 8,202,215 |
| | $ | 7,694,754 |
| $ | 9,755,627 |
| | $ | 8,247,079 |
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See accompanying notes to consolidated financial statements. | | | | | | |
| | HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands, except per share data) | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 | | 2017 | | 2016 |
INTEREST INCOME: | | | | | | | | | | | | | | |
Interest and fees on loans | $ | 70,046 |
| | $ | 58,328 |
| | $ | 208,280 |
| | $ | 167,201 |
| $ | 82,906 |
| | $ | 70,046 |
| | $ | 217,898 |
| | $ | 208,280 |
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Interest on securities: | | | | | | | | | | | | | | |
Taxable | 7,917 |
| | 5,858 |
| | 24,604 |
| | 19,729 |
| 10,394 |
| | 7,917 |
| | 27,246 |
| | 24,604 |
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Nontaxable | 3,717 |
| | 3,077 |
| | 10,793 |
| | 8,867 |
| 5,086 |
| | 3,717 |
| | 15,297 |
| | 10,793 |
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Interest on federal funds sold | 1 |
| | 1 |
| | 12 |
| | 3 |
| 34 |
| | 1 |
| | 37 |
| | 12 |
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Interest on interest bearing deposits in other financial institutions | 6 |
| | 4 |
| | 13 |
| | 11 |
| 558 |
| | 6 |
| | 1,112 |
| | 13 |
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TOTAL INTEREST INCOME | 81,687 |
| | 67,268 |
| | 243,702 |
|
| 195,811 |
| 98,978 |
| | 81,687 |
| | 261,590 |
|
| 243,702 |
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INTEREST EXPENSE: | | | | | | | | | | | | | | |
Interest on deposits | 4,001 |
| | 3,767 |
| | 12,195 |
| | 11,758 |
| 5,073 |
| | 4,001 |
| | 12,966 |
| | 12,195 |
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Interest on short-term borrowings | 235 |
| | 228 |
| | 1,083 |
| | 638 |
| 271 |
| | 235 |
| | 498 |
| | 1,083 |
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Interest on other borrowings (includes $492 and $557 of interest expense related to derivatives reclassified from accumulated other comprehensive income for the three months ended September 30, 2016 and 2015, respectively, and $1,463 and $1,680 of interest expense related to derivatives reclassified from accumulated other comprehensive income for the nine months ended September 30, 2016 and 2015, respectively) | 3,770 |
| | 3,549 |
| | 10,918 |
| | 12,117 |
| |
Interest on other borrowings (includes $308 and $492 of interest expense related to derivatives reclassified from accumulated other comprehensive income for the three months ended September 30, 2017 and 2016, respectively, and $1,005 and $1,463 of interest expense related to derivatives reclassified from accumulated other comprehensive income for the nine months ended September 30, 2017 and 2016, respectively) | | 3,790 |
| | 3,770 |
| | 10,674 |
| | 10,918 |
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TOTAL INTEREST EXPENSE | 8,006 |
| | 7,544 |
| | 24,196 |
|
| 24,513 |
| 9,134 |
| | 8,006 |
| | 24,138 |
|
| 24,196 |
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NET INTEREST INCOME | 73,681 |
| | 59,724 |
| | 219,506 |
|
| 171,298 |
| 89,844 |
| | 73,681 |
| | 237,452 |
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| 219,506 |
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Provision for loan losses | 5,328 |
| | 3,181 |
| | 9,513 |
| | 10,526 |
| 5,705 |
| | 5,328 |
| | 10,235 |
| | 9,513 |
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 68,353 |
| | 56,543 |
| | 209,993 |
|
| 160,772 |
| 84,139 |
| | 68,353 |
| | 227,217 |
|
| 209,993 |
|
NONINTEREST INCOME: | | | | | | | | | | | | | | |
Service charges and fees | 8,278 |
| | 6,350 |
| | 23,462 |
| | 17,654 |
| 10,138 |
| | 8,278 |
| | 29,291 |
| | 23,462 |
|
Loan servicing income | 873 |
| | 1,368 |
| | 3,433 |
| | 3,572 |
| 1,161 |
| | 873 |
| | 4,236 |
| | 3,433 |
|
Trust fees | 3,689 |
| | 3,507 |
| | 11,127 |
| | 11,051 |
| 3,872 |
| | 3,689 |
| | 11,482 |
| | 11,127 |
|
Brokerage and insurance commissions | 1,006 |
| | 869 |
| | 2,914 |
| | 2,872 |
| 950 |
| | 1,006 |
| | 2,962 |
| | 2,914 |
|
Securities gains, net (includes $1,586 and $1,807 of net security gains reclassified from accumulated other comprehensive income for the three months ended September 30, 2016 and 2015, respectively, and $9,964 and $9,270 of net security gains reclassified from accumulated other comprehensive income for the nine months ended September 30, 2016 and 2015, respectively) | 1,584 |
| | 1,767 |
| | 9,732 |
| | 9,230 |
| |
Securities gains, net (includes $1,679 and $1,586 of net security gains reclassified from accumulated other comprehensive income for the three months ended September 30, 2017 and 2016, respectively, $5,553 and $9,964 of net security gains reclassified from accumulated other comprehensive income for the nine months ended September 30, 2017 and 2016, respectively) | | 1,679 |
| | 1,584 |
| | 5,553 |
| | 9,732 |
|
Net gains on sale of loans held for sale | 11,459 |
| | 9,823 |
| | 33,794 |
| | 38,164 |
| 4,997 |
| | 11,459 |
| | 17,961 |
| | 33,794 |
|
Valuation allowance on commercial servicing rights | 5 |
| | — |
| | (41 | ) | | — |
| 5 |
| | 5 |
| | 29 |
| | (41 | ) |
Income on bank owned life insurance | 620 |
| | 372 |
| | 1,733 |
| | 1,355 |
| 766 |
| | 620 |
| | 2,039 |
| | 1,733 |
|
Other noninterest income | 1,028 |
| | 924 |
| | 2,992 |
| | 2,406 |
| 1,409 |
| | 1,028 |
| | 2,941 |
| | 2,992 |
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TOTAL NONINTEREST INCOME | 28,542 |
| | 24,980 |
| | 89,146 |
|
| 86,304 |
| 24,977 |
| | 28,542 |
| | 76,494 |
|
| 89,146 |
|
NONINTEREST EXPENSES: | | | | | | | | | | | | | | |
Salaries and employee benefits | 40,733 |
| | 37,033 |
| | 124,432 |
| | 110,522 |
| 45,225 |
| | 40,733 |
| | 128,118 |
| | 124,432 |
|
Occupancy | 5,099 |
| | 4,307 |
| | 15,322 |
| | 12,594 |
| 6,223 |
| | 5,099 |
| | 16,352 |
| | 15,322 |
|
Furniture and equipment | 2,746 |
| | 2,121 |
| | 7,301 |
| | 6,403 |
| 2,826 |
| | 2,746 |
| | 7,913 |
| | 7,301 |
|
Professional fees | 5,985 |
| | 5,251 |
| | 20,481 |
| | 16,544 |
| 8,450 |
| | 5,985 |
| | 24,342 |
| | 20,481 |
|
FDIC insurance assessments | 1,180 |
| | 1,018 |
| | 3,468 |
| | 2,873 |
| 894 |
| | 1,180 |
| | 2,610 |
| | 3,468 |
|
Advertising | 1,339 |
| | 1,327 |
| | 4,174 |
| | 3,841 |
| 1,358 |
| | 1,339 |
| | 5,141 |
| | 4,174 |
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Intangible assets amortization | 1,291 |
| | 734 |
| | 4,483 |
| | 2,080 |
| |
Core deposit intangibles and customer relationship intangibles amortization | | 1,863 |
| | 1,291 |
| | 4,252 |
| | 4,483 |
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Other real estate and loan collection expenses | 640 |
| | 496 |
| | 1,871 |
| | 1,714 |
| 581 |
| | 640 |
| | 1,774 |
| | 1,871 |
|
(Gain)/loss on sales/valuations of assets, net | 794 |
| | 721 |
| | 1,064 |
| | 2,583 |
| |
Loss on sales/valuations of assets, net | | 1,342 |
| | 794 |
| | 1,642 |
| | 1,064 |
|
Other noninterest expenses | 8,620 |
| | 8,988 |
| | 27,160 |
| | 25,938 |
| 9,997 |
| | 8,620 |
| | 27,653 |
| | 27,160 |
|
TOTAL NONINTEREST EXPENSES | 68,427 |
| | 61,996 |
| | 209,756 |
|
| 185,092 |
| 78,759 |
| | 68,427 |
| | 219,797 |
|
| 209,756 |
|
INCOME BEFORE INCOME TAXES | 28,468 |
| | 19,527 |
| | 89,383 |
|
| 61,984 |
| 30,357 |
| | 28,468 |
| | 83,914 |
|
| 89,383 |
|
Income taxes (includes $408 and $451 of income tax expense reclassified from accumulated other comprehensive income for the three months ended September 30, 2016 and 2015, respectively, and $3,171 and $2,816 of income tax expense reclassified from accumulated other comprehensive income for the nine months ended September 30, 2016 and 2015, respectively) | 8,260 |
| | 4,945 |
| | 28,196 |
| | 16,533 |
| |
Income taxes (includes $511 and $408 of income tax expense reclassified from accumulated other comprehensive income for the three months ended September 30, 2017 and 2016, respectively, $1,696 and $3,171 of income tax expense reclassified from accumulated other comprehensive income for the nine months ended September 30, 2017 and 2016, respectively) | | 8,725 |
| | 8,260 |
| | 22,314 |
| | 28,196 |
|
NET INCOME | 20,208 |
| | 14,582 |
| | 61,187 |
|
| 45,451 |
| 21,632 |
| | 20,208 |
| | 61,600 |
|
| 61,187 |
|
Preferred dividends | (53 | ) | | (205 | ) | | (273 | ) | | (613 | ) | (13 | ) | | (53 | ) | | (45 | ) | | (273 | ) |
Interest expense on convertible preferred debt | 17 |
| | — |
| | 48 |
| | — |
| 3 |
| | 17 |
| | 12 |
| | 48 |
|
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS | $ | 20,172 |
| | $ | 14,377 |
| | $ | 60,962 |
|
| $ | 44,838 |
| $ | 21,622 |
| | $ | 20,172 |
| | $ | 61,567 |
|
| $ | 60,962 |
|
EARNINGS PER COMMON SHARE - BASIC | $ | 0.82 |
| | $ | 0.70 |
| | $ | 2.51 |
| | $ | 2.19 |
| $ | 0.73 |
| | $ | 0.82 |
| | $ | 2.23 |
| | $ | 2.51 |
|
EARNINGS PER COMMON SHARE - DILUTED | $ | 0.81 |
| | $ | 0.69 |
| | $ | 2.48 |
| | $ | 2.16 |
| $ | 0.72 |
| | $ | 0.81 |
| | $ | 2.21 |
| | $ | 2.48 |
|
CASH DIVIDENDS DECLARED PER COMMON SHARE | $ | 0.10 |
| | $ | 0.10 |
| | $ | 0.30 |
| | $ | 0.30 |
| $ | 0.11 |
| | $ | 0.10 |
| | $ | 0.33 |
| | $ | 0.30 |
|
| | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements. | | | | | | | | | | | | | | |
| | HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Dollars in thousands) | HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Dollars in thousands) | HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Dollars in thousands) |
| Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 | | 2017 | | 2016 |
NET INCOME | $ | 20,208 |
| | $ | 14,582 |
| | $ | 61,187 |
| | $ | 45,451 |
| $ | 21,632 |
| | $ | 20,208 |
| | $ | 61,600 |
| | $ | 61,187 |
|
OTHER COMPREHENSIVE INCOME | | | | | | | | | | | | | | |
Securities: | | | | | | | | | | | | | | |
Net change in unrealized gain (loss) on securities | (5,696 | ) | | 2,202 |
| | 18,274 |
| | 10,916 |
| |
Net change in unrealized gain on securities | | 6,940 |
| | (5,696 | ) | | 22,002 |
| | 18,274 |
|
Reclassification adjustment for net gains realized in net income | (1,586 | ) | | (1,807 | ) | | (9,964 | ) | | (9,270 | ) | (1,679 | ) | | (1,586 | ) | | (5,553 | ) | | (9,964 | ) |
Net change in non-credit related other than temporary impairment | — |
| | 24 |
| | 7 |
| | 72 |
| — |
| | — |
| | — |
| | 7 |
|
Income taxes | 2,871 |
| | (169 | ) | | (3,364 | ) | | (667 | ) | (2,084 | ) | | 2,871 |
| | (6,433 | ) | | (3,364 | ) |
Other comprehensive income (loss) on securities | (4,411 | ) | | 250 |
| | 4,953 |
| | 1,051 |
| 3,177 |
| | (4,411 | ) | | 10,016 |
| | 4,953 |
|
Derivatives used in cash flow hedging relationships: | | | | | | | | | | | | | | |
Net change in unrealized gain (loss) on derivatives | 844 |
| | (3,071 | ) | | (4,623 | ) | | (3,016 | ) | |
Net change in unrealized loss on derivatives | | 17 |
| | 844 |
| | (656 | ) | | (4,623 | ) |
Reclassification adjustment for net losses on derivatives realized in net income | 492 |
| | 557 |
| | 1,463 |
| | 1,680 |
| 308 |
| | 492 |
| | 1,005 |
| | 1,463 |
|
Income taxes | (517 | ) | | 936 |
| | 1,155 |
| | 488 |
| (123 | ) | | (517 | ) | | (337 | ) | | 1,155 |
|
Other comprehensive income (loss) on cash flow hedges | 819 |
| | (1,578 | ) | | (2,005 | ) | | (848 | ) | 202 |
| | 819 |
| | 12 |
| | (2,005 | ) |
Other comprehensive income (loss) | (3,592 | ) | | (1,328 | ) | | 2,948 |
| | 203 |
| 3,379 |
| | (3,592 | ) | | 10,028 |
| | 2,948 |
|
TOTAL COMPREHENSIVE INCOME | $ | 16,616 |
| | $ | 13,254 |
| | $ | 64,135 |
| | $ | 45,654 |
| $ | 25,011 |
| | $ | 16,616 |
| | $ | 71,628 |
| | $ | 64,135 |
|
| | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements. | | | | | | | | | | | | | | |
| | HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) | | |
| Nine Months Ended September 30, | Nine Months Ended September 30, |
| 2016 | | 2015 | 2017 | | 2016 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
Net income | $ | 61,187 |
| | $ | 45,451 |
| $ | 61,600 |
| | $ | 61,187 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Depreciation and amortization | 22,975 |
| | 16,325 |
| 22,738 |
| | 22,975 |
|
Provision for loan losses | 9,513 |
| | 10,526 |
| 10,235 |
| | 9,513 |
|
Net amortization of premium on securities | 24,093 |
| | 21,339 |
| 20,186 |
| | 24,093 |
|
Securities gains, net | (9,732 | ) | | (9,230 | ) | (5,553 | ) | | (9,732 | ) |
Stock based compensation | 3,073 |
| | 2,635 |
| 3,588 |
| | 3,073 |
|
Write downs and losses on repossessed assets, net | 1,094 |
| | 1,686 |
| |
Loans originated for sale | (863,354 | ) | | (1,087,510 | ) | (548,768 | ) | | (863,354 | ) |
Proceeds on sales of loans held for sale | 883,758 |
| | 1,083,285 |
| 586,202 |
| | 883,758 |
|
Net gains on sale of loans held for sale | (23,938 | ) | | (27,102 | ) | (11,968 | ) | | (23,938 | ) |
Increase (decrease) in accrued interest receivable | (1,054 | ) | | 170 |
| |
Increase in prepaid expenses | (128 | ) | | (1,021 | ) | |
Increase (decrease) in accrued interest payable | 332 |
| | (177 | ) | |
Decrease in accrued interest receivable | | (1,449 | ) | | (1,054 | ) |
(Increase) decrease in prepaid expenses | | 838 |
| | (128 | ) |
Increase in accrued interest payable | | 1,104 |
| | 332 |
|
Capitalization of servicing rights | (9,856 | ) | | (11,766 | ) | (5,993 | ) | | (9,856 | ) |
Valuation adjustment on commercial servicing rights | 41 |
| | — |
| |
Valuation allowance on commercial servicing rights | | (29 | ) | | 41 |
|
Write downs and losses on sales of assets, net | (30 | ) | | 897 |
| 1,642 |
| | 1,064 |
|
Net excess tax benefit from stock based compensation | | 1,121 |
| | 1,121 |
|
Other, net | (2,419 | ) | | 8,137 |
| (5,637 | ) | | (2,419 | ) |
NET CASH PROVIDED BY OPERATING ACTIVITIES | 95,555 |
| | 53,645 |
| 129,857 |
| | 96,676 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | |
Proceeds from the sale of securities available for sale | 768,617 |
| | 877,077 |
| 1,127,091 |
| | 768,617 |
|
Proceeds from the sale of securities held to maturity | 4,557 |
| | — |
| — |
| | 4,557 |
|
Proceeds from the sale of other investments | 4,722 |
| | 12,917 |
| — |
| | 4,722 |
|
Proceeds from the sale of time deposits in other financial institutions | — |
| | 2,925 |
| |
Proceeds from the redemption of time deposits in other financial institutions | | 12,171 |
| | — |
|
Proceeds from the maturity of and principal paydowns on securities available for sale | 130,549 |
| | 124,084 |
| 161,827 |
| | 130,549 |
|
Proceeds from the maturity of and principal paydowns on securities held to maturity | 8,271 |
| | 1,338 |
| 6,645 |
| | 8,271 |
|
Proceeds from the maturity of and principal paydowns on time deposits in other financial institutions | 250 |
| | 250 |
| 24,931 |
| | 250 |
|
Proceeds from the maturity of and principal paydowns on other investments | — |
| | 619 |
| 2,574 |
| | — |
|
Purchase of securities available for sale | (888,903 | ) | | (774,657 | ) | (1,299,492 | ) | | (888,903 | ) |
Purchase of other investments | (1,875 | ) | | (9,833 | ) | (1,012 | ) | | (1,875 | ) |
Net (increase) decrease in loans | 138,725 |
| | (225,356 | ) | |
Net decrease in loans | | 45,139 |
| | 138,725 |
|
Purchase of bank owned life insurance policies | — |
| | (1,100 | ) | (2,000 | ) | | — |
|
Proceeds from bank owned life insurance policies | 111 |
| | — |
| — |
| | 111 |
|
Proceeds from sale of mortgage servicing rights | | 5,137 |
| | — |
|
Capital expenditures | (8,318 | ) | | (4,982 | ) | (6,876 | ) | | (8,318 | ) |
Net cash and cash equivalents received (paid) in acquisitions | 8,084 |
| | (6,861 | ) | |
Net cash and cash equivalents received in acquisitions | | 71,089 |
| | 8,084 |
|
Proceeds from the sale of equipment | 686 |
| | 1,108 |
| 1,845 |
| | 686 |
|
Proceeds on sale of OREO and other repossessed assets | 3,266 |
| | 6,328 |
| 7,578 |
| | 3,266 |
|
NET CASH PROVIDED BY INVESTING ACTIVITIES | 168,742 |
| | 3,857 |
| $ | 156,647 |
| | $ | 168,742 |
|
| | | | | | |
| | HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (Unaudited) (Dollars in thousands) | | | | | | |
| Nine Months Ended September 30, | Nine Months Ended September 30, |
| 2016 | | 2015 | 2017 | | 2016 |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | |
Net increase in demand deposits | 160,313 |
| | 191,361 |
| $ | 181,206 |
| | $ | 160,313 |
|
Net increase (decrease) in savings deposits | 51,530 |
| | (73,050 | ) | (179,721 | ) | | 51,530 |
|
Net decrease in time deposit accounts | (353,084 | ) | | (26,326 | ) | (8,582 | ) | | (353,084 | ) |
Proceeds on short-term revolving credit line | | 20,000 |
| | — |
|
Repayments on short-term revolving credit line | | (15,000 | ) | | — |
|
Net decrease in short-term borrowings | (101,409 | ) | | (25,901 | ) | (168,667 | ) | | (101,409 | ) |
Proceeds from short term FHLB advances | 243,100 |
| | 276,100 |
| 186,039 |
| | 243,100 |
|
Repayments of short term FHLB advances | (257,250 | ) | | (270,000 | ) | (191,405 | ) | | (257,250 | ) |
Proceeds from other borrowings | 40,000 |
| | 29,000 |
| — |
| | 40,000 |
|
Repayments of other borrowings | (15,562 | ) | | (134,803 | ) | (8,573 | ) | | (15,562 | ) |
Redemption of preferred stock | (81,698 | ) | | — |
| — |
| | (81,698 | ) |
Purchase of treasury stock | (2,293 | ) | | (2,856 | ) | (440 | ) | | (2,293 | ) |
Proceeds from issuance of common stock | 1,863 |
| | 2,330 |
| 804 |
| | 1,863 |
|
Excess tax benefits on exercised stock options | 1,121 |
| | 671 |
| |
Dividends paid | (7,638 | ) | | (6,794 | ) | (9,153 | ) | | (7,638 | ) |
NET CASH USED BY FINANCING ACTIVITIES | (321,007 | ) | | (40,268 | ) | (193,492 | ) | | (322,128 | ) |
Net increase (decrease) in cash and cash equivalents | (56,710 | ) | | 17,234 |
| 93,012 |
| | (56,710 | ) |
Cash and cash equivalents at beginning of year | 258,799 |
| | 73,871 |
| 158,724 |
| | 258,799 |
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 202,089 |
| | $ | 91,105 |
| $ | 251,736 |
| | $ | 202,089 |
|
Supplemental disclosures: | | | | | | |
Cash paid for income/franchise taxes | $ | 16,550 |
| | $ | 7,305 |
| $ | 10,775 |
| | $ | 16,550 |
|
Cash paid for interest | $ | 23,864 |
| | $ | 24,690 |
| $ | 23,034 |
| | $ | 23,864 |
|
Loans transferred to OREO | $ | 1,359 |
| | $ | 5,206 |
| $ | 4,955 |
| | $ | 1,359 |
|
Purchases of securities available for sale, accrued, not paid | $ | — |
| | $ | 3,523 |
| |
Purchases of securities available for sale, accrued, not settled | | $ | 2,063 |
| | $ | — |
|
Sales of securities available for sale, accrued, not settled | $ | 250 |
| | $ | — |
| $ | 125 |
| | $ | 250 |
|
Stock consideration granted for acquisition | $ | 57,433 |
| | $ | 53,052 |
| |
Conversion of convertible debt to common stock | | $ | 558 |
| | $ | — |
|
Conversion of Series D preferred stock to common stock | | $ | 419 |
| | $ | — |
|
Stock consideration granted for acquisitions | | $ | 175,196 |
| | $ | 57,433 |
|
| | | | | | |
See accompanying notes to consolidated financial statements. |
| | HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited) (Dollars in thousands, except per share data) | HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited) (Dollars in thousands, except per share data) | | HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited) (Dollars in thousands, except per share data) | |
| Heartland Financial USA, Inc. Stockholders' Equity | | Heartland Financial USA, Inc. Stockholders' Equity | |
| Preferred Stock | | Common Stock | | Capital Surplus | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total Equity | Preferred Stock | | Common Stock | | Capital Surplus | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total Equity |
Balance at January 1, 2015 | $ | 81,698 |
| | $ | 18,511 |
| | $ | 95,816 |
| | $ | 298,764 |
| | $ | 1,528 |
| | $ | — |
| | $ | 496,317 |
| |
Comprehensive income |
|
| |
|
|
|
|
|
| 45,451 |
| | 203 |
|
|
|
|
| 45,654 |
| |
Cash dividends declared: |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| | | |
Series C Preferred, $7.50 per share |
|
| |
|
|
|
|
|
| (613 | ) | |
|
|
|
|
|
| (613 | ) | |
Common, $0.30 per share |
|
| |
|
|
|
|
|
| (6,181 | ) | |
|
|
|
|
|
| (6,181 | ) | |
Purchase of 54,389 shares of common stock |
|
| |
|
|
|
|
|
|
|
| |
|
|
| (2,856 | ) |
| (2,856 | ) | |
Issuance of 2,180,585 shares of common stock |
|
| | 2,129 |
|
| 51,162 |
|
|
|
| |
|
|
| 2,762 |
|
| 56,053 |
| |
Stock based compensation |
|
| |
|
|
| 2,635 |
|
|
|
| |
|
|
|
|
|
| 2,635 |
| |
Balance at September 30, 2015 | $ | 81,698 |
| | $ | 20,640 |
| | $ | 149,613 |
| | $ | 337,421 |
| | $ | 1,731 |
| | $ | (94 | ) | | $ | 591,009 |
| |
Balance at January 1, 2016 | $ | 81,698 |
| | $ | 22,436 |
| | $ | 216,436 |
| | $ | 348,630 |
| | $ | (6,027 | ) | | $ | — |
| | $ | 663,173 |
| $ | 81,698 |
| | $ | 22,436 |
| | $ | 216,436 |
| | $ | 348,630 |
| | $ | (6,027 | ) | | $ | — |
| | $ | 663,173 |
|
Comprehensive income | | | | | | | 61,187 |
| | 2,948 |
| |
|
| | 64,135 |
|
|
| |
|
|
|
|
|
| 61,187 |
| | 2,948 |
|
|
|
|
| 64,135 |
|
Cash dividends declared: | | | | | | | | |
|
| |
|
| | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| | |
Series C Preferred, $2.50 per share | | | |
| |
| (168 | ) | |
|
|
|
|
|
| (168 | ) |
|
| |
|
|
|
|
|
| (168 | ) | |
|
|
|
|
|
| (168 | ) |
Series D Preferred, $35.00 per share | | | | | | | (105 | ) | | | | | | (105 | ) | | | | | | | (105 | ) | | | | | | (105 | ) |
Common, $0.30 per share | | | |
| |
| (7,365 | ) | |
|
|
|
|
|
| (7,365 | ) |
|
| |
|
|
|
|
|
| (7,365 | ) | |
|
|
|
|
|
| (7,365 | ) |
Redemption of Series C preferred stock | (81,698 | ) | | | | | | | | | | | | (81,698 | ) | |
Issuance of Series D preferred stock | 3,777 |
| | | | | | | | | | | | 3,777 |
| |
Redemption of Series D preferred stock | (2,420 | ) | | | | | | | | | | | | (2,420 | ) | |
Redemption of Series C Preferred Stock | | (81,698 | ) | | | | | | | | | | | | (81,698 | ) |
Issuance of Series D Preferred Stock | | 3,777 |
| | | | | | | | | | | | 3,777 |
|
Redemption of Series D Preferred Stock | | (2,420 | ) | | | | | | | | | | | | (2,420 | ) |
Purchase of 49,785 shares of common stock | | | |
| |
|
|
| |
|
|
| (2,293 | ) |
| (2,293 | ) |
|
| |
|
|
|
|
|
|
|
| |
|
|
| (2,293 | ) |
| (2,293 | ) |
Issuance of 2,295,472 shares of common stock | | | 2,247 |
|
| 59,807 |
| |
|
| |
|
|
| 2,225 |
|
| 64,279 |
|
|
| | 2,247 |
|
| 59,807 |
|
|
|
| |
|
|
| 2,225 |
|
| 64,279 |
|
Stock based compensation | | | |
| 3,073 |
|
|
|
| |
|
|
|
|
|
| 3,073 |
|
|
| |
|
|
| 3,073 |
|
|
|
| |
|
|
|
|
|
| 3,073 |
|
Balance at September 30, 2016 | $ | 1,357 |
| | $ | 24,683 |
| | $ | 279,316 |
| | $ | 402,179 |
| | $ | (3,079 | ) | | $ | (68 | ) | | $ | 704,388 |
| $ | 1,357 |
| | $ | 24,683 |
| | $ | 279,316 |
| | $ | 402,179 |
| | $ | (3,079 | ) | | $ | (68 | ) | | $ | 704,388 |
|
Balance at January 1, 2017 | | $ | 1,357 |
| | $ | 26,120 |
| | $ | 328,376 |
| | $ | 416,109 |
| | $ | (31,046 | ) | | $ | — |
| | $ | 740,916 |
|
Comprehensive income | | | | | | | | 61,600 |
| | 10,028 |
| |
|
| | 71,628 |
|
Cash dividends declared: | | | | | | | | | |
|
| |
|
| | |
|
Series D Preferred, $52.50 per share | | | | | | | | (45 | ) | | | | | | (45 | ) |
Common, $0.33 per share | | | | |
| |
| (9,108 | ) | |
|
|
|
|
|
| (9,108 | ) |
Conversion of Series D preferred stock | | (419 | ) | | | | | | | | | | | | (419 | ) |
Purchase of 9,392 shares of common stock | | | | |
| |
|
|
| |
|
|
| (440 | ) |
| (440 | ) |
Issuance of 3,835,532 shares of common stock | | | | 3,826 |
|
| 171,298 |
| |
|
| |
|
|
| 440 |
|
| 175,564 |
|
Stock based compensation | | | | |
| 3,588 |
|
|
|
| |
|
|
|
|
|
| 3,588 |
|
Balance at September 30, 2017 | | $ | 938 |
| | $ | 29,946 |
| | $ | 503,262 |
| | $ | 468,556 |
| | $ | (21,018 | ) | | $ | — |
| | $ | 981,684 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements. | See accompanying notes to consolidated financial statements. | | | | | | | | | See accompanying notes to consolidated financial statements. | | | | | | | | |
HEARTLAND FINANCIAL USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The interim unaudited consolidated financial statements contained herein should be read in conjunction with the audited consolidated financial statements and accompanying notes to the consolidated financial statements for the fiscal year ended December 31, 2015,2016, included in the Form 10-K of Heartland Financial USA, Inc. ("Heartland") filed with the Securities and Exchange Commission ("SEC") on March 11, 20161, 2017. Accordingly, footFootnote disclosures to the interim unaudited consolidated financial statements which would substantially duplicate the disclosure contained in the footnotes to the audited consolidated financial statements have been omitted.
The financial information of Heartland included herein has been prepared in accordance with U.S. generally accepted accounting principles for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X. Such information reflects all adjustments (consisting of normal recurring adjustments), that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of the interim period ended September 30, 2016,2017, are not necessarily indicative of the results expected for the year ending December 31, 2016.2017.
Earnings Per Share
Basic earnings per share is determined using net income available to common stockholders and weighted average common shares outstanding. Diluted earnings per share is computed by dividing net income available to common stockholders by the weighted average common shares and assumed incremental common shares issued. Amounts used in the determination of basic and diluted earnings per share for the three- and nine-month periods ended September 30, 20162017 and 2015,2016, are shown in the table below:
| | | Three Months Ended September 30, | Three Months Ended September 30, |
(Dollars and number of shares in thousands, except per share data) | 2016 | | 2015 | 2017 | | 2016 |
Net income attributable to Heartland | $ | 20,208 |
| | $ | 14,582 |
| |
Net income | | $ | 21,632 |
| | $ | 20,208 |
|
Preferred dividends and discount | (53 | ) | | (205 | ) | (13 | ) | | (53 | ) |
Interest expense on convertible preferred debt | 17 |
| | — |
| 3 |
| | 17 |
|
Net income available to common stockholders | $ | 20,172 |
| | $ | 14,377 |
| $ | 21,622 |
| | $ | 20,172 |
|
Weighted average common shares outstanding for basic earnings per share | 24,601 |
| | 20,620 |
| 29,648 |
| | 24,601 |
|
Assumed incremental common shares issued upon exercise of stock options and non-vested restricted stock units | 322 |
| | 273 |
| 262 |
| | 322 |
|
Weighted average common shares for diluted earnings per share | 24,923 |
| | 20,893 |
| 29,910 |
| | 24,923 |
|
Earnings per common share — basic | $ | 0.82 |
| | $ | 0.70 |
| $ | 0.73 |
| | $ | 0.82 |
|
Earnings per common share — diluted | $ | 0.81 |
| | $ | 0.69 |
| $ | 0.72 |
| | $ | 0.81 |
|
Number of antidilutive common stock equivalents excluded from diluted earnings per share computation | — |
| | — |
| — |
| | — |
|
| | | | | | |
| Nine Months Ended September 30, | Nine Months Ended September 30, |
(Dollars and number of shares in thousands, except per share data) | 2016 | | 2015 | 2017 | | 2016 |
Net income attributable to Heartland | $ | 61,187 |
| | $ | 45,451 |
| |
Net income | | $ | 61,600 |
| | $ | 61,187 |
|
Preferred dividends | (273 | ) | | (613 | ) | (45 | ) | | (273 | ) |
Interest expense on convertible preferred debt | 48 |
| | — |
| 12 |
| | 48 |
|
Net income available to common stockholders | $ | 60,962 |
| | $ | 44,838 |
| $ | 61,567 |
| | $ | 60,962 |
|
Weighted average common shares outstanding for basic earnings per share | 24,262 |
| | 20,483 |
| 27,569 |
| | 24,262 |
|
Assumed incremental common shares issued upon exercise of stock options and non-vested restricted stock units | 319 |
| | 269 |
| 265 |
| | 319 |
|
Weighted average common shares for diluted earnings per share | 24,581 |
| | 20,752 |
| 27,834 |
| | 24,581 |
|
Earnings per common share — basic | $ | 2.51 |
| | $ | 2.19 |
| $ | 2.23 |
| | $ | 2.51 |
|
Earnings per common share — diluted | $ | 2.48 |
| | $ | 2.16 |
| $ | 2.21 |
| | $ | 2.48 |
|
Number of antidilutive common stock equivalents excluded from diluted earnings per share computation | — |
| | — |
| — |
| | — |
|
Stock-Based Compensation
Heartland may grant, through its Nominating and Compensation Committee (the "Compensation Committee"), non-qualified and incentive stock options, stock appreciation rights, stock awards, restricted stock, restricted stock units and cash incentive awards, under its 2012 Long-Term Incentive Plan (the "Plan"). The Plan was originally approved by stockholders in May 2012 and was amended effective March 8, 2016, to increase the number of shares of common stock authorized for issuance and make certain other changes to the Plan. As of September 30, 2016, 549,1442017, 499,656 shares of common stock were available for issuance under future awards that may be granted under the Plan to employees and directors of, and service providers to, Heartland or its subsidiaries.
Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 718, "Compensation-Stock Compensation"Compensation-Stock Compensation" requires the measurement of the cost of employee services received in exchange for an award of equity instruments based upon the fair value of the award on the grant date. The cost of the award is based upon its fair value estimated on the date of grant and recognized in the consolidated statements of income over the vesting period of the award. The fair market value of restricted stock and restricted stock units is based on the fair value of the underlying shares of common stock on the date of grant. The fair value of stock options is estimated on the date of grant using the Black-Scholes model. Forfeitures are accounted for as they occur.
The amount of tax benefit related to the exercise, vesting and forfeiture of equity-based awards reflected as a tax benefit in additional paid-in-capital, not taxes payable,Heartland's income tax expense was $1.1 million and $671,000 during the nine months ended September 30, 20162017. Prior to the adoption of ASU 2016-09 on January 1, 2017, $1.1 million of tax benefit related to the exercise, vesting and 2015, respectively.forfeiture of equity based awards was reflected in additional paid-in-capital during the nine months ended September 30, 2016.
Restricted Stock Units
The Plan permits the Compensation Committee to grant restricted stock units ("RSUs"). In the first quarter of 2017, the Compensation Committee granted time-based RSUs with respect to 55,665 shares of common stock, and in the first quarter of 2016, the Compensation Committee granted time-based RSUs with respect to 72,644 shares of common stock and in the first quarter of 2015, the Compensation Committee granted time-based RSUs with respect to 78,220 shares of common stock to selected officers.officers and employees. The time-based RSUs represent the right, without payment, to receive shares of Heartland common stock aton a specified future date in the future. The time-based RSUs granted in 2016 vest over three years in equal installments onstarting in the first, second and third anniversaries ofyear following the grant date. The time-based RSUs granted in 2015 vest over five years in equal installments on the third, fourth, and fifth anniversaries of the grant date.initial grant. The time-based RSUs will be settled in common stock upon vesting, and will not be entitled to dividends until vested. The time-based RSUs may also vest upon death or disability, upon a change in control or upon a "qualified retirement" (as defined in the RSU agreement). The retiree is required to sign a non-solicitation and non-compete agreement as a condition to vesting.
In addition to the time-based RSUs referenced in the preceding paragraph, the Compensation Committee granted performance-based RSUs with respect to 27,570 shares of common stock in the first quarter of 2017, and 35,516 shares of common stock in the first quarter of 2016, and 39,075 shares of common stock in the first quarter of 2015.2016. These performance-based RSUs are earned based on satisfaction of performance targets for the fiscal years ended December 31, 2016,2017, and December 31, 2015,2016, respectively, and then fully vest two years afteron a specified date in the endthird calendar year following the year of the performance period. For the grants awarded in 2016, the portion of the RSUs earned based on performance vests on December 31, 2018, and for the grants awarded in 2015, the portion of the RSUs earned based on performance vests on December 31, 2017, subject to employment on the respective vesting dates.initial grant. The performance-based RSUs vest to the extent that they are earned upon death or disability, upon a change in control or upon a "qualified retirement."
The Compensation Committee also granted three-year performance-based RSUs with respect to 9,032 shares of common stock in the first quarter of 2017, and 11,408 shares of common stock in the first quarter of 2016. These performance-based RSUs will be earned based on satisfaction of performance targets for the three-year performance period ended December 31, 2018.2019, and December 31, 2018, respectively. These performance-based RSUs willor a portion thereof may vest in 2020 and 2019, respectively, after measurement of performance in relation to the performance targets.
Upon death, disability, or a "qualified retirement," all performance-based RSUs granted in 2016 remain outstanding and are earned based on actual performance at the end of each performance period. All RSUs granted on or after March 8, 2016, become fully vested upon a change in control if (1) they are not assumed by the successor corporation or (2) upon an involuntary termination of the participant's employment within two years after the change in control.
The Compensation Committee also grantsmay grant RSUs under the Plan to directors as part of their compensation, to new management level employees at commencement of employment, and to other employees and service providers as incentives. During the nine months ended September 30, 2016,2017, and September 30, 2015,2016, 16,804 and 24,153 and 22,648time-based RSUs, respectively, were granted to directors and new employees.
A summary of the RSUs outstanding as of September 30, 20162017 and 2015,2016, and changes during the nine months ended September 30, 20162017 and 2015,2016, follows:
| | | 2016 | | 2015 | 2017 | | 2016 |
| Shares | | Weighted-Average Grant Date Fair Value | | Shares | | Weighted-Average Grant Date Fair Value | Shares | | Weighted-Average Grant Date Fair Value | | Shares | | Weighted-Average Grant Date Fair Value |
Outstanding at January 1 | 353,195 |
| | $ | 25.53 |
| | 396,555 |
| | $ | 21.48 |
| 346,817 |
| | $ | 27.61 |
| | 353,195 |
| | $ | 25.53 |
|
Granted | 143,721 |
| | 29.75 |
| | 139,943 |
| | 28.90 |
| 109,071 |
| | 47.21 |
| | 143,721 |
| | 29.75 |
|
Vested | (117,898 | ) | | 23.44 |
| | (151,681 | ) | | 17.98 |
| (136,428 | ) | | 26.66 |
| | (117,898 | ) | | 23.44 |
|
Forfeited | (11,547 | ) | | 27.12 |
| | (15,636 | ) | | 25.08 |
| (12,923 | ) | | 31.57 |
| | (11,547 | ) | | 27.12 |
|
Outstanding at September 30 | 367,471 |
| | $ | 27.60 |
| | 369,181 |
| | $ | 25.56 |
| 306,537 |
| | $ | 34.72 |
| | 367,471 |
| | $ | 27.60 |
|
Total compensation costs recorded for RSUs were $3.1$3.6 million and $2.6$3.1 million for the nine-month periods ended September 30, 20162017 and 2015.2016. As of September 30, 2016,2017, there were $3.7$4.3 million of total unrecognized compensation costs related to the Plan for RSUs that are expected to be recognized through 2019.2020.
Options
Although the Plan provides authority to the Compensation Committee to grant stock options, no options were granted during the first nine months of 20162017 and 2015.2016. Prior to 2009, options were typically granted annually with an expiration date ten years after the date of grant. Vesting was generally over a five-year service period with equal portions of a grant becoming exercisable at three years, four years, and five years after the date of grant. A summary of the stock options outstanding as of September 30, 20162017 and 2015,2016, and changes during the nine months ended September 30, 20162017 and 2015,2016, follows:
| | | 2016 | | 2015 | 2017 | | 2016 |
| Shares | | Weighted-Average Exercise Price | | Shares | | Weighted-Average Exercise Price | Shares | | Weighted-Average Exercise Price | | Shares | | Weighted-Average Exercise Price |
Outstanding at January 1 | 125,950 |
| | $ | 24.08 |
| | 215,851 |
| | $ | 23.85 |
| 26,400 |
| | $ | 18.60 |
| | 125,950 |
| | $ | 24.08 |
|
Granted | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
|
Exercised | (55,250 | ) | | 24.82 |
| | (81,401 | ) | | 23.34 |
| (13,650 | ) | | 18.60 |
| | (55,250 | ) | | 24.82 |
|
Forfeited | (1,500 | ) | | 21.10 |
| | (3,250 | ) | | 23.51 |
| (500 | ) | | 18.60 |
| | (1,500 | ) | | 21.10 |
|
Outstanding at September 30 | 69,200 |
| | $ | 23.55 |
| | 131,200 |
| | $ | 24.15 |
| 12,250 |
| | $ | 18.60 |
| | 69,200 |
| | $ | 23.55 |
|
Options exercisable at September 30 | 69,200 |
| | $ | 23.55 |
| | 131,200 |
| | $ | 24.15 |
| 12,250 |
| | $ | 18.60 |
| | 69,200 |
| | $ | 23.55 |
|
At September 30, 2016,2017, the vested options totaled 69,20012,250 shares with a weighted average exercise price of $23.55$18.60 per share and a weighted average remaining contractual life of 0.860.32 years. The intrinsic value (the difference between the market price and the aggregate exercise price) for the vested options as of September 30, 2016,2017, was $866,000.$377,000. The intrinsic value for the total of all options exercised during the nine months ended September 30, 2016,2017, was $486,000.$379,000.
The exercise price of stock options granted is established by the Compensation Committee, but the exercise price for the stock options may not be less than the fair market value of the shares on the date that the option is granted or, if greater, the par value of a share of stock. Each option granted is exercisable in full at any time or from time to time, subject to vesting provisions, as determined by the Compensation Committee and as provided in the option agreement, but such time may not exceed ten years from the grant date. Cash received from options exercised was $254,000 for the nine months ended September 30, 2017, and $1.4 million for the nine months ended September 30, 2016, and $1.9 million for the nine months ended September 30, 2015.2016.
TotalNo compensation costs were recorded for options were $0 for bothduring the nine month periods ended September 30, 20162017 and 2015.2016. There are no unrecorded compensation costs related to options at September 30, 2016.2017. No stock options vested during the nine-month periods ended September 30, 20162017 and 2015.2016.
Subsequent Events
On October 29, 2016, - Heartland entered into a definitive merger agreement providing forhas evaluated subsequent events that may require recognition or disclosure through the acquisitionfiling date of Founders Bancorp, parent company of Founders Community Bank, based in San Luis Obispo, California. The transaction is valued at approximately $29.1 million, subject to adjustment. Ofthis Quarterly Report on Form 10-Q with the merger consideration, 70% will be in the form of shares of Heartland common stock,SEC.
and 30% will be in cash. As of September 30, 2016, Founders Community Bank had total assets of $198.5 million, which includes gross loans of $106.6 million and total deposits of $180.5 million. The closing of the acquisition is subject to customary closing conditions, including approvals by the Founders Bancorp shareholders and banking regulators, and is expected to occur in the first quarter of 2017. Simultaneous with the close, Founders Community Bank will be merged into Heartland's Premier Valley Bank subsidiary. Heartland expects the acquisition to be accretive to its earning per share during 2018.
On November 2, 2016, Heartland commenced a public offering of 1,379,690 shares of its common stock at $36.24 per share, and the offering closed on November 8, 2016. The offering resulted in net proceeds of approximately $49.7 million after deducting estimated offering expenses payable by Heartland. All of the shares of common stock included in the offering are primary shares. Heartland intends to use the net proceeds from this offering for general corporate purposes, which may include, among other things, working capital, debt repayment or financing potential acquisitions.
The interim unaudited consolidated financial statements contained herein cover results for the quarter ended September 30, 2016, and as a result, the effects of these transactions are excluded from the financial results and financial position of Heartland disclosed herein.
Effect of New Financial Accounting Standards
In May 2014, the FASB issued ASU 2014-09, ""Revenue from Contracts with CustomersCustomers." ." The amendment clarifies the principles for recognizing revenue and develops a common revenue standard. The amendment outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” In applying the revenue model to contracts within its scope, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The amendment appliesnew guidance does not apply to allcertain contracts with customers except those that are within the scope of other topicsASC Topics, such as lease contracts, insurance contracts, financing arrangements, financial instruments, guarantees other than product or service warranties and nonmonetary exchanges between entities in the FASB Codification. The standard also requires significantly expanded disclosures about revenue recognition.same line of business to facilitate sales to customers. Heartland continues to evaluate noninterest income contracts affected by the new guidance by analyzing contracts and current accounting practices to determine if a change is appropriate. The amendment is effective for annual reporting periods beginning after December 15, 2017 (including interim reporting periods within those periods). Early application is not permitted.largely consistent with existing guidance and current practices. Heartland intends to adopt the accounting standard during the first quarter ofin 2018, as required, which may require a change in the recognition of certain recurring revenue streams within trust and is currently evaluatinginvestment management fees; however, Heartland's preliminary analysis suggests the impactadoption of these amendments are not expected to have a significant effect on itsHeartland's results of operations, financial position and liquidity.
In November 2014, the FASB issued ASU 2014-16, "Derivatives and Hedging (Topic 815): Determining Whether a Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or to Equity." The amendment clarifies how current guidance should be interpreted in evaluating the characteristics and risks of a host contract in a hybrid financial instrument issued in the form of a share. One criterion requires evaluating whether the nature of the host contract is more akin to debt or to equity and whether the economic characteristics and risks of the embedded derivative feature are "clearly and closely related" to the host contract. In making that evaluation, an issuer or investor must consider all terms and features in a hybrid financial instrument including the embedded derivative feature that is being evaluated for separate accounting or may consider all terms and features in the hybrid financial instrument except for the embedded derivative feature that is being evaluated for separate accounting. This ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, with early adoption permitted. Heartland adopted this standard on January 1, 2016, and the adoption of this standard did not have a material impact on its results of operations, financial position, and liquidity.
In January 2015, the FASB issued ASU 2015-01, "Income Statement-Extraordinary and Unusual Items." The amendment eliminates from U.S. GAAP the concept of extraordinary items. Presently, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item. If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. This amended guidance will prohibit separateliquidity other than expanded disclosure of extraordinary items in the income statement. This amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Entities may apply the amendment prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. Heartland adopted this standard on January 1, 2016, and the adoption of this standard did not have a material impact on the results of operations, financial position, and liquidity.
In April 2015, the FASB issued ASU 2015-05, "Intangibles-Goodwill and Other-Internal-Use Software." The amendment intends to provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change GAAP for a customer's accounting for service contracts. As a result, all software licenses within the scope of this guidance will be accounted for consistently with other licenses of intangible assets. This amendment is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Entities can elect to adopt the standard either retrospectively or prospectively to all cloud computing arrangements entered into or materially modified after the adoption date. Early adoption is permitted. Heartland adopted this standard on January 1, 2016, and the adoption did not have a material impact on the results of operations, financial position, and liquidity.
In September 2015, the FASB issued ASU 2015-16, "Simplifying the Accounting for Measurement-Period Adjustments." The amendment eliminates the requirement of Topic 805, Business Combinations, to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after a business combination is consummated. Measurement-period adjustments are calculated as if they were known at the acquisition date, but are recognized in the reporting period in which they are determined. Prior period information is not revised. Additional disclosures are required about the impact on current period income statement line items of adjustments that would have been recognized in prior periods if prior period information had been revised. This amendment is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted if financial statements have not been issued. Heartland adopted this standard effective September 30, 2015. The adoption of this standard did not have a material impact on the results of operations, financial position, and liquidity.requirements.
In January 2016, the FASB issued guidance ASU 2016-01, ""Recognition and Measurement of Financial Assets and Financial LiabilitieLiabilities."s." The amendments in ASU 2016-01 to Subtopic 825-10, Financial Instruments, containmake the following elements:changes: (1) requiresrequire equity investments to be measured at fair value with changes in fair value recognized in net income; (2) simplifiessimplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (3) eliminateseliminate the requirement for public entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (4) requiresrequire public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (5) requiresrequire an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (6) requiresrequire separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or accompanying notes to the financial statements; (7) clarifiesclarify that the entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity's other deferred tax assets. The amendments are effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. Except for the early application of the amendment noted in item (5) above, early adoption of the amendments in this update is not permitted. Heartland intends to adopt the accounting standard in 2018, as required, and is currently evaluating the potential impact of this guidance on its results of operations, financial position and liquidity.
In February 2016, the FASB issued ASU 2016-02, ""Leases (Topic 842)."Topic 842 requires a lessee to recognize a lease liability and a right of use asset for each lease, with the exception of short term leases at the commencement date of the leaseon its balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the leasing arrangement. Accounting requirements applied by lessors is largely unchanged.balance sheet for all leases with a term longer than 12 months. Leases will be classified as financing or operating, with such classification affecting the categorization of expense recognition in the income statement. The amendment is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and will be applied on a modified retrospective basis. Heartland leases certain properties and equipment under operating leases that will result in recognition of lease assets and lease liabilities on the consolidated balance sheets under this ASU; however the majority of Heartland's properties and equipment are owned and not leased. Heartland intends to adopt the accounting standard in 2019 as required, and is currently evaluating the potential impact of this guidance on its results of operations, financial position, and liquidity.required.
In March 2016, the FASB issued ASU 2016-09, "Compensation-Stock Compensation (Topic 718)." The amendments in this ASU simplify several aspects of the accounting for share-based payments, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The amendments in this ASU are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption iswas permitted for any interim or annual period prior to the effective date. An entity that elects early adoption must adopt all of the amendments in the same period. Heartland intends to adoptadopted this ASU inon January 1, 2017, as required, using a prospective transition method. The requirement to report the excess tax benefit or shortfall related to settlements of share-based payment awards in earnings as an increase or decrease to tax expense has been applied to settlements occurring on or after January 1, 2017, and is currently evaluating the potential impact of thisapplying the guidance reduced reported income tax expense by $1.1 million.
ASU 2016-09 also requires that all income tax related cash flows resulting from share-based payments be reported as an operating activity in the consolidated statements of cash flows. Previously income tax benefits resulting from the settlement of a share-based award were reported as a reduction of operating cash flows and an increase to financing cash flows to the extent that those benefits exceeded the income tax benefits reported in earnings during the period in which the share-based awards vested. Heartland elected to adopt the change in cash flow classification on its resultsa retrospective basis, which resulted in a $1.1 million increase to net cash from operating activities and a corresponding decrease to net cash from financing activities in the accompanying consolidated statement of operations, financial position, and liquidity.cash flows for the nine months ended September 30, 2016. Heartland has elected to account for forfeitures as they occur.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)."Theamendments in this ASU require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial
asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The amendments in this ASU indicate that an entity should not use the length of time a security has been in an unrealized loss position to avoid recording a credit loss. In addition, in determining whether a credit loss exists, the amendments in this ASU also remove the requirements to consider the historical and implied volatility of the fair value of a security and recoveries or declines in fair value after the balance sheet date. The amendment isamendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. An entity may adopt the amendments earlier as of theEarly adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Heartland intends to adopt the accounting standard in 2020, as required, and is currently evaluatingrequired. Heartland has formed a committee to review the standard, understand the potential impact of this guidance on its results of operations, financial position and liquidity.liquidity, and oversee the implementation of the standard.
In August 2016, the FASB issued ASU 2016-15, ""Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments."" The amendments in this update address eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendment isamendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments early in an interim period, any adjustments shouldmust be reflected as of the beginning of the fiscal year that includes the interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this update shouldmust be applied using a retrospective transition method to each period presented. Heartland intends to adopt this ASU in 2018, as required, and is currently evaluating the potential impact on its results of operations, financial position, and liquidity.
In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740) - Intra-Entity Transfer of Assets Other Than Inventory." The amendment requires an entity to recognize income tax consequences on an intra-entity transfer of an asset other than inventory at the time the transaction occurs. The amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The amendments must be applied using a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Heartland intends to adopt this ASU in 2018, as required, and the adoption of this amendment is not expected to have a significant effect on Heartland's results of operations, financial position and liquidity.
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350)." This amendment is to simplify the subsequent measurement of goodwill by eliminating step two from the goodwill impairment test. Instead, an entity will perform only step one of its quantitative goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and then recognizing the impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized cannot exceed the total amount of goodwill allocated to that reporting unit. An entity will still have the option to perform a qualitative assessment for a reporting unit to determine if the quantitative step one impairment test is necessary. This amendment is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied prospectively. Early adoption is permitted, including in an interim period for impairment tests performed after January 1, 2017. Heartland intends to adopt this ASU in the third quarter of 2020, consistent with the annual impairment test as of September 30, 2020, and is currently evaluating the potential impact of this guidance on its results of operations, financial position and liquidity.
In March 2017, the FASB issued ASU 2017-08, "Receivables - Nonrefundable Fee and Other Costs (Subtopic 310-20)." These amendments shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount. Discounts continue to be amortized to maturity. These amendments are effective for public business entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If any entity early adopts the amendments in an interim period, any adjustments must be reflected as of the beginning of the fiscal year that includes the interim period. The amendments must be applied on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption.
Heartland intends to adopt this ASU in 2019, as required, and is currently evaluating the potential impact on its results of operations, financial position, and liquidity.
In May 2017, the FASB issued ASU 2017-09, "Compensation - Stock Compensation (Topic 718)." The amendments provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless all the following are met; (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The amendments are effective for annual periods and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim periods for public business entities for reporting periods for which financial statements have not yet been issued. The amendments should be applied prospectively to an award modified on or after the adoption date. Heartland intends to adopt this ASU in 2018, as required, and does not believe there will be a material impact to its results of operations, financial position, and liquidity because Heartland has not typically modified share-based payment awards after the original award has been granted.
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging:Targeted Improvements to Accounting for Hedging Activities." The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. ASU 2017-12 requires a modified retrospective transition method in which Heartland will recognize the cumulative effect of the change on the opening balance of each affected component of equity in the statement of financial position as of the date of adoption. Heartland currently intends to adopt this ASU in 2019, as required, and does not believe there will be a material impact to its results of operations, financial position, and liquidity.
NOTE 2: ACQUISITIONS
Citywide Banks of Colorado, Inc.
On July 7, 2017, Heartland acquired Citywide Banks of Colorado, Inc., parent company of Citywide Banks, headquartered in Aurora, Colorado. The transaction consideration was approximately $211.2 million, of which $58.6 million was cash, and the remainder was settled by delivery of 3,216,161 shares of Heartland common stock. Simultaneous with the close, Citywide Banks merged into Heartland's Centennial Bank and Trust subsidiary, and the combined entity operates as Citywide Banks. The transaction included, at fair value, total assets of $1.49 billion, including $985.4 million of net loans outstanding, and $1.21 billion of deposits on the acquisition date. Included in this transaction was one bank building with a fair value of $1.4 million that Heartland intends to sell and is classified as premises, furniture and equipment held for sale on the consolidated balance sheet. The transaction was a tax-free reorganization with respect to the stock consideration received by the stockholders of Citywide Banks of Colorado, Inc.
The assets and liabilities of Citywide Banks of Colorado, Inc. were recorded on the consolidated balance sheet at the estimated fair value on the acquisition date. The following table represents, in thousands, the amounts recorded on the consolidated balance sheet as of July 7, 2017:
|
| | | |
| As of July 7, 2017 |
Fair value of consideration paid: | |
Common stock (3,216,161 shares) | $ | 152,607 |
|
Cash | 58,636 |
|
Total consideration paid | 211,243 |
|
Fair value of assets acquired: | |
Cash and due from banks | 21,341 |
|
Interest bearing deposits in other financial institutions | 74,686 |
|
Time deposits in other financial institutions | 6,304 |
|
Securities: | |
Securities available for sale | 234,390 |
|
Other securities | 2,628 |
|
Loans held to maturity | 985,399 |
|
Premises, furniture and equipment, net | 17,206 |
|
Premises, furniture and equipment held for sale | 1,350 |
|
Other real estate, net | 6,916 |
|
Other intangible assets, net | 16,041 |
|
Other assets | 32,278 |
|
Total assets | 1,398,539 |
|
Fair value of liabilities assumed: | |
Deposits | 1,210,074 |
|
Short term borrowings | 34,445 |
|
Other borrowings | 21,636 |
|
Other liabilities | 16,295 |
|
Total liabilities assumed | 1,282,450 |
|
Fair value of net assets acquired | 116,089 |
|
Goodwill resulting from acquisition | $ | 95,154 |
|
Heartland recognized $95.2 million of goodwill in conjunction with the acquisition of Citywide Banks of Colorado, Inc., which is calculated as the excess of both the consideration exchanged and the liabilities assumed as compared to the fair value of identifiable assets acquired. Goodwill resulted from the expected operational synergies, enhanced market area, cross-selling opportunities and expanded business lines. See Note 6 for further information on goodwill.
Pro Forma Information (unaudited): The following pro forma information represents the results of operations for the nine-month periods ended September 30, 2017, and 2016, as if the Citywide Banks of Colorado, Inc. acquisition occurred on January 1, 2017, and January 1, 2016, respectively:
|
| | | | | | | |
(Dollars in thousands, except per share data), unaudited | For the Nine Months Ended |
| September 30, 2017 | | September 30, 2016 |
Net interest income | $ | 264,485 |
| | $ | 256,579 |
|
Net income available to common stockholders | $ | 61,940 |
| | $ | 68,857 |
|
Basic earnings per share | $ | 2.08 |
| | $ | 2.51 |
|
Diluted earnings per share | $ | 2.06 |
| | $ | 2.48 |
|
The above pro forma results are presented for illustrative purposes and are not intended to represent or be indicative of the actual
results of operations of the merged companies that would have been achieved had the acquisition occurred on January 1, 2016, nor are they intended to represent or be indicative of future results of operations. The pro forma results do not include expected
operating cost savings as a result of the acquisition or adjustments for $10.1 million of transaction costs recorded by Citywide Banks of Colorado Inc. prior to the acquisition. These pro forma results require significant estimates and judgments particularly with respect to valuation and accretion of income associated with the acquired loans.
Heartland incurred $3.8 million of pre-tax merger related expenses in the nine months ended September 30, 2017, associated with the Citywide Banks of Colorado, Inc. acquisition. The merger expenses are reflected on the consolidated statements of income for the applicable period and are reported primarily in the categories of salaries and employee benefits, professional fees, loss on sales/valuations of assets, net and other noninterest expenses.
Acquired loans were preliminarily recorded at fair value based on a discounted cash flow valuation methodology that considers,
among other things, projected default rates, loss given defaults and recovery rates. No allowance for credit losses was carried over
from the acquisition. The balance of nonaccrual loans on the acquisition date was $1.1 million.
Founders Bancorp
On February 28, 2017, Heartland acquired Founders Bancorp, parent company of Founders Community Bank, based in San Luis Obispo, California. The purchase price was approximately $31.0 million, which was paid by delivery of 455,877 shares of Heartland common stock and cash of $8.4 million. The transaction included, at fair value, total assets of $213.9 million, loans of $96.4 million, and deposits of $181.5 million on the acquisition date. The transaction also included one bank building with a fair value of $576,000 that Heartland sold during the second quarter of 2017. Simultaneous with the closing of the transaction, Founders Community Bank merged into Heartland's Premier Valley Bank subsidiary. The transaction was a tax-free reorganization with respect to the stock consideration received by the stockholders of Founders Bancorp.
CIC Bancshares, Inc.
On February 5, 2016, Heartland completed the acquisition of CIC Bancshares, Inc., parent company of Centennial Bank, headquartered in Denver, Colorado. The purchase price was approximately $76.9 million, which was paid by delivery of 2,003,235 shares of Heartland common stock and cash of $15.7 million. In addition, Heartland issued a new series of convertible preferred stock with a fair value of $3.8 million and assumed convertible notes and subordinated debt totaling approximately $7.9 million. Simultaneous with the closing of the transaction, Centennial Bank merged into Heartland's Summit Bank & Trust, with the resulting institution operating under the name, Centennial Bank and Trust. As of the close date, the transaction included, at fair value, total assets of $772.6 million, total loans of $581.5 million, and total deposits of $648.1 million. The transaction was a tax-free reorganization with respect to the stock consideration received by the stockholders of CIC Bancshares, Inc.
The assets and liabilities of CIC Bancshares, Inc. were recorded on the consolidated balance sheet at estimated fair value on the acquisition date. The following table represents, in thousands, the amounts recorded on the consolidated balance sheet as of February 5, 2016:
|
| | | |
| As of February 5, 2016 |
Fair value of consideration paid: | |
Common Stock (2,003,235 shares) | $ | 57,433 |
|
Preferred Stock (3,000 shares) | 3,777 |
|
Cash | 15,672 |
|
Total consideration paid | 76,882 |
|
Fair value of assets acquired: | |
Cash and due from banks | 23,756 |
|
Securities: |
|
Securities available for sale | 92,831 |
|
Other securities | 3,486 |
|
Loans held to maturity | 581,477 |
|
Premises, furniture and equipment, net | 16,450 |
|
Other real estate, net | 1,934 |
|
Other intangible assets, net | 6,576 |
|
Other assets | 16,276 |
|
Total assets | 742,786 |
|
Fair value of liabilities assumed: | |
Deposits | 648,111 |
|
Short term borrowings | 35,766 |
|
Other borrowings | 7,924 |
|
Other liabilities | 3,951 |
|
Total liabilities assumed | 695,752 |
|
Fair value of net assets acquired | 47,034 |
|
Goodwill resulting from acquisition | $ | 29,848 |
|
Heartland recognized $29.8 million of goodwill in conjunction with the acquisition of CIC Bancshares, Inc., which is calculated as the excess of both the consideration exchanged and the liabilities assumed as compared to the fair value of identifiable assets acquired. Goodwill resulted from the expected operational synergies, enhanced market area, cross-selling opportunities and expanded business lines. See Note 6 for further information on goodwill.
Pro Forma Information (unaudited): The following pro forma information presents the results of operations for the years ended December 31, 2015, and December 31, 2014, as if the CIC Bancshares, Inc. acquisition occurred on January 1, 2014:
|
| | | | | | | |
(Dollars in thousands, except per share data), unaudited | For the Years Ended |
| December 31, 2015 | | December 31, 2014 |
Net interest income | $ | 259,531 |
| | $ | 221,808 |
|
Net income available to common shareholders | $ | 59,491 |
| | $ | 41,004 |
|
Basic earnings per share | $ | 2.63 |
| | $ | 2.00 |
|
Diluted earnings per share | $ | 2.58 |
| | $ | 1.96 |
|
The above pro forma results are presented for illustrative purposes and are not intended to represent or be indicative of the actual results of operations of the merged companies that would have been achieved had the acquisition occurred at January 1, 2014, nor are they intended to represent or be indicative of future results of operations. The pro forma results do not include expected operating cost savings as a result of the acquisition. These pro forma results require significant estimates and judgments particularly with respect to valuation and accretion of income associated with the acquired loans.
Heartland incurred $551,000 of pre-tax merger related expenses in 2016 associated with the Centennial Bank acquisition. The merger expenses are reflected on the consolidated statements of income for the applicable period and are reported primarily in the categories of professional fees and other noninterest expenses.
Acquired loans were preliminarily recorded at fair value based on a discounted cash flow valuation methodology that considers, among other things, projected default rates, loss given defaults and recovery rates. No allowance for credit losses was carried over from the acquisition. The balance of nonaccrual loans on the acquisition date was $1.6 million.
Premier Valley Bank
On November 30, 2015, Heartland completed the purchase of Premier Valley Bank in Fresno, California. The purchase price was approximately $95.5 million, which was paid by delivery of 1,758,543 shares of Heartland common stock and cash of $28.5 million. The transaction included, at fair value, total assets of $692.7 million, loans of $389.8 million, and deposits of $622.7 million. Premier Valley Bank continues to operate under its current name and management team as Heartland's tenth, wholly-owned state-chartered bank. The transaction was a tax-free reorganization with respect to the stock consideration received by the stockholders of Premier Valley Bank.
Heartland recognized $41.0 million of goodwill in conjunction with the acquisition of Premier Valley Bank, which is calculated as the excess of both the consideration exchanged and the liabilities assumed as compared to the fair value of identifiable assets acquired. Goodwill resulted from the expected operational synergies, enhanced market area, cross-selling opportunities and expanded business lines. See Note 6 for further information on goodwill.
First Scottsdale Bank, N.A.
On September 11, 2015, Heartland completed the purchase of First Scottsdale Bank, N.A., in Scottsdale, Arizona, in an all cash transaction valued at approximately $17.7 million. Simultaneous with the closing of the transaction, First Scottsdale Bank, N.A., merged into Heartland's Arizona Bank & Trust subsidiary. The transaction included, at fair value, total assets of $81.2 million, loans of $54.7 million, and deposits of $65.9 million on the acquisition date.
Community Bancorporation of New Mexico, Inc.
On August 21, 2015, Heartland acquired Community Bancorporation of New Mexico, Inc., parent company of Community Bank in Santa Fe, New Mexico, in an all cash transaction valued at approximately $11.1 million. Simultaneous with the closing of the transaction, Community Bank merged into Heartland's New Mexico Bank & Trust subsidiary. The transaction included, at fair value, total assets of $166.3 million, loans of $99.5 million, and deposits of $147.4 million on the acquisition date. Also included in this transaction is one bank building with a fair value of $3.4 million that Heartland intends to sell. The bank building is part of the balance of premises, furniture and equipment held for sale on the consolidated balance sheet.
Community Banc-Corp of Sheboygan, Inc.
On January 16, 2015, Heartland completed the acquisition of Community Banc-Corp of Sheboygan, Inc., parent company of Community Bank & Trust in Sheboygan, Wisconsin. Under the terms of the merger agreement for this transaction, the aggregate purchase price was based upon 155% of the December 31, 2014, adjusted tangible book value, as defined in the merger agreement, of Community Banc-Corp of Sheboygan, Inc. The purchase price was approximately $53.1 million, which was paid by delivery of 1,970,720 shares of Heartland common stock. The transaction included, at fair value, total assets of $506.8 million, including loans of $395.0 million, and deposits of $433.9 million. Simultaneous with the close of the transaction, Community Bank & Trust merged into Heartland’s Wisconsin Bank & Trust subsidiary. The transaction was a tax-free reorganization with respect to the stock consideration received by the stockholders of Community Banc-Corp of Sheboygan, Inc.
Heartland recognized goodwill of $18.6 million in conjunction with the acquisition of Community Banc-Corp of Sheboygan, Inc., which is calculated as the excess of both the consideration exchanged and the liabilities assumed as compared to the fair value of identifiable assets acquired. See Note 6 for further information on goodwill.
NOTE 3: SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair values of securities available for sale as of September 30, 2016,2017, and December 31, 2015,2016, are summarized in the table below, in thousands:
| | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
September 30, 2016 | | | | | | | | |
September 30, 2017 | | | | | | | | |
U.S. government corporations and agencies | $ | 4,830 |
| | $ | 125 |
| | $ | — |
| | $ | 4,955 |
| $ | 7,435 |
| | $ | 14 |
| | $ | (34 | ) | | $ | 7,415 |
|
Mortgage-backed securities | 1,281,459 |
| | 14,401 |
| | (20,767 | ) | | 1,275,093 |
| 1,593,677 |
| | 4,656 |
| | (32,933 | ) | | 1,565,400 |
|
Obligations of states and political subdivisions | 353,483 |
| | 9,611 |
| | (987 | ) | | 362,107 |
| 506,867 |
| | 4,307 |
| | (7,200 | ) | | 503,974 |
|
Corporate debt securities | — |
| | — |
| | — |
| | — |
| |
Total debt securities | 1,639,772 |
| | 24,137 |
| | (21,754 | ) | | 1,642,155 |
| 2,107,979 |
| | 8,977 |
| | (40,167 | ) | | 2,076,789 |
|
Equity securities | 13,166 |
| | 375 |
| | — |
| | 13,541 |
| 16,253 |
| | 343 |
| | — |
| | 16,596 |
|
Total | $ | 1,652,938 |
| | $ | 24,512 |
| | $ | (21,754 | ) | | $ | 1,655,696 |
| $ | 2,124,232 |
| | $ | 9,320 |
| | $ | (40,167 | ) | | $ | 2,093,385 |
|
December 31, 2015 | | | | | | | | |
December 31, 2016 | | | | | | | | |
U.S. government corporations and agencies | $ | 25,847 |
| | $ | 22 |
| | $ | (103 | ) | | $ | 25,766 |
| $ | 4,716 |
| | $ | 16 |
| | $ | (32 | ) | | $ | 4,700 |
|
Mortgage-backed securities | 1,254,452 |
| | 9,134 |
| | (20,884 | ) | | 1,242,702 |
| 1,321,760 |
| | 7,026 |
| | (38,286 | ) | | 1,290,500 |
|
Obligations of states and political subdivisions | 290,522 |
| | 6,547 |
| | (1,087 | ) | | 295,982 |
| 553,020 |
| | 2,436 |
| | (19,312 | ) | | 536,144 |
|
Corporate debt securities | 740 |
| | 106 |
| | — |
| | 846 |
| |
Total debt securities | 1,571,561 |
|
| 15,809 |
|
| (22,074 | ) |
| 1,565,296 |
| 1,879,496 |
|
| 9,478 |
|
| (57,630 | ) |
| 1,831,344 |
|
Equity securities | 13,142 |
| | 40 |
| | (44 | ) | | 13,138 |
| 14,451 |
| | 69 |
| | — |
| | 14,520 |
|
Total | $ | 1,584,703 |
| | $ | 15,849 |
| | $ | (22,118 | ) | | $ | 1,578,434 |
| $ | 1,893,947 |
| | $ | 9,547 |
| | $ | (57,630 | ) | | $ | 1,845,864 |
|
At September 30, 2016, and December 31, 2015, the amortized cost of the available for sale securities is net of $0 and $237,000 of credit related other-than-temporary impairment ("OTTI"), respectively.
The amortized cost, gross unrealized gains and losses and estimated fair values of held to maturity securities as of September 30, 2016,2017, and December 31, 2015,2016, are summarized in the table below, in thousands:
| | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
September 30, 2016 | | | | | | | | |
Mortgage-backed securities | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| |
September 30, 2017 | | | | | | | | |
Obligations of states and political subdivisions | 265,302 |
| | 20,191 |
| | (545 | ) | | 284,948 |
| $ | 256,355 |
| | $ | 14,722 |
| | $ | (691 | ) | | $ | 270,386 |
|
Total | $ | 265,302 |
| | $ | 20,191 |
| | $ | (545 | ) | | $ | 284,948 |
| $ | 256,355 |
| | $ | 14,722 |
| | $ | (691 | ) | | $ | 270,386 |
|
December 31, 2015 | | | | | | | | |
Mortgage-backed securities | $ | 4,369 |
| | $ | 306 |
| | $ | — |
| | $ | 4,675 |
| |
December 31, 2016 | | | | | | | | |
Obligations of states and political subdivisions | 274,748 |
| | 15,595 |
| | (505 | ) | | 289,838 |
| $ | 263,662 |
| | $ | 12,282 |
| | $ | (1,145 | ) | | $ | 274,799 |
|
Total | $ | 279,117 |
| | $ | 15,901 |
| | $ | (505 | ) | | $ | 294,513 |
| $ | 263,662 |
| | $ | 12,282 |
| | $ | (1,145 | ) | | $ | 274,799 |
|
At September 30, 2016, the amortized cost of the held to maturity securities is net of $0 of credit related OTTI and $0 of non-credit related OTTI. At December 31, 2015, the amortized cost of the held to maturity securities was net of $1.5 million of credit related OTTI and $40,000 of non-credit related OTTI.
Approximately 77%2017, approximately 74% of Heartland's mortgage-backed securities are issuances ofwere issued by government-sponsored enterprises.
The amortized cost and estimated fair value of debt securities available for sale at September 30, 2016,2017, by contractual maturity, are as follows, in thousands. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.
| | | | | | | September 30, 2017 |
| Amortized Cost | | Estimated Fair Value | Amortized Cost | | Estimated Fair Value |
Due in 1 year or less | $ | 1,075 |
| | $ | 1,078 |
| $ | 185 |
| | $ | 186 |
|
Due in 1 to 5 years | 22,931 |
| | 23,277 |
| 40,716 |
| | 41,077 |
|
Due in 5 to 10 years | 103,104 |
| | 105,529 |
| 93,240 |
| | 91,514 |
|
Due after 10 years | 231,203 |
| | 237,178 |
| 380,161 |
| | 378,612 |
|
Total debt securities | 358,313 |
| | 367,062 |
| 514,302 |
| | 511,389 |
|
Mortgage-backed securities | 1,281,459 |
| | 1,275,093 |
| 1,593,677 |
| | 1,565,400 |
|
Equity securities | 13,166 |
| | 13,541 |
| 16,253 |
| | 16,596 |
|
Total investment securities | $ | 1,652,938 |
| | $ | 1,655,696 |
| $ | 2,124,232 |
| | $ | 2,093,385 |
|
The amortized cost and estimated fair value of debt securities held to maturity at September 30, 2016,2017, by contractual maturity, are as follows, in thousands. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.
| | | | | | | September 30, 2017 |
| Amortized Cost | | Estimated Fair Value | Amortized Cost | | Estimated Fair Value |
Due in 1 year or less | $ | 3,695 |
| | $ | 3,760 |
| $ | 1,510 |
| | $ | 1,533 |
|
Due in 1 to 5 years | 14,233 |
| | 15,163 |
| 21,157 |
| | 22,090 |
|
Due in 5 to 10 years | 87,275 |
| | 92,278 |
| 105,030 |
| | 109,119 |
|
Due after 10 years | 160,099 |
| | 173,747 |
| 128,658 |
| | 137,644 |
|
Total debt securities | 265,302 |
| | 284,948 |
| |
Mortgage-backed securities | — |
| | — |
| |
Total investment securities | $ | 265,302 |
| | $ | 284,948 |
| $ | 256,355 |
| | $ | 270,386 |
|
As of September 30, 2016,2017, and December 31, 2015,2016, securities with a fair value of $792.7$758.1 million and $855.8$810.6 million, respectively, were pledged to secure public and trust deposits, short-term borrowings and for other purposes as required andor permitted by law.
Gross gains and losses realized related to the sales of securities available for sale for the three- and nine-month periods ended September 30, 20162017 and 2015,2016, are summarized as follows, in thousands:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 | | 2017 | | 2016 |
Proceeds from sales | $ | 146,242 |
| | $ | 351,050 |
| | $ | 768,617 |
| | $ | 877,077 |
| $ | 503,083 |
| | $ | 146,242 |
| | $ | 1,127,091 |
| | $ | 768,617 |
|
Gross security gains | 1,763 |
| | 2,416 |
| | 11,416 |
| | 10,857 |
| 2,088 |
| | 1,763 |
| | 8,585 |
| | 11,416 |
|
Gross security losses | 177 |
| | 609 |
| | 1,332 |
| | 1,587 |
| 409 |
| | 177 |
| | 3,023 |
| | 1,332 |
|
The following tables summarize, in thousands, the amount of unrealized losses, defined as the amount by which cost or amortized cost exceeds fair value, and the related fair value of investments with unrealized losses in Heartland's securities portfolio as of September 30, 2016,2017, and December 31, 2015.2016. The investments were segregated into two categories: those that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 months or more months.more. The reference point for determining how long an investment was in an unrealized loss position was September 30, 2015,2016, and December 31, 2014,2015, respectively. Securities for which Heartland has taken credit-related OTTIother-than-temporary impairment ("OTTI") write-downs are categorized as being "less than 12 months" or "12 months or longer" in a continuous loss position based on the point in time that the fair value declined to below the cost basis and not the period of time since the credit-related OTTI write-down.
|
| | | | | | | | | | | | | | | | | | | | | | | |
Securities available for sale | Less than 12 months | | 12 months or longer | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
September 30, 2017 | | | | | | | | | | | |
U.S. government corporations and agencies | $ | 6,901 |
| | $ | (34 | ) | | $ | — |
| | $ | — |
| | $ | 6,901 |
| | $ | (34 | ) |
Mortgage-backed securities | 761,235 |
| | (11,558 | ) | | 431,669 |
| | (21,375 | ) | | 1,192,904 |
| | (32,933 | ) |
Obligations of states and political subdivisions | 149,931 |
| | (1,820 | ) | | 153,068 |
| | (5,380 | ) | | 302,999 |
| | (7,200 | ) |
Total debt securities | 918,067 |
| | (13,412 | ) | | 584,737 |
| | (26,755 | ) | | 1,502,804 |
| | (40,167 | ) |
Equity securities | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total temporarily impaired securities | $ | 918,067 |
| | $ | (13,412 | ) | | $ | 584,737 |
| | $ | (26,755 | ) | | $ | 1,502,804 |
| | $ | (40,167 | ) |
December 31, 2016 |
U.S. government corporations and agencies | $ | 4,185 |
| | $ | (32 | ) | | $ | — |
| | $ | — |
| | $ | 4,185 |
| | $ | (32 | ) |
Mortgage-backed securities | 744,202 |
| | (23,527 | ) | | 272,449 |
| | (14,759 | ) | | 1,016,651 |
| | (38,286 | ) |
Obligations of states and political subdivisions | 414,151 |
| | (19,309 | ) | | 251 |
| | (3 | ) | | 414,402 |
| | (19,312 | ) |
Total debt securities | 1,162,538 |
| | (42,868 | ) | | 272,700 |
| | (14,762 | ) | | 1,435,238 |
| | (57,630 | ) |
Equity securities | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total temporarily impaired securities | $ | 1,162,538 |
| | $ | (42,868 | ) | | $ | 272,700 |
| | $ | (14,762 | ) | | $ | 1,435,238 |
| | $ | (57,630 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Securities available for sale | Less than 12 months | | 12 months or longer | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
September 30, 2016 | | | | | | | | | | | |
U.S. government corporations and agencies | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Mortgage-backed securities | 575,105 |
| | (14,317 | ) | | 180,406 |
| | (6,450 | ) | | 755,511 |
| | (20,767 | ) |
Obligations of states and political subdivisions | 70,894 |
| | (986 | ) | | 253 |
| | (1 | ) | | 71,147 |
| | (987 | ) |
Total debt securities | 645,999 |
| | (15,303 | ) | | 180,659 |
| | (6,451 | ) | | 826,658 |
| | (21,754 | ) |
Equity securities | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total temporarily impaired securities | $ | 645,999 |
| | $ | (15,303 | ) | | $ | 180,659 |
| | $ | (6,451 | ) | | $ | 826,658 |
| | $ | (21,754 | ) |
December 31, 2015 |
U.S. government corporations and agencies | $ | 22,359 |
| | $ | (103 | ) | | $ | — |
| | $ | — |
| | $ | 22,359 |
| | $ | (103 | ) |
Mortgage-backed securities | 724,330 |
| | (15,523 | ) | | 139,562 |
| | (5,361 | ) | | 863,892 |
| | (20,884 | ) |
Obligations of states and political subdivisions | 68,482 |
| | (896 | ) | | 7,460 |
| | (191 | ) | | 75,942 |
| | (1,087 | ) |
Total debt securities | 815,171 |
| | (16,522 | ) | | 147,022 |
| | (5,552 | ) | | 962,193 |
| | (22,074 | ) |
Equity securities | 6,566 |
| | (44 | ) | | — |
| | — |
| | 6,566 |
| | (44 | ) |
Total temporarily impaired securities | $ | 821,737 |
| | $ | (16,566 | ) | | $ | 147,022 |
| | $ | (5,552 | ) | | $ | 968,759 |
| | $ | (22,118 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Securities held to maturity | Less than 12 months | | 12 months or longer | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
September 30, 2017 | | | | | | | | | | | |
Obligations of states and political subdivisions | $ | 6,278 |
| | $ | (43 | ) | | $ | 8,894 |
| | $ | (648 | ) | | $ | 15,172 |
| | $ | (691 | ) |
Total temporarily impaired securities | $ | 6,278 |
| | $ | (43 | ) | | $ | 8,894 |
| | $ | (648 | ) | | $ | 15,172 |
| | $ | (691 | ) |
December 31, 2016 |
Obligations of states and political subdivisions | $ | 31,479 |
| | $ | (884 | ) | | $ | 2,017 |
| | $ | (261 | ) | | $ | 33,496 |
| | $ | (1,145 | ) |
Total temporarily impaired securities | $ | 31,479 |
| | $ | (884 | ) | | $ | 2,017 |
| | $ | (261 | ) | | $ | 33,496 |
| | $ | (1,145 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Securities held to maturity | Less than 12 months | | 12 months or longer | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
September 30, 2016 | | | | | | | | | | | |
Obligations of states and political subdivisions | 2,639 |
| | (276 | ) | | 1,123 |
| | (269 | ) | | 3,762 |
| | (545 | ) |
Total temporarily impaired securities | $ | 2,639 |
| | $ | (276 | ) | | $ | 1,123 |
| | $ | (269 | ) | | $ | 3,762 |
| | $ | (545 | ) |
December 31, 2015 |
Obligations of states and political subdivisions | 3,646 |
| | (12 | ) | | 18,033 |
| | (493 | ) | | 21,679 |
| | (505 | ) |
Total temporarily impaired securities | $ | 3,646 |
| | $ | (12 | ) | | $ | 18,033 |
| | $ | (493 | ) | | $ | 21,679 |
| | $ | (505 | ) |
Heartland reviews the investment securities portfolio on a quarterly basis to monitor its exposure to OTTI. A determination as to whether a security's decline in fair value is other-than-temporary takes into consideration numerous factors and the relative significance of any single factor can vary by security. Some factors Heartland may consider in the OTTI analysis include the length of time the security has been in an unrealized loss position, changes in security ratings, financial condition of the issuer, as well as security and industry specific economic conditions. In addition, with regard to debt securities, Heartland may also evaluate payment structure, whether there are defaulted payments or expected defaults, prepayment speeds and the value of any underlying collateral. For certain debt securities in unrealized loss positions, Heartland prepares cash flow analyses to compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security.
Heartland previously recorded $981,000 of OTTI on three private label mortgage-backed securities in March 2012. The other-than-temporary credit-related losses were $797,000 in the held to maturity category and $184,000 in the available for sale category. During 2015, Heartland recorded additional credit-related OTTI on two of the private label mortgage-backed securities that previously had OTTI credit losses. The underlying collateral on these securities experienced an increased level of defaults and a slowing of voluntary prepayments causing the present value of the forward expected cash flows, using prepayment and default vectors, to be below the amortized cost basis of the securities. Based on Heartland's evaluation, $769,000 of OTTI attributable to credit-related losses was recorded in December 2015. The credit-related OTTI was $716,000, of which $200,000 was reclassified from previous non-credit related OTTI in the held to maturity category. Credit-related OTTI was $53,000 in the available for sale category.
In the first quarter of 2016, Heartland sold the mortgage-backed securities in the held to maturity portfolio because the credit quality of the securities showed further deterioration, and it was unlikely Heartland would recover the remaining basis of the
securities prior to maturity. The significant deterioration of the credit quality of these securities was inconsistent with Heartland's original intent upon purchase and classification of these held to maturity securities. The carrying value of these securities was $4.4 million, and the associated realized gross gains were $89,000, and the realized gross losses were $439,000.
The remaining unrealized losses on Heartland's mortgage-backed securities are the result of changes in market interest rates or widening of market spreads subsequent to the initial purchase of the securities. The losses are not related to concerns regarding the underlying credit of the issuers or the underlying collateral. It is expected that the securities will not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates or widening market spreads and not credit quality, and because Heartland has the intent and ability to hold these investments until a market price recovery or to maturity and does not believe it will be required to sell the securities before maturity, these investments are not considered other-than-temporarily impaired.
In the third quarter of 2016, Heartland sold one obligation of states and political subdivisions from the held to maturity portfolio because the credit quality of the security showed significant deterioration, and it was unlikely Heartland would recover the remaining basis of the security prior to maturity. The significant deterioration of the credit quality of this security was inconsistent with Heartland's original intent upon purchase and classification of this held to maturity security. The carrying value of this security was $503,000, and the associated gross loss was $1,500.
The remaining unrealized losses on Heartland's obligations of states and political subdivisions are the result of changes in market interest rates or widening of market spreads subsequent to the initial purchase of the securities. Management monitors the published credit ratings of these securities and the stability of the underlying municipalities. Because the decline in fair value is attributable to changes in interest rates or widening market spreads due to insurance company downgrades and not underlying credit quality, and because Heartland has the intent and ability to hold these investments until a market price recovery or to maturity and does not believe it will be required to sell the securities before maturity, these investments are not considered other-than-temporarily impaired.
There were no available for sale or held to maturity securities with OTTI write-downs held as of or for the nine-month period ended September 30, 2017. There were no gross realized gains and no$85,000 of gross realized losses on the sale of available for sale securities with OTTI write-downswritedowns for the nine-month period ended September 30, 2016. Additionally, there were no gross realized gains and no$439,000 of gross realized losses on the sale of held to maturity securities with OTTI write-downs for the nine-month period ended September 30, 2016. There were no gross realized gains or losses on the sale of available for sale or held to maturity securities with OTTI write-downs for the period ended September 30, 2015.
The following table shows the detail of OTTI write-downs on debt securities included in earnings and the related changes in other accumulated comprehensive income ("AOCI") for the same securities, in thousands:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 | | 2017 | | 2016 |
Recorded as part of gross realized losses: | | | | | | | | | | | | | | |
Credit related OTTI | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Intent to sell OTTI | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
|
Total recorded as part of gross realized losses | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
|
Recorded directly to AOCI for non-credit related impairment: | | | | | | | | | | | | | | |
Residential mortgage backed securities | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
|
Reduction of non-credit related impairment related to security sales | — |
| | — |
| | (120 | ) | | — |
| — |
| | — |
| | — |
| | (120 | ) |
Accretion of non-credit related impairment | — |
| | (24 | ) | | (7 | ) | | (72 | ) | — |
| | — |
| | — |
| | (7 | ) |
Total changes to AOCI for non-credit related impairment | — |
| | (24 | ) | | (127 | ) | | (72 | ) | — |
| | — |
| | — |
| | (127 | ) |
Total OTTI losses (accretion) recorded on debt securities, net | $ | — |
| | $ | (24 | ) | | $ | (127 | ) | | $ | (72 | ) | $ | — |
| | $ | — |
| | $ | — |
| | $ | (127 | ) |
Included in other securities at September 30, 2016,2017, and December 31, 2015,2016, were shares of stock in eachthe Federal Home Loan BankBanks (the "FHLB""FHLBs") of Des Moines, Chicago, Dallas, San Francisco and Topeka at an amortized cost of $14.9$14.0 million and $14.3$14.4 million, respectively.
The Heartland banks are required by federal law to maintain FHLB stock as members of the various FHLBs. These equity securities are "restricted" in that they can only be sold back to the respective institutions from which they were acquired or another member institution at par. Therefore, the FHLB stock is less liquid than other marketable equity securities, and the fair value approximates
amortized cost. Heartland considers its FHLB stock as a long-term investment that provides access to competitive products and liquidity. Heartland evaluates impairment in these investments based on the ultimate recoverability of the par value and, at September 30, 2017, did not consider the investments to be other than temporarily impaired.
NOTE 4: LOANS
Loans as of September 30, 2016,2017, and December 31, 2015,2016, were as follows, in thousands:
| | | September 30, 2016 | | December 31, 2015 | September 30, 2017 | | December 31, 2016 |
Loans receivable held to maturity: | | | | | | |
Commercial | $ | 1,295,316 |
| | $ | 1,279,214 |
| $ | 1,613,903 |
| | $ | 1,287,265 |
|
Commercial real estate | 2,605,296 |
| | 2,326,360 |
| 3,163,953 |
| | 2,538,582 |
|
Agricultural and agricultural real estate | 489,387 |
| | 471,870 |
| 511,764 |
| | 489,318 |
|
Residential real estate | 625,965 |
| | 539,555 |
| 635,611 |
| | 617,924 |
|
Consumer | 425,582 |
| | 386,867 |
| 450,088 |
| | 420,613 |
|
Gross loans receivable held to maturity | 5,441,546 |
| | 5,003,866 |
| 6,375,319 |
| | 5,353,702 |
|
Unearned discount | (721 | ) | | (488 | ) | (605 | ) | | (699 | ) |
Deferred loan fees | (2,110 | ) | | (1,892 | ) | (1,299 | ) | | (1,284 | ) |
Total net loans receivable held to maturity | 5,438,715 |
| | 5,001,486 |
| 6,373,415 |
| | 5,351,719 |
|
Allowance for loan losses | (54,653 | ) | | (48,685 | ) | (54,885 | ) | | (54,324 | ) |
Loans receivable, net | $ | 5,384,062 |
| | $ | 4,952,801 |
| $ | 6,318,530 |
| | $ | 5,297,395 |
|
Heartland has certain lending policies and procedures in place that are designed to provide for an acceptable level of credit risk. The board of directors reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management and the board with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies, nonperforming loans and potential problem loans. Diversification in the loan portfolio is also a means of managing risk associated with fluctuations in economic conditions.
The commercial and commercial real estate loan portfolio includes a wide range of business loans, including lines of credit for working capital and operational purposes and term loans for the acquisition of equipment and real estate. Although most loans are made on a secured basis, loans may be made on an unsecured basis whereif warranted by the overall financial condition of the borrower. Terms of commercial business loans generally range from one to five years. Commercial loans are primarily made based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The collateral that Heartland requires for most of these loans is based upon the discounted market value of the collateral. The primary repayment risks of commercial loans are that the cash flow of the borrowers may be unpredictable, and the collateral securing these loans may fluctuate in value. Heartland seeks to minimize these risks in a variety of ways. The underwriting analysis includes credit verification, analysis of global cash flows, appraisals and a review of the financial condition of the borrower. Personal guarantees are frequently required as a tertiary form of repayment. In addition, when underwriting loans for commercial real estate, careful consideration is given to the property's operating history, future operating projections, current and projected occupancy, location and physical condition. Heartland also utilizes government guaranteed lending through the U.S. Small Business Administration and the U.S. Department of Agriculture's Rural Development Business and Industry Program to assist customers with longer-term funding and to reduce risk.
Agricultural loans, many of which are secured by crops, machinery and real estate, are provided to finance capital improvements and farm operations as well as acquisitions of livestock and machinery. Agricultural loans present unique credit risks relating to adverse weather conditions, loss of livestock due to disease or other factors,reasons, declines in market prices for agricultural products and the impact of government regulations. The ultimate repayment of agricultural loans is dependent upon the profitable operation or management of the agricultural entity. In underwriting agricultural loans, lending personnel work closely with their customers to review budgets and cash flow projections for crop production for the ensuing crop year. These budgets and cash flow projections are monitored closely during the year and reviewed with the customers at least annually. Lending personnel also work closely with governmental agencies, including the Farm Service Agency, to help agricultural customers obtain credit enhancement products such as loan guarantees or interest assistance.
Heartland originates first-lien, adjustable-rate and fixed-rate, one-to-four-family residential real estate loans for the construction, purchase or refinancing of a single family residential property. These loans are principally collateralized by owner-occupied properties and are amortized over 10 to 30 years. Heartland typically sells longer-term, low-rate, residential mortgage loans in the
secondary market with servicing rights retained. This practice allows Heartland to better manage interest rate risk and liquidity risk. The Heartland bank subsidiaries participate in lending programs sponsored by U.S. government agencies such as Veterans Administration and Federal Home Administration when justified by market conditions. As of September 30, 2016,2017, Heartland had $1.5$4.8 million of loans secured by residential real estate property that were in the process of foreclosure.
Consumer lending includes motor vehicle, home improvement, home equity and small personal credit lines. Consumer loans typically have shorter terms, lower balances, higher yields and higher risks of default than one-to-four-family residential mortgage loans. Consumer loan collections are dependent on the borrower's continuing financial stability, and are therefore more likely to be affected by adverse personal circumstances. Risk is reduced through underwriting criteria, which include credit verification, appraisals, a review of the borrower's financial condition, and personal cash flows. A security interest, with title insurance when necessary, is taken in the underlying real estate. Heartland's consumer finance subsidiaries, Citizens Finance Co. and Citizens Finance of Illinois Co., typically lend to borrowers with past credit problems or limited credit histories, and these loans comprise approximately 19%17% of Heartland's total consumer loan portfolio.
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Heartland’s policy is to discontinue the accrual of interest income on any loan when, in the opinion of management, there is a reasonable doubt as to the timely collection of the interest and principal, normally when a loan is 90 days past due. When interest accruals are deemed uncollectible, interest credited to income in the current year is reversed and interest accrued in prior years is charged to the allowance for loan losses. Nonaccrual loans are returned to an accrual status when, in the opinion of management, the financial position of the borrower indicates that there is no longer any reasonable doubt as to the timely payment of interest and principal.
Under Heartland’s credit practices, a loan is impaired when, based on current information and events, it is probable that Heartland will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loan impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except where more practical, impairment is measured at the observable market price of the loan or the fair value of the collateral if the loan is collateral dependent.
The following table shows the balance in the allowance for loan losses at September 30, 2016,2017, and December 31, 2015,2016, and the related loan balances, disaggregated on the basis of impairment methodology, in thousands. Loans evaluated under ASC 310-10-35 include loans on nonaccrual status and troubled debt restructurings, which are individually evaluated for impairment, and other impaired loans deemed to have similar risk characteristics. All other loans are collectively evaluated for impairment under ASC 450-20. Heartland has made no significant changes to the accounting for the allowance for loan losses policy during 2016.2017.
| | | Allowance For Loan Losses | | Gross Loans Receivable Held to Maturity | Allowance For Loan Losses | | Gross Loans Receivable Held to Maturity |
| Ending Balance Under ASC 310-10-35 | | Ending Balance Under ASC 450-20 | | Total | | Ending Balance Evaluated for Impairment Under ASC 310-10-35 | | Ending Balance Evaluated for Impairment Under ASC 450-20 | | Total | Ending Balance Under ASC 310-10-35 | | Ending Balance Under ASC 450-20 | | Total | | Ending Balance Evaluated for Impairment Under ASC 310-10-35 | | Ending Balance Evaluated for Impairment Under ASC 450-20 | | Total |
September 30, 2016 | | | | | | | | | | | | |
September 30, 2017 | | | | | | | | | | | | |
Commercial | $ | 2,077 |
| | $ | 14,814 |
| | $ | 16,891 |
| | $ | 8,002 |
| | $ | 1,287,314 |
| | $ | 1,295,316 |
| $ | 2,166 |
| | $ | 14,804 |
| | $ | 16,970 |
| | $ | 6,957 |
| | $ | 1,606,946 |
| | $ | 1,613,903 |
|
Commercial real estate | 2,661 |
| | 21,020 |
| | 23,681 |
| | 56,894 |
| | 2,548,402 |
| | 2,605,296 |
| 864 |
| | 19,676 |
| | 20,540 |
| | 27,943 |
| | 3,136,010 |
| | 3,163,953 |
|
Agricultural and agricultural real estate | 967 |
| | 4,039 |
| | 5,006 |
| | 17,155 |
| | 472,232 |
| | 489,387 |
| 2,353 |
| | 3,774 |
| | 6,127 |
| | 12,792 |
| | 498,972 |
| | 511,764 |
|
Residential real estate | 473 |
| | 1,509 |
| | 1,982 |
| | 22,448 |
| | 603,517 |
| | 625,965 |
| 393 |
| | 1,873 |
| | 2,266 |
| | 29,833 |
| | 605,778 |
| | 635,611 |
|
Consumer | 1,364 |
| | 5,729 |
| | 7,093 |
| | 5,858 |
| | 419,724 |
| | 425,582 |
| 1,267 |
| | 7,715 |
| | 8,982 |
| | 6,524 |
| | 443,564 |
| | 450,088 |
|
Total | $ | 7,542 |
| | $ | 47,111 |
| | $ | 54,653 |
| | $ | 110,357 |
| | $ | 5,331,189 |
| | $ | 5,441,546 |
| $ | 7,043 |
| | $ | 47,842 |
| | $ | 54,885 |
| | $ | 84,049 |
| | $ | 6,291,270 |
| | $ | 6,375,319 |
|
December 31, 2015 | | | | | | | | | | | | |
December 31, 2016 | | | | | | | | | | | | |
Commercial | $ | 471 |
| | $ | 15,624 |
| | $ | 16,095 |
| | $ | 6,919 |
| | $ | 1,272,295 |
| | $ | 1,279,214 |
| $ | 1,318 |
| | $ | 13,447 |
| | $ | 14,765 |
| | $ | 3,712 |
| | $ | 1,283,553 |
| | $ | 1,287,265 |
|
Commercial real estate | 698 |
| | 18,834 |
| | 19,532 |
| | 45,442 |
| | 2,280,918 |
| | 2,326,360 |
| 2,671 |
| | 21,648 |
| | 24,319 |
| | 45,217 |
| | 2,493,365 |
| | 2,538,582 |
|
Agricultural and agricultural real estate | — |
| | 3,887 |
| | 3,887 |
| | 4,612 |
| | 467,258 |
| | 471,870 |
| 816 |
| | 3,394 |
| | 4,210 |
| | 16,730 |
| | 472,588 |
| | 489,318 |
|
Residential real estate | 393 |
| | 1,541 |
| | 1,934 |
| | 17,790 |
| | 521,765 |
| | 539,555 |
| 497 |
| | 1,766 |
| | 2,263 |
| | 25,726 |
| | 592,198 |
| | 617,924 |
|
Consumer | 1,206 |
| | 6,031 |
| | 7,237 |
| | 5,458 |
| | 381,409 |
| | 386,867 |
| 1,451 |
| | 7,316 |
| | 8,767 |
| | 5,988 |
| | 414,625 |
| | 420,613 |
|
Total | $ | 2,768 |
| | $ | 45,917 |
| | $ | 48,685 |
| | $ | 80,221 |
| | $ | 4,923,645 |
| | $ | 5,003,866 |
| $ | 6,753 |
| | $ | 47,571 |
| | $ | 54,324 |
| | $ | 97,373 |
| | $ | 5,256,329 |
| | $ | 5,353,702 |
|
The following table presents nonaccrual loans, accruing loans past due 90 days or more and troubled debt restructured loans at September 30, 2016,2017, and December 31, 2015,2016, in thousands.thousands:
| | | September 30, 2016 | | December 31, 2015 | September 30, 2017 | | December 31, 2016 |
Nonaccrual loans | $ | 57,344 |
| | $ | 37,874 |
| $ | 59,451 |
| | $ | 62,591 |
|
Nonaccrual troubled debt restructured loans | 455 |
| | 1,781 |
| 4,005 |
| | 1,708 |
|
Total nonaccrual loans | $ | 57,799 |
| | $ | 39,655 |
| $ | 63,456 |
| | $ | 64,299 |
|
Accruing loans past due 90 days or more | $ | 105 |
| | $ | — |
| $ | 2,348 |
| | $ | 86 |
|
Performing troubled debt restructured loans | $ | 10,281 |
| | $ | 11,075 |
| $ | 10,040 |
| | $ | 10,380 |
|
The following tables provide information on troubled debt restructured loans that were modified during the three- and nine-month periods ended September 30, 2016,2017, and September 30, 2015,2016, dollars in thousands:
| | | Three Months Ended September 30, | Three Months Ended September 30, |
| 2016 | | 2015 | 2017 | | 2016 |
| Number of Loans | | Pre- Modification Recorded Investment | | Post- Modification Recorded Investment | | Number of Loans | | Pre- Modification Recorded Investment | | Post- Modification Recorded Investment | Number of Loans | | Pre- Modification Recorded Investment | | Post- Modification Recorded Investment | | Number of Loans | | Pre- Modification Recorded Investment | | Post- Modification Recorded Investment |
Commercial | — |
| | $ | — |
| | $ | — |
| | — |
| | $ | — |
| | $ | — |
| — |
| | $ | — |
| | $ | — |
| | — |
| | $ | — |
| | $ | — |
|
Commercial real estate | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total commercial and commercial real estate | — |
| | — |
| | — |
| | — |
|
| — |
| | — |
| — |
| | — |
| | — |
| | — |
|
| — |
| | — |
|
Agricultural and agricultural real estate | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Residential real estate | 5 |
| | 651 |
| | 651 |
| | 1 |
| | 55 |
| | 55 |
| 8 |
| | 1,174 |
| | 1,174 |
| | 5 |
| | 651 |
| | 651 |
|
Consumer | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total | 5 |
| | $ | 651 |
| | $ | 651 |
| | 1 |
|
| $ | 55 |
| | $ | 55 |
| 8 |
| | $ | 1,174 |
| | $ | 1,174 |
| | 5 |
|
| $ | 651 |
| | $ | 651 |
|
| | | Nine Months Ended September 30, | Nine Months Ended September 30, |
| 2016 | | 2015 | 2017 | | 2016 |
| Number of Loans | | Pre- Modification Recorded Investment | | Post- Modification Recorded Investment | | Number of Loans | | Pre- Modification Recorded Investment | | Post- Modification Recorded Investment | Number of Loans | | Pre- Modification Recorded Investment | | Post- Modification Recorded Investment | | Number of Loans | | Pre- Modification Recorded Investment | | Post- Modification Recorded Investment |
Commercial | 1 |
| | $ | 100 |
| | $ | 100 |
| | 1 |
| | $ | 830 |
| | $ | 830 |
| 3 |
| | $ | 131 |
| | $ | 131 |
| | 1 |
| | $ | 100 |
| | $ | 100 |
|
Commercial real estate | 1 |
| | 179 |
| | 179 |
| | 1 |
| | 3,992 |
| | 3,992 |
| — |
| | — |
| | — |
| | 1 |
| | 179 |
| | 179 |
|
Total commercial and commercial real estate | 2 |
| | 279 |
| | 279 |
| | 2 |
| | 4,822 |
| | 4,822 |
| 3 |
| | 131 |
| | 131 |
| | 2 |
| | 279 |
| | 279 |
|
Agricultural and agricultural real estate | — |
| | — |
| | — |
| | 1 |
| | 311 |
| | 311 |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Residential real estate | 5 |
| | 651 |
| | 651 |
| | 1 |
| | 55 |
| | 55 |
| 22 |
| | 2,977 |
| | 2,977 |
| | 5 |
| | 651 |
| | 651 |
|
Consumer | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total | 7 |
| | $ | 930 |
| | $ | 930 |
| | 4 |
| | $ | 5,188 |
| | $ | 5,188 |
| 25 |
| | $ | 3,108 |
| | $ | 3,108 |
| | 7 |
| | $ | 930 |
| | $ | 930 |
|
The pre-modification and post-modification recorded investment represents amounts as of the date of loan modification. Since the modifications onof these loans have been only interest rate concessions and term extensions, not principal reductions, the pre-modification and post-modification recorded investment amounts are the same. At September 30, 2016,2017, there were no commitments to extend credit to any of the borrowers with an existing troubled debt restructuring.
The following tables presenttable shows troubled debt restructured loans for which there was a payment default during the three- and nine-month periods ended September 30, 2016,2017, and September 30, 2015,2016, that had been modified during the twelve-month period prior to default:
default, in thousands:
| | | With Payment Defaults During the Following Periods | With Payment Defaults During the Following Periods |
| Three Months Ended September 30, | Three Months Ended September 30, |
| 2016 | | 2015 | 2017 | | 2016 |
| Number of Loans | | Recorded Investment | | Number of Loans | | Recorded Investment | Number of Loans | | Recorded Investment | | Number of Loans | | Recorded Investment |
Commercial | — |
| | $ | — |
| | — |
|
| $ | — |
| — |
| | $ | — |
| | — |
|
| $ | — |
|
Commercial real estate | — |
| | — |
| | 1 |
|
| 814 |
| — |
| | — |
| | — |
|
| — |
|
Total commercial and commercial real estate | — |
| | — |
| | 1 |
| | 814 |
| — |
| | — |
| | — |
| | — |
|
Agricultural and agricultural real estate | — |
| | — |
| | — |
|
| — |
| — |
| | — |
| | — |
|
| — |
|
Residential real estate | — |
| | — |
| | — |
|
| — |
| 5 |
| | 1,221 |
| | — |
|
| — |
|
Consumer | — |
| | — |
| | — |
|
| — |
| — |
| | — |
| | — |
|
| — |
|
Total | — |
| | $ | — |
| | 1 |
|
| $ | 814 |
| 5 |
| | $ | 1,221 |
| | — |
|
| $ | — |
|
| | | With Payment Defaults During the Following Periods | With Payment Defaults During the Following Periods |
| Nine Months Ended September 30, | Nine Months Ended September 30, |
| 2016 | | 2015 | 2017 | | 2016 |
| Number of Loans | | Recorded Investment | | Number of Loans | | Recorded Investment | Number of Loans | | Recorded Investment | | Number of Loans | | Recorded Investment |
Commercial | 1 |
| | $ | 95 |
|
| — |
|
| $ | — |
| — |
| | $ | — |
|
| 1 |
|
| $ | 95 |
|
Commercial real estate | — |
| | — |
|
| 1 |
|
| 814 |
| — |
| | — |
|
| — |
|
| — |
|
Total commercial and commercial real estate | 1 |
| | 95 |
| | 1 |
| | 814 |
| — |
| | — |
| | 1 |
| | 95 |
|
Agricultural and agricultural real estate | — |
| | — |
|
| — |
|
| — |
| — |
| | — |
|
| — |
|
| — |
|
Residential real estate | — |
| | — |
|
| — |
|
| — |
| 8 |
| | 1,480 |
|
| — |
|
| — |
|
Consumer | — |
| | — |
|
| — |
|
| — |
| — |
| | — |
|
| — |
|
| — |
|
Total | 1 |
| | $ | 95 |
| | 1 |
| | $ | 814 |
| 8 |
| | $ | 1,480 |
| | 1 |
| | $ | 95 |
|
Heartland's internal rating system is a series of grades reflecting management's risk assessment, based on its analysis of the borrower's financial condition. The "pass" category consists of all loans that are not in the "nonpass" category, categorized into a range of loan grades that reflect increasing, though still acceptable, risk. Movement of risk through the various grade levels in the pass category is monitored for early identification of credit deterioration. The "nonpass" category consists of special mention, substandard, doubtful and loss loans. The "special mention" rating is attached to loans where the borrower exhibits negative trends in financial trendscircumstances due to borrower specific or systemic conditions that, if left uncorrected, threaten the borrower's capacity to meet its debt obligations. The borrower is believed to have sufficient financial flexibility to react to and resolve its negative financial situation. These credits are closely monitored for improvement or deterioration. The "substandard" rating is assigned to loans that are inadequately protected by the current sound net worth and paying capacity of the borrower and that may be further at risk due to deterioration in the value of collateral pledged. Well-defined weaknesses jeopardize liquidation of the debt. These loans are still considered collectible; however, a distinct possibility exists that Heartland will sustain some loss if deficiencies are not corrected. Substandard loans may exhibit some or all of the following weaknesses: deteriorating financial trends, lack of earnings, inadequate debt service capacity, excessive debt and/or lack of liquidity. The "doubtful" rating is assigned to loans where identified weaknesses in the borrowers' ability to repay the loan make collection or liquidation in full, on the basis of existing facts, conditions and values, highly questionable and improbable. These borrowers are usually in default, lack liquidity and capital, as well as resources necessary to remain as an operating entity. Specific pending events, such as capital injections, liquidations or perfection of liens on additional collateral, may strengthen the credit, thus deferring classificationthe rating of the loan as loss"loss" until the exact status of the loan can be determined. The "loss"loss rating is assigned to loans considered uncollectible. As of September 30, 2016,2017, Heartland had one loan relationship with a gross balance of $9.6 million included in the balance of gross loans receivable held to maturity, of which $2.2 million is classified as a loss. Included in the ASC 310-10-35 portion of the allowance as of September 30, 2017, is a $2.2 million specific reserve associated with this loan relationship. Heartland had no loans classified as doubtful and no loans classified as loss.of September 30, 2017. Loans are placed on "nonaccrual" when management does not expect to collect payments of principal and interest in
full or when principal or interest has been in default for a period of 90 days or more, unless the loan is both well secured and in the process of collection.
The following table presents loans by credit quality indicator at September 30, 2016,2017, and December 31, 2015,2016, in thousands:
| | | Pass | | Nonpass | | Total | Pass | | Nonpass | | Total |
September 30, 2016 | | | | | | |
September 30, 2017 | | | | | | |
Commercial | $ | 1,196,389 |
| | $ | 98,927 |
| | $ | 1,295,316 |
| $ | 1,523,080 |
| | $ | 90,823 |
| | $ | 1,613,903 |
|
Commercial real estate | 2,412,518 |
| | 192,778 |
| | 2,605,296 |
| 2,992,663 |
| | 171,290 |
| | 3,163,953 |
|
Total commercial and commercial real estate | 3,608,907 |
| | 291,705 |
| | 3,900,612 |
| 4,515,743 |
| | 262,113 |
| | 4,777,856 |
|
Agricultural and agricultural real estate | 422,810 |
| | 66,577 |
| | 489,387 |
| 445,554 |
| | 66,210 |
| | 511,764 |
|
Residential real estate | 596,479 |
| | 29,486 |
| | 625,965 |
| 597,987 |
| | 37,624 |
| | 635,611 |
|
Consumer | 415,919 |
| | 9,663 |
| | 425,582 |
| 437,831 |
| | 12,257 |
| | 450,088 |
|
Total gross loans receivable held to maturity | $ | 5,044,115 |
| | $ | 397,431 |
| | $ | 5,441,546 |
| $ | 5,997,115 |
| | $ | 378,204 |
| | $ | 6,375,319 |
|
December 31, 2015 | | | | | | |
December 31, 2016 | | | | | | |
Commercial | $ | 1,106,276 |
| | $ | 172,938 |
| | $ | 1,279,214 |
| $ | 1,187,557 |
| | $ | 99,708 |
| | $ | 1,287,265 |
|
Commercial real estate | 2,107,474 |
| | 218,886 |
| | 2,326,360 |
| 2,379,632 |
| | 158,950 |
| | 2,538,582 |
|
Total commercial and commercial real estate | 3,213,750 |
| | 391,824 |
| | 3,605,574 |
| 3,567,189 |
| | 258,658 |
| | 3,825,847 |
|
Agricultural and agricultural real estate | 435,745 |
| | 36,125 |
| | 471,870 |
| 424,311 |
| | 65,007 |
| | 489,318 |
|
Residential real estate | 515,195 |
| | 24,360 |
| | 539,555 |
| 584,626 |
| | 33,298 |
| | 617,924 |
|
Consumer | 377,173 |
| | 9,694 |
| | 386,867 |
| 409,474 |
| | 11,139 |
| | 420,613 |
|
Total gross loans receivable held to maturity | $ | 4,541,863 |
| | $ | 462,003 |
| | $ | 5,003,866 |
| $ | 4,985,600 |
| | $ | 368,102 |
| | $ | 5,353,702 |
|
The nonpass category in the table above is comprised of approximately 53%48% special mention loans and 47%52% substandard loans as of September 30, 2016.2017. The percent of nonpass loans on nonaccrual status as of September 30, 2016,2017, was 15%17%. As of December 31, 2015,2016, the nonpass category in the table above was comprised of approximately 68%47% special mention loans and 32%53% substandard loans. The percent of nonpass loans on nonaccrual status as of December 31, 2015,2016, was 8%17%. Loans delinquent 30 to 89 days as a percent of total loans were 0.40%0.33% at September 30, 2016,2017, compared to 0.31%0.37% at December 31, 2015.2016. Changes in credit risk are monitored on a continuousregular basis and changes in risk ratings are made when identified. All impaired loans are reviewed at least annually.
The following table sets forth information regarding Heartland's accruing and nonaccrual loans at September 30, 2016,2017, and December 31, 2015,2016, in thousands:
| | | Accruing Loans | | | | | Accruing Loans | | | | |
| 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or More Past Due | | Total Past Due | | Current | | Nonaccrual | | Total Loans | 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or More Past Due | | Total Past Due | | Current | | Nonaccrual | | Total Loans |
September 30, 2016 | | | | | | | | | | | | | | |
September 30, 2017 | | | | | | | | | | | | | | |
Commercial | $ | 2,754 |
| | $ | 427 |
| | $ | 91 |
| | $ | 3,272 |
| | $ | 1,287,663 |
| | $ | 4,381 |
| | $ | 1,295,316 |
| $ | 2,591 |
| | $ | 133 |
| | $ | 215 |
| | $ | 2,939 |
| | $ | 1,603,397 |
| | $ | 7,567 |
| | $ | 1,613,903 |
|
Commercial real estate | 8,499 |
| | 815 |
| | — |
| | 9,314 |
| | 2,576,946 |
| | 19,036 |
| | 2,605,296 |
| 6,140 |
| | 465 |
| | — |
| | 6,605 |
| | 3,140,672 |
| | 16,676 |
| | 3,163,953 |
|
Total commercial and commercial real estate | 11,253 |
| | 1,242 |
| | 91 |
| | 12,586 |
| | 3,864,609 |
| | 23,417 |
| | 3,900,612 |
| 8,731 |
| | 598 |
| | 215 |
| | 9,544 |
| | 4,744,069 |
| | 24,243 |
| | 4,777,856 |
|
Agricultural and agricultural real estate | 93 |
| | 1,473 |
| | — |
| | 1,566 |
| | 473,708 |
| | 14,113 |
| | 489,387 |
| 315 |
| | 782 |
| | 1,282 |
| | 2,379 |
| | 496,593 |
| | 12,792 |
| | 511,764 |
|
Residential real estate | 2,042 |
| | 142 |
| | — |
| | 2,184 |
| | 607,229 |
| | 16,552 |
| | 625,965 |
| 5,033 |
| | 449 |
| | — |
| | 5,482 |
| | 607,165 |
| | 22,964 |
| | 635,611 |
|
Consumer | 4,888 |
| | 760 |
| | 14 |
| | 5,662 |
| | 416,203 |
| | 3,717 |
| | 425,582 |
| 3,001 |
| | 1,813 |
| | 851 |
| | 5,665 |
| | 440,966 |
| | 3,457 |
| | 450,088 |
|
Total gross loans receivable held to maturity | $ | 18,276 |
| | $ | 3,617 |
| | $ | 105 |
| | $ | 21,998 |
| | $ | 5,361,749 |
| | $ | 57,799 |
| | $ | 5,441,546 |
| $ | 17,080 |
| | $ | 3,642 |
| | $ | 2,348 |
| | $ | 23,070 |
| | $ | 6,288,793 |
| | $ | 63,456 |
| | $ | 6,375,319 |
|
December 31, 2015 | | | | | | | | | | | | | | |
December 31, 2016 | | | | | | | | | | | | | | |
Commercial | $ | 2,005 |
| | $ | 608 |
| | $ | — |
| | $ | 2,613 |
| | $ | 1,273,678 |
| | $ | 2,923 |
| | $ | 1,279,214 |
| $ | 1,127 |
| | $ | 219 |
| | $ | 77 |
| | $ | 1,423 |
| | $ | 1,281,241 |
| | $ | 4,601 |
| | $ | 1,287,265 |
|
Commercial real estate | 3,549 |
| | 2,077 |
| | — |
| | 5,626 |
| | 2,302,052 |
| | 18,682 |
| | 2,326,360 |
| 886 |
| | 3,929 |
| | — |
| | 4,815 |
| | 2,513,069 |
| | 20,698 |
| | 2,538,582 |
|
Total commercial and commercial real estate | 5,554 |
| | 2,685 |
| | — |
| | 8,239 |
| | 3,575,730 |
| | 21,605 |
| | 3,605,574 |
| 2,013 |
| | 4,148 |
| | 77 |
| | 6,238 |
| | 3,794,310 |
| | 25,299 |
| | 3,825,847 |
|
Agricultural and agricultural real estate | 143 |
| | 54 |
| | — |
| | 197 |
| | 470,455 |
| | 1,218 |
| | 471,870 |
| 199 |
| | 3,191 |
| | — |
| | 3,390 |
| | 472,597 |
| | 13,331 |
| | 489,318 |
|
Residential real estate | 1,900 |
| | 115 |
| | — |
| | 2,015 |
| | 523,915 |
| | 13,625 |
| | 539,555 |
| 4,986 |
| | 846 |
| | — |
| | 5,832 |
| | 590,626 |
| | 21,466 |
| | 617,924 |
|
Consumer | 3,964 |
| | 933 |
| | — |
| | 4,897 |
| | 378,763 |
| | 3,207 |
| | 386,867 |
| 3,455 |
| | 1,021 |
| | 9 |
| | 4,485 |
| | 411,925 |
| | 4,203 |
| | 420,613 |
|
Total gross loans receivable held to maturity | $ | 11,561 |
| | $ | 3,787 |
| | $ | — |
| | $ | 15,348 |
| | $ | 4,948,863 |
| | $ | 39,655 |
| | $ | 5,003,866 |
| $ | 10,653 |
| | $ | 9,206 |
| | $ | 86 |
| | $ | 19,945 |
| | $ | 5,269,458 |
| | $ | 64,299 |
| | $ | 5,353,702 |
|
The majority of Heartland's impaired loans are those that areon nonaccrual or have had their terms restructured in a troubled debt restructuring. The following tables present, by category of loan, impaired loans, the unpaid contractual loan balances at September 30, 2016,2017, and December 31, 2015;2016; the outstanding loan balances recorded on the consolidated balance sheets at September 30, 2016,2017, and December 31, 2015;2016; any related allowance recorded for those loans as of September 30, 2016,2017, and December 31, 2015;2016; the average outstanding loan balances recorded on the consolidated balance sheets during the three- and nine- monthsnine-months ended September 30, 2016,2017, and year ended December 31, 2015;2016; and the interest income recognized on the impaired loans during the three- and nine-month periods ended September 30, 2016,2017, and year ended December 31, 2015,2016, in thousands:
| | | Unpaid Contractual Balance | | Loan Balance | | Related Allowance Recorded | | Quarter- to- Date Avg. Loan Balance | | Quarter- to- Date Interest Income Recognized | | Year- to- Date Avg. Loan Balance | | Year- to- Date Interest Income Recognized | Unpaid Contractual Balance | | Loan Balance | | Related Allowance Recorded | | Quarter- to- Date Avg. Loan Balance | | Quarter- to- Date Interest Income Recognized | | Year- to- Date Avg. Loan Balance | | Year- to- Date Interest Income Recognized |
September 30, 2016 | | | | | | | | | | | | | | |
September 30, 2017 | | | | | | | | | | | | | | |
Impaired loans with a related allowance: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | $ | 4,664 |
| | $ | 4,283 |
| | $ | 2,077 |
| | $ | 3,121 |
| | $ | 73 |
| | $ | 2,566 |
| | $ | 87 |
| $ | 3,190 |
| | $ | 3,190 |
| | $ | 2,166 |
| | $ | 4,885 |
| | $ | — |
| | $ | 3,829 |
| | $ | 1 |
|
Commercial real estate | 15,379 |
| | 15,346 |
| | 2,661 |
| | 15,696 |
| | 138 |
| | 9,114 |
| | 350 |
| 11,272 |
| | 9,416 |
| | 864 |
| | 10,637 |
| | — |
| | 12,106 |
| | 7 |
|
Total commercial and commercial real estate | 20,043 |
| | 19,629 |
| | 4,738 |
| | 18,817 |
| | 211 |
| | 11,680 |
| | 437 |
| 14,462 |
| | 12,606 |
| | 3,030 |
| | 15,522 |
| | — |
| | 15,935 |
| | 8 |
|
Agricultural and agricultural real estate | 3,181 |
| | 3,181 |
| | 967 |
| | 1,112 |
| | — |
| | 390 |
| | — |
| 10,289 |
| | 10,289 |
| | 2,353 |
| | 3,532 |
| | — |
| | 2,140 |
| | — |
|
Residential real estate | 3,512 |
| | 3,427 |
| | 473 |
| | 3,602 |
| | 8 |
| | 3,285 |
| | 15 |
| 1,640 |
| | 1,640 |
| | 393 |
| | 1,633 |
| | — |
| | 2,197 |
| | 10 |
|
Consumer | 3,277 |
| | 3,277 |
| | 1,364 |
| | 3,198 |
| | 10 |
| | 3,251 |
| | 25 |
| 2,179 |
| | 2,179 |
| | 1,267 |
| | 2,155 |
| | 10 |
| | 2,343 |
| | 32 |
|
Total impaired loans with a related allowance | $ | 30,013 |
| | $ | 29,514 |
| | $ | 7,542 |
| | $ | 26,729 |
| | $ | 229 |
| | $ | 18,606 |
| | $ | 477 |
| $ | 28,570 |
| | $ | 26,714 |
| | $ | 7,043 |
| | $ | 22,842 |
| | $ | 10 |
| | $ | 22,615 |
| | $ | 50 |
|
Impaired loans without a related allowance: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | $ | 4,632 |
| | $ | 3,719 |
| | $ | — |
| | $ | 4,413 |
| | $ | 78 |
| | $ | 7,105 |
| | $ | 339 |
| $ | 4,887 |
| | $ | 3,767 |
| | $ | — |
| | $ | 2,727 |
| | $ | — |
| | $ | 2,017 |
| | $ | 112 |
|
Commercial real estate | 44,750 |
| | 41,548 |
| | — |
| | 37,243 |
| | 452 |
| | 41,645 |
| | 1,236 |
| 19,132 |
| | 18,527 |
| | — |
| | 18,237 |
| | 201 |
| | 21,750 |
| | 536 |
|
Total commercial and commercial real estate | 49,382 |
| | 45,267 |
| | — |
| | 41,656 |
| | 530 |
| | 48,750 |
| | 1,575 |
| 24,019 |
| | 22,294 |
| | — |
| | 20,964 |
| | 201 |
| | 23,767 |
| | 648 |
|
Agricultural and agricultural real estate | 13,974 |
| | 13,974 |
| | — |
| | 15,310 |
| | 23 |
| | 12,232 |
| | 118 |
| 2,503 |
| | 2,503 |
| | — |
| | 8,343 |
| | — |
| | 10,858 |
| | — |
|
Residential real estate | 19,496 |
| | 19,021 |
| | — |
| | 18,660 |
| | 136 |
| | 17,684 |
| | 217 |
| 28,197 |
| | 28,193 |
| | — |
| | 27,556 |
| | 112 |
| | 26,006 |
| | 230 |
|
Consumer | 2,741 |
| | 2,581 |
| | — |
| | 2,397 |
| | 12 |
| | 2,619 |
| | 32 |
| 4,345 |
| | 4,345 |
| | — |
| | 4,222 |
| | 19 |
| | 3,849 |
| | 61 |
|
Total impaired loans without a related allowance | $ | 85,593 |
| | $ | 80,843 |
| | $ | — |
| | $ | 78,023 |
| | $ | 701 |
| | $ | 81,285 |
| | $ | 1,942 |
| $ | 59,064 |
| | $ | 57,335 |
| | $ | — |
| | $ | 61,085 |
| | $ | 332 |
| | $ | 64,480 |
| | $ | 939 |
|
Total impaired loans held to maturity: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | $ | 9,296 |
| | $ | 8,002 |
| | $ | 2,077 |
| | $ | 7,534 |
| | $ | 151 |
| | $ | 9,671 |
| | $ | 426 |
| $ | 8,077 |
| | $ | 6,957 |
| | $ | 2,166 |
| | $ | 7,612 |
| | $ | — |
| | $ | 5,846 |
| | $ | 113 |
|
Commercial real estate | 60,129 |
| | 56,894 |
| | 2,661 |
| | 52,939 |
| | 590 |
| | 50,759 |
| | 1,586 |
| 30,404 |
| | 27,943 |
| | 864 |
| | 28,874 |
| | 201 |
| | 33,856 |
| | 543 |
|
Total commercial and commercial real estate | 69,425 |
| | 64,896 |
| | 4,738 |
| | 60,473 |
| | 741 |
| | 60,430 |
| | 2,012 |
| 38,481 |
| | 34,900 |
| | 3,030 |
| | 36,486 |
| | 201 |
| | 39,702 |
| | 656 |
|
Agricultural and agricultural real estate | 17,155 |
| | 17,155 |
| | 967 |
| | 16,422 |
| | 23 |
| | 12,622 |
| | 118 |
| 12,792 |
| | 12,792 |
| | 2,353 |
| | 11,875 |
| | — |
| | 12,998 |
| | — |
|
Residential real estate | 23,008 |
| | 22,448 |
| | 473 |
| | 22,262 |
| | 144 |
| | 20,969 |
| | 232 |
| 29,837 |
| | 29,833 |
| | 393 |
| | 29,189 |
| | 112 |
| | 28,203 |
| | 240 |
|
Consumer | 6,018 |
| | 5,858 |
| | 1,364 |
| | 5,595 |
| | 22 |
| | 5,870 |
| | 57 |
| 6,524 |
| | 6,524 |
| | 1,267 |
| | 6,377 |
| | 29 |
| | 6,192 |
| | 93 |
|
Total impaired loans held to maturity | $ | 115,606 |
| | $ | 110,357 |
| | $ | 7,542 |
| | $ | 104,752 |
| | $ | 930 |
| | $ | 99,891 |
| | $ | 2,419 |
| $ | 87,634 |
| | $ | 84,049 |
| | $ | 7,043 |
| | $ | 83,927 |
| | $ | 342 |
| | $ | 87,095 |
| | $ | 989 |
|
| | | Unpaid Contractual Balance | | Loan Balance | | Related Allowance Recorded | | Year-to- Date Avg. Loan Balance | | Year-to- Date Interest Income Recognized | Unpaid Contractual Balance | | Loan Balance | | Related Allowance Recorded | | Year-to- Date Avg. Loan Balance | | Year-to- Date Interest Income Recognized |
December 31, 2015 | | | | | | | | | | |
December 31, 2016 | | | | | | | | | | |
Impaired loans with a related allowance: | | | | | | | | | | | | | | | | | | |
Commercial | $ | 1,192 |
| | $ | 1,160 |
| | $ | 471 |
| | $ | 524 |
| | $ | 12 |
| $ | 2,852 |
| | $ | 2,840 |
| | $ | 1,318 |
| | $ | 3,136 |
| | $ | 2 |
|
Commercial real estate | 2,697 |
| | 2,697 |
| | 698 |
| | 2,539 |
| | 19 |
| 14,221 |
| | 14,221 |
| | 2,671 |
| | 10,625 |
| | 21 |
|
Total commercial and commercial real estate | 3,889 |
| | 3,857 |
| | 1,169 |
| | 3,063 |
| | 31 |
| 17,073 |
| | 17,061 |
| | 3,989 |
| | 13,761 |
| | 23 |
|
Agricultural and agricultural real estate | — |
| | — |
| | — |
| | 2,823 |
| | — |
| 2,771 |
| | 2,771 |
| | 816 |
| | 912 |
| | 21 |
|
Residential real estate | 2,210 |
| | 2,125 |
| | 393 |
| | 2,524 |
| | 16 |
| 3,490 |
| | 3,490 |
| | 497 |
| | 3,371 |
| | 43 |
|
Consumer | 3,111 |
| | 3,111 |
| | 1,206 |
| | 2,877 |
| | 33 |
| 2,644 |
| | 2,644 |
| | 1,451 |
| | 3,082 |
| | 42 |
|
Total impaired loans with a related allowance | $ | 9,210 |
| | $ | 9,093 |
| | $ | 2,768 |
| | $ | 11,287 |
| | $ | 80 |
| $ | 25,978 |
| | $ | 25,966 |
| | $ | 6,753 |
| | $ | 21,126 |
| | $ | 129 |
|
Impaired loans without a related allowance: | | | | | | | | | | | | | | | | | | |
Commercial | $ | 5,784 |
| | $ | 5,759 |
| | $ | — |
| | $ | 7,511 |
| | $ | 515 |
| $ | 925 |
| | $ | 872 |
| | $ | — |
| | $ | 5,329 |
| | $ | 251 |
|
Commercial real estate | 46,099 |
| | 42,745 |
| | — |
| | 38,444 |
| | 1,395 |
| 31,875 |
| | 30,996 |
| | — |
| | 39,632 |
| | 1,647 |
|
Total commercial and commercial real estate | 51,883 |
| | 48,504 |
| | — |
| | 45,955 |
| | 1,910 |
| 32,800 |
| | 31,868 |
| | — |
| | 44,961 |
| | 1,898 |
|
Agricultural and agricultural real estate | 4,612 |
| | 4,612 |
| | — |
| | 2,287 |
| | 175 |
| 13,959 |
| | 13,959 |
| | — |
| | 12,722 |
| | 157 |
|
Residential real estate | 15,802 |
| | 15,665 |
| | — |
| | 10,186 |
| | 145 |
| 22,408 |
| | 22,236 |
| | — |
| | 18,446 |
| | 202 |
|
Consumer | 2,347 |
| | 2,347 |
| | — |
| | 2,403 |
| | 38 |
| 3,344 |
| | 3,344 |
| | — |
| | 2,659 |
| | 68 |
|
Total impaired loans without a related allowance | $ | 74,644 |
| | $ | 71,128 |
| | $ | — |
| | $ | 60,831 |
| | $ | 2,268 |
| $ | 72,511 |
| | $ | 71,407 |
| | $ | — |
| | $ | 78,788 |
| | $ | 2,325 |
|
Total impaired loans held to maturity: | | | | | | | | | | | | | | | | | | |
Commercial | $ | 6,976 |
| | $ | 6,919 |
| | $ | 471 |
| | $ | 8,035 |
| | $ | 527 |
| $ | 3,777 |
| | $ | 3,712 |
| | $ | 1,318 |
| | $ | 8,465 |
| | $ | 253 |
|
Commercial real estate | 48,796 |
| | 45,442 |
| | 698 |
| | 40,983 |
| | 1,414 |
| 46,096 |
| | 45,217 |
| | 2,671 |
| | 50,257 |
| | 1,668 |
|
Total commercial and commercial real estate | 55,772 |
| | 52,361 |
| | 1,169 |
| | 49,018 |
| | 1,941 |
| 49,873 |
| | 48,929 |
| | 3,989 |
| | 58,722 |
| | 1,921 |
|
Agricultural and agricultural real estate | 4,612 |
| | 4,612 |
| | — |
| | 5,110 |
| | 175 |
| 16,730 |
| | 16,730 |
| | 816 |
| | 13,634 |
| | 178 |
|
Residential real estate | 18,012 |
| | 17,790 |
| | 393 |
| | 12,710 |
| | 161 |
| 25,898 |
| | 25,726 |
| | 497 |
| | 21,817 |
| | 245 |
|
Consumer | 5,458 |
| | 5,458 |
| | 1,206 |
| | 5,280 |
| | 71 |
| 5,988 |
| | 5,988 |
| | 1,451 |
| | 5,741 |
| | 110 |
|
Total impaired loans held to maturity | $ | 83,854 |
| | $ | 80,221 |
| | $ | 2,768 |
| | $ | 72,118 |
| | $ | 2,348 |
| $ | 98,489 |
| | $ | 97,373 |
| | $ | 6,753 |
| �� | $ | 99,914 |
| | $ | 2,454 |
|
On July 7, 2017, Heartland acquired Citywide Banks of Colorado, Inc., parent company of Citywide Banks, based in Denver, Colorado. As of July 7, 2017, Citywide Banks had gross loans of $1.00 billion, and the estimated fair value of the loans acquired was $985.4 million.
On February 28, 2017, Heartland acquired Founders Bancorp, parent company of Founders Community Bank, based in San Luis Obispo, California. As of February 28, 2017, Founders Community Bank had gross loans of $98.9 million, and the estimated fair value of the loans acquired was $96.4 million.
On February 5, 2016, Heartland acquired CIC Bancshares, Inc., parent company of Centennial Bank, in Denver, Colorado. As of February 5, 2016, Centennial Bank had gross loans of $594.9 million, and the estimated fair value of the loans acquired was $581.5 million.
On November 30, 2015, Heartland acquired Premier Valley Bank in Fresno, California. As of November 30, 2015, Premier Valley Bank had loans of $400.5 million, and the estimated fair value of the loans acquired was $389.8 million.
On September 11, 2015, Heartland acquired First Scottsdale Bank, N.A. in Scottsdale, Arizona. As of September 11, 2015, First Scottsdale Bank, N.A. had loans of $56.5 million, and the estimated fair value of the loans acquired was $54.7 million.
On August 21, 2015, Heartland acquired Community Bancorporation of New Mexico, Inc., parent company of Community Bank of Santa Fe, New Mexico. As of August 21, 2015, Community Bank had loans of $103.7 million, and the estimated fair value of the loans acquired was $99.5 million.
On January 16, 2015, Heartland acquired Community Banc-Corp of Sheboygan, Inc., parent company of Community Bank & Trust in Sheboygan, Wisconsin. As of January 16, 2015, Community Bank & Trust had loans of $413.4 million, and the estimated fair value of the loans acquired was $395.0 million.
The acquisitions of Community Banc-Corp of Sheboygan, Inc., Community Bancorporation of New Mexico, Inc., First Scottsdale Bank, N.A., Premier Valley Bank and CIC Bancshares, Inc. were accounted for underuses the acquisition method of accounting for purchased loans in accordance with ASC 805, “"Business Combinations." ” Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date, but the purchaser cannot carry over the related allowance for loan losses. Purchased loans are accounted for under ASC 310-30, “"Loans and Debt Securities with Deteriorated Credit Quality,"” when the loans have evidence of credit deterioration since origination, and when at the date of the acquisition, it is probable that Heartland will not collect all
contractually required principal and interest payments. Evidence of credit quality deterioration at the purchase date includes statistics such as past due and nonaccrual status. Generally, acquired loans that meet Heartland’s definition for nonaccrual status fall within the scope of ASC 310-30. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference, which is included in the carrying value of the loans. Subsequent decreases to the expected cash flows of the loan will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges, or a reclassification of the difference from nonaccretable to accretable with a positive impact on future interest income. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred
to as the accretable yield and is recognized into interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.
TheAt September 30, 2017, and December 31, 2016, the carrying amount of theloans acquired loans at September 30, 2016, and December 31,since 2015 consistedconsist of purchased impaired and nonimpaired loans as summarized in the following table, in thousands:
| | | September 30, 2016 | | December 31, 2015 | September 30, 2017 | | December 31, 2016 |
| Impaired Purchased Loans | | Non Impaired Purchased Loans | | Total Purchased Loans | | Impaired Purchased Loans | | Non Impaired Purchased Loans | | Total Purchased Loans | Impaired Purchased Loans | | Non Impaired Purchased Loans | | Total Purchased Loans | | Impaired Purchased Loans | | Non Impaired Purchased Loans | | Total Purchased Loans |
Commercial | $ | 2,371 |
| | $ | 119,811 |
| | $ | 122,182 |
| | $ | — |
| | $ | 159,393 |
| | $ | 159,393 |
| $ | 968 |
| | $ | 270,241 |
| | $ | 271,209 |
| | $ | 2,198 |
| | $ | 99,082 |
| | $ | 101,280 |
|
Commercial real estate | 4,119 |
| | 688,587 |
| | 692,706 |
| | 7,716 |
| | 494,010 |
| | 501,726 |
| 2,509 |
| | 1,181,333 |
| | 1,183,842 |
| | 2,079 |
| | 622,117 |
| | 624,196 |
|
Agricultural and agricultural real estate | — |
| | 174 |
| | 174 |
| | — |
| | 2,985 |
| | 2,985 |
| — |
| | 1,251 |
| | 1,251 |
| | — |
| | 181 |
| | 181 |
|
Residential real estate | 185 |
| | 175,812 |
| | 175,997 |
| | — |
| | 85,549 |
| | 85,549 |
| 211 |
| | 184,167 |
| | 184,378 |
| | 186 |
| | 157,468 |
| | 157,654 |
|
Consumer loans | — |
| | 49,515 |
| | 49,515 |
| | — |
| | 33,644 |
| | 33,644 |
| — |
| | 62,491 |
| | 62,491 |
| | — |
| | 47,368 |
| | 47,368 |
|
Total Loans | $ | 6,675 |
| | $ | 1,033,899 |
| | $ | 1,040,574 |
| | $ | 7,716 |
| | $ | 775,581 |
| | $ | 783,297 |
| |
Total loans | | $ | 3,688 |
| | $ | 1,699,483 |
| | $ | 1,703,171 |
| | $ | 4,463 |
| | $ | 926,216 |
| | $ | 930,679 |
|
Changes in accretable yield on acquired loans with evidence of credit deterioration at the date of acquisition for the three- and nine-month periods ended September 30, 2016,2017, and September 30, 2015,2016, were as follows, in thousands:
| | Balance at June 30, 2016 | $ | 168 |
| |
Original yield discount, net, at date of acquisition | — |
| |
Accretion | (379 | ) | |
Reclassification from nonaccretable difference(1) | 331 |
| |
Balance at September 30, 2016 | $ | 120 |
| |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
Balance at December 31, 2015 | $ | 557 |
| |
| | 2017 | | 2016 | | 2017 | | 2016 |
Balance at beginning of period | | $ | 101 |
| | $ | 168 |
| | $ | 182 |
| | $ | 557 |
|
Original yield discount, net, at date of acquisitions | 19 |
| — |
| | — |
| | — |
| | 19 |
|
Accretion | (845 | ) | (700 | ) | | (379 | ) | | (1,074 | ) | | (845 | ) |
Reclassification from nonaccretable difference(1) | 389 |
| 654 |
| | 331 |
| | 947 |
| | 389 |
|
Balance at September 30, 2016 | $ | 120 |
| |
Balance at period end | | $ | 55 |
| | $ | 120 |
| | $ | 55 |
| | $ | 120 |
|
| | | | | | | | |
(1) Represents increases in estimated cash flows expected to be received, primarily due to lower estimated credit losses. |
|
| | | |
Balance at June 30, 2015 | $ | 398 |
|
Original yield discount, net, at date of acquisitions | 68 |
|
Accretion | (202 | ) |
Reclassification from nonaccretable difference(1) | 34 |
|
Balance at September 30, 2015 | $ | 298 |
|
| |
Balance at December 31, 2014 | $ | — |
|
Original yield discount, net, at date of acquisitions | 420 |
|
Accretion | (318 | ) |
Reclassification from nonaccretable difference(1) | 196 |
|
Balance at September 30, 2015 | $ | 298 |
|
| |
(1) Represents increases in estimated cash flows expected to be received, primarily due to lower estimated credit losses. |
OnFor loans acquired since January 2015, on the acquisition dates the preliminary estimate of the contractually required payments receivable for all loans with evidence of credit deterioration since origination was $21.0$22.2 million, and the estimated fair value of thethese loans was $13.1 million. At September 30, 2016,2017, a majority of these loans were valued based upon the liquidation value of the underlying collateral, because the expected cash flows are primarily based on the liquidation of underlyingsuch collateral, and the timing and amount of the cash flows could not be reasonably estimated. At September 30, 2017, and December 31, 2016, there was an allowance for loan losses of $549,000$132,000 and $588,000, respectively, related to these ASC 310-30 loans. Provision expense of $4,000 and $126,000 was recorded for the three-month periods ended September 30, 2017, and 2016, respectively. Provision expense of $5,000 and $517,000 was recorded for the nine-month periods ended September 30, 2017, and 2016, respectively.
OnFor loans acquired since January 2015, the preliminary estimate on the acquisition dates the preliminary estimate of the contractually required payments receivable for all nonimpaired loans acquired in the acquisitions was $1.55$2.66 billion, and the estimated fair value of the loans was $1.51$2.59 billion.
NOTE 5: ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the three- and nine-month periods ended September 30, 2016,2017, and September 30, 2015,2016, were as follows, in thousands:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Commercial | | Commercial Real Estate | | Agricultural | | Residential Real Estate | | Consumer | | Total |
Balance at June 30, 2016 | $ | 15,525 |
| | $ | 22,968 |
| | $ | 4,100 |
| | $ | 2,065 |
| | $ | 7,098 |
| | $ | 51,756 |
|
Charge-offs | (240 | ) | | (814 | ) | | — |
| | (106 | ) | | (2,123 | ) | | (3,283 | ) |
Recoveries | 119 |
| | 467 |
| | 2 |
| | 1 |
| | 263 |
| | 852 |
|
Provision | 1,487 |
| | 1,060 |
| | 904 |
| | 22 |
| | 1,855 |
| | 5,328 |
|
Balance at September 30, 2016 | $ | 16,891 |
| | $ | 23,681 |
| | $ | 5,006 |
| | $ | 1,982 |
| | $ | 7,093 |
| | $ | 54,653 |
|
| | | | | | | | | | | |
| Commercial | | Commercial Real Estate | | Agricultural | | Residential Real Estate | | Consumer | | Total |
Balance at December 31, 2015 | $ | 16,095 |
| | $ | 19,532 |
| | $ | 3,887 |
| | $ | 1,934 |
| | $ | 7,237 |
| | $ | 48,685 |
|
Charge-offs | (587 | ) | | (2,229 | ) | | — |
| | (248 | ) | | (4,775 | ) | | (7,839 | ) |
Recoveries | 438 |
| | 3,056 |
| | 9 |
| | 25 |
| | 766 |
| | 4,294 |
|
Provision | 945 |
| | 3,322 |
| | 1,110 |
| | 271 |
| | 3,865 |
| | 9,513 |
|
Balance at September 30, 2016 | $ | 16,891 |
| | $ | 23,681 |
| | $ | 5,006 |
| | $ | 1,982 |
| | $ | 7,093 |
| | $ | 54,653 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Commercial | | Commercial Real Estate | | Agricultural | | Residential Real Estate | | Consumer | | Total |
Balance at June 30, 2017 | $ | 17,168 |
| | $ | 21,861 |
| | $ | 3,832 |
| | $ | 2,263 |
| | $ | 8,927 |
| | $ | 54,051 |
|
Charge-offs | (1,954 | ) | | (1,913 | ) | | — |
| | (142 | ) | | (1,750 | ) | | (5,759 | ) |
Recoveries | 347 |
| | 46 |
| | 14 |
| | 63 |
| | 418 |
| | 888 |
|
Provision | 1,409 |
| | 546 |
| | 2,281 |
| | 82 |
| | 1,387 |
| | 5,705 |
|
Balance at September 30, 2017 | $ | 16,970 |
| | $ | 20,540 |
| | $ | 6,127 |
| | $ | 2,266 |
| | $ | 8,982 |
| | $ | 54,885 |
|
| | | | | | | | | | | |
| Commercial | | Commercial Real Estate | | Agricultural | | Residential Real Estate | | Consumer | | Total |
Balance at December 31, 2016 | $ | 14,765 |
| | $ | 24,319 |
| | $ | 4,210 |
| | $ | 2,263 |
| | $ | 8,767 |
| | $ | 54,324 |
|
Charge-offs | (3,310 | ) | | (2,522 | ) | | (888 | ) | | (541 | ) | | (4,982 | ) | | (12,243 | ) |
Recoveries | 635 |
| | 860 |
| | 17 |
| | 70 |
| | 987 |
| | 2,569 |
|
Provision | 4,880 |
| | (2,117 | ) | | 2,788 |
| | 474 |
| | 4,210 |
| | 10,235 |
|
Balance at September 30, 2017 | $ | 16,970 |
| | $ | 20,540 |
| | $ | 6,127 |
| | $ | 2,266 |
| | $ | 8,982 |
| | $ | 54,885 |
|
| | | Commercial | | Commercial Real Estate | | Agricultural | | Residential Real Estate | | Consumer | | Total | Commercial | | Commercial Real Estate | | Agricultural | | Residential Real Estate | | Consumer | | Total |
Balance at June 30, 2015 | $ | 13,064 |
| | $ | 17,608 |
| | $ | 3,676 |
| | $ | 4,099 |
| | $ | 7,167 |
| | $ | 45,614 |
| |
Balance at June 30, 2016 | | $ | 15,525 |
| | $ | 22,968 |
| | $ | 4,100 |
| | $ | 2,065 |
| | $ | 7,098 |
| | $ | 51,756 |
|
Charge-offs | (869 | ) | | (376 | ) | | — |
| | (13 | ) | | (1,181 | ) | | (2,439 | ) | (240 | ) | | (814 | ) | | — |
| | (106 | ) | | (2,123 | ) | | (3,283 | ) |
Recoveries | 87 |
| | 357 |
| | 5 |
| | 71 |
| | 229 |
| | 749 |
| 119 |
| | 467 |
| | 2 |
| | 1 |
| | 263 |
| | 852 |
|
Provision | 1,628 |
| | 497 |
| | 258 |
| | (311 | ) | | 1,109 |
| | 3,181 |
| 1,487 |
| | 1,060 |
| | 904 |
| | 22 |
| | 1,855 |
| | 5,328 |
|
Balance at September 30, 2015 | $ | 13,910 |
| | $ | 18,086 |
| | $ | 3,939 |
| | $ | 3,846 |
| | $ | 7,324 |
| | $ | 47,105 |
| |
Balance at September 30, 2016 | | $ | 16,891 |
| | $ | 23,681 |
| | $ | 5,006 |
| | $ | 1,982 |
| | $ | 7,093 |
| | $ | 54,653 |
|
| | | | | | | | | | | | | | | | | | | | | | |
| Commercial | | Commercial Real Estate | | Agricultural | | Residential Real Estate | | Consumer | | Total | Commercial | | Commercial Real Estate | | Agricultural | | Residential Real Estate | | Consumer | | Total |
Balance at December 31, 2014 | $ | 11,909 |
| | $ | 15,898 |
| | $ | 3,295 |
| | $ | 3,741 |
| | $ | 6,606 |
| | $ | 41,449 |
| |
Balance at December 31, 2015 | | $ | 16,095 |
| | $ | 19,532 |
| | $ | 3,887 |
| | $ | 1,934 |
| | $ | 7,237 |
| | $ | 48,685 |
|
Charge-offs | (1,825 | ) | | (1,080 | ) | | (551 | ) | | (126 | ) | | (3,595 | ) | | (7,177 | ) | (587 | ) | | (2,229 | ) | | — |
| | (248 | ) | | (4,775 | ) | | (7,839 | ) |
Recoveries | 518 |
| | 853 |
| | 29 |
| | 178 |
| | 729 |
| | 2,307 |
| 438 |
| | 3,056 |
| | 9 |
| | 25 |
| | 766 |
| | 4,294 |
|
Provision | 3,308 |
| | 2,415 |
| | 1,166 |
| | 53 |
| | 3,584 |
| | 10,526 |
| 945 |
| | 3,322 |
| | 1,110 |
| | 271 |
| | 3,865 |
| | 9,513 |
|
Balance at September 30, 2015 | $ | 13,910 |
| | $ | 18,086 |
| | $ | 3,939 |
| | $ | 3,846 |
| | $ | 7,324 |
| | $ | 47,105 |
| |
Balance at September 30, 2016 | | $ | 16,891 |
| | $ | 23,681 |
| | $ | 5,006 |
| | $ | 1,982 |
| | $ | 7,093 |
| | $ | 54,653 |
|
Management allocates the allowance for loan losses by pools of risk within each loan portfolio. The allocation of the allowance for loan losses by loan portfolio is made for analytical purposes and is not necessarily indicative of the trend of future loan losses in any particular category. The total allowance for loan losses is available to absorb losses from any segment of the loan portfolio.
NOTE 6: GOODWILL, CORE DEPOSIT PREMIUM AND OTHER INTANGIBLE ASSETS
Heartland had goodwill of $127.7$236.6 million at September 30, 2016,2017, and $97.9$127.7 million at December 31, 2015.2016. Heartland conducts its annual internal assessment of the goodwill both collectivelyat the consolidated level and at its subsidiaries as of September 30. There was no goodwill impairment as of the most recent assessment.
Heartland recorded $95.2 million of goodwill and $16.0 million of core deposit intangibles in connection with the acquisition of Citywide Banks of Colorado, Inc., parent company of Citywide Banks, headquartered in Aurora, Colorado on July 7, 2017.
Heartland recorded $13.8 million of goodwill and $2.5 million of core deposit intangibles in connection with the acquisition of Founders Bancorp, parent company of Founders Community Bank, based in San Luis Obispo, California on February 28, 2017.
Heartland recorded $29.8 million of goodwill in connection with the acquisition of CIC Bancshares, Inc., parent company of Centennial Bank, based in Denver, Colorado on February 5, 2016. The goodwill associated with this transaction is not deductible for tax purposes. As part of this acquisition,In addition, Heartland recognized core deposit intangibles of $6.4 million thatand commercial servicing rights of $190,000 with this acquisition.
The core deposit intangibles recorded with the Citywide Banks of Colorado, Inc., Founders Bancorp, and CIC Bancshares, Inc. acquisitions are not deductible for tax purposes and are expected to be amortized over a period of 10 years on an accelerated basis. The core deposit intangibles associated with this transaction are not deductible for tax purposes. In addition, Heartland recognized commercial servicing rights of $190,000.
Heartland recorded $41.0 million of goodwill in connection with the acquisition of Premier Valley Bank, based in Fresno, California on November 30, 2015. The goodwill associated with this transaction is not deductible for tax purposes. As part of this acquisition, Heartland recognized core deposit intangibles of $8.0 million that are expected to be amortized over a period of 10 years on an accelerated basis. The core deposit intangibles associated with this transaction are not deductible for tax purposes. In addition, Heartland recognized commercial servicing rights of $616,000.
Heartland recorded $2.5 million of goodwill in connection with the acquisition of First Scottsdale Bank, N.A., based in Scottsdale, Arizona on September 11, 2015. The goodwill associated with this transaction is not deductible for tax purposes. As part of this acquisition, Heartland also recognized core deposit intangibles of $357,000 that are expected to be amortized over a period of 10 years on an accelerated basis. The core deposit intangibles associated with this transaction are not deductible for tax purposes.
Heartland recorded $213,000 of goodwill in connection with the acquisition of Community Bancorporation of New Mexico, Inc., parent company of Community Bank, based in Santa Fe, New Mexico, on August 21, 2015. The goodwill associated with this transaction is not deductible for tax purposes. As part of this acquisition, Heartland also recognized core deposit intangibles of $1.7 million that are expected to be amortized over a period of 10 years on an accelerated basis. The core deposit intangibles associated with this transaction are not deductible for tax purposes.
Heartland recorded $18.6 million of goodwill in connection with the acquisition of Community Banc-Corp of Sheboygan, Inc., the parent company of Community Bank & Trust, based in Sheboygan, Wisconsin on January 16, 2015. The goodwill associated with this transaction is not deductible for tax purposes. As part of this acquisition, Heartland recognized core deposit intangibles of $6.0 million that are expected to be amortized over a period of 10 years on an accelerated basis. The core deposit intangibles associated with this transaction are not deductible for tax purposes. In addition, Heartland recognized commercial servicing rights of $4.3 million.
Goodwill related to the Citywide Banks of Colorado, Inc., Founders Bancorp, and CIC Bancshares, Inc., Premier Valley Bank, First Scottsdale Bank, N.A., Community Bancorporation of New Mexico, Inc. and Community Banc-Corp of Sheboygan, Inc., acquisitions resulted from expected operational synergies, increased market presence, cross-selling opportunities, and expanded business lines.lines and is not deductible for tax purposes.
OtherHeartland's intangible assets consist of core deposit intangibles, mortgage servicing rights, customer relationship intangible,intangibles, and commercial servicing rights. The gross carrying amount of otherthese intangible assets and the associated accumulated amortization at September 30, 2016,2017, and December 31, 2015,2016, are presented in the table below, in thousands:
| | | September 30, 2016 | | December 31, 2015 | September 30, 2017 | | December 31, 2016 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Amortizing intangible assets: | | | | | | | | | | | | | | | | | | | | | | |
Core deposit intangibles | $ | 43,504 |
| | $ | 19,913 |
| | $ | 23,591 |
| | $ | 37,118 |
| | $ | 15,460 |
| | $ | 21,658 |
| $ | 62,008 |
| | $ | 25,271 |
| | $ | 36,737 |
| | $ | 43,504 |
| | $ | 21,049 |
| | $ | 22,455 |
|
Customer relationship intangibles | | 1,177 |
| | 886 |
| | 291 |
| | 1,177 |
| | 857 |
| | 320 |
|
Mortgage servicing rights | 49,494 |
| | 17,652 |
| | 31,842 |
| | 45,744 |
| | 15,430 |
| | 30,314 |
| 41,903 |
| | 18,161 |
| | 23,742 |
| | 50,467 |
| | 18,379 |
| | 32,088 |
|
Customer relationship intangible | 1,177 |
| | 846 |
| | 331 |
| | 1,177 |
| | 815 |
| | 362 |
| |
Commercial servicing rights | 6,409 |
| | 2,345 |
| | 4,064 |
| | 5,685 |
| | 1,074 |
| | 4,611 |
| 6,719 |
| | 3,862 |
| | 2,857 |
| | 6,504 |
| | 2,814 |
| | 3,690 |
|
Total | $ | 100,584 |
| | $ | 40,756 |
| | $ | 59,828 |
| | $ | 89,724 |
| | $ | 32,779 |
| | $ | 56,945 |
| $ | 111,807 |
| | $ | 48,180 |
| | $ | 63,627 |
| | $ | 101,652 |
| | $ | 43,099 |
| | $ | 58,553 |
|
The following table shows the estimated future amortization expense for amortizable intangible assets, in thousands:
| | | Core Deposit Intangibles | | Mortgage Servicing Rights | | Customer Relationship Intangible | | Commercial Servicing Rights | | Total | Core Deposit Intangibles | | Customer Relationship Intangibles | | Mortgage Servicing Rights | | Commercial Servicing Rights | | Total |
Three months ending December 31, 2016 | $ | 1,206 |
| | $ | 2,968 |
| | $ | 10 |
| | $ | 232 |
| | $ | 4,416 |
| |
Three months ending December 31, 2017 | | $ | 1,815 |
| | $ | 10 |
| | $ | 2,463 |
| | $ | 184 |
| | $ | 4,472 |
|
Year ending December 31, | | | | | | | | | | | | | | | | | | |
2017 | 4,409 |
| | 7,219 |
| | 40 |
| | 908 |
| | 12,576 |
| |
2018 | 3,900 |
| | 6,187 |
| | 39 |
| | 836 |
| | 10,962 |
| 6,712 |
| | 39 |
| | 5,319 |
| | 701 |
| | 12,771 |
|
2019 | 3,418 |
| | 5,156 |
| | 38 |
| | 657 |
| | 9,269 |
| 5,915 |
| | 38 |
| | 4,560 |
| | 566 |
| | 11,079 |
|
2020 | 2,975 |
| | 4,125 |
| | 37 |
| | 482 |
| | 7,619 |
| 5,191 |
| | 37 |
| | 3,800 |
| | 442 |
| | 9,470 |
|
2021 | 2,457 |
| | 3,094 |
| | 35 |
| | 489 |
| | 6,075 |
| 4,425 |
| | 35 |
| | 3,040 |
| | 380 |
| | 7,880 |
|
2022 | | 3,391 |
| | 34 |
| | 2,280 |
| | 307 |
| | 6,012 |
|
Thereafter | 5,226 |
| | 3,093 |
| | 132 |
| | 460 |
| | 8,911 |
| 9,288 |
| | 98 |
| | 2,280 |
| | 277 |
| | 11,943 |
|
Total | $ | 23,591 |
| | $ | 31,842 |
| | $ | 331 |
| | $ | 4,064 |
| | $ | 59,828 |
| $ | 36,737 |
| | $ | 291 |
| | $ | 23,742 |
| | $ | 2,857 |
| | $ | 63,627 |
|
Projections of amortization expense for mortgage servicing rights are based on existing asset balances and the existing interest rate environment as of September 30, 2016.2017. Heartland's actual experience may be significantly different depending upon changes in mortgage interest rates and market conditions. Mortgage loans serviced for others were $4.26approximately $3.56 billion and $4.06$4.31 billion as of September 30, 2016,2017, and December 31, 2015,2016, respectively. Custodial escrow balances maintained in connection with the mortgage loan servicing portfolio were approximately $28.3$24.3 million and $19.2$21.4 million as of September 30, 2016,2017, and December 31, 2015,2016, respectively. The fair value of Heartland's mortgage servicing rights was estimated at $38.135.0 million at September 30, 2016,2017, and $40.9$45.2 million at December 31, 2015.2016.
Heartland's mortgage servicing rights portfolio is comprised of loans serviced for the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation and("FHLMC"). Prior to the third quarter of 2017, Heartland also serviced loans for the Government National Mortgage Association.Association ("GNMA"). The servicing rights portfolio is separated into 15- and 30-year tranches, and the servicing rights portfolio is an asset of one of Heartland's subsidiaries.
During the third quarter of 2017, Heartland entered into an agreement to sell substantially all of its GNMA servicing portfolio, which contained loans with an unpaid principal balance of approximately $773.9 million. The transaction qualifies as a sale, and $6.9 million of mortgage servicing rights have been de-recognized on the consolidated balance sheet as of September 30, 2017. Cash of approximately $5.1 million was received during the third quarter, and Heartland recorded an estimated loss on the sale
of this portfolio of approximately $183,000. A receivable of approximately $1.6 million was recorded due to the timing of the servicing transfer per the terms of the sale agreement and to address indemnification claims and mortgage loan documentation deficiencies.
The fair value of mortgage servicing rights is calculated based upon either a discounted cash flow analysis.analysis or market indication. Cash flow assumptions, including prepayment speeds, servicing costs and escrow earnings are considered in the calculation. The average constant prepayment rate was 13.13%10.93% and 10.65%9.63% for the September 30, 2016,2017, and December 31, 2015,2016, valuations, respectively. The discount rate was 9.26%9.06% and 9.25%9.26% for the September 30, 2016,2017, and December 31, 2015,2016, valuations, respectively. The average capitalization rate for the first nine months of 20162017 ranged from 8891 to 141150 basis points compared to the range of 6588 to 138135 basis points for 2015.2016. Fees collected for the servicing of mortgage loans for others were $3.1$2.9 million and $2.6$3.1 million for the quarterquarters ended September 30, 2016,2017, and September 30, 2015,2016, respectively and $9.0$9.3 million and $7.8$9.0 million for the nine months ended September 30, 2016,2017, and September 30, 2015,2016, respectively.
The following table summarizes, in thousands, the changes in capitalized mortgage servicing rights for the nine months ended September 30, 2016,2017, and September 30, 2015:2016: | | | 2016 | | 2015 | 2017 | | 2016 |
Balance at January 1, | $ | 30,314 |
| | $ | 24,984 |
| $ | 32,088 |
| | $ | 30,314 |
|
Originations | 9,323 |
| | 11,062 |
| 5,778 |
| | 9,323 |
|
Amortization | (7,795 | ) | | (6,446 | ) | (7,184 | ) | | (7,795 | ) |
Balance at September 30, | $ | 31,842 |
| | $ | 29,600 |
| |
Sale of mortgage servicing rights | | (6,940 | ) | | — |
|
Balance at period end | | $ | 23,742 |
| | $ | 31,842 |
|
Fair value of mortgage servicing rights | $ | 38,127 |
| | $ | 40,166 |
| $ | 35,002 |
| | $ | 38,127 |
|
Mortgage servicing rights, net to servicing portfolio | 0.75 | % | | 0.75 | % | 0.67 | % | | 0.75 | % |
Heartland's commercial servicing rights portfolio was initially acquired with the Community Banc-Corp of Sheboygan, Inc. transaction that closed on January 16, 2015. Heartland also acquired commercial servicing rights portfolios with the Premier Valley Bank transaction that closed on November 30, 2015, and the CIC Bancshares, Inc. transaction that closed on February 5, 2016. The commercial servicing portfolio is comprised of loans guaranteed by the Small Business Administration and United States Department of Agriculture that have been sold with servicing retained by Heartland, which totaled $175.6 million.$144.4 million at September 30, 2017 and $164.6 million at December 31, 2016. The commercial servicing rights portfolio is separated into two tranches at the respective Heartland subsidiary, loans with a term of less than 20 years and loans with a term of more than 20 years, at each subsidiary.years. Fees collected for the servicing of commercial loans for others were $230,000$394,000 and $78,000$230,000 for the quarter ended September 30, 2016,2017, and September 30, 2015,2016, respectively, and $685,000$1.2 million and $438,000$685,000 for the nine months ended September 30, 2016,2017, and September 30, 2015,2016, respectively.
The fair value of each commercial servicing rights portfolio is calculated based upon a discounted cash flow analysis. Cash flow assumptions, including prepayment speeds and servicing costs, are considered in the calculation. The range of average constant prepayment rates for the portfolio valuations for the firstninemonthswas 6.66% to 7.99% as of 2016 was 6.65% to 7.63%September 30, 2017, compared to 7.33%6.96% to 8.10%7.88% as of December 31, 2015.2016. The discount rate range was 12.07%12.52% to 13.59%14.65% for the September 30, 2016,2017, valuations compared to 12.35%12.44% to 13.49%13.88% for the December 31, 2015,2016, valuations. The capitalization rate for 20162017 ranged from 310 to 445 basis points compared to 180310 to 445 basis points for 2015.2016. The total fair value of Heartland's commercial servicing rights was estimated at $4.4$3.5 million as of September 30, 2017, and $4.1 million as of December 31, 2016.
The following table summarizes, in thousands, the changes in capitalized commercial servicing rights for the nine months ended September 30, 2016,2017, and September 30, 2015:2016:
| | | 2016 | | 2015 | 2017 | | 2016 |
Balance at January 1, | $ | 4,611 |
| | $ | — |
| $ | 3,690 |
| | $ | 4,611 |
|
Purchased commercial servicing rights | 190 |
| | 4,255 |
| — |
| | 190 |
|
Originations | 533 |
| | 704 |
| 215 |
| | 533 |
|
Amortization | (1,229 | ) | | (802 | ) | (1,077 | ) | | (1,229 | ) |
Valuation allowance on commercial servicing rights | (41 | ) | | — |
| 29 |
| | (41 | ) |
Balance at September 30, | $ | 4,064 |
| | $ | 4,157 |
| |
Balance at period end | | $ | 2,857 |
| | $ | 4,064 |
|
Fair value of commercial servicing rights | $ | 4,397 |
| | $ | 4,412 |
| $ | 3,458 |
| | $ | 4,397 |
|
Commercial servicing rights, net to servicing portfolio | 2.38 | % | | 2.33 | % | 1.98 | % | | 2.38 | % |
Mortgage and commercial servicing rights are initially recorded at fair value in net gains on sale of loans held for sale when they are acquired through loan sales. Fair value is based on market prices for comparable servicing contracts, when available, or based on a valuation model that calculates the present value of estimated future net servicing income.
Mortgage and commercial servicing rights are subsequently measured using the amortization method, which requires the asset to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Servicing rights are evaluated for impairment at each Heartland subsidiary based upon the fair value of the assets as compared to the carrying amount. Impairment is recognized through a valuation allowance for specific tranches to the extent that fair value is less than carrying amount at each Heartland subsidiary. At September 30, 2017, no valuation allowance was required on commercial servicing rights with a term less than 20 years and a $4,000 valuation allowance was required on commercial servicing rights with a term greater than 20 years. At December 31, 2016, no valuation allowance was required on commercial servicing rights with a term less than 20 years and a $41,000$33,000 valuation allowance was required on commercial servicing rights with a term greater than 20 years. At December 31, 2015, no valuation allowance was required for any of Heartland's servicing rights.
The following table summarizes, in thousands, the book value, the fair value of each tranche of the commercial servicing rights and any recorded valuation allowance at each respective subsidiary at September 30, 2016,2017, and December 31, 2015:2016:
| | September 30, 2016 | Book Value- Less than 20 Years | | Fair Value- Less than 20 Years | | Impairment- Less than 20 Years | | Book Value- More than 20 Years | | Fair Value- More than 20 Years | | Impairment- More than 20 Years | |
Centennial Bank and Trust | $ | 25 |
| | $ | 27 |
| | $ | — |
| | $ | 118 |
| | $ | 121 |
| | $ | — |
| |
September 30, 2017 | | Book Value- Less than 20 Years | | Fair Value- Less than 20 Years | | Impairment- Less than 20 Years | | Book Value- More than 20 Years | | Fair Value- More than 20 Years | | Impairment- More than 20 Years |
Citywide Banks | | $ | 12 |
| | $ | 15 |
| | $ | — |
| | $ | 54 |
| | $ | 61 |
| | $ | — |
|
Premier Valley Bank | 171 |
| | 188 |
| | — |
| | 373 |
| | 332 |
| | 41 |
| 95 |
| | 124 |
| | — |
| | 317 |
| | 313 |
| | 4 |
|
Wisconsin Bank & Trust | 916 |
| | 1,031 |
| | — |
| | 2,502 |
| | 2,698 |
| | — |
| 515 |
| | 688 |
| | — |
| | 1,868 |
| | 2,257 |
| | — |
|
Total | $ | 1,112 |
| | $ | 1,246 |
| | $ | — |
| | $ | 2,993 |
| | $ | 3,151 |
| | $ | 41 |
| $ | 622 |
| | $ | 827 |
| | $ | — |
| | $ | 2,239 |
| | $ | 2,631 |
| | $ | 4 |
|
December 31, 2015 | | | | | | | | | | | | |
Centennial Bank and Trust | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| |
December 31, 2016 | | | | | | | | | | | | |
Citywide Banks | | $ | 19 |
| | $ | 23 |
| | $ | — |
| | $ | 107 |
| | $ | 114 |
| | $ | — |
|
Premier Valley Bank | 189 |
| | 200 |
| | — |
| | 417 |
| | 432 |
| | — |
| 156 |
| | 180 |
| | — |
| | 359 |
| | 326 |
| | 33 |
|
Wisconsin Bank & Trust | 1,048 |
| | 1,097 |
| | — |
| | 2,957 |
| | 3,173 |
| | — |
| 833 |
| | 997 |
| | — |
| | 2,249 |
| | 2,487 |
| | — |
|
Total | $ | 1,237 |
| | $ | 1,297 |
| | $ | — |
| | $ | 3,374 |
| | $ | 3,605 |
| | $ | — |
| $ | 1,008 |
| | $ | 1,200 |
| | $ | — |
| | $ | 2,715 |
| | $ | 2,927 |
| | $ | 33 |
|
NOTE 7: DERIVATIVE FINANCIAL INSTRUMENTS
Heartland uses derivative financial instruments as part of its interest rate risk management strategy. As part of the strategy, Heartland considers the use of interest rate swaps, caps, floors, collars, and certain interest rate lock commitments and forward sales of securities related to mortgage banking activities. Heartland's current strategy includes the use of interest rate swaps, interest rate lock commitments and forward sales of mortgage securities. In addition, Heartland is facilitating back-to-back loan swaps to assist customers in managing interest rate risk. Heartland's objectives are to add stability to its net interest margin and to manage its exposure to movements in interest rates. The contract or notional amount of a derivative is used to determine, along with the other terms of the derivative, the amounts to be exchanged between the counterparties. Heartland is exposed to credit risk in the event of nonperformance by counterparties to financial instruments. Heartland minimizes this risk by entering into derivative contracts with counterparties that meet Heartland’s credit standards, and the contracts contain collateral provisions protecting the at-risk party. Heartland has not experienced any losses from nonperformance by these counterparties. Heartland monitors counterparty risk in accordance with the provisions of ASC 815.
In addition, interest rate-related derivative instruments generally contain language outlining collateral pledging requirements for each counterparty. Collateral must be posted when the market value exceeds certain threshold limits which are determined by credit ratings of each counterparty. Heartland was required to pledge $7.6 million and $5.3$2.2 million of cash as collateral at both September 30, 2016,2017, and December 31, 2015, respectively.2016. No collateral was required to be pledged by Heartland's counterparties were required to pledge $0 at both September 30, 2016,2017, and $79,000 at December 31, 2015, respectively.2016.
Heartland's derivative and hedging instruments are recorded at fair value on the consolidated balance sheets. See Note 8, “Fair Value,” for additional fair value information and disclosures.
Cash Flow Hedges
Heartland has variable rate funding which creates exposure to variability in interest payments due to changes in interest rates. To manage the interest rate risk related to the variability of interest payments, Heartland has entered into various interest rate swap agreements. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest
expense as interest payments are received or made on Heartland's variable-rate liabilities. For the nine months ended September 30, 2016,2017, the change in net unrealized losses on cash flow hedges reflects changes in the fair value of the swaps and reclassification from accumulated other comprehensive income to interest expense totaling $1.5$1.0 million. For the next twelve months, Heartland estimates that cash payments and reclassification from accumulated other comprehensive income to interest expense will total $2.0$1.2 million.
Heartland executed an interest rate swap transaction on April 5, 2011, with an effective date of April 20, 2011, to effectively convert $15.0 million of variable rate amortizing debt to fixed rate debt. For accounting purposes, this swap transaction was designated as a cash flow hedge of the changes in cash flows attributable to changes in one-month LIBOR, the benchmark interest rate being hedged. This interest rate swap transaction expired on April 20, 2016.
Heartland entered into five forward starting interest rate swap transactions to effectively convert Heartland Financial Statutory Trust IV, V, and VII, which total $65.0 million, as well as Morrill Statutory Trust I and II, which total $20.0 million, from variable rate subordinated debentures to fixed rate debt. For accounting purposes, these five swap transactions are designated as cash flow
hedges of the changes in LIBOR, the benchmark interest rate being hedged, associated with the interest payments made on $85.0 million of Heartland's subordinated debentures that reset quarterly on a specified reset date. At inception, Heartland asserted that the underlying principal balance would remain outstanding throughout the hedge transaction, making it probable that sufficient LIBOR-based interest payments would exist through the maturity date of the swaps.
During the first quarter of 2015, Heartland entered into two additional forward starting interest rate swaps. The first forward starting interest rate swap transaction relates to Heartland's $20.0 million Statutory Trust VI, which will convertconverted from a fixed interest rate subordinated debenture to a variable interest rate subordinated debenture. Thedebenture effective date of the interest rate swap transaction ison June 15, 2017, and Heartland Statutory Trust VI will effectively remain at a fixed interest rate.2017. The forward-startingforward starting swap transaction expires on June 15, 2024. The second forward starting interest rate swap iswas effective on March 1, 2017, and will replacereplaced the current interest rate swap related to Heartland Statutory Trust VII upon its expiration on March 1, 2017.
Heartland entered into an interest rate swap transaction on May 10, 2016, to effectively convert $40.0 million of amortizing term debt from variable rate debt to fixed rate debt. For accounting purposes, this swap is designated as a cash flow hedge of the changes in LIBOR, the benchmark interest rate being hedged, associated with the interest payments on the amortizing term debt that resets monthly on a specified reset date. The swap expires on May 10, 2021.
The table below identifies the balance sheet category and fair values of Heartland's derivative instruments designated as cash flow hedges at September 30, 2016,2017, and December 31, 2015,2016, in thousands:
| | | Notional Amount | | Fair Value | | Balance Sheet Category | | Receive Rate | | Weighted Average Pay Rate | | Maturity | Notional Amount | | Fair Value | | Balance Sheet Category | | Receive Rate | | Weighted Average Pay Rate | | Maturity |
September 30, 2016 | | | | | | | | | | | | |
September 30, 2017 | | | | | | | | | | | | |
Interest rate swap | $ | — |
| | $ | — |
| | Other liabilities | | — | % | | — | % | | 04/20/2016 | $ | 25,000 |
| | $ | (346 | ) | | Other liabilities | | 1.321 | % | | 2.255 | % | | 03/17/2021 |
Interest rate swap | 25,000 |
| | (1,263 | ) | | Other liabilities | | 0.857 | % | | 2.255 | % | | 03/17/2021 | — |
| | — |
| | Other liabilities | | — | % | | 3.220 | % | | 03/01/2017 |
Interest rate swap | 20,000 |
| | (236 | ) | | Other liabilities | | 0.842 | % | | 3.220 | % | | 03/01/2017 | 20,000 |
| | (828 | ) | | Other liabilities | | 1.303 | % | | 3.355 | % | | 01/07/2020 |
Interest rate swap | 20,000 |
| | (1,626 | ) | | Other liabilities | | 0.657 | % | | 3.355 | % | | 01/07/2020 | 10,000 |
| | (6 | ) | | Other liabilities | | 1.329 | % | | 1.674 | % | | 03/26/2019 |
Interest rate swap | 10,000 |
| | (163 | ) | | Other liabilities | | 0.857 | % | | 1.674 | % | | 03/26/2019 | 10,000 |
| | (5 | ) | | Other liabilities | | 1.321 | % | | 1.658 | % | | 03/18/2019 |
Interest rate swap | 10,000 |
| | (160 | ) | | Other liabilities | | 0.857 | % | | 1.658 | % | | 03/18/2019 | 35,667 |
| | 557 |
| | Other assets | | 3.735 | % | | 3.674 | % | | 05/10/2021 |
Interest rate swap | 38,667 |
| | (352 | ) | | Other liabilities | | 3.018 | % | | 3.674 | % | | 05/10/2021 | 20,000 |
| | (393 | ) | | Other liabilities | | 1.320 | % | | 2.390 | % | | 06/15/2024 |
Interest rate swap(1) | 20,000 |
| | (1,391 | ) | | Other liabilities | | — | % | | 2.390 | % | | 06/15/2024 | |
Interest rate swap(2) | 20,000 |
| | (1,409 | ) | | Other liabilities | | — | % | | 2.352 | % | | 03/01/2024 | |
December 31, 2015 | | | | | | | | | |
Interest rate swap | | 20,000 |
| | (365 | ) | | Other liabilities | | 1.316 | % | | 2.352 | % | | 03/01/2024 |
December 31, 2016 | | | | | | | | | |
Interest rate swap | $ | 8,947 |
| | $ | (57 | ) | | Other liabilities | | 3.152 | % | | 5.140 | % | | 04/20/2016 | $ | 25,000 |
| | $ | (447 | ) | | Other liabilities | | 0.993 | % | | 2.255 | % | | 03/17/2021 |
Interest rate swap | 25,000 |
| | (713 | ) | | Other liabilities | | 0.526 | % | | 2.255 | % | | 03/17/2021 | 20,000 |
| | (114 | ) | | Other liabilities | | 0.931 | % | | 3.220 | % | | 03/01/2017 |
Interest rate swap | 20,000 |
| | (600 | ) | | Other liabilities | | 0.414 | % | | 3.220 | % | | 03/01/2017 | 20,000 |
| | (1,145 | ) | | Other liabilities | | 0.868 | % | | 3.355 | % | | 01/07/2020 |
Interest rate swap | 20,000 |
| | (1,582 | ) | | Other liabilities | | 0.323 | % | | 3.355 | % | | 01/07/2020 | 10,000 |
| | (42 | ) | | Other liabilities | | 0.997 | % | | 1.674 | % | | 03/26/2019 |
Interest rate swap | 10,000 |
| | (83 | ) | | Other liabilities | | 0.603 | % | | 1.674 | % | | 03/26/2019 | 10,000 |
| | (41 | ) | | Other liabilities | | 0.993 | % | | 1.658 | % | | 03/18/2019 |
Interest rate swap | 10,000 |
| | (83 | ) | | Other liabilities | | 0.526 | % | | 1.658 | % | | 03/18/2019 | 37,667 |
| | 530 |
| | Other assets | | 3.164 | % | | 3.674 | % | | 05/10/2021 |
Interest rate swap(1) | | 20,000 |
| | (214 | ) | | Other liabilities | | — | % | | 2.390 | % | | 06/15/2024 |
Interest rate swap(1)(2) | 20,000 |
| | (146 | ) | | Other liabilities | | — | % | | 2.390 | % | | 06/15/2024 | 20,000 |
| | (262 | ) | | Other Liabilities | | — | % | | 2.352 | % | | 03/01/2024 |
Interest rate swap(2) | 20,000 |
| | (176 | ) | | Other liabilities | | — | % | | 2.352 | % | | 03/01/2024 | |
| (1) This swap is a forward starting swap with a weighted average pay rate of 2.390% beginning on June 15, 2017. No interest payments are required related to this swap until September 15, 2017. | |
(2) This swap is a forward starting swap with a weighted average pay rate of 2.352% beginning on March 1, 2017. No interest payments are required on this swap until June 1, 2017. | |
(1) This swap is a forward starting swap with a weighted average pay rate of 2.390% beginning on June 15, 2017. No interest payments were required on this swap until September 15, 2017. | | (1) This swap is a forward starting swap with a weighted average pay rate of 2.390% beginning on June 15, 2017. No interest payments were required on this swap until September 15, 2017. |
(2) This swap is a forward starting swap with a weighted average pay rate of 2.352% beginning on March 1, 2017. No interest payments were required on this swap until June 1, 2017. | | (2) This swap is a forward starting swap with a weighted average pay rate of 2.352% beginning on March 1, 2017. No interest payments were required on this swap until June 1, 2017. |
The table below identifies the gains and losses recognized on Heartland's derivative instruments designated as cash flow hedges for the three- and nine-month periods ended September 30, 2016,2017, and September 30, 2015,2016, in thousands:
| | | Effective Portion | | Ineffective Portion | Effective Portion | | Ineffective Portion |
| Recognized in OCI | | Reclassified from AOCI into Income | | Recognized in Income on Derivatives | Recognized in OCI | | Reclassified from AOCI into Income | | Recognized in Income on Derivatives |
| Amount of Gain (Loss) | | Category | | Amount of Gain (Loss) | | Category | | Amount of Gain (Loss) | Amount of Gain (Loss) | | Category | | Amount of Gain (Loss) | | Category | | Amount of Gain (Loss) |
Three Months Ended September 30, 2017 | | | | | | | | | | |
Interest rate swaps | | $ | 325 |
| | Interest expense | | $ | (308 | ) | | Other income | | $ | — |
|
Nine Months Ended September 30, 2017 | | | | | | |
Interest rate swaps | | $ | 349 |
| | Interest expense | | $ | (1,005 | ) | | Other income | | $ | — |
|
Three Months Ended September 30, 2016 | | | | | | | | | | | | | | |
Interest rate swaps | $ | 1,336 |
| | Interest expense | | $ | (492 | ) | | Other income | | $ | — |
| $ | 1,336 |
| | Interest expense | | $ | (492 | ) | | Other income | | $ | — |
|
Nine Months Ended September 30, 2016 | | | | | | | | | | |
Interest rate swaps | $ | (3,160 | ) | | Interest expense | | $ | (1,463 | ) | | Other income | | $ | — |
| $ | (3,160 | ) | | Interest expense | | $ | (1,463 | ) | | Other income | | $ | — |
|
Three Months Ended September 30, 2015 | | | | | | |
Interest rate swaps | $ | (2,514 | ) | | Interest expense | | $ | (557 | ) | | Other income | | $ | — |
| |
Nine Months Ended September 30, 2015 | | | | | | |
Interest rate swaps | $ | (1,336 | ) | | Interest expense | | $ | (1,680 | ) | | Other income | | $ | — |
| |
Fair Value HedgeHedges
Heartland uses interest rate swaps to convert certain long term fixed rate loans to floating rates to hedge interest rate risk exposure. Heartland uses hedge accounting in accordance with ASC 815, with the unrealized gains and losses, representing the change in fair value of the derivative and the change in fair value of the risk being hedged on the related loan, being recorded in the consolidated statements of income. The ineffective portions of the unrealized gains or losses, if any, are recorded in interest income and interest expense in the consolidated statements of income. Heartland uses statistical regression to assess hedge effectiveness, both at the inception of the hedge as well as on a continual basis. The regression analysis involves regressing the periodic change in the fair value of the hedging instrument against the periodic changes in the fair value of the asset being hedged due to changes in the hedge risk.
During the second quarter of 2015, Heartland entered into an interest rate swap, paying a fixed interest rate of 3.40% to the counterparty and receiving a variable interest rate from the same counterparty based on one month LIBOR plus .88% calculated on a notional amount of $13.8 million. In the fourth quarter of 2015, Heartland acquired undesignated interest rate swaps with the Premier Valley Bank transaction. These swaps were classified as undesignated interest rate swaps at December 31, 2015. During the first quarter of 2016, Heartland was able to designate some of these interest rate swaps with long term fixed rate loans and now classifies these interest rate swaps as fair value hedges and uses hedge accounting in accordance with ASC 815. Heartland was required to pledge $6.7$4.5 million and $5.0 million of cash and securities as collateral as offor these fair value hedges at September 30, 2016.2017, and December 31, 2016, respectively.
The table below identifies the notional amount, fair value and balance sheet category of Heartland's fair value hedges at September 30, 2016,2017, and December 31, 2015,2016, in thousands:
| | | Notional Amount | | Fair Value | | Balance Sheet Category | Notional Amount | | Fair Value | | Balance Sheet Category |
September 30, 2016 | | | | | |
September 30, 2017 | | | | | |
Fair value hedges | $ | 41,007 |
| | $ | (4,467 | ) | | Other liabilities | $ | 35,813 |
| | $ | (1,537 | ) | | Other liabilities |
December 31, 2015 | | | | | |
December 31, 2016 | | | | | |
Fair value hedges | $ | 13,805 |
| | $ | (621 | ) | | Other liabilities | $ | 40,807 |
| | $ | (1,626 | ) | | Other liabilities |
The table below identifies the gains and losses recognized on Heartland's fair value hedges for the three- and nine-month periods ended September 30, 2016,2017, and September 30, 2015,2016, in thousands:
| | | | Amount of Gain (Loss) | | Income Statement Category | | Amount of Gain (Loss) | | Income Statement Category |
Three Months Ended September 30, 2017 | | | | |
Fair value hedges | | | $ | (63 | ) | | Interest income |
Nine Months Ended September 30, 2017 | | | | |
Fair value hedges | | | $ | 89 |
| | Interest income |
Three Months Ended September 30, 2016 | | | | | | |
Fair value hedges | | $ | (225 | ) | | Interest income | | $ | (225 | ) | | Interest income |
Nine Months Ended September 30, 2016 | | | | | | |
Fair value hedges | | $ | (2,335 | ) | | Interest income | | $ | (2,335 | ) | | Interest income |
Three Months Ended September 30, 2015 | | | | |
Fair value hedges | | $ | — |
| | Interest income | |
Nine Months Ended September 30, 2015 | | | | |
Fair value hedges | | $ | — |
| | Interest income | |
Embedded Derivatives
Heartland acquiredhas fixed rate loans with embedded derivatives in the Premier Valley Bank transaction during the fourth quarter of 2015.derivatives. The loans contain terms that affect the cash flows or value of the loan similar to a derivative instrument, and therefore are considered to contain an embedded derivative. The embedded derivatives are bifurcated from the loans because the terms of the derivative instrument are not clearly and closely related to the loans. The embedded derivatives are recorded at fair value on the consolidated balance sheets as a part of other assets, and changes in the fair value are a component of noninterest income. The table below identifies the notional amount, fair value and balance sheet category of Heartland's embedded derivatives at September 30, 2016,2017, and December 31, 2015,2016, in thousands:
| | | Notional Amount | | Fair Value | | Balance Sheet Category | | Income Statement Category | | Quarter-to-Date Gain (Loss) Recognized | | Year-to-Date Gain (Loss) Recognized | Notional Amount | | Fair Value | | Balance Sheet Category |
September 30, 2016 | | | | | | | | |
September 30, 2017 | | | | | |
Embedded derivatives | $ | 14,668 |
| | $ | 1,817 |
| | Other assets | | Other noninterest income | | $ | (173 | ) | | $ | 243 |
| $ | 14,175 |
| | $ | 923 |
| | Other assets |
December 31, 2015 | | | | | | | | |
December 31, 2016 | | | | | |
Embedded derivatives | $ | 15,020 |
| | $ | 1,574 |
| | Other assets | | Other noninterest income | | $ | — |
| | $ | — |
| $ | 14,549 |
| | $ | 1,104 |
| | Other assets |
The table below identifies the gains and losses recognized on Heartland's embedded derivatives for the three- and nine-month periods ended September 30, 2017, and September 30, 2016, in thousands:
|
| | | | | | |
| | Amount of Gain (Loss) | | Income Statement Category |
Three Months Ended September 30, 2017 | | | | |
Embedded derivatives | | $ | (296 | ) | | Other noninterest income |
Nine Months Ended September 30, 2017 | | | | |
Embedded derivatives | | $ | (181 | ) | | Other noninterest income |
Three Months Ended September 30, 2016 | | | | |
Embedded derivatives | | $ | (173 | ) | | Other noninterest income |
Nine Months Ended September 30, 2016 | | | | |
Embedded derivatives | | $ | 243 |
| | Other noninterest income |
In conjunction with the CIC Bancshares, Inc., transaction on February 5, 2016, Heartland acquiredassumed convertible subordinated debt. The subordinated debt has a face value of $2.0 million, and the embedded conversion option allows the holder to convert the debt to Heartland common equity in any increment.increment and at the discretion of the holder. The conversion option is bifurcated from the debt because the terms of the conversion option are not clearly and closely related to the terms of the debt. TheOn February 5, 2016, the total number of shares to be issued upon conversion iswas 73,394.
During the third quarter of 2016, $1.4 million of the debt was converted to 52,917 shares of common equity. As of September 30,At December 31, 2016, the remaining shares to be issued upon conversion total 20,477.totaled 20,481. During 2017, all of the remaining convertible subordinated debt was converted to common stock, resulting in the issuance of 20,481 shares of common stock. The embedded conversion option iswas reported at fair value on the consolidated balance sheets using the Black-Scholes model. The following table identifies, in thousands, the notional amount, fair value, balance sheet category and income statement category for the change in fair value of the embedded conversion option as of September 30, 2017, and December 31, 2016:
| | | Notional Amount | | Fair Value | | Balance Sheet Category | | Income Statement Category | | Quarter- to-Date Gain (Loss) Recognized | | Year- to-Date Gain (Loss) Recognized | Notional Amount | | Fair Value | | Balance Sheet Category |
September 30, 2016 | | | | | | | | |
September 30, 2017 | | | | | |
Embedded conversion option | $ | 558 |
| | $ | (184 | ) | | Other liabilities | | Other noninterest income | | $ | 435 |
| | $ | 138 |
| $ | — |
| | $ | — |
| | Other liabilities |
December 31, 2016 | | | | | |
Embedded conversion option | | $ | 558 |
| | $ | (422 | ) | | Other liabilities |
Back-To-BackThe table below identifies the gains and losses recognized on Heartland's embedded conversion options for the three- and nine-month periods ended September 30, 2017, and September 30, 2016, in thousands:
|
| | | | | | |
| | Amount of Gain (Loss) | | Income Statement Category |
Three Months Ended September 30, 2017 | | | | |
Embedded conversion option | | $ | 285 |
| | Other noninterest income |
Nine Months Ended September 30, 2017 | | | | |
Embedded conversion option | | $ | 422 |
| | Other noninterest income |
Three Months Ended September 30, 2016 | | | | |
Embedded conversion option | | $ | 435 |
| | Other noninterest income |
Nine Months Ended September 30, 2016 | | | | |
Embedded conversion option | | $ | 138 |
| | Other noninterest income |
Back-to-Back Loan Swaps
During 2015, Heartland began entering intohas interest rate swap loan relationships with customers to meet their financing needs. Upon entering into these loan swaps, Heartland enters into offsetting positions with counterparties in order to minimize interest rate risk. These back-to-back loan swaps qualify as free standing financial derivatives with the fair values reported in other assets and other liabilities on the consolidated balance sheets. Heartland was required to post $3.6$2.0 million and $0 as of$1.8 million at both September 30, 2016,2017, and December 31, 2015,2016, respectively, as collateral related to these back-to-back swaps. Heartland's counterparties were required to pledge $190,000 at September 30, 2017, and $768,000 at December 31, 2016. Any gains and losses on these back-to-back swaps are recorded in noninterest income on the consolidated statements of income, and for the three and nine months ended September 30, 20162017 and September 30, 2015,2016, no gain or loss was recognized. The table below identifies the balance sheet category and fair values of Heartland's derivative instruments designated as loan swaps at September 30, 2016,2017, and December 31, 2015,2016, in thousands:
|
| | | | | | | | | | | | | | | | |
| | Notional Amount | | Fair Value | | Balance Sheet Category | | Weighted Average Receive Rate | | Weighted Average Pay Rate |
September 30, 2016 | | | | | | | | | | |
Receive fixed-pay floating interest rate swap | | $ | 52,930 |
| | $ | 3,411 |
| | Other assets | | 4.82 | % | | 3.34 | % |
Pay fixed-receive floating interest rate swap | | 52,930 |
| | (3,411 | ) | | Other liabilities | | 3.34 | % | | 4.82 | % |
December 31, 2015 | | | | | | | | | | |
Receive fixed-pay floating interest rate swap | | $ | 15,782 |
| | $ | 663 |
| | Other assets | | 5.08 | % | | 3.07 | % |
Pay fixed-receive floating interest rate swap | | 15,782 |
| | (663 | ) | | Other liabilities | | 3.07 | % | | 5.08 | % |
|
| | | | | | | | | | | | | | | | |
| | Notional Amount | | Fair Value | | Balance Sheet Category | | Weighted Average Receive Rate | | Weighted Average Pay Rate |
September 30, 2017 | | | | | | | | | | |
Customer interest rate swaps | | $ | 90,370 |
| | $ | 1,906 |
| | Other assets | | 4.75 | % | | 3.91 | % |
Customer interest rate swaps | | 90,370 |
| | (1,906 | ) | | Other liabilities | | 3.91 | % | | 4.75 | % |
December 31, 2016 | | | | | | | | | | |
Customer interest rate swaps | | $ | 69,594 |
| | $ | 1,588 |
| | Other assets | | 4.66 | % | | 3.47 | % |
Customer interest rate swaps | | 69,594 |
| | (1,588 | ) | | Other liabilities | | 3.47 | % | | 4.66 | % |
Other Free Standing Derivatives
Heartland has entered into interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans and mortgage backed securities that are considered derivative instruments. Heartland enters into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of future changes in interest rates on the commitments to fund the loans as well as on residential mortgage loans available for sale. The fair value of these commitments is recorded on the consolidated balance sheets, with the changes in fair value recorded in the consolidated statements of income as a component of gains on sale of loans held for sale. These derivative contracts are designated as free standing derivative contracts and are not designated against specific assets and liabilities on the consolidated balance sheets or forecasted transactions and therefore do not qualify for hedge accounting treatment. Heartland was required to pledge $768,000collateral of $353,000 at September 30, 2017, and $0 at December 31, 2016. Heartland's counterparties were required to pledge $29,000 and $2.9 million at September 30, 2016,2017, and December 31, 2015,2016, respectively, as collateral for these forward commitments.
Heartland acquired undesignated interest rate swaps with the Premier Valley Bank transaction in the fourth quarter of 2015. These swaps were entered into primarily for the benefit of customers seeking to manage their interest rate risk and are not designated against specific assets or liabilities on the consolidated balance sheet or forecasted transactions and therefore do not qualify for hedge accounting in accordance with ASC 815. These swaps are carried at fair value on the consolidated balance sheets as a component of other liabilities, with changes in the fair value recorded as a component of other noninterest income.
The table below identifies the balance sheet category and fair values of Heartland's other free standing derivative instruments not designated as hedging instruments at September 30, 2016,2017, and December 31, 2015,2016, in thousands:
|
| | | | | | | | | |
| Balance Sheet Category | | Notional Amount | | Fair Value |
September 30, 2016 | | | | | |
Interest rate lock commitments (mortgage) | Other assets | | $ | 139,704 |
| | $ | 6,239 |
|
Forward commitments | Other assets | | 112,500 |
| | 209 |
|
Forward commitments | Other liabilities | | 285,248 |
| | (1,312 | ) |
Undesignated interest rate swaps | Other liabilities | | 22,620 |
| | (1,944 | ) |
December 31, 2015 | | |
|
| |
|
|
Interest rate lock commitments (mortgage) | Other assets | | $ | 99,665 |
| | $ | 3,168 |
|
Forward commitments | Other assets | | 118,378 |
| | 523 |
|
Forward commitments | Other liabilities | | 136,709 |
| | (315 | ) |
Undesignated interest rate swaps | Other liabilities | | 50,975 |
| | (3,677 | ) |
|
| | | | | | | | | |
| Balance Sheet Category | | Notional Amount | | Fair Value |
September 30, 2017 | | | | | |
Interest rate lock commitments (mortgage) | Other assets | | $ | 77,910 |
| | $ | 2,463 |
|
Forward commitments | Other assets | | 75,192 |
| | 237 |
|
Forward commitments | Other liabilities | | 91,865 |
| | (261 | ) |
Undesignated interest rate swaps | Other liabilities | | 14,175 |
| | (923 | ) |
December 31, 2016 | | |
|
| |
|
|
Interest rate lock commitments (mortgage) | Other assets | | $ | 80,465 |
| | $ | 2,790 |
|
Forward commitments | Other assets | | 142,750 |
| | 2,546 |
|
Forward commitments | Other liabilities | | 59,276 |
| | (266 | ) |
Undesignated interest rate swaps | Other liabilities | | 15,564 |
| | (1,126 | ) |
The table below identifies the income statement category of the gains and losses recognized in income on Heartland's other free standing derivative instruments not designated as hedging instruments for the three- and nine-month periods ended September 30, 2016,2017, and September 30, 2015,2016, in thousands:
| | | Income Statement Category | | Gain (Loss) Recognized | Income Statement Category | | Gain (Loss) Recognized |
Three Months Ended September 30, 2017 | | | | |
Interest rate lock commitments (mortgage) | | Net gains on sale of loans held for sale | | $ | (1,245 | ) |
Forward commitments | | Net gains on sale of loans held for sale | | 72 |
|
Undesignated interest rate swaps | | Other noninterest income | | 88 |
|
Nine Months Ended September 30, 2017 | | | |
Interest rate lock commitments (mortgage) | | Net gains on sale of loans held for sale | | $ | (587 | ) |
Forward commitments | | Net gains on sale of loans held for sale | | (2,304 | ) |
Undesignated interest rate swaps | | Other noninterest income | | 203 |
|
Three Months Ended September 30, 2016 | | | | | |
Interest rate lock commitments (mortgage) | Gains on sale of loans held for sale | | $ | (1,344 | ) | Net gains on sale of loans held for sale | | $ | (1,344 | ) |
Forward commitments | Gains on sale of loans held for sale | | 931 |
| Net gains on sale of loans held for sale | | 931 |
|
Undesignated interest rate swaps | Other noninterest income | | 269 |
| Other noninterest income | | 269 |
|
Nine Months Ended September 30, 2016 | | | | |
Interest rate lock commitments (mortgage) | Gains on sale of loans held for sale | | $ | 4,464 |
| Net gains on sale of loans held for sale | | $ | 4,464 |
|
Forward commitments | Gains on sale of loans held for sale | | (1,311 | ) | Net gains on sale of loans held for sale | | (1,311 | ) |
Undesignated interest rate swaps | Other noninterest income | | (101 | ) | Other noninterest income | | (101 | ) |
Three Months Ended September 30, 2015 | | | |
Interest rate lock commitments (mortgage) | Gains on sale of loans held for sale | | $ | (361 | ) | |
Forward commitments | Gains on sale of loans held for sale | | (4,237 | ) | |
Nine Months Ended September 30, 2015 | | | |
Interest rate lock commitments (mortgage) | Gains on sale of loans held for sale | | $ | 3,471 |
| |
Forward commitments | Gains on sale of loans held for sale | | (662 | ) | |
NOTE 8: FAIR VALUE
Heartland utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available for sale, trading securities and derivatives are recorded in the consolidated balance sheets at fair value on a recurring basis. Additionally, from time to time, Heartland may be required to record at fair value other assets on a nonrecurring basis such as loans held for sale, loans held to maturity and certain other assets including, but not limited to, mortgage servicing rights, commercial servicing rights and other real estate owned. These nonrecurring fair value adjustments typically involve application of the lower of cost or fair value accounting or write-downs of individual assets.
Fair Value Hierarchy
Under ASC 820, assets and liabilities are grouped at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1 — Valuation is based upon quoted prices for identical instruments in active markets.
Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, or similar instruments in markets that are not active, and model-based valuation techniques for all significant assumptions are observable in the market.
Level 3 — Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
The following is a description of valuation methodologies used for assets and liabilities recorded at fair value on a recurring or non-recurring basis.
Assets
Securities Available for Sale and Held to Maturity
Securities available for sale are recorded at fair value on a recurring basis. Securities held to maturity are generally recorded at cost and are recorded at fair value only to the extent a decline in fair value is determined to be other-than-temporary. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security's credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded
on an active exchange, such as the New York Stock Exchange, as well as U.S. Treasury securities. Level 2 securities include U.S. government and agency securities, mortgage-backed securities and private collateralized mortgage obligations, municipal bonds and corporate debt securities. Level 3 securities consistconsisted primarily of Z-TRANCHE mortgage-backed securities and corporate debt securities. On a quarterly basis, a secondary independent pricing service is used for a sample ofthe securities portfolio to validate the pricing from Heartland's primary pricing service.
Loans Held for Sale
Loans held for sale are carried at the lower of cost or fair value on an aggregate basis. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, Heartland classifies loans held for sale subjected to nonrecurring fair value adjustments as Level 2.
Loans Held to Maturity
Heartland does not record loans held to maturity at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC 310. The fair value of impaired loans is measured using one of the following impairment methods: 1) the present value of expected future cash flows discounted at the loan's effective interest rate or 2) the observable market price of the loan or 3) the fair value of the collateral if the loan is collateral dependent. In accordance with ASC 820, impaired loans measured at fair value are classified as nonrecurring Level 3 in the fair value hierarchy.
Premises, Furniture and Equipment Held for Sale
Heartland values premises, furniture and equipment held for sale based on third-party appraisals less estimated disposal costs. Heartland considers third party appraisals, as well as independent fair value assessments from Realtors or persons involved in selling bank premises, furniture and equipment, in determining the fair value of particular properties. Accordingly, the valuation of premises, furniture and equipment held for sale is subject to significant external and internal judgment. Heartland periodically reviews premises, furniture and equipment held for sale to determine if the fair value of the property, less disposal costs, has declined below its recorded book value and records any adjustments accordingly. Premises, furniture and equipment held for sale are classified as nonrecurring Level 3 in the fair value hierarchy.
Mortgage Servicing Rights
Mortgage servicing rights assets represent the value associated with servicing residential real estate loans that have been sold to outside investors with servicing retained. Heartland uses the amortization method (i.e., the lower of amortized cost or estimated fair value measured on a nonrecurring basis), not fair value measurement accounting, to determine the carrying value of its mortgage servicing rights. The fair value for servicing assets is determined through discounted cash flow analysis and utilizes discount rates, prepayment speeds and delinquency rate assumptions as inputs. All of thesethe assumptions in the discounted cash flow analysis require a significant degree of management estimation and judgment. Mortgage servicing rights are subject to impairment testing. The carrying values of these rights are reviewed quarterly for impairment based upon the calculation of fair value as performed by an outside third party. For purposes of measuring impairment, the rights are stratified into certain risk characteristics including note
type and note term. If the valuation model reflects a fair value less than the carrying value, mortgage servicing rights are adjusted to fair value through a valuation allowance. Heartland classifies mortgage servicing rights as nonrecurring with Level 3 measurement inputs.
Commercial Servicing Rights
Commercial servicing rights assets represent the value associated with servicing commercial loans guaranteed by the Small Business Administration and the United States Department of Agriculture that have been sold with servicing retained by Heartland. Heartland uses the amortization method (i.e., the lower of amortized cost or estimated fair value measured on a nonrecurring basis), not fair value measurement accounting, to determine the carrying value of its commercial servicing rights. The fair value for servicing assets is determined through market prices for comparable servicing contracts, when available, or through a valuation model that calculates the present value of estimated future net servicing income. Inputs utilized include discount rates, prepayment speeds and delinquency rate assumptions as inputs. All of these assumptions require a significant degree of management estimation and judgment. Commercial servicing rights are subject to impairment testing, and the carrying values of these rights are reviewed quarterly for impairment based upon the calculation of fair value as performed by an outside third party. If the valuation model reflects a fair value less than the carrying value, commercial servicing rights are adjusted to fair value through a valuation allowance. Heartland classifies commercial servicing rights as nonrecurring with Level 3 measurement inputs.
Derivative Financial Instruments
Heartland's current interest rate risk strategy includes interest rate swaps. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. To comply with the provisions of ASC 820, Heartland incorporates credit
valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty's nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, Heartland has considered the impact of netting any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Although Heartland has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2016,2017, and December 31, 2015,2016, Heartland has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, Heartland has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
Interest rate lock commitments
Heartland uses an internal valuation model that relies on internally developed inputs to estimate the fair value of its interest rate lock commitments which is based on unobservable inputs that reflect management's assumptions and specific information about each borrower. Interest rate lock commitments are classified in Level 3 of the fair value hierarchy.
Forward commitments
The fair value of forward commitments are estimated using an internal valuation model, which includes current trade pricing for similar financial instruments in active markets that Heartland has the ability to access and are classified in Level 2 of the fair value hierarchy.
Other Real Estate Owned
Other real estate owned ("OREO") represents property acquired through foreclosures and settlements of loans. Property acquired is carried at the fair value of the property at the time of acquisition (representing the property's cost basis), plus any acquisition costs, or the estimated fair value of the property, less disposal costs. Heartland considers third party appraisals, as well as independent fair value assessments from realtors or persons involved in selling OREO, in determining the fair value of particular properties. Accordingly, the valuation of OREO is subject to significant external and internal judgment. Heartland periodically reviews OREO to determine if the fair value of the property, less disposal costs, has declined below its recorded book value and records any adjustments accordingly. OREO is classified as nonrecurring Level 3 of the fair value hierarchy.
The table below presents Heartland's assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2016,2017, and December 31, 2015,2016, in thousands, aggregated by the level in the fair value hierarchy within which those measurements fall:
| | | Total Fair Value | | Level 1 | | Level 2 | | Level 3 | Total Fair Value | | Level 1 | | Level 2 | | Level 3 |
September 30, 2016 | | | | | | | | |
September 30, 2017 | | | | | | | | |
Assets | | | | | | | | | | | | | | |
Securities available for sale | | | | | | | | | | | | | | |
U.S. government corporations and agencies | $ | 4,955 |
| | $ | 530 |
| | $ | 4,425 |
| | $ | — |
| $ | 7,415 |
| | $ | 3,505 |
| | $ | 3,910 |
| | $ | — |
|
Mortgage-backed securities | 1,275,093 |
| | — |
| | 1,273,196 |
| | 1,897 |
| 1,565,400 |
| | — |
| | 1,565,400 |
| | — |
|
Obligations of states and political subdivisions | 362,107 |
| | — |
| | 362,107 |
| | — |
| 503,974 |
| | — |
| | 503,974 |
| | — |
|
Corporate debt securities | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
|
Equity securities | 13,541 |
| | — |
| | 13,541 |
| | — |
| 16,596 |
| | — |
| | 16,596 |
| | — |
|
Derivative financial instruments(1) | 5,228 |
| | — |
| | 5,228 |
| | — |
| 3,386 |
| | — |
| | 3,386 |
| | — |
|
Interest rate lock commitments | 6,239 |
| | — |
| | — |
| | 6,239 |
| 2,463 |
| | — |
| | ��� |
| | 2,463 |
|
Forward commitments | 209 |
| | — |
| | 209 |
| | — |
| 237 |
| | — |
| | 237 |
| | — |
|
Total assets at fair value | $ | 1,667,372 |
| | $ | 530 |
| | $ | 1,658,706 |
| | $ | 8,136 |
| $ | 2,099,471 |
| | $ | 3,505 |
| | $ | 2,093,503 |
| | $ | 2,463 |
|
Liabilities | | | | | | | | | | | | | | |
Derivative financial instruments(2) | $ | 16,606 |
| | $ | — |
| | $ | 16,606 |
| | $ | — |
| $ | 6,309 |
| | $ | — |
| | $ | 6,309 |
| | $ | — |
|
Forward commitments | 1,312 |
| | — |
| | 1,312 |
| | — |
| 261 |
| | — |
| | 261 |
| | — |
|
Total liabilities at fair value | $ | 17,918 |
| | $ | — |
| | $ | 17,918 |
| | $ | — |
| $ | 6,570 |
| | $ | — |
| | $ | 6,570 |
| | $ | — |
|
December 31, 2015 | | | | | | | | |
December 31, 2016 | | | | | | | | |
Assets | | | | | | | | | | | | | | |
Securities available for sale | | | | | | | | | | | | | | |
U.S. government corporations and agencies | $ | 25,766 |
| | $ | 519 |
| | $ | 25,247 |
| | $ | — |
| $ | 4,700 |
| | $ | 517 |
| | $ | 4,183 |
| | $ | — |
|
Mortgage-backed securities | 1,242,702 |
| | — |
| | 1,240,663 |
| | 2,039 |
| 1,290,500 |
| | — |
| | 1,288,276 |
| | 2,224 |
|
Obligations of states and political subdivisions | 295,982 |
| | — |
| | 295,982 |
| | — |
| 536,144 |
| | — |
| | 536,144 |
| | — |
|
Corporate debt securities | 846 |
| | — |
| | — |
| | 846 |
| |
Equity securities | 13,138 |
| | — |
| | 13,138 |
| | — |
| 14,520 |
| | — |
| | 14,520 |
| | — |
|
Derivative financial instruments(1) | 2,237 |
| | — |
| | 2,237 |
| | — |
| 3,222 |
| | — |
| | 3,222 |
| | — |
|
Interest rate lock commitments | 3,168 |
| | — |
| | — |
| | 3,168 |
| 2,790 |
| | — |
| | — |
| | 2,790 |
|
Forward commitments | 523 |
| | — |
| | 523 |
| | — |
| 2,546 |
| | — |
| | 2,546 |
| | — |
|
Total assets at fair value | $ | 1,584,362 |
| | $ | 519 |
| | $ | 1,577,790 |
| | $ | 6,053 |
| $ | 1,854,422 |
| | $ | 517 |
| | $ | 1,848,891 |
| | $ | 5,014 |
|
Liabilities | | | | | | | | | | | | | | |
Derivative financial instruments(2) | $ | 8,401 |
| | $ | — |
| | $ | 8,401 |
| | $ | — |
| $ | 7,027 |
| | $ | — |
| | $ | 7,027 |
| | $ | — |
|
Forward commitments | 315 |
| | — |
| | 315 |
| | — |
| 266 |
| | — |
| | 266 |
| | — |
|
Total liabilities at fair value | $ | 8,716 |
| | $ | — |
| | $ | 8,716 |
| | $ | — |
| $ | 7,293 |
| | $ | — |
| | $ | 7,293 |
| | $ | — |
|
| | | | | | | | | | | | | | |
(1) Includes embedded derivatives and loan swaps | |
(2) Includes cash flow hedges, fair value hedges, loan swaps, embedded conversion options and free standing derivative instruments | |
(1) Includes cash flow hedges, embedded derivatives and back-to-back loan swaps | | (1) Includes cash flow hedges, embedded derivatives and back-to-back loan swaps |
(2) Includes cash flow hedges, fair value hedges, back-to-back loan swaps, embedded conversion options and free standing derivative instruments | | (2) Includes cash flow hedges, fair value hedges, back-to-back loan swaps, embedded conversion options and free standing derivative instruments |
The tables below present Heartland's assets that are measured at fair value on a nonrecurring basis, in thousands:
| | | Fair Value Measurements at September 30, 2016 | Fair Value Measurements at September 30, 2017 |
| Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Year-to- Date Losses | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Year-to- Date (Gains) Losses |
Collateral dependent impaired loans: | | | | | | | | | | | | | | | | | | |
Commercial | $ | 2,366 |
| | $ | — |
| | $ | — |
| | $ | 2,366 |
| | $ | 190 |
| $ | 3,556 |
| | $ | — |
| | $ | — |
| | $ | 3,556 |
| | $ | 1,119 |
|
Commercial real estate | 14,707 |
| | — |
| | — |
| | 14,707 |
| | 3,895 |
| 8,718 |
| | — |
| | — |
| | 8,718 |
| | 2,043 |
|
Agricultural and agricultural real estate | 2,213 |
| | — |
| | — |
| | 2,213 |
| | — |
| 7,936 |
| | — |
| | — |
| | 7,936 |
| | — |
|
Residential real estate | 3,200 |
| | — |
| | — |
| | 3,200 |
| | — |
| 1,365 |
| | — |
| | — |
| | 1,365 |
| | — |
|
Consumer | 1,913 |
| | — |
| | — |
| | 1,913 |
| | — |
| 912 |
| | — |
| | — |
| | 912 |
| | — |
|
Total collateral dependent impaired loans | $ | 24,399 |
| | $ | — |
| | $ | — |
| | $ | 24,399 |
| | $ | 4,085 |
| $ | 22,487 |
| | $ | — |
| | $ | — |
| | $ | 22,487 |
| | $ | 3,162 |
|
Other real estate owned | $ | 10,740 |
| | $ | — |
| | $ | — |
| | $ | 10,740 |
| | $ | 1,094 |
| $ | 13,226 |
| | $ | — |
| | $ | — |
| | $ | 13,226 |
| | $ | 594 |
|
Premises, furniture and equipment held for sale | $ | 3,634 |
| |
| | $ | — |
| | $ | 3,634 |
| | $ | 255 |
| $ | 4,428 |
| | $ | — |
| | $ | — |
| | $ | 4,428 |
| | $ | 404 |
|
Commercial servicing rights | $ | 332 |
| | $ | — |
| | $ | — |
| | $ | 332 |
| | $ | 41 |
| $ | 313 |
| | $ | — |
| | $ | — |
| | $ | 313 |
| | $ | (29 | ) |
| | | Fair Value Measurements at December 31, 2015 | Fair Value Measurements at December 31, 2016 |
| Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Year-to- Date Losses | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Year-to- Date (Gains) Losses |
Collateral dependent impaired loans: | | | | | | | | | | | | | | | | | | |
Commercial | $ | 597 |
| | $ | — |
| | $ | — |
| | $ | 597 |
| | $ | 82 |
| $ | 1,683 |
| | $ | — |
| | $ | — |
| | $ | 1,683 |
| | $ | 41 |
|
Commercial real estate | 1,522 |
| | — |
| | — |
| | 1,522 |
| | 86 |
| 3,026 |
| | — |
| | — |
| | 3,026 |
| | 527 |
|
Agricultural and agricultural real estate | — |
| | — |
| | — |
| | — |
| | — |
| 1,955 |
| | — |
| | — |
| | 1,955 |
| | — |
|
Residential real estate | 2,330 |
| | — |
| | — |
| | 2,330 |
| | 104 |
| 3,565 |
| | — |
| | — |
| | 3,565 |
| | 85 |
|
Consumer | 1,905 |
| | — |
| | — |
| | 1,905 |
| | — |
| 1,193 |
| | — |
| | — |
| | 1,193 |
| | — |
|
Total collateral dependent impaired loans | $ | 6,354 |
| | $ | — |
| | $ | — |
| | $ | 6,354 |
| | $ | 272 |
| $ | 11,422 |
| | $ | — |
| | $ | — |
| — |
| $ | 11,422 |
| | $ | 653 |
|
Other real estate owned | $ | 11,524 |
| | $ | — |
| | $ | — |
| | $ | 11,524 |
| | $ | 5,520 |
| $ | 9,744 |
| | $ | — |
| | $ | — |
| | $ | 9,744 |
| | $ | 1,341 |
|
Premises, furniture and equipment held for sale | $ | 3,889 |
| | $ | — |
| | $ | — |
| | $ | 3,889 |
| | $ | — |
| $ | 414 |
| | $ | — |
| | $ | — |
| | $ | 414 |
| | $ | 35 |
|
Commercial servicing rights | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| $ | 326 |
| | $ | — |
| | $ | — |
| | $ | 326 |
| | $ | 33 |
|
The following tables present additional quantitative information about assets measured at fair value and for which Heartland has utilized Level 3 inputs to determine fair value, in thousands:
| | | Fair Value at 9/30/16 | | Valuation Technique | | Unobservable Input | | Range (Weighted Average) | Fair Value at 9/30/17 | | Valuation Technique | | Unobservable Input | | Range (Weighted Average) |
Z-TRANCHE Securities | $ | 1,897 |
| | Discounted cash flows | | Pretax discount rate | | 7.50 - 9.50% | $ | — |
| | Discounted cash flows | | Pretax discount rate | | — |
| | | Actual defaults | | 17.09 - 35.91% (30.93%) | | | Actual defaults | | — |
| | | Actual deferrals | | 8.22 - 22.82% (13.62%) | | | Actual deferrals | | — |
Corporate debt securities | — |
| | Discounted cash flows | | Bank analysis | | (1) | |
Interest rate lock commitments | 6,239 |
| | Discounted cash flows | | Closing ratio | | (2) | 2,463 |
| | Discounted cash flows | | Closing ratio | | 0-99% (89%)(1) |
Premises, furniture and equipment held for sale | 3,634 |
| | Modified appraised value | | Third party appraisal | | (3) | 4,428 |
| | Modified appraised value | | Third party appraisal | | (2) |
| | | Appraisal discount | | (3) | | | Appraisal discount | | 0-10%(4) |
Commercial servicing rights | 332 |
| | Discounted cash flows | | Third party valuation | | (4) | 313 |
| | Discounted cash flows | | Third party valuation | | (3) |
Other real estate owned | 10,740 |
| | Modified appraised value | | Third party appraisal | | (3) | 13,226 |
| | Modified appraised value | | Third party appraisal | | (2) |
| | | Appraisal discount | | (3) | | | Appraisal discount | | 0-10% |
Collateral dependent impaired loans: | | | | |
Commercial | 2,366 |
| | Modified appraised value | | Third party appraisal | | (3) | 3,556 |
| | Modified appraised value | | Third party appraisal | | (2) |
| | | Appraisal discount | | (3) | | | Appraisal discount | | 0-15%(4) |
Commercial real estate | 14,707 |
| | Modified appraised value | | Third party appraisal | | (3) | 8,718 |
| | Modified appraised value | | Third party appraisal | | (2) |
| | | Appraisal discount | | (3) | | | Appraisal discount | | 0-14%(4) |
Agricultural and agricultural real estate | 2,213 |
| | Modified appraised value | | Third party appraisal | | (3) | 7,936 |
| | Modified appraised value | | Third party appraisal | | (2) |
| | | Appraisal discount | | (3) | | | Appraisal discount | | 0-6%(4) |
Residential real estate | 3,200 |
| | Modified appraised value | | Third party appraisal | | (3) | 1,365 |
| | Modified appraised value | | Third party appraisal | | (2) |
| | | Appraisal discount | | (3) | | | Appraisal discount | | 0-13%(4) |
Consumer | 1,913 |
| | Modified appraised value | | Third party valuation | | (3) | 912 |
| | Modified appraised value | | Third party valuation | | (2) |
| | | Valuation discount | | (3) | | | Valuation discount | | 0-11%(4) |
| | | | |
(1) The unobservable input is the bank analysis market using Moody's Global Bank Rating Methodology. The analysis takes into consideration various performance metrics as well as yield on the debt securities and credit risk analysis. | |
(2) The significant unobservable input used in the fair value measurement is the closing ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. The closing ratio calculation takes into consideration historical data and loan-level data; therefore providing a range would not be meaningful. The weighted average closing ratio at September 30, 2016, was 87%. | |
(3) Third party appraisals are obtained as to the value of the underlying asset, but disclosure of this information would not provide meaningful information, as the range will vary widely from loan to loan. Types of discounts considered included age of the appraisal, local market conditions, current condition of the property, and estimated sales costs. These discounts will also vary from loan to loan, thus providing range would not be meaningful. | |
(4) The significant unobservable input used in the fair value measurement are the value indices, which are weighted-average spreads to LIBOR based on maturity groups. | |
(1) The significant unobservable input used in the fair value measurement is the closing ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. The closing ratio calculation takes into consideration historical data and loan-level data. | | (1) The significant unobservable input used in the fair value measurement is the closing ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. The closing ratio calculation takes into consideration historical data and loan-level data. |
(2) Third party appraisals are obtained and updated at least annually to establish the value of the underlying asset, but the disclosure of the unobservable inputs used by the appraisers would not be meaningful because the range will vary widely from appraisal to appraisal. | | (2) Third party appraisals are obtained and updated at least annually to establish the value of the underlying asset, but the disclosure of the unobservable inputs used by the appraisers would not be meaningful because the range will vary widely from appraisal to appraisal. |
(3) The significant unobservable input used in the fair value measurement are the value indices, which are weighted-average spreads to LIBOR based on maturity groups. | | (3) The significant unobservable input used in the fair value measurement are the value indices, which are weighted-average spreads to LIBOR based on maturity groups. |
(4) Discounts applied to the appraised values primarily include estimated sales costs, but also consider the age of the appraisal, changes in local market conditions and changes in the current condition of the collateral. | | (4) Discounts applied to the appraised values primarily include estimated sales costs, but also consider the age of the appraisal, changes in local market conditions and changes in the current condition of the collateral. |
|
| | | | | | | | | |
| Fair Value at 12/31/15 | | Valuation Technique | | Unobservable Input | | Range (Weighted Average) |
Z-TRANCHE Securities | $ | 2,039 |
| | Discounted cash flows | | Pretax discount rate | | 7.50 - 9.50% |
| | | | | Actual defaults | | 22.20 - 33.55% (30.60%) |
| | | | | Actual deferrals | | 10.75 - 21.82% (13.36%) |
Corporate debt securities | 846 |
| | Discounted cash flows | | Bank analysis | | (1) |
Interest rate lock commitments | 3,168 |
| | Discounted cash flows | | Closing ratio | | (2) |
Premises, furniture and equipment held for sale | 3,889 |
| | Modified appraised value | | Third party appraisal | | (3) |
Commercial servicing rights | — |
| | Discounted cash flows | | Third party valuation | | (4) |
Other real estate owned | 11,524 |
| | Modified appraised value | | Disposal costs | | (3) |
| | | | | Third party appraisal | | (3) |
| | | | | Appraisal discount | | (3) |
Collateral dependent impaired loans: | | | | | | | |
Commercial | 597 |
| | Modified appraised value | | Third party appraisal | | (3) |
| | | | | Appraisal discount | | (3) |
Commercial real estate | 1,522 |
| | Modified appraised value | | Third party appraisal | | (3) |
| | | | | Appraisal discount | | (3) |
Agricultural and agricultural real estate | — |
| | Modified appraised value | | Third party appraisal | | (3) |
| | | | | Appraisal discount | | (3) |
Residential real estate | 2,330 |
| | Modified appraised value | | Third party appraisal | | (3) |
| | | | | Appraisal discount | | (3) |
Consumer | 1,905 |
| | Modified appraised value | | Third party valuation | | (3) |
| | | | | Valuation discount | | (3) |
| | | | | | | |
(1) The unobservable input is the bank analysis market using Moody's Global Bank Rating Methodology. The analysis takes into consideration various performance metrics as well as yield on the debt securities and credit risk analysis. |
(2) The significant unobservable input used in the fair value measurement is the closing ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. The closing ratio calculation takes into consideration historical data and loan-level data; therefore providing a range would not be meaningful. The weighted average closing ratio at December 31, 2015, was 86%. |
(3) Third party appraisals are obtained as to the value of the underlying asset, but disclosure of this information would not provide meaningful information, as the range will vary widely from loan to loan. Types of discounts considered included age of the appraisal, local market conditions, current condition of the property, and estimated sales costs. These discounts will also vary from loan to loan, thus providing range would not be meaningful. |
(4) The significant unobservable input used in the fair value measurement are the value indices, which are weighted-average spreads to LIBOR based on maturity groups. |
|
| | | | | | | | | |
| Fair Value at 12/31/16 | | Valuation Technique | | Unobservable Input | | Range (Weighted Average) |
Z-TRANCHE Securities | $ | 2,224 |
| | Discounted cash flows | | Pretax discount rate | | 7.50 - 9.50% |
| | | | | Actual defaults | | 21.77 - 37.62% (33.11%) |
| | | | | Actual deferrals | | 10.44 - 26.29% (14.81%) |
Interest rate lock commitments | 2,790 |
| | Discounted cash flows | | Closing ratio | | 0-99% (89%)(1) |
Premises, furniture and equipment held for sale | 414 |
| | Modified appraised value | | Third party appraisal | | (2) 0-8%(4) |
Commercial servicing rights | 326 |
| | Discounted cash flows | | Third party valuation | | (3) |
Other real estate owned | 9,744 |
| | Modified appraised value | | Third party appraisal | | (2) |
| | | | | Appraisal discount | | 0-10% |
Collateral dependent impaired loans: | | | | | | | |
Commercial | 1,683 |
| | Modified appraised value | | Third party appraisal | | (2) |
| | | | | Appraisal discount | | 0-8%(4) |
Commercial real estate | 3,026 |
| | Modified appraised value | | Third party appraisal | | (2) |
| | | | | Appraisal discount | | 0-7%(4) |
Agricultural and agricultural real estate | 1,955 |
| | Modified appraised value | | Third party appraisal | | (2) |
| | | | | Appraisal discount | | 0-10%(4) |
Residential real estate | 3,565 |
| | Modified appraised value | | Third party appraisal | | (2) |
| | | | | Appraisal discount | | 0-8%(4) |
Consumer | 1,193 |
| | Modified appraised value | | Third party valuation | | (2) |
| | | | | Valuation discount | | 0-11%(4) |
| | | | | | | |
(1) The significant unobservable input used in the fair value measurement is the closing ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. The closing ratio calculation takes into consideration historical data and loan-level data. |
(2) Third party appraisals are obtained and updated at least annually to establish the value of the underlying asset, but the disclosure of the unobservable inputs used by the appraisers would not be meaningful because the range will vary widely from appraisal to appraisal. |
(3) The significant unobservable input used in the fair value measurement are the value indices, which are weighted-average spreads to LIBOR based on maturity groups. |
(4) Discounts applied to the appraised values primarily include estimated sales costs, but also consider the age of the appraisal, changes in local market conditions and changes in the current condition of the collateral. |
The changes in fair value of the Z-TRANCHE asecurities, Level 3 asset,assets that isare measured on a recurring basis, are summarized in the following table, in thousands:
| | | For the Nine Months Ended September 30, 2016 | | For the Year Ended December 31, 2015 | For the Nine Months Ended September 30, 2017 | | For the Year Ended December 31, 2016 |
Balance at January 1, | $ | 2,039 |
| | $ | 4,947 |
| $ | 2,224 |
| | $ | 2,039 |
|
Total gains (losses): | | |
|
| | |
|
|
Included in earnings | — |
| | (3,038 | ) | 2,810 |
| | — |
|
Included in other comprehensive income | (142 | ) | | 982 |
| (2,166 | ) | | 185 |
|
Purchases, sales and settlements: | | |
| | |
|
Purchases | — |
| | 6 |
| — |
| | — |
|
Sales | — |
| | (736 | ) | (2,868 | ) | | — |
|
Settlements | — |
| | (122 | ) | — |
| | — |
|
Balance at period end | $ | 1,897 |
| | $ | 2,039 |
| $ | — |
| | $ | 2,224 |
|
The changes in fair value of the corporate debt securities, Level 3 assets, that are measured on a recurring basis is summarized in the following table, in thousands:
|
| | | | | | | |
| For the Nine Months Ended September 30, 2016 | | For the Year Ended December 31, 2015 |
Balance at January 1, | $ | 846 |
| | $ | — |
|
Total gains (losses): |
|
| |
|
|
Included in earnings | 56 |
| | — |
|
Included in other comprehensive income | (106 | ) | | 106 |
|
Purchases, acquired, sales and settlements: | | |
|
Purchases | — |
| | — |
|
Acquired | — |
| | 740 |
|
Sales | (796 | ) | | — |
|
Settlements | — |
| | — |
|
Balance at period end | $ | — |
| | $ | 846 |
|
The changes in fair value of the interest rate lock commitments, which are Level 3 financial instruments and are measured on a recurring basis, are summarized in the following table, in thousands:
| | | For the Nine Months Ended September 30, 2016 | | For the Year Ended December 31, 2015 | For the Nine Months Ended September 30, 2017 | | For the Year Ended December 31, 2016 |
Balance at January 1, | $ | 3,168 |
| | $ | 2,496 |
| $ | 2,790 |
| | $ | 3,168 |
|
Total gains (losses) included in earnings | 4,464 |
| | 288 |
| (587 | ) | | (1,564 | ) |
Issuances | 1,540 |
| | 5,428 |
| 1,580 |
| | 5,373 |
|
Settlements | (2,933 | ) | | (5,044 | ) | (1,320 | ) | | (4,187 | ) |
Balance at period end | $ | 6,239 |
| | $ | 3,168 |
| $ | 2,463 |
| | $ | 2,790 |
|
Gains included in gains (losses) on sale of loans held for sale attributable to interest rate lock commitments held at September 30, 2016,2017, and December 31, 2015,2016, were $6.2$2.5 million and $3.2$2.8 million, respectively.
The tables below summarize the estimated fair value of Heartland's financial instruments as defined by ASC 825 as of September 30, 2016,2017, and December 31, 2015,2016, in thousands. The carrying amounts in the following tables are recorded in the consolidated balance sheets under the indicated captions. In accordance with ASC 825, the assets and liabilities that are not financial instruments are not included in the disclosure, such as the value of the mortgage servicing rights, premises, furniture and equipment, premises, furniture and equipment held for sale, goodwill and other intangibles and other liabilities.
Heartland does not believe that the estimated information presented herein is representative of the earnings power or value of Heartland. The following analysis, which is inherently limited in depicting fair value, also does not consider any value associated with either existing customer relationships or the ability of Heartland to create value through loan origination, deposit gathering or fee generating activities. Many of the estimates presented herein are based upon the use of highly subjective information and
assumptions and, accordingly, the results may not be precise. Management believes that fair value estimates may not be comparable between financial institutions due to the wide range of permitted valuation techniques and numerous estimates which must be made. Furthermore, because the disclosed fair value amounts were estimated as of the balance sheet date, the amounts actually realized or paid upon maturity or settlement of the various financial instruments could be significantly different.
| | | | | | | Fair Value Measurements at September 30, 2016 | | | | | Fair Value Measurements at September 30, 2017 |
| Carrying Amount | | Estimated Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | Carrying Amount | | Estimated Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Financial assets: | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | 202,089 |
| | $ | 202,089 |
| | $ | 202,089 |
| | $ | — |
| | $ | — |
| $ | 251,736 |
| | $ | 251,736 |
| | $ | 251,736 |
| | $ | — |
| | $ | — |
|
Time deposits in other financial institutions | 2,105 |
| | 2,105 |
| | 2,105 |
| | — |
| | — |
| 19,793 |
| | 19,793 |
| | 19,793 |
| | — |
| | — |
|
Securities: | | | | | | | | | | | | | | | | | | |
Available for sale | 1,655,696 |
| | 1,655,696 |
| | 530 |
| | 1,653,269 |
| | 1,897 |
| 2,093,385 |
| | 2,093,385 |
| | 3,505 |
| | 2,089,880 |
| | — |
|
Held to maturity | 265,302 |
| | 284,948 |
| | — |
| | 284,948 |
| | — |
| 256,355 |
| | 270,386 |
| | — |
| | 270,386 |
| | — |
|
Other investments | 22,082 |
| | 22,082 |
| | — |
| | 21,847 |
| | 235 |
| 23,176 |
| | 23,176 |
| | — |
| | 22,981 |
| | 195 |
|
Loans held for sale | 78,317 |
| | 78,317 |
| | — |
| | 78,317 |
| | — |
| 35,795 |
| | 35,795 |
| | — |
| | 35,795 |
| | — |
|
Loans, net: | | | | | | | | | | | | | | | | | | |
Commercial | 1,277,691 |
| | 1,271,961 |
| | — |
| | 1,269,595 |
| | 2,366 |
| 1,596,934 |
| | 1,601,351 |
| | — |
| | 1,597,795 |
| | 3,556 |
|
Commercial real estate | 2,580,136 |
| | 2,584,885 |
| | — |
| | 2,570,178 |
| | 14,707 |
| 3,143,414 |
| | 3,117,829 |
| | — |
| | 3,109,111 |
| | 8,718 |
|
Agricultural and agricultural real estate | 485,071 |
| | 487,861 |
| | — |
| | 485,648 |
| | 2,213 |
| 506,388 |
| | 507,974 |
| | — |
| | 500,038 |
| | 7,936 |
|
Residential real estate | 622,684 |
| | 618,770 |
| | — |
| | 615,570 |
| | 3,200 |
| 632,306 |
| | 622,698 |
| | — |
| | 621,333 |
| | 1,365 |
|
Consumer | 418,480 |
| | 422,770 |
| | — |
| | 420,857 |
| | 1,913 |
| 441,079 |
| | 444,384 |
| | — |
| | 443,472 |
| | 912 |
|
Total Loans, net | 5,384,062 |
| | 5,386,247 |
| | — |
| | 5,361,848 |
| | 24,399 |
| 6,320,121 |
| | 6,294,236 |
| | — |
| | 6,271,749 |
| | 22,487 |
|
Derivative financial instruments(1) | 5,228 |
| | 5,228 |
| | — |
| | 5,228 |
| | — |
| 3,386 |
| | 3,386 |
| | — |
| | 3,386 |
| | — |
|
Interest rate lock commitments | 6,239 |
| | 6,239 |
| | — |
| | — |
| | 6,239 |
| 2,463 |
| | 2,463 |
| | — |
| | — |
| | 2,463 |
|
Forward commitments | 209 |
| | 209 |
| | — |
| | 209 |
| | — |
| 237 |
| | 237 |
| | — |
| | 237 |
| | — |
|
Financial liabilities: | | | | | | | | | | | | | | | | | | |
Deposits | | | | | | | | | | | | | | | | | | |
Demand deposits | 2,238,736 |
| | 2,238,736 |
| | — |
| | 2,238,736 |
| | — |
| 3,009,940 |
| | 3,009,940 |
| | — |
| | 3,009,940 |
| | — |
|
Savings deposits | 3,753,300 |
| | 3,753,300 |
| | — |
| | 3,753,300 |
| | — |
| 4,227,340 |
| | 4,227,340 |
| | — |
| | 4,227,340 |
| | — |
|
Time deposits | 920,657 |
| | 920,657 |
| | — |
| | 920,657 |
| | — |
| 994,604 |
| | 994,604 |
| | — |
| | 994,604 |
| | — |
|
Short term borrowings | 214,105 |
| | 214,105 |
| | — |
| | 214,105 |
| | — |
| 171,871 |
| | 171,871 |
| | — |
| | 171,871 |
| | — |
|
Other borrowings | 294,493 |
| | 297,018 |
| | — |
| | 297,018 |
| | — |
| 301,473 |
| | 305,741 |
| | — |
| | 305,741 |
| | — |
|
Derivative financial instruments(2) | 16,606 |
| | 16,606 |
| | — |
| | 16,606 |
| | — |
| 6,309 |
| | 6,309 |
| | — |
| | 6,309 |
| | — |
|
Forward commitments | 1,312 |
| | 1,312 |
| | — |
| | 1,312 |
| | — |
| 261 |
| | 261 |
| | — |
| | 261 |
| | — |
|
| (1) Includes embedded derivatives and loan swaps | |
(2) Includes cash flow hedges, fair value hedges, loan swaps, embedded conversion options and free standing derivative instruments | |
(1) Includes cash flow hedges, embedded derivatives and back-to-back loan swaps | | (1) Includes cash flow hedges, embedded derivatives and back-to-back loan swaps |
(2) Includes cash flow hedges, fair value hedges, back-to-back loan swaps, embedded conversion options and free standing derivative instruments | | (2) Includes cash flow hedges, fair value hedges, back-to-back loan swaps, embedded conversion options and free standing derivative instruments |
| | | | | | | Fair Value Measurements at December 31, 2015 | | | | | Fair Value Measurements at December 31, 2016 |
| Carrying Amount | | Estimated Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | Carrying Amount | | Estimated Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Financial assets: | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | 258,799 |
| | $ | 258,799 |
| | $ | 258,799 |
| | $ | — |
| | $ | — |
| $ | 158,724 |
| | $ | 158,724 |
| | $ | 158,724 |
| | $ | — |
| | $ | — |
|
Time deposits in other financial institutions | 2,355 |
| | 2,355 |
| | 2,355 |
| | — |
| | — |
| 2,105 |
| | 2,105 |
| | 2,105 |
| | — |
| | — |
|
Securities: | | | | | | | | | | | | | | | | | | |
Available for sale | 1,578,434 |
| | 1,578,434 |
| | 519 |
| | 1,575,030 |
| | 2,885 |
| 1,845,864 |
| | 1,845,864 |
| | 517 |
| | 1,843,123 |
| | 2,224 |
|
Held to maturity | 279,117 |
| | 294,513 |
| | — |
| | 294,513 |
| | — |
| 263,662 |
| | 274,799 |
| | — |
| | 274,799 |
| | — |
|
Other investments | 21,443 |
| | 21,443 |
| | — |
| | 21,208 |
| | 235 |
| 21,560 |
| | 21,560 |
| | — |
| | 21,365 |
| | 195 |
|
Loans held for sale | 74,783 |
| | 74,783 |
| | — |
| | 74,783 |
| | — |
| 61,261 |
| | 61,261 |
| | — |
| | 61,261 |
| | — |
|
Loans, net: | | | | | | | | | | | | | | | | | | |
Commercial | 1,262,612 |
| | 1,257,355 |
| | — |
| | 1,256,758 |
| | 597 |
| 1,272,089 |
| | 1,258,754 |
| | — |
| | 1,257,071 |
| | 1,683 |
|
Commercial real estate | 2,305,908 |
| | 2,304,716 |
| | — |
| | 2,303,194 |
| | 1,522 |
| 2,513,446 |
| | 2,506,858 |
| | — |
| | 2,503,832 |
| | 3,026 |
|
Agricultural and agricultural real estate | 468,533 |
| | 469,485 |
| | — |
| | 469,485 |
| | — |
| 485,820 |
| | 487,001 |
| | — |
| | 485,046 |
| | 1,955 |
|
Residential real estate | 536,190 |
| | 531,931 |
| | — |
| | 529,601 |
| | 2,330 |
| 614,207 |
| | 604,233 |
| | — |
| | 600,668 |
| | 3,565 |
|
Consumer | 379,558 |
| | 382,579 |
| | — |
| | 380,674 |
| | 1,905 |
| 411,833 |
| | 414,266 |
| | — |
| | 413,073 |
| | 1,193 |
|
Total Loans, net | 4,952,801 |
| | 4,946,066 |
| | — |
| | 4,939,712 |
| | 6,354 |
| 5,297,395 |
| | 5,271,112 |
| | — |
| | 5,259,690 |
| | 11,422 |
|
Derivative financial instruments(1) | 2,237 |
| | 2,237 |
| | — |
| | 2,237 |
| | — |
| 3,222 |
| | 3,222 |
| | — |
| | 3,222 |
| | — |
|
Interest rate lock commitments | 3,168 |
| | 3,168 |
| | — |
| | — |
| | 3,168 |
| 2,790 |
| | 2,790 |
| | — |
| | — |
| | 2,790 |
|
Forward commitments | 523 |
| | 523 |
| | — |
| | 523 |
| | — |
| 2,546 |
| | 2,546 |
| | — |
| | 2,546 |
| | — |
|
Financial liabilities: | | | | | | | | | | | | | | | | | | |
Deposits | | | | | | | | | | | | | | | | | | |
Demand deposits | 1,914,141 |
| | 1,914,141 |
| | — |
| | 1,914,141 |
| | — |
| 2,202,036 |
| | 2,202,036 |
| | — |
| | 2,202,036 |
| | — |
|
Savings deposits | 3,367,479 |
| | 3,367,479 |
| | — |
| | 3,367,479 |
| | — |
| 3,788,089 |
| | 3,788,089 |
| | — |
| | 3,788,089 |
| | — |
|
Time deposits | 1,124,203 |
| | 1,124,203 |
| | — |
| | 1,124,203 |
| | — |
| 857,286 |
| | 857,286 |
| | — |
| | 857,286 |
| | — |
|
Short term borrowings | 293,898 |
| | 293,898 |
| | — |
| | 293,898 |
| | — |
| 306,459 |
| | 306,459 |
| | — |
| | 306,459 |
| | — |
|
Other borrowings | 263,214 |
| | 281,271 |
| | — |
| | 281,271 |
| | — |
| 288,534 |
| | 288,534 |
| | — |
| | 288,534 |
| | — |
|
Derivative financial instruments(2) | 8,401 |
| | 8,401 |
| | — |
| | 8,401 |
| | — |
| 7,027 |
| | 7,027 |
| | — |
| | 7,027 |
| | — |
|
Forward commitments | 315 |
| | 315 |
| | — |
| | 315 |
| | — |
| 266 |
| | 266 |
| | — |
| | 266 |
| | — |
|
| (1) Includes embedded derivatives and loan swaps | |
(2) Includes cash flow hedges, fair value hedges, loan swaps, embedded conversion options and free standing derivative instruments | |
(1) Includes cash flow hedges, embedded derivatives and back-to-back loan swaps | | (1) Includes cash flow hedges, embedded derivatives and back-to-back loan swaps |
(2) Includes cash flow hedges, fair value hedges, back-to-back loan swaps, embedded conversion options and free standing derivative instruments | | (2) Includes cash flow hedges, fair value hedges, back-to-back loan swaps, embedded conversion options and free standing derivative instruments |
Cash and Cash Equivalents — The carrying amount is a reasonable estimate of fair value due to the short-term nature of these instruments.
Time Deposits in Other Financial Institutions — The carrying amount is a reasonable estimate of fair value due to the short-term nature of these instruments.
Securities — For securities either held to maturity, available for sale or trading, fair value equals quoted market price if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. For Level 3 securities, Heartland utilizes independent pricing provided by third party vendors or brokers.
Other Investments — Fair value measurement of other investments, which consists primarily of FHLB stock, are based on their redeemable value, which is at cost due to the restrictions placed on their transferability. The market for these securities is restricted to the issuer of the stock and subject to impairment evaluation.
Loans — The fair value of loans is estimated using an entrance price concept by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value of impaired loans is measured using the fair value of the underlying collateral. The fair value of loans held for sale is estimated using quoted market prices.
Interest Rate Lock Commitments — The fair value of interest rate lock commitments is estimated using an internal valuation model, which includes grouping the interest rate lock commitments by interest rate and terms, applying an estimated closing ratio based on historical experience, and then multiplying by quoted investor prices determined to be reasonably applicable to the loan commitment groups based on interest rate, terms, and rate lock expiration dates of the loan commitment group.
Forward Commitments — The fair value of these instruments is estimated using an internal valuation model, which includes current trade pricing for similar financial instruments.
Derivative Financial Instruments — The fair value of all derivatives is estimated based on the amount that Heartland would pay or would be paid to terminate the contract or agreement, using current rates and prices, and, when appropriate, the current creditworthiness of the counter-party.
Deposits — The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. If the fair value of the fixed maturity certificates of deposit is calculated at less than the carrying amount, the carrying value of these deposits is reported as the fair value.
Short-term and Other Borrowings — Rates currently available to Heartland for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.
Commitments to Extend Credit, Unused Lines of Credit and Standby Letters of Credit — Based upon management's analysis of the off balance sheet financial instruments, there are no significant unrealized gains or losses associated with these financial instruments based upon review of the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties.
NOTE 9: SEGMENT REPORTING
Heartland has identified two operating segments for purposes of financial reporting: community and other banking, and retail mortgage banking. These segments were determined based on the products and services provided or the type of customers served and are consistent with the information used by Heartland's key decision makers to make operating decisions and to assess Heartland's performance. The following tables present financial information fromfor Heartland's operating segments for the three- and nine-month periods ended September 30, 2016,2017, and September 30, 2015,2016, in thousands.
thousands:
| | | Three Months Ended September 30, | Three Months Ended September 30, |
| 2016 | | 2015 | 2017 | | 2016 |
| Community and Other Banking | | Retail Mortgage Banking | | Total | | Community and Other Banking | | Retail Mortgage Banking | | Total | Community and Other Banking | | Retail Mortgage Banking | | Total | | Community and Other Banking | | Retail Mortgage Banking | | Total |
Net interest income | $ | 72,694 |
| | $ | 987 |
| | $ | 73,681 |
| | $ | 58,123 |
| | $ | 1,601 |
| | $ | 59,724 |
| $ | 88,778 |
| | $ | 1,066 |
| | $ | 89,844 |
| | $ | 72,694 |
| | $ | 987 |
| | $ | 73,681 |
|
Provision for loan losses | 5,328 |
| | — |
| | 5,328 |
| | 3,181 |
| | — |
| | 3,181 |
| 5,705 |
| | — |
| | 5,705 |
| | 5,328 |
| | — |
| | 5,328 |
|
Total noninterest income | 17,337 |
| | 11,205 |
| | 28,542 |
| | 16,015 |
| | 8,965 |
| | 24,980 |
| 19,680 |
| | 5,297 |
| | 24,977 |
| | 17,337 |
| | 11,205 |
| | 28,542 |
|
Total noninterest expense | 57,988 |
| | 10,439 |
| | 68,427 |
| | 49,168 |
| | 12,828 |
| | 61,996 |
| 69,977 |
| | 8,782 |
| | 78,759 |
| | 57,988 |
| | 10,439 |
| | 68,427 |
|
Income (loss) before taxes | $ | 26,715 |
| | $ | 1,753 |
| | $ | 28,468 |
| | $ | 21,789 |
| | $ | (2,262 | ) | | $ | 19,527 |
| $ | 32,776 |
| | $ | (2,419 | ) | | $ | 30,357 |
| | $ | 26,715 |
| | $ | 1,753 |
| | $ | 28,468 |
|
Average Loans, for the period | $ | 5,464,304 |
| | $ | 73,784 |
| | $ | 5,538,088 |
| | $ | 4,563,221 |
| | $ | 90,958 |
| | $ | 4,654,179 |
| $ | 6,245,445 |
| | $ | 40,839 |
| | $ | 6,286,284 |
| | $ | 5,464,304 |
| | $ | 73,784 |
| | $ | 5,538,088 |
|
Segment Assets, at period end | $ | 8,084,810 |
| | $ | 117,405 |
| | $ | 8,202,215 |
| | $ | 6,676,526 |
| | $ | 129,358 |
| | $ | 6,805,884 |
| $ | 9,693,172 |
| | $ | 62,455 |
| | $ | 9,755,627 |
| | $ | 8,084,810 |
| | $ | 117,405 |
| | $ | 8,202,215 |
|
| | | Nine Months Ended September 30, | Nine Months Ended September 30, |
| 2016 | | 2015 | 2017 | | 2016 |
| Community and Other Banking | | Retail Mortgage Banking | | Total | | Community and Other Banking | | Retail Mortgage Banking | | Total | Community and Other Banking | | Retail Mortgage Banking | | Total | | Community and Other Banking | | Retail Mortgage Banking | | Total |
Net interest income | $ | 216,172 |
| | $ | 3,334 |
| | $ | 219,506 |
| | $ | 167,000 |
| | $ | 4,298 |
| | $ | 171,298 |
| $ | 234,406 |
| | $ | 3,046 |
| | $ | 237,452 |
| | $ | 216,172 |
| | $ | 3,334 |
| | $ | 219,506 |
|
Provision for loan losses | 9,513 |
| | — |
| | 9,513 |
| | 10,526 |
| | — |
| | 10,526 |
| 10,235 |
| | — |
| | 10,235 |
| | 9,513 |
| | — |
| | 9,513 |
|
Total noninterest income | 55,773 |
| | 33,373 |
| | 89,146 |
| | 48,679 |
| | 37,625 |
| | 86,304 |
| 56,964 |
| | 19,530 |
| | 76,494 |
| | 55,773 |
| | 33,373 |
| | 89,146 |
|
Total noninterest expense | 177,421 |
| | 32,335 |
| | 209,756 |
| | 145,614 |
| | 39,478 |
| | 185,092 |
| 193,753 |
| | 26,044 |
| | 219,797 |
| | 177,421 |
| | 32,335 |
| | 209,756 |
|
Income before taxes | $ | 85,011 |
| | $ | 4,372 |
| | $ | 89,383 |
| | $ | 59,539 |
| | $ | 2,445 |
| | $ | 61,984 |
| |
Income (loss) before taxes | | $ | 87,382 |
| | $ | (3,468 | ) | | $ | 83,914 |
| | $ | 85,011 |
| | $ | 4,372 |
| | $ | 89,383 |
|
Average Loans, for the period | $ | 5,422,843 |
| | $ | 70,344 |
| | $ | 5,493,187 |
| | $ | 4,365,908 |
| | $ | 91,807 |
| | $ | 4,457,715 |
| $ | 5,641,641 |
| | $ | 37,979 |
| | $ | 5,679,620 |
| | $ | 5,422,843 |
| | $ | 70,344 |
| | $ | 5,493,187 |
|
Segment Assets, at period end | $ | 8,084,810 |
| | $ | 117,405 |
| | $ | 8,202,215 |
| | $ | 6,676,526 |
| | $ | 129,358 |
| | $ | 6,805,884 |
| $ | 9,693,172 |
| | $ | 62,455 |
| | $ | 9,755,627 |
| | $ | 8,084,810 |
| | $ | 117,405 |
| | $ | 8,202,215 |
|
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT
This document (including any information incorporated herein by reference) contains, and future oral and written statements of Heartland and its management may contain, forward-looking statements within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the business, financial condition, results of operations, plans, objectives and future performance and business of Heartland. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of Heartland's management and on information currently available to management, are generally identifiable by the use of words such as "believe," "expect," "anticipate," "plan," "intend," "estimate," "may," "will," "would," "could," "should" or other similar expressions. Although Heartland has made these statements based on management's experience and best estimate of future events, there may be events or factors that management has not anticipated, and the accuracy and achievement of such forward-looking statements and estimates are subject to a number of risks, including those identified in our Annual Report on Form 10-K for the year ended December 31, 2015.2016. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and Heartland undertakes no obligation to update any statement in light of new information or future events.
CRITICAL ACCOUNTING POLICIES
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 Heartland's reported financial position and results of operations are described as critical accounting policies in Heartland's Annual Report on Form 10-K for the year ended December 31, 2015.2016. There have been no significant changes in the critical accounting policies or the assumptions and judgments utilized in applying these policies since the year ended December 31, 2015.2016.
OVERVIEW
Heartland'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 income, brokerage and insurance commissions, securities gains, net gains on sale of loans held for sale, and valuation adjustment on commercial servicing rights and income on bank owned life insurance also affects Heartland's results of operations. Heartland's principal operating expenses, aside from interest expense, consist of the provision for loan losses, salaries and employee benefits, occupancy and equipment costs, professional fees, FDICFederal Deposit Insurance Corporation ("FDIC") insurance premiums, advertising and other real estate and loan collection expenses.
Net income available to common stockholders for the quarter ended September 30, 2016,2017, was $20.2$21.6 million, or $0.81$0.72 per diluted common share, compared to $14.4$20.2 million, or $0.69$0.81 per diluted common share, for the quarter ended September 30, 2015.2016. Return on average common equity was 11.64%8.99% and return on average assets was 0.98%0.89% for the third quarter of 2016,2017, compared to 11.40%11.64% and 0.85%0.98%, respectively, for the same quarter in 2015.2016.
Net income available to common stockholders for the first nine months of 20162017 was $61.0$61.6 million, or $2.48$2.21 per diluted common share, compared to $44.8$61.0 million, or $2.16$2.48 per diluted common share, for the first nine months of 2015.2016. Return on average common equity was 12.28%9.88% and return on average assets was 1.00%0.94% for the first nine months of 2016,2017, compared to 12.38%12.28% and 0.91%1.00%, respectively, for the same period in 2015.2016.
Acquisitions were a significant contributing factor to improved net income during 2016. Heartland's earning assets duringFor the third quarter of 2016 were $7.38 billion in comparison with $6.16 billion during the third quarter of 2015, a $1.22 billion or 20% increase. During the first nine months of 2016, average earning assets were $7.37 billion in comparison with $6.03 billion during the first nine months of 2015, a $1.34 billion or 22% increase. This growth resulted in an increase of $14.0 million or 23% in2017, Heartland's net interest incomemargin was 4.08% (4.26% on a fully tax-equivalent basis) compared to 3.97% (4.14% on a fully tax-equivalent basis) for the same quarter in 2016, and the efficiency ratio was 64.54% and 63.88% for the third quarter of 2017 and 2016, respectively. For the nine-month period ended September 30, 2017, Heartland's net interest margin was 4.00% (4.19% on a fully tax-equivalent basis) compared to the third quarter of 2015 and an increase of $48.2 million or 28%3.98% (4.15% on a fully tax-equivalent basis) for the firstsame period in 2016. Heartland's efficiency ratio increased to 66.58% for the nine months of 2016ended September 30, 2017 compared to the first nine months of 2015. The effect of these increases was partially offset by a $6.4 million or 10% increase in noninterest expense66.23% for the quarterly comparative periods and a $24.7 million or 13% increase for the nine-month comparative periods.
same period in 2016.
On February 5, 2016,28, 2017, Heartland completed the acquisition of CIC Bancshares, Inc., parent company of Centennial Bank, headquartered in Denver, Colorado, in a transaction valued at approximately $76.9 million. Of this amount, approximately $15.7 million was paid in cash and the remainder of the consideration was provided by the issuance of 2,003,235 shares of Heartland common stock and 3,000 shares of newly issued Heartland Series D preferred stock. In addition, Heartland assumed convertible notes and subordinated debt totaling approximately $7.9 million. Simultaneous with closing of the transaction, Centennial Bank merged into Heartland’s Summit Bank & Trust subsidiary, with the resulting institution operating under the name Centennial Bank and Trust. As of the closing date, CIC Bancshares, Inc. had, at fair value, total assets of $772.6 million, total loans of $581.5 million and total deposits of $648.1 million. The systems conversion for this transaction was completed during the second quarter of 2016.
On March 15, 2016, Heartland redeemed all of the 81,698 shares of its Series C Preferred Stock issued to the U.S. Treasury as part of the Small Business Lending Fund program. The aggregate redemption price was approximately $81.9 million, including dividends accrued but unpaid through the redemption date, and was paid with available funds. The redemption terminated Heartland's participation in the Small Business Lending Fund program.
Total assets of Heartland were $8.20 billion at September 30, 2016, an increase of $507.5 million or 7% since year-end 2015. Included in this growth, at fair value, were $772.6 million of assets acquired in the CIC Bancshares, Inc. transaction. Securities represented 24% of total assets at both September 30, 2016, and December 31, 2015.
Total loans held to maturity were $5.44 billion at September 30, 2016, compared to $5.00 billion at year-end 2015, an increase of $437.2 million or 9%. This increase includes $581.5 million of total loans held to maturity, at fair value, acquired in the CIC Bancshares, Inc. transaction.
Total deposits were $6.91 billion as of September 30, 2016, compared to $6.41 billion at year-end 2015, an increase of $506.9 million or 8%. This increase includes $648.1 million of deposits, at fair value, acquired in the CIC Bancshares, Inc. transaction. Demand deposits totaled $2.24 billion at September 30, 2016, an increase of $324.6 million or 17% since year-end 2015, with $164.3 million of the increase attributable to the CIC Bancshares, Inc. transaction.
Common stockholders' equity was $703.0 million at September 30, 2016, compared to $581.5 million at year-end 2015. Book value per common share was $28.48 at September 30, 2016, compared to $25.92 at year-end 2015. Heartland's unrealized loss on securities available for sale and derivative instruments, net of applicable taxes, was $3.1 million at September 30, 2016, compared to a $6.0 million unrealized loss, net of applicable taxes, at December 31, 2015.
RECENT DEVELOPMENTS
On October 29, 2016, Heartland entered into a definitive merger agreement for the acquisition of Founders Bancorp, parent company of Founders Community Bank, based in San Luis Obispo, California. The transaction is valued at approximately $29.1Based on Heartland's closing common stock price of $49.55 per share as of February 28,
2017, the aggregate consideration was $31.0 million, subject to adjustment. Ofwith 30% of the merger consideration paid in cash and 70% will be in the form of sharesby delivery of Heartland common stock, and 30% will be in cash. Asstock. Simultaneous with the closing of September 30, 2016,the transaction, Founders Community Bank had total assets of $198.5 million, which includes gross loans of $106.6 million and total deposits of $180.5 million. The closing of the acquisition is subject to customary closing conditions, including approvals by the Founders Bancorp shareholders and banking regulators, and is expected to occur in the first quarter of 2017. Simultaneous with the close, Founders Community Bank will be merged into Heartland's Premier Valley Bank subsidiary. As of the close date, Founders Community Bank had, at fair value, total assets of $213.3 million, total loans of $96.4 million and total deposits of $181.5 million. The systems conversion for this transaction occurred two weeks after the closing.
On July 7, 2017, Heartland expectscompleted the acquisition to be accretive to its earning per share during 2018.of Citywide Banks of Colorado, Inc., parent company of Citywide Banks, headquartered in Aurora, Colorado. Simultaneous with the close, Citywide Banks merged into Heartland's Centennial Bank and Trust subsidiary. The aggregate consideration was approximately $211.2 million, of which $58.6 million was cash, and the remainder was settled by delivery of 3,216,161 shares of Heartland common stock. The combined entity operates as Citywide Banks. As of the close date, Citywide Banks of Colorado, Inc. had, at fair value, total assets of $1.49 billion, including $985.4 million in net loans outstanding, and $1.21 billion of deposits. The systems conversion for this transaction occurred on October 13, 2017.
On November 2, 2016,Total assets of Heartland commenced a public offeringwere $9.76 billion at September 30, 2017, an increase of 1,379,690 shares$1.51 billion or 18% since year-end 2016. Excluding $213.9 million of its common stockassets acquired at $36.24 per share, and the offering closed on November 8, 2016. The offering resulted in net proceeds of approximately $49.7 million after deducting estimated offering expenses payable by Heartland. All of the shares of common stock includedfair value in the offering are primary shares. Heartland intendsFounders Bancorp transaction and $1.49 billion of assets acquired at fair value in the Citywide Banks of Colorado, Inc. transaction, total assets decreased $199.1 million or 2% since December 31, 2016. Securities represented 24% of total assets at September 30, 2017, and 26% of total assets at December 31, 2016.
Total loans held to usematurity were $6.37 billion at September 30, 2017, compared to $5.35 billion at year-end 2016, an increase of $1.02 billion. This change includes $96.4 million of total loans held to maturity acquired at fair value in the Founders Bancorp transaction and $985.4 million of total loans held to maturity acquired at fair value in the Citywide Banks of Colorado, Inc. transaction. Exclusive of these transactions, total loans held to maturity decreased $60.2 million or 1% since December 31, 2016.
Total deposits were $8.23 billion as of September 30, 2017, compared to $6.85 billion at year-end 2016, an increase of $1.38 billion or 20%. This increase includes $181.5 million of deposits, at fair value, acquired in the Founders Bancorp transaction and $1.21 billion of deposits, at fair value, acquired in the Citywide Banks of Colorado, Inc. transaction. Exclusive of these transactions, total deposits decreased $7.1 million or less than 1% since December 31, 2016.
Common stockholders' equity was $980.7 million at September 30, 2017, compared to $739.6 million at year-end 2016. Book value per common share was $32.75 at September 30, 2017, compared to $28.31 at year-end 2016. Heartland's unrealized loss on securities available for sale, net proceeds from this offering for general corporate purposes, which may include, among other things, working capital, debt repayment or financing potential acquisitions.of applicable taxes, was $20.1 million at September 30, 2017, compared to an unrealized loss of $30.2 million, net of applicable taxes, at December 31, 2016.
FINANCIAL HIGHLIGHTS
|
| | | | | | | | | | | | | | | |
(Dollars in thousands, except per share data) | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
STATEMENT OF INCOME DATA | | | | | | | |
Interest income | $ | 98,978 |
| | $ | 81,687 |
| | $ | 261,590 |
| | $ | 243,702 |
|
Interest expense | 9,134 |
| | 8,006 |
| | 24,138 |
| | 24,196 |
|
Net interest income | 89,844 |
| | 73,681 |
| | 237,452 |
| | 219,506 |
|
Provision for loan losses | 5,705 |
| | 5,328 |
| | 10,235 |
| | 9,513 |
|
Net interest income after provision for loan losses | 84,139 |
| | 68,353 |
| | 227,217 |
| | 209,993 |
|
Noninterest income | 24,977 |
| | 28,542 |
| | 76,494 |
| | 89,146 |
|
Noninterest expenses | 78,759 |
| | 68,427 |
| | 219,797 |
| | 209,756 |
|
Income taxes | 8,725 |
| | 8,260 |
| | 22,314 |
| | 28,196 |
|
Net income | 21,632 |
| | 20,208 |
| | 61,600 |
| | 61,187 |
|
Preferred dividends | (13 | ) | | (53 | ) | | (45 | ) | | (273 | ) |
Interest expense on convertible preferred debt | 3 |
| | 17 |
| | 12 |
| | 48 |
|
Net income available to common stockholders | $ | 21,622 |
| | $ | 20,172 |
| | $ | 61,567 |
| | $ | 60,962 |
|
| | | | | | | |
Key Performance Ratios | | | | | | | |
Annualized return on average assets | 0.89 | % | | 0.98 | % | | 0.94 | % | | 1.00 | % |
Annualized return on average common equity (GAAP) | 8.99 | % | | 11.64 | % | | 9.88 | % | | 12.28 | % |
Annualized return on average tangible common equity (non-GAAP)(1) | 12.41 | % | | 14.93 | % | | 12.90 | % | | 15.87 | % |
Annualized ratio of net charge-offs to average loans | 0.31 | % | | 0.17 | % | | 0.23 | % | | 0.09 | % |
|
| | | | | | | | | | | | | | | |
(Dollars in thousands, except per share data) | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Annualized net interest margin (GAAP) | 4.08 | % | | 3.97 | % | | 4.00 | % | | 3.98 | % |
Annualized net interest margin, fully tax-equivalent (non-GAAP)(2) | 4.26 | % | | 4.14 | % | | 4.19 | % | | 4.15 | % |
Efficiency ratio, fully tax-equivalent(3) | 64.54 | % | | 63.88 | % | | 66.58 | % | | 66.23 | % |
| | | | | | | |
Reconciliation of Return on Average Tangible Common Equity (non-GAAP)(4) | | | | | | | |
Net income available to common shareholders (GAAP) | $ | 21,622 |
| | $ | 20,172 |
| | $ | 61,567 |
| | $ | 60,962 |
|
| | | | | | | |
Average common stockholders' equity (GAAP) | $ | 954,511 |
| | $ | 689,637 |
| | $ | 833,150 |
| | $ | 663,050 |
|
Less average goodwill | 226,097 |
| | 127,699 |
| | 167,009 |
| | 125,061 |
|
Less average other intangibles, net | 36,950 |
| | 24,563 |
| | 27,992 |
| | 24,958 |
|
Average tangible common equity (non-GAAP) | $ | 691,464 |
| | $ | 537,375 |
| | $ | 638,149 |
| | $ | 513,031 |
|
Annualized return on average common equity (GAAP) | 8.99 | % | | 11.64 | % | | 9.88 | % | | 12.28 | % |
Annualized return on average tangible common equity (non-GAAP) | 12.41 | % | | 14.93 | % | | 12.90 | % | | 15.87 | % |
| | | | | | | |
Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP)(5) | | | | | | | |
Net Interest Income (GAAP) | $ | 89,844 |
| | $ | 73,681 |
| | $ | 237,452 |
| | $ | 219,506 |
|
Plus tax-equivalent adjustment(7) | 3,925 |
| | 3,221 |
| | 11,581 |
| | 9,408 |
|
Net interest income - tax-equivalent (non-GAAP)
| $ | 93,769 |
| | $ | 76,902 |
| | $ | 249,033 |
| | $ | 228,914 |
|
| | | | | | | |
Average earning assets | $ | 8,726,228 |
| | $ | 7,382,860 |
| | $ | 7,942,810 |
| | $ | 7,368,856 |
|
Net interest margin (GAAP) | 4.08 | % | | 3.97 | % | | 4.00 | % | | 3.98 | % |
Net interest margin, fully tax-equivalent (non-GAAP) | 4.26 | % | | 4.14 | % | | 4.19 | % | | 4.15 | % |
| | | | | | | |
Reconciliation of Non-GAAP Measure-Efficiency Ratio(6) | | | | | | | |
Net Interest Income (GAAP) | $ | 89,844 |
| | $ | 73,681 |
| | $ | 237,452 |
| | $ | 219,506 |
|
Plus tax-equivalent adjustment(7) | 3,925 |
| | 3,221 |
| | 11,581 |
| | 9,408 |
|
Net interest income - tax-equivalent (non-GAAP)
| 93,769 |
| | 76,902 |
| | 249,033 |
| | 228,914 |
|
Noninterest income | 24,977 |
| | 28,542 |
| | 76,494 |
| | 89,146 |
|
Securities gains, net | (1,679 | ) | | (1,584 | ) | | (5,553 | ) | | (9,732 | ) |
Adjusted income | $ | 117,067 |
| | $ | 103,860 |
| | $ | 319,974 |
| | $ | 308,328 |
|
| | | | | | | |
Total noninterest expenses | $ | 78,759 |
| | $ | 68,427 |
| | $ | 219,797 |
| | $ | 209,756 |
|
Less: | | | | | | | |
Core deposit intangibles and customer relationship intangibles amortization | 1,863 |
| | 1,291 |
| | 4,252 |
| | 4,483 |
|
Partnership investment in tax credit projects | — |
| | — |
| | 876 |
| | — |
|
Loss on sales/valuations of assets, net | 1,342 |
| | 794 |
| | 1,642 |
| | 1,064 |
|
Adjusted noninterest expenses | $ | 75,554 |
| | $ | 66,342 |
| | $ | 213,027 |
| | $ | 204,209 |
|
| | | | | | | |
Efficiency ratio, fully tax-equivalent (non-GAAP) | 64.54 | % | | 63.88 | % | | 66.58 | % | | 66.23 | % |
(1) Refer to the "Reconciliation of Return on Average Tangible Common Equity (non-GAAP)" table. |
(2) Refer to the "Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP)" table. |
(3) Refer to the "Reconciliation of Non-GAAP Measure-Efficiency Ratio" (non-GAAP)" table. |
(4) Return on average tangible common equity is net income available to common stockholders divided by average common stockholders' equity less goodwill and core deposit intangibles and customer relationship intangibles, net. This financial measure is included as it is considered to be a critical metric to analyze and evaluate the financial condition and capital strength of Heartland. This measure should not be considered a substitute for operating results determined in accordance with GAAP. |
(5) Annualized net interest margin, fully tax-equivalent is a non-GAAP measure, which adjusts net interest income for the tax-favored status of certain loans and securities. Management believes this measure enhances the comparability of net interest income arising from taxable and tax-exempt sources. This measure should not be considered a substitute for operating results determined in accordance with GAAP. |
(6) Efficiency ratio, fully tax-equivalent, expresses noninterest expenses as a percentage of fully tax-equivalent net interest income and noninterest income. This efficiency ratio is presented on a tax-equivalent basis, which adjusts net interest income and noninterest expenses for the tax favored status of certain loans, securities and tax credit projects. Management believes the presentation of this non-GAAP measure provides supplemental useful information for proper understanding of the financial results of Heartland as it enhances the comparability of income and expenses arising from taxable and nontaxable sources and excludes specific items, as noted in the table. This measure should not be considered a substitute for operating results determined in accordance with GAAP. |
(7) Computed on a tax-equivalent basis using an effective tax rate of 35%. |
FINANCIAL HIGHLIGHTS, continued
|
| | | | | | | | | | | | | | | | | | | |
(Dollars in thousands, except per share data) | As Of and For the Quarter Ended |
| 9/30/2017 | | 6/30/2017 | | 3/31/2017 | | 12/31/2016 | | 9/30/2016 |
BALANCE SHEET DATA | | | | | | | | | |
Investments | $ | 2,372,916 |
| | $ | 2,070,121 |
| | $ | 2,175,701 |
| | $ | 2,131,086 |
| | $ | 1,943,080 |
|
Loans held for sale | 35,795 |
| | 48,848 |
| | 49,009 |
| | 61,261 |
| | 78,317 |
|
Total loans receivable(1) | 6,373,415 |
| | 5,325,082 |
| | 5,361,604 |
| | 5,351,719 |
| | 5,438,715 |
|
Allowance for loan losses | 54,885 |
| | 54,051 |
| | 54,999 |
| | 54,324 |
| | 54,653 |
|
Total assets | 9,755,627 |
| | 8,204,721 |
| | 8,361,845 |
| | 8,247,079 |
| | 8,202,215 |
|
Total deposits | 8,231,884 |
| | 6,930,169 |
| | 7,089,861 |
| | 6,847,411 |
| | 6,912,693 |
|
Long-term obligations | 301,473 |
| | 281,096 |
| | 282,051 |
| | 288,534 |
| | 294,493 |
|
Preferred equity | 938 |
| | 938 |
| | 938 |
| | 1,357 |
| | 1,357 |
|
Common stockholders’ equity | 980,746 |
| | 805,032 |
| | 780,374 |
| | 739,559 |
| | 703,031 |
|
| | | | | | | | | |
Common Share Data | | | | | | | | | |
Book value per common share (GAAP) | $ | 32.75 |
| | $ | 30.15 |
| | $ | 29.26 |
| | $ | 28.31 |
| | $ | 28.48 |
|
Tangible book value per common share (non-GAAP)(2) | $ | 23.61 |
| | $ | 24.00 |
| | $ | 23.05 |
| | $ | 22.55 |
| | $ | 22.34 |
|
ASC 320 effect on book value per common share | $ | (0.67 | ) | | $ | (0.87 | ) | | $ | (1.06 | ) | | $ | (1.15 | ) | | $ | 0.03 |
|
Common shares outstanding, net of treasury stock | 29,946,069 |
| | 26,701,226 |
| | 26,674,121 |
| | 26,119,929 |
| | 24,681,380 |
|
Tangible common equity ratio (non-GAAP)(3) | 7.46 | % | | 7.97 | % | | 7.50 | % | | 7.28 | % | | 6.85 | % |
| | | | | | | | | |
Reconciliation of Tangible Book Value Per Common Share (non-GAAP)(4) | | | | | | | | | |
Common stockholders' equity (GAAP) | $ | 980,746 |
| | $ | 805,032 |
| | $ | 780,374 |
| | $ | 739,559 |
| | $ | 703,031 |
|
Less goodwill | 236,615 |
| | 141,461 |
| | 141,461 |
| | 127,699 |
| | 127,699 |
|
Less core deposit intangibles and customer relationship intangibles, net | 37,028 |
| | 22,850 |
| | 24,068 |
| | 22,775 |
| | 23,922 |
|
Tangible common stockholders' equity (non-GAAP) | $ | 707,103 |
| | $ | 640,721 |
| | $ | 614,845 |
| | $ | 589,085 |
| | $ | 551,410 |
|
| | | | | | | | | |
Common shares outstanding, net of treasury stock | 29,946,069 |
| | 26,701,226 |
| | 26,674,121 |
| | 26,119,929 |
| | 24,681,380 |
|
Common stockholders' equity (book value) per share (GAAP) | $ | 32.75 |
| | $ | 30.15 |
| | $ | 29.26 |
| | $ | 28.31 |
| | $ | 28.48 |
|
Tangible book value per common share (non-GAAP) | $ | 23.61 |
| | $ | 24.00 |
| | $ | 23.05 |
| | $ | 22.55 |
| | $ | 22.34 |
|
| | | | | | | | | |
Reconciliation of Tangible Common Equity Ratio (non-GAAP)(5) | | | | | | | | | |
Total assets (GAAP) | $ | 9,755,627 |
| | $ | 8,204,721 |
| | $ | 8,361,845 |
| | $ | 8,247,079 |
| | $ | 8,202,215 |
|
Less goodwill | 236,615 |
| | 141,461 |
| | 141,461 |
| | 127,699 |
| | 127,699 |
|
Less core deposit intangibles and customer relationship intangibles, net | 37,028 |
| | 22,850 |
| | 24,068 |
| | 22,775 |
| | 23,922 |
|
Total tangible assets (non-GAAP) | $ | 9,481,984 |
| | $ | 8,040,410 |
| | $ | 8,196,316 |
| | $ | 8,096,605 |
| | $ | 8,050,594 |
|
Tangible common equity ratio (non-GAAP) | 7.46 | % | | 7.97 | % | | 7.50 | % | | 7.28 | % | | 6.85 | % |
|
(1) Excludes loans held for sale. |
(2) Refer to the "Reconciliation of Tangible Book Value Per Common Share (non-GAAP)" table. |
(3) Refer to the "Reconciliation of Tangible Common Equity Ratio (non-GAAP)" table. |
(4) Tangible book value per common share is total common stockholders' equity less goodwill and core deposit and customer relationship intangibles, net, divided by common shares outstanding, net of treasury. This amount is a non-GAAP financial measure but has been included as it is considered to be a critical metric with which to analyze and evaluate the financial condition and capital strength of Heartland. This measure should not be considered a substitute for operating results determined in accordance with GAAP. |
(5) The tangible common equity ratio is total common stockholders' equity less goodwill and core deposit intangibles, net divided by total assets less goodwill and core deposit intangibles, net. This ratio is a non-GAAP financial measure but has been included as it is considered to be a critical metric with which to analyze and evaluate the financial condition and capital strength of Heartland. This measure should not be considered a substitute for operating results determined in accordance with GAAP. |
RESULTS OF OPERATIONS
Net Interest Income
Net interest margin, expressed as a percentage of average earning assets, was 3.97% (4.14%4.08% (4.26% on a fully taxable equivalenttax-equivalent basis) during the third quarter of 2016,2017, compared to 3.85% (4.01%3.97% (4.14% on a fully taxable equivalenttax-equivalent basis) during the third quarter of 2015. Net interest margin, expressed as a percentage of average earning assets, was 3.98% (4.15% on a fully taxable equivalent basis) during the first nine months of 2016, compared to 3.80% (3.96% on a fully taxable equivalent basis) during the first nine months of 2015.2016. Heartland's success in maintaining net interest margin at or near the 4.00% level has been the result of improved yield on earning assets and continuous loan and deposit pricing discipline and management's ability to shift dollars from the securities portfolio into the loan portfolio.discipline. Also contributing to the improvedHeartland's ability to maintain its net interest margin during the most recent quarters has been the amortization of purchase accounting discounts associated with the three acquisitions completed by Heartland during the last half of 2015 and the CIC Bancshares, Inc. acquisition completed during the first quarter of 2016.Heartland. See "Analysis of Average Balances, Tax-Equivalent Yields and Rates" for a description of our use of net interest income on a fully taxable equivalenttax-equivalent basis, which is not defined by GAAP, and a reconciliation of annualized net interest margin on a fully taxable equivalenttax-equivalent basis to GAAP.
Interest income for the third quarter of 20162017 was $81.7$99.0 million, an increase of $14.4$17.3 million or 21%, compared to the $67.3$81.7 million recorded in the third quarter of 2015.2016. The tax-equivalent adjustments for income taxes saved on the interest earned on nontaxable securities and loans were $3.9 million for the third quarter of 2017 and $3.2 million for the third quarter of 2016 and $2.6 million for the third quarter of 2015.2016. With these adjustments, interest income on a tax-equivalent basis was $102.9 million for the third quarter of 2017, an increase of $18.0 million or 21%, compared to $84.9 million for the third quarter of 2016. The increase in interest income on a fully tax-equivalent basis in the third quarter of 2017, as compared to the third quarter of 2016, an increasewas primarily due to the acquisitions completed in 2017. For the third quarter of $15.12017, average earning assets attributable to the Founders Bancorp transaction totaled $147.6 million, and average earning assets attributable to the Citywide Banks of Colorado, Inc. transaction totaled $1.20 billion. Exclusive of these transactions, average earning assets decreased $7.4 million or 22%, comparedless than 1% from the third quarter of 2016. The average interest rate earned on average earning assets increased 10 basis points to $69.9 million4.68% for the third quarter of 2015. 2017 compared to 4.58% for the same quarter in 2016.
For the first nine months of 2016,2017, interest income increased $47.9$17.9 million or 24%7% to $243.7$261.6 million from $195.8$243.7 million for the first nine months of 2015.2016. The tax-equivalent adjustments for income taxes saved on the interest earned on nontaxable securities and loans were $9.4$11.6 million and $7.4$9.4 million for the first nine months of 20162017 and 2015,2016, respectively. With these adjustments, interest income on a tax-equivalent basis was $273.2 million during the first nine months of 2017 compared to $253.1 million during the first nine months of 2016, compared to $203.2 million during the first nine months of 2015, an increase of $49.9$20.1 million or 25%8%. The increases in interest income during 2016 were primarily due to increases in average earning assets, which totaled $7.38 billion during the third quarter of 2016 compared to $6.16 billion during the third quarter of 2015, a $1.22 billion or 20% increase. For the first nine months of 2016,2017, average earning assets were $7.37$7.94 billion compared to $6.03$7.37 billion during the first nine months of 2015,2016, an increase of $1.34 billion$574.0 million or 22%8%. A majorityExcluding $521.2 million of the growth in average earning assets during both comparable periods was attributable to the acquisitions completed duringin 2017, average earning assets increased $52.8 million or 1% for the last halffirst nine months of 2015, in addition2017 compared to the CIC Bancshares, Inc. acquisition completed during the first quarter ofsame period in 2016.
Interest expense for the third quarter of 20162017 was $8.0$9.1 million, an increase of $462,000$1.1 million or 6%14% from $7.5$8.0 million in the third quarter of 2015. Interest expense for2016. For the first nine months of 2016 was $24.2 million compared to $24.5 million for the first nine months of 2015, a decrease of $317,000 or 1%. Averagequarter ended September 30, 2017, average interest bearing liabilities increased $733.1were $5.70 billion, an increase of $473.5 million or 16%9%, from $5.22 billion for the quarter ended September 30, 2016, as compared2016. Average interest bearing deposits increased $520.3 million or 11% to $5.19 billion for the quarter ended September 30, 2017, from $4.67 billion in the same quarter in 2015, while2016. Average interest bearing deposits attributable to the Founders Bancorp and the Citywide Banks of Colorado, Inc. transactions totaled $713.3 million for the third quarter of 2017. Exclusive of these transactions, average interest bearing deposits decreased $193.0 million or 4% for the third quarter of 2017 in comparison with the same quarter in 2016. The average interest rate paid on Heartland's interest bearing deposits increased 5 basis points to 0.39% for the third quarter of 2017 compared to 0.34% for the same quarter in 2016. Average borrowings attributable to the Citywide Banks of Colorado, Inc. transaction totaled $51.8 million, and exclusive of this transaction, average borrowings declined 6 basis points from 0.67%$98.6 million or 18% during the third quarter of 2017 compared to the same quarter in 2016. The average interest rate paid on Heartland's borrowings was 3.16% for the third quarter of 2017 compared to 2.86% in the third quarter of 20152016.
Interest expense for the first nine months of 2017 was $24.1 million compared to 0.61% in the third quarter of 2016. Average interest bearing liabilities increased $839.5$24.2 million or 19% for the first nine months of 2016, asa decrease of $58,000 or less than 1%. Average interest bearing liabilities increased $60.1 million or 1% for the first nine months of 2017 compared to the first nine months in 2015, while2016. Excluding $296.8 million of interest bearing liabilities attributable to the Founders Bancorp and Citywide Banks of Colorado, Inc. transactions, average interest bearing liabilities decreased $236.6 million or 4% during the nine months ended September 30, 2017, compared to the same period in 2016. The average interest rate paid on Heartland's interest bearing deposits and borrowingsliabilities declined 131 basis points from 0.74% inpoint to 0.60% for the first nine months of 2015 to2017 from 0.61% infor the first nine months of 2016. The average interest rate paid on savings deposits was 0.26% for the first nine months of 2017 compared to 0.22% during bothfor the third quarterfirst nine months of 2016, and the third quarter of 2015, and the average interest rate paid on time deposits was 0.79% duringfor the third quarter of 2016nine-month period ended September 30, 2017 compared to 0.91% during0.80% for the third quarter of 2015. For the first nine months of 2016, thesame period in 2016. The average interest rate paid on savings deposits was 0.22%Heartland's borrowings increased 37 basis points to 3.06% for the nine months ended September 30, 2017 compared to 0.23% during2.69% for the first nine months of 2015, and the average interest rate paid on time deposits was 0.80% during the first nine months of 2016 compared to 0.99% during the first nine months of 2015.ended September 30, 2016.
Net interest income increased $14.0$16.2 million or 23%22% to $89.8 million in the third quarter of 2017 from $73.7 million in the third quarter of 2016 from $59.7 million in the third quarter of 2015.2016. After the tax-equivalent adjustment discussed above, net interest income on a tax-equivalent basis totaled $93.8 million during the third quarter of 2017, an increase of $16.9 million or 22% from $76.9 million during the third quarter of 2016, an increase of $14.6 million or 23% from $62.3 million during the third quarter of 2015.2016. For the first nine months of 2016,2017, net interest income increased $48.2$17.9 million or 28%8% to $219.5$237.5 million from the $171.3$219.5 million recorded in the first nine months of 2015.2016. After the tax-equivalent adjustment discussed above, net interest income on a tax-equivalent basis totaled $228.9$249.0 million during the first nine months of 2016,2017, an increase of $50.2$20.1 million or 28%9% from the $178.7$228.9 million recorded during the first nine months of 2015. Net interest income in dollars has increased steadily for each of the last sixteen quarters.2016.
Heartland attempts to manage its balance sheet to minimize the effect that a change in interest rates has on its net interest margin. Heartland plans to continue to work toward increasingimproving both its earning assets and improving its funding mix through targeted acquisitions and organic growth strategies, which management believes will result in additional net interest income. Heartland believes its net interest income simulations reflect a well-balanced and manageable interest rate position. Approximately 39%posture. Excluding the loans acquired in the Citywide Banks of Colorado, Inc. transaction, approximately 38% of Heartland's
commercial and agricultural loan portfolios consist of floating rate loans that reprice based upon changes in the national prime or LIBOR interest rate. Since nearly 38%rate, and approximately 9% of these floating rate loans have interest rate floors that are currently in effect, an upward movement in the national prime interest rate or LIBOR would not have an immediate positive effect on Heartland's interest income.effect. Item 3 of Part I of this Form 10-Q report contains additional information about the results of Heartland's most recent net interest income simulations. Note 7 to the quarterly consolidated financial statements included in this Quarterly Report on Form 10-Q contains a detailed discussion of the derivative instruments Heartland has utilized to manage its interest rate risk.
The following table sets forth certain information relating to Heartland's average consolidated balance sheets and reflects the yield on average earning assets and the cost of average interest bearing liabilities for the periods indicated, in thousands. DividingSuch yields and costs are calculated by dividing income or expense by the average balance of assets or liabilities derives such yields and costs.liabilities. Average balances are derived from daily balances, and nonaccrual loans and loans held for sale are included in each respective loan category. Assets withthat receive tax favorable treatment are evaluated on a tax-equivalent basis assuming a federal income tax rate of 35%. Tax favorable assets generally have lower contractual pre-tax yields than fully taxable assets. A tax-equivalent yield is calculated by adding the tax savings to the interest earned on tax favorable assets and dividing this amount by the average balance of the tax favorable assets.
| | ANALYSIS OF AVERAGE BALANCES, TAX-EQUIVALENT YIELDS AND RATES(1) For the Quarters Ended September 30, 2016 and 2015 | |
ANALYSIS OF AVERAGE BALANCES, TAX-EQUIVALENT YIELDS AND RATES(1) (Dollars in thousands) | | ANALYSIS OF AVERAGE BALANCES, TAX-EQUIVALENT YIELDS AND RATES(1) (Dollars in thousands) |
| | For the Quarter Ended |
| 2016 | | 2015 | September 30, 2017 | | September 30, 2016 |
| Average Balance | | Interest | | Rate | | Average Balance | | Interest | | Rate | Average Balance | | Interest | | Rate | | Average Balance | | Interest | | Rate |
Earning Assets | | | | | | | | | | | | | | | | | | | | | | |
Securities: | | | | | | | | | | | | | | | | | | | | | | |
Taxable | $ | 1,415,446 |
| | $ | 7,917 |
| | 2.23 | % | | $ | 1,192,259 |
| | $ | 5,858 |
| | 1.95 | % | $ | 1,667,076 |
| | $ | 10,394 |
| | 2.47 | % | | $ | 1,415,446 |
| | $ | 7,917 |
| | 2.23 | % |
Nontaxable(1) | 473,152 |
| | 5,719 |
| | 4.81 |
| | 348,760 |
| | 4,733 |
| | 5.38 |
| 643,925 |
| | 7,825 |
| | 4.82 |
| | 473,152 |
| | 5,719 |
| | 4.81 |
|
Total securities | 1,888,598 |
| | 13,636 |
| | 2.87 |
| | 1,541,019 |
| | 10,591 |
| | 2.73 |
| 2,311,001 |
| | 18,219 |
| | 3.13 |
| | 1,888,598 |
| | 13,636 |
| | 2.87 |
|
Interest bearing deposits | 7,026 |
| | 6 |
| | 0.34 |
| | 11,567 |
| | 4 |
| | 0.14 |
| |
Interest bearing deposits with the Federal Reserve Bank and other banks and other short-term investments | | 164,809 |
| | 558 |
| | 1.34 |
| | 7,026 |
| | 6 |
| | 0.34 |
|
Federal funds sold | 1,409 |
| | 1 |
| | 0.28 |
| | 1,032 |
| | 1 |
| | 0.38 |
| 18,874 |
| | 34 |
| | 0.71 |
| | 1,409 |
| | 1 |
| | 0.28 |
|
Loans:(2) | | | | | | | | | | | | | | | | | | | | | | |
Commercial and commercial real estate(1) | 3,908,623 |
| | 48,334 |
| | 4.92 |
| | 3,252,610 |
| | 38,802 |
| | 4.73 |
| 4,647,414 |
| | 59,121 |
| | 5.05 |
| | 3,908,623 |
| | 48,334 |
| | 4.92 |
|
Residential mortgage | 717,374 |
| | 7,248 |
| | 4.02 |
| | 570,117 |
| | 5,848 |
| | 4.07 |
| 683,186 |
| | 7,300 |
| | 4.24 |
| | 717,374 |
| | 7,248 |
| | 4.02 |
|
Agricultural and agricultural real estate(1) | 486,008 |
| | 5,719 |
| | 4.68 |
| | 461,144 |
| | 5,525 |
| | 4.75 |
| 504,970 |
| | 6,175 |
| | 4.85 |
| | 486,008 |
| | 5,719 |
| | 4.68 |
|
Consumer | 426,083 |
| | 8,256 |
| | 7.71 |
| | 370,308 |
| | 7,384 |
| | 7.91 |
| 450,694 |
| | 9,032 |
| | 7.95 |
| | 426,083 |
| | 8,256 |
| | 7.71 |
|
Fees on loans | — |
| | 1,708 |
| | — |
| | — |
| | 1,701 |
| | — |
| | | 2,464 |
| | — |
| | — |
| | 1,708 |
| | — |
|
Less: allowance for loan losses | (52,261 | ) | | — |
| | — |
| | (46,302 | ) | | — |
| | — |
| (54,720 | ) | | — |
| | — |
| | (52,261 | ) | | — |
| | — |
|
Net loans | 5,485,827 |
| | 71,265 |
| | 5.17 |
| | 4,607,877 |
| | 59,260 |
| | 5.10 |
| 6,231,544 |
| | 84,092 |
| | 5.35 |
| | 5,485,827 |
| | 71,265 |
| | 5.17 |
|
Total earning assets | 7,382,860 |
| | 84,908 |
| | 4.58 | % | | 6,161,495 |
| | 69,856 |
| | 4.50 | % | 8,726,228 |
| | 102,903 |
| | 4.68 | % | | 7,382,860 |
| | 84,908 |
| | 4.58 | % |
Nonearning Assets | 789,823 |
| | | | | | 564,701 |
| | | | | 913,616 |
| | | | | | 789,823 |
| | | | |
Total Assets | $ | 8,172,683 |
| | | | | | $ | 6,726,196 |
| | | | | $ | 9,639,844 |
| | | | | | $ | 8,172,683 |
| | | | |
Interest Bearing Liabilities | | | | | | | | | | | | | | | | | | | | | | |
Savings | $ | 3,697,426 |
| | $ | 2,066 |
| | 0.22 | % | | $ | 2,870,847 |
| | $ | 1,565 |
| | 0.22 | % | $ | 4,205,946 |
| | $ | 3,162 |
| | 0.30 | % | | $ | 3,697,426 |
| | $ | 2,066 |
| | 0.22 | % |
Time, $100,000 and over | 399,498 |
| | 813 |
| | 0.81 |
| | 337,163 |
| | 741 |
| | 0.87 |
| 408,560 |
| | 787 |
| | 0.76 |
| | 399,498 |
| | 813 |
| | 0.81 |
|
Other time deposits | 570,445 |
| | 1,122 |
| | 0.78 |
| | 622,110 |
| | 1,461 |
| | 0.93 |
| 573,178 |
| | 1,124 |
| | 0.78 |
| | 570,445 |
| | 1,122 |
| | 0.78 |
|
Short-term borrowings | 258,783 |
| | 235 |
| | 0.36 |
| | 362,094 |
| | 228 |
| | 0.25 |
| 209,795 |
| | 271 |
| | 0.51 |
| | 258,783 |
| | 235 |
| | 0.36 |
|
Other borrowings | 298,020 |
| | 3,770 |
| | 5.03 |
| | 298,875 |
| | 3,549 |
| | 4.71 |
| 300,234 |
| | 3,790 |
| | 5.01 |
| | 298,020 |
| | 3,770 |
| | 5.03 |
|
Total interest bearing liabilities | 5,224,172 |
| | 8,006 |
| | 0.61 | % | | 4,491,089 |
| | 7,544 |
| | 0.67 | % | 5,697,713 |
| | 9,134 |
| | 0.64 | % | | 5,224,172 |
| | 8,006 |
| | 0.61 | % |
Noninterest Bearing Liabilities | | | | | | | | | | | | | | | | | | | | | | |
Noninterest bearing deposits | 2,171,965 |
| | | | | | 1,593,298 |
| | | | | 2,912,344 |
| | | | | | 2,171,965 |
| | | | |
Accrued interest and other liabilities | 84,142 |
| | | | | | 59,712 |
| | | | | 74,338 |
| | | | | | 84,142 |
| | | | |
Total noninterest bearing liabilities | 2,256,107 |
| | | | | | 1,653,010 |
| | | | | 2,986,682 |
| | | | | | 2,256,107 |
| | | | |
Stockholders' Equity | 692,404 |
| | | | | | 582,097 |
| | | | | 955,449 |
| | | | | | 692,404 |
| | | | |
Total Liabilities and Stockholders' Equity | $ | 8,172,683 |
| | | | | | $ | 6,726,196 |
| | | | | $ | 9,639,844 |
| | | | | | $ | 8,172,683 |
| | | | |
Net interest income, fully taxable equivalent (non-GAAP)(1) | | | $ | 76,902 |
| | | | | | $ | 62,312 |
| | | |
Net interest income, fully tax-equivalent (non-GAAP)(1) | | | | $ | 93,769 |
| | | | | | $ | 76,902 |
| | |
Net interest spread(1) | | | | | 3.97 | % | | | | | | 3.83 | % | | | | | 4.04 | % | | | | | | 3.97 | % |
Net interest income, fully taxable equivalent (non-GAAP) to total earning assets(3) | | | | | 4.14 | % | | | | | | 4.01 | % | |
Net interest income, fully tax-equivalent (non-GAAP) to total earning assets(3) | | | | | | 4.26 | % | | | | | | 4.14 | % |
Interest bearing liabilities to earning assets | 70.76 | % | | | | | | 72.89 | % | | | | | 65.29 | % | | | | | | 70.76 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Reconciliation of Annualized Net Interest Margin, Fully Taxable Equivalent (non-GAAP)(3) | | | | | | | | | | | | |
| | | | | | | | | | | | |
Net interest income, fully taxable equivalent (non-GAAP) | | | $ | 76,902 |
| | | | | | $ | 62,312 |
| | | |
Adjustments for taxable equivalent interest(1) | | | (3,221 | ) | | | | | | (2,588 | ) | | | |
Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP)(3) | | | | | | | | | | | | |
Net interest income, fully tax-equivalent (non-GAAP) | | | | $ | 93,769 |
| | | | | | $ | 76,902 |
| | |
Adjustments for tax-equivalent interest(1) | | | | (3,925 | ) | | | | | | (3,221 | ) | | |
Net interest income (GAAP) | | | $ | 73,681 |
| | | | | | $ | 59,724 |
| | | | | $ | 89,844 |
| | | | | | $ | 73,681 |
| | |
| | | | | | | | | | | | | | | | | | | | | | |
Average Earning Assets | $ | 7,382,860 |
| | | | | | $ | 6,161,495 |
| | | | | $ | 8,726,228 |
| | | | | | $ | 7,382,860 |
| | | | |
Annualized net interest margin (GAAP) | | | | | 3.97 | % | | | | | | 3.85 | % | | | | | 4.08 | % | | | | | | 3.97 | % |
Annualized net interest margin, fully taxable equivalent (non-GAAP) | | | | | 4.14 | % | | | | | | 4.01 | % | |
Annualized net interest margin, fully tax-equivalent (non-GAAP) | | | | | | 4.26 | % | | | | | | 4.14 | % |
| | | | | | | | | | | | | | | | | | | | | | |
(1) Computed on a taxable equivalent basis using an effective tax rate of 35% | |
(1) Computed on a tax-equivalent basis using an effective tax rate of 35% | | (1) Computed on a tax-equivalent basis using an effective tax rate of 35% |
(2) Nonaccrual loans are included in the average loans outstanding. | (3) Annualized net interest margin, fully taxable equivalent is a non-GAAP measure, which adjusts net interest income for the tax-favored status of certain loans and securities. Management believes this measure enhances the comparability of net interest income arising from taxable and tax-exempt sources. This measure should not be considered a substitute for operating results determined in accordance with GAAP. | |
(3) Annualized net interest margin, fully tax-equivalent is a non-GAAP measure, which adjusts net interest income for the tax-favored status of certain loans and securities. Management believes this measure enhances the comparability of net interest income arising from taxable and tax-exempt sources. This measure should not be considered a substitute for operating results determined in accordance with GAAP. | | (3) Annualized net interest margin, fully tax-equivalent is a non-GAAP measure, which adjusts net interest income for the tax-favored status of certain loans and securities. Management believes this measure enhances the comparability of net interest income arising from taxable and tax-exempt sources. This measure should not be considered a substitute for operating results determined in accordance with GAAP. |
| | ANALYSIS OF AVERAGE BALANCES, TAX-EQUIVALENT YIELDS AND RATES(1) For the Nine Months Ended September 30, 2016 and 2015 | |
ANALYSIS OF AVERAGE BALANCES, TAX-EQUIVALENT YIELDS AND RATES(1) (Dollars in thousands) | | ANALYSIS OF AVERAGE BALANCES, TAX-EQUIVALENT YIELDS AND RATES(1) (Dollars in thousands) |
| | For the Nine Months Ended |
| 2016 | | 2015 | September 30, 2017 | | September 30, 2016 |
| Average Balance | | Interest | | Rate | | Average Balance | | Interest | | Rate | Average Balance | | Interest | | Rate | | Average Balance | | Interest | | Rate |
Earning Assets | | | | | | | | | | | | | | | | | | | | | | |
Securities: | | | | | | | | | | | | | | | | | | | | | | |
Taxable | $ | 1,464,080 |
| | $ | 24,604 |
| | 2.24 | % | | $ | 1,266,546 |
| | $ | 19,729 |
| | 2.08 | % | $ | 1,545,091 |
| | $ | 27,246 |
| | 2.36 | % | | $ | 1,464,080 |
| | $ | 24,604 |
| | 2.24 | % |
Nontaxable(1) | 440,275 |
| | 16,605 |
| | 5.04 |
| | 335,104 |
| | 13,641 |
| | 5.44 |
| 638,119 |
| | 23,534 |
| | 4.93 |
| | 440,275 |
| | 16,605 |
| | 5.04 |
|
Total securities | 1,904,355 |
| | 41,209 |
| | 2.89 |
| | 1,601,650 |
| | 33,370 |
| | 2.79 |
| 2,183,210 |
| | 50,780 |
| | 3.11 |
| | 1,904,355 |
| | 41,209 |
| | 2.89 |
|
Interest bearing deposits | 9,785 |
| | 13 |
| | 0.18 |
| | 10,541 |
| | 11 |
| | 0.14 |
| |
Interest bearing deposits with the Federal Reserve Bank and other banks and other short-term investments | | 127,870 |
| | 1,112 |
| | 1.16 |
| | 9,785 |
| | 13 |
| | 0.18 |
|
Federal funds sold | 12,509 |
| | 12 |
| | 0.13 |
| | 4,562 |
| | 3 |
| | 0.09 |
| 6,885 |
| | 37 |
| | 0.72 |
| | 12,509 |
| | 12 |
| | 0.13 |
|
Loans:(2) | | | | | | | | | | | | | | | | | | | | | | |
Commercial and commercial real estate(1) | 3,840,060 |
| | 141,977 |
| | 4.94 |
| | 3,133,525 |
| | 112,343 |
| | 4.79 |
| 4,097,967 |
| | 151,946 |
| | 4.96 |
| | 3,840,060 |
| | 141,977 |
| | 4.94 |
|
Residential mortgage | 751,694 |
| | 23,133 |
| | 4.11 |
| | 529,412 |
| | 16,146 |
| | 4.08 |
| 654,488 |
| | 20,492 |
| | 4.19 |
| | 751,694 |
| | 23,133 |
| | 4.11 |
|
Agricultural and agricultural real estate(1) | 478,564 |
| | 16,952 |
| | 4.73 |
| | 436,050 |
| | 15,835 |
| | 4.86 |
| 492,170 |
| | 17,536 |
| | 4.76 |
| | 478,564 |
| | 16,952 |
| | 4.73 |
|
Consumer | 422,869 |
| | 24,452 |
| | 7.72 |
| | 358,728 |
| | 21,476 |
| | 8.00 |
| 434,995 |
| | 25,374 |
| | 7.80 |
| | 422,869 |
| | 24,452 |
| | 7.72 |
|
Fees on loans | | | 5,362 |
| | — |
| | | | 4,016 |
| | — |
| | | 5,894 |
| | — |
| | | | 5,362 |
| | — |
|
Less: allowance for loan losses | (50,980 | ) | | — |
| | — |
| | (43,856 | ) | | — |
| | — |
| (54,775 | ) | | — |
| | — |
| | (50,980 | ) | | — |
| | — |
|
Net loans | 5,442,207 |
| | 211,876 |
| | 5.20 |
| | 4,413,859 |
| | 169,816 |
| | 5.14 |
| 5,624,845 |
| | 221,242 |
| | 5.26 |
| | 5,442,207 |
| | 211,876 |
| | 5.20 |
|
Total earning assets | 7,368,856 |
| | 253,110 |
| | 4.59 | % | | 6,030,612 |
| | 203,200 |
| | 4.50 | % | 7,942,810 |
| | 273,171 |
| | 4.60 | % | | 7,368,856 |
| | 253,110 |
| | 4.59 | % |
Nonearning Assets | 767,636 |
| | | | | | 572,473 |
| | | | | 797,893 |
| | | | | | 767,636 |
| | | | |
Total Assets | $ | 8,136,492 |
| | | | | | $ | 6,603,085 |
| | | | | $ | 8,740,703 |
| | | | | | $ | 8,136,492 |
| | | | |
Interest Bearing Liabilities | | | | | | | | | | | | | | | | | | | | | | |
Savings | $ | 3,651,370 |
| | $ | 5,988 |
| | 0.22 | % | | $ | 2,851,506 |
| | $ | 5,002 |
| | 0.23 | % | $ | 3,976,403 |
| | $ | 7,772 |
| | 0.26 | % | | $ | 3,651,370 |
| | $ | 5,988 |
| | 0.22 | % |
Time, $100,000 and over | 439,609 |
| | 2,417 |
| | 0.73 |
| | 343,369 |
| | 2,373 |
| | 0.92 |
| 369,595 |
| | 2,239 |
| | 0.81 |
| | 439,609 |
| | 2,417 |
| | 0.73 |
|
Other time deposits | 599,745 |
| | 3,790 |
| | 0.84 |
| | 570,446 |
| | 4,383 |
| | 1.03 |
| 512,551 |
| | 2,955 |
| | 0.77 |
| | 599,745 |
| | 3,790 |
| | 0.84 |
|
Short-term borrowings | 314,367 |
| | 1,083 |
| | 0.46 |
| | 343,537 |
| | 638 |
| | 0.25 |
| 199,503 |
| | 498 |
| | 0.33 |
| | 314,367 |
| | 1,083 |
| | 0.46 |
|
Other borrowings | 281,617 |
| | 10,918 |
| | 5.18 |
| | 338,307 |
| | 12,117 |
| | 4.79 |
| 288,774 |
| | 10,674 |
| | 4.94 |
| | 281,617 |
| | 10,918 |
| | 5.18 |
|
Total interest bearing liabilities | 5,286,708 |
| | 24,196 |
| | 0.61 | % | | 4,447,165 |
| | 24,513 |
| | 0.74 | % | 5,346,826 |
| | 24,138 |
| | 0.60 | % | | 5,286,708 |
| | 24,196 |
| | 0.61 | % |
Noninterest Bearing Liabilities | | | | | | | | | | | | | | | | | | | | | | |
Noninterest bearing deposits | 2,084,379 |
| | | | | | 1,531,450 |
| | | | | 2,494,850 |
| | | | | | 2,084,379 |
| | | | |
Accrued interest and other liabilities | 78,093 |
| | | | | | 58,354 |
| | | | | 64,824 |
| | | | | | 78,093 |
| | | | |
Total noninterest bearing liabilities | 2,162,472 |
| | | | | | 1,589,804 |
| | | | | 2,559,674 |
| | | | | | 2,162,472 |
| | | | |
Stockholders' Equity | 687,312 |
| | | | | | 566,116 |
| | | | | 834,203 |
| | | | | | 687,312 |
| | | | |
Total Liabilities and Stockholders' Equity | $ | 8,136,492 |
| | | | | | $ | 6,603,085 |
| | | | | $ | 8,740,703 |
| | | | | | $ | 8,136,492 |
| | | | |
Net interest income, fully taxable equivalent (non-GAAP)(1) | | | $ | 228,914 |
| | | | | | $ | 178,687 |
| | | |
Net interest income, fully tax-equivalent (non-GAAP)(1) | | | | $ | 249,033 |
| | | | | | $ | 228,914 |
| | |
Net interest spread(1) | | | | | 3.98 | % | | | | | | 3.76 | % | | | | | 4.00 | % | | | | | | 3.98 | % |
Net interest income, fully taxable equivalent (non-GAAP) to total earning assets(3) | | | | | 4.15 | % | | | | | | 3.96 | % | |
Net interest income, fully tax-equivalent (non-GAAP) to total earning assets(3) | | | | | | 4.19 | % | | | | | | 4.15 | % |
Interest bearing liabilities to earning assets | 71.74 | % | | | | | | 73.74 | % | | | | | 67.32 | % | | | | | | 71.74 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Reconciliation of Annualized Net Interest Margin, Fully Taxable Equivalent (non-GAAP)(3) | | | | | | | | | | | | |
| | | | | | | | | | | | |
Net interest income, fully taxable equivalent (non-GAAP) | | | $ | 228,914 |
| | | | | | $ | 178,687 |
| | | |
Adjustments for taxable equivalent interest(1) | | | (9,408 | ) | | | | | | (7,389 | ) | | | |
Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP)(3) | | | | | | | | | | | | |
Net interest income, fully tax-equivalent (non-GAAP) | | | | $ | 249,033 |
| | | | | | $ | 228,914 |
| | |
Adjustments for tax-equivalent interest(1) | | | | (11,581 | ) | | | | | | (9,408 | ) | | |
Net interest income (GAAP) | | | $ | 219,506 |
| | | | | | $ | 171,298 |
| | | | | $ | 237,452 |
| | | | | | $ | 219,506 |
| | |
| | | | | | | | | | | | | | | | | | | | | | |
Average Earning Assets | $ | 7,368,856 |
| | | | | | $ | 6,030,612 |
| | | | | $ | 7,942,810 |
| | | | | | $ | 7,368,856 |
| | | | |
Annualized net interest margin (GAAP) | | | | | 3.98 | % | | | | | | 3.80 | % | | | | | 4.00 | % | | | | | | 3.98 | % |
Annualized net interest margin, fully taxable equivalent (non-GAAP) | | | | | 4.15 | % | | | | | | 3.96 | % | |
Annualized net interest margin, fully tax-equivalent (non-GAAP) | | | | | | 4.19 | % | | | | | | 4.15 | % |
| | | | | | | | | | | | | | | | | | | | | | |
(1) Computed on a taxable equivalent basis using an effective tax rate of 35%. | |
(1) Computed on a tax-equivalent basis using an effective tax rate of 35%. | | (1) Computed on a tax-equivalent basis using an effective tax rate of 35%. |
(2) Nonaccrual loans are included in the average loans outstanding. | (3) Annualized net interest margin, fully taxable equivalent is a non-GAAP measure, which adjusts net interest income for the tax-favored status of certain loans and securities. Management believes this measure enhances the comparability of net interest income arising from taxable and tax-exempt sources. This measure should not be considered a substitute for operating results determined in accordance with GAAP. | |
(3) Annualized net interest margin, fully tax-equivalent is a non-GAAP measure, which adjusts net interest income for the tax-favored status of certain loans and securities. Management believes this measure enhances the comparability of net interest income arising from taxable and tax-exempt sources. This measure should not be considered a substitute for operating results determined in accordance with GAAP. | | (3) Annualized net interest margin, fully tax-equivalent is a non-GAAP measure, which adjusts net interest income for the tax-favored status of certain loans and securities. Management believes this measure enhances the comparability of net interest income arising from taxable and tax-exempt sources. This measure should not be considered a substitute for operating results determined in accordance with GAAP. |
Provision For Loan Losses
The allowance for loan losses is established through a provision charged to expense to provide, in Heartland management's opinion, an appropriate allowance for loan losses. The provision for loan losses was $5.7 million for the third quarter of 2017 compared to $5.3 million for the third quarter of 2016 compared to $2.1 million for the second quarter of 2016 and $3.2 million for the third quarter of 2015. Contributing to the lower provision during the second quarter of 2016 was a $2.3 million recovery on a previously charged-off loan. A contributing factor to the higher 2016 third quarter provision for loan losses was a $946,000 allowance for impairment recorded on two agricultural loans at New Mexico Bank & Trust classified as impaired during the quarter. Also affecting the provision for loan losses during the third quarter of 2016 were higher charge-offs at Citizens Finance Co., Heartland's consumer finance company.2016. For the first nine months of 2016,2017, the provision for loan losses was $9.5$10.2 million compared to $10.5$9.5 million for the first nine months of 2015.
2016. In determining that the allowance for loan losses is appropriate, management uses factors that include the overall composition of the loan portfolio, general economic conditions, types of loans, loan collateral values, past loss experience, loan delinquencies, substandard credits, and doubtful credits. Given the size of Heartland's loan portfolio, the level of organic loan growth, acquired loans that move out of the purchase accounting pool, changes in credit quality and the variability that can occur in the factors considered when determining the appropriateness of the allowance for loan losses, Heartland's quarterly provision for loan losses will vary from quarter to quarter. For additional details on the specific factors considered in establishing the allowance for loan losses, refer to the discussion of critical accounting policies set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Heartland's Annual Report on Form 10-K for the year ended December 31, 2015,2016, and the information under the caption "Allowance For Loan Losses" in Item 2 of this Quarterly Report on Form 10-Q report. and Note 5 to the consolidated financial statements included herein.
During the first nine months of 2017, Heartland’s credit quality remained relatively stable as nonperforming loans increased $1.4 million or 2% to $65.8 million from $64.4 million at December 31, 2016, and delinquent loan levels improved to 0.33% from 0.37% at December 31, 2016. Net charge-offs for the nine months ended September 30, 2017, were $9.7 million compared to $3.5 million for the same period in 2016. Included in the net charge-offs recorded in 2017 were $3.0 million of charge-offs related to two commercial and industrial loan relationships at Dubuque Bank and Trust and Arizona Bank & Trust and $3.7 million of charge-offs at Heartland's consumer finance subsidiary. During the nine months ended September 30, 2016, a recovery of $2.3 million was recorded on a previously charged-off loan.
Heartland believes the allowance for loan losses as of September 30, 2016,2017, was at a level commensurate with the overall risk exposure of the loan portfolio. However, if economic conditions should become more unfavorable, certain borrowers may experience difficulty and the level of nonperforming loans, charge-offs and delinquencies could rise and require further increases in the provision for loan losses.
Noninterest Income
The tables below show Heartland's noninterest income for the three- and nine-month periods ended September 30, 20162017 and 2015,2016, in thousands:
| | | Three Months Ended September 30, | | | Three Months Ended September 30, | | |
| 2016 | | 2015 | | Change | | % Change | 2017 | | 2016 | | Change | | % Change |
Service charges and fees | $ | 8,278 |
| | $ | 6,350 |
| | $ | 1,928 |
| | 30 | % | $ | 10,138 |
| | $ | 8,278 |
| | $ | 1,860 |
| | 22 | % |
Loan servicing income | 873 |
| | 1,368 |
| | (495 | ) | | (36 | ) | 1,161 |
| | 873 |
| | 288 |
| | 33 |
|
Trust fees | 3,689 |
| | 3,507 |
| | 182 |
| | 5 |
| 3,872 |
| | 3,689 |
| | 183 |
| | 5 |
|
Brokerage and insurance commissions | 1,006 |
| | 869 |
| | 137 |
| | 16 |
| 950 |
| | 1,006 |
| | (56 | ) | | (6 | ) |
Securities gains, net | 1,584 |
| | 1,767 |
| | (183 | ) | | (10 | ) | 1,679 |
| | 1,584 |
| | 95 |
| | 6 |
|
Net gains on sale of loans held for sale | 11,459 |
| | 9,823 |
| | 1,636 |
| | 17 |
| 4,997 |
| | 11,459 |
| | (6,462 | ) | | (56 | ) |
Valuation adjustment on commercial servicing rights | 5 |
| | — |
| | 5 |
| | 100 |
| 5 |
| | 5 |
| | — |
| | — |
|
Income on bank owned life insurance | 620 |
| | 372 |
| | 248 |
| | 67 |
| 766 |
| | 620 |
| | 146 |
| | 24 |
|
Other noninterest income | 1,028 |
| | 924 |
| | 104 |
| | 11 |
| 1,409 |
| | 1,028 |
| | 381 |
| | 37 |
|
Total noninterest income | $ | 28,542 |
| | $ | 24,980 |
| | $ | 3,562 |
| | 14 | % | $ | 24,977 |
| | $ | 28,542 |
| | $ | (3,565 | ) | | (12 | )% |
| |
|
| | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | | | |
| 2016 | | 2015 | | Change | | % Change |
Service charges and fees | $ | 23,462 |
| | $ | 17,654 |
| | $ | 5,808 |
| | 33 | % |
Loan servicing income | 3,433 |
| | 3,572 |
| | (139 | ) | | (4 | ) |
Trust fees | 11,127 |
| | 11,051 |
| | 76 |
| | 1 |
|
Brokerage and insurance commissions | 2,914 |
| | 2,872 |
| | 42 |
| | 1 |
|
Securities gains, net | 9,732 |
| | 9,230 |
| | 502 |
| | 5 |
|
Net gains on sale of loans held for sale | 33,794 |
| | 38,164 |
| | (4,370 | ) | | (11 | ) |
Valuation adjustment on commercial servicing rights | (41 | ) | | — |
| | (41 | ) | | (100 | ) |
Income on bank owned life insurance | 1,733 |
| | 1,355 |
| | 378 |
| | 28 |
|
Other noninterest income | 2,992 |
| | 2,406 |
| | 586 |
| | 24 |
|
Total noninterest income | $ | 89,146 |
| | $ | 86,304 |
| | $ | 2,842 |
| | 3 | % |
|
| | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2017 | | 2016 | | Change | | % Change |
Service charges and fees | $ | 29,291 |
| | $ | 23,462 |
| | $ | 5,829 |
| | 25 | % |
Loan servicing income | 4,236 |
| | 3,433 |
| | 803 |
| | 23 |
|
Trust fees | 11,482 |
| | 11,127 |
| | 355 |
| | 3 |
|
Brokerage and insurance commissions | 2,962 |
| | 2,914 |
| | 48 |
| | 2 |
|
Securities gains, net | 5,553 |
| | 9,732 |
| | (4,179 | ) | | (43 | ) |
Net gains on sale of loans held for sale | 17,961 |
| | 33,794 |
| | (15,833 | ) | | (47 | ) |
Valuation adjustment on commercial servicing rights | 29 |
| | (41 | ) | | 70 |
| | (171 | ) |
Income on bank owned life insurance | 2,039 |
| | 1,733 |
| | 306 |
| | 18 |
|
Other noninterest income | 2,941 |
| | 2,992 |
| | (51 | ) | | (2 | ) |
Total noninterest income | $ | 76,494 |
| | $ | 89,146 |
| | $ | (12,652 | ) | | (14 | )% |
Noninterest income totaled $25.0 million during the third quarter of 2017 compared to $28.5 million during the third quarter of 2016, compared to $25.0 million during the third quarter of 2015, an increasea decrease of $3.6 million or 12%. For the nine-month period ended on September 30, noninterest income totaled $76.5 million during 2017 compared to $89.1 million during 2016, a decrease of $12.7 million or 14%. This increaseDecreases in noninterest income for both the quarterly and nine-month periods under comparison reflected higher service charges and fees and increasedlower net gains on sale of loans held for sale. For the nine month period ended on September 30, noninterest income totaled $89.1 million during 2016 compared to $86.3 million during 2015, an increase of $2.8 million or 3%. This increase reflected higher service charges and fees,sale, the effect of which was partially offset by decreased net gains on sale of loans held for sale.increased service charges and fees.
Service Charges and Fees
The following tables summarize the changes in service charges and fees for the three- and nine-month periods ended September 30, 2017 and 2016, in thousands:
|
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | |
| 2017 | | 2016 | | Change | | % Change |
Service charges and fees on deposit accounts | $ | 2,577 |
| | $ | 2,018 |
| | $ | 559 |
| | 28 | % |
Overdraft fees | 2,479 |
| | 2,285 |
| | 194 |
| | 8 |
|
Customer service fees | 102 |
| | 55 |
| | 47 |
| | 85 |
|
Credit card fee income | 1,994 |
| | 1,290 |
| | 704 |
| | 55 |
|
Debit card income | 2,985 |
| | 2,629 |
| | 356 |
| | 14 |
|
Other service charges | 1 |
| | 1 |
| | — |
| | — |
|
Total service charges and fees | $ | 10,138 |
| | $ | 8,278 |
| | $ | 1,860 |
| | 22 | % |
| | | | | | | |
| Nine Months Ended September 30, | | | | |
| 2017 | | 2016 | | Change | | % Change |
Service charges and fees on deposit accounts | $ | 7,002 |
| | $ | 5,968 |
| | $ | 1,034 |
| | 17 | % |
Overdraft fees | 6,950 |
| | 6,342 |
| | 608 |
| | 10 |
|
Customer service fees | 217 |
| | 161 |
| | 56 |
| | 35 |
|
Credit card fee income | 6,212 |
| | 3,431 |
| | 2,781 |
| | 81 |
|
Debit card income | 8,908 |
| | 7,532 |
| | 1,376 |
| | 18 |
|
Other service charges | 2 |
| | 27 |
| | (25 | ) | | (93 | ) |
Total service charges and fees | $ | 29,291 |
| | $ | 23,462 |
| | $ | 5,829 |
| | 25 | % |
Service charges and fees increased $1.9 million or 30%22% to $10.1 million during the third quarter of 20162017 compared to the third quarter of 2015 and $5.8$8.3 million or 33% during the first nine months of 2016 compared to the first nine months of 2015. Service charges on checking and savings accounts recorded during the third quarter of 2016 were $2.0 million compared to $1.5 million during the third quarter of 2015, an increase of $527,000 or 35%. For the nine months ended September 30, service charges on checking and savings accounts totaled $6.0 million during 2016 compared to $4.4 million during 2015, an increase of $1.6$5.8 million or 37%. Overdraft fees were $2.3 million during the third quarter of 2016 compared25% to $1.9 million during the third quarter of 2015, an increase of $372,000 or 19%. For the nine months ended September 30, overdraft fees totaled $6.3 million during 2016 compared to $5.3 million during 2015, an increase of $1.1 million or 21%. Interchange revenue from activity on bank debit cards, along with surcharges on ATM activity, resulted in service charges and fees of $2.6 million during the third quarter of 2016 compared to $2.2 million during the third quarter of 2015, an increase of $454,000 or 21%. These same fees were $7.5 million during first nine months of 2016 compared to $6.1$29.3 million during the first nine months of 2015, an increase2017 compared to $23.5 million for the first nine months of $1.4 million or 24%. These increases2016. Increases in service charges and fees were primarily attributable to a larger demand deposit customer base, a portion of which is attributable to the acquisitions completed during the last half of 2015 and first quarter of 2016.in 2017. Fees associated with credit card services were $2.0 million during the third quarter of 2017 compared to $1.3 million during the third quarter of 2016, compared to $644,000 during the third quarter of 2015, an increase of $646,000$704,000 or 100%55%. For the first nine months of 2016,2017, these fees were $3.4$6.2 million compared to $1.5$3.4 million during the first nine months of 2015,2016, an increase of $1.9$2.8 million or 124%81%. Fees for credit card services grew in both 2016 periods,This increase resulted primarily as a result offrom efforts to increase the level of commercial credit card services provided at Heartland's subsidiary banks, including at the offices of the newly acquired banks in California and Colorado. Heartland has focused on growing its card payment solutions for businesses, particularly with its expense management service that provides business customers the ability to more efficiently manage their card-based spending.
Loan Servicing Income
The following tables show the changes in loan servicing income for the three- and nine-month periods ended September 30, 2017, and 2016, in thousands:
|
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | |
| 2017 | | 2016 | | Change | | % Change |
Commercial and agricultural loan servicing fees(1) | $ | 684 |
| | $ | 730 |
| | $ | (46 | ) | | (6 | )% |
Residential mortgage servicing fees | 2,932 |
| | 3,111 |
| | (179 | ) | | (6 | ) |
Mortgage servicing rights amortization | (2,455 | ) | | (2,968 | ) | | 513 |
| | (17 | ) |
Total loan servicing income | $ | 1,161 |
| | $ | 873 |
| | $ | 288 |
| | 33 | % |
|
| Nine Months Ended September 30, | | | | |
| 2017 | | 2016 | | Change | | % Change |
Commercial and agricultural loan servicing fees(1) | $ | 2,101 |
| | $ | 2,197 |
| | $ | (96 | ) | | (4 | )% |
Residential mortgage servicing fees | 9,319 |
| | 9,031 |
| | 288 |
| | 3 |
|
Mortgage servicing rights amortization | (7,184 | ) | | (7,795 | ) | | 611 |
| | (8 | ) |
Total loan servicing income | $ | 4,236 |
| | $ | 3,433 |
| | $ | 803 |
| | 23 | % |
| | | | |
| |
|
(1) Includes servicing fees for commercial, commercial real estate, agricultural and agricultural real estate loans |
Loan servicing income includes the fees collected for the servicing of commercial, agricultural, and mortgage loans, which are dependent upon the aggregate outstanding balances of these loans, rather than quarterly production and sale of these loans. Loan servicing income totaled $1.2 million during the third quarter of 2017 compared to $873,000 during the third quarter of 2016, compared to $1.4 million during the third quarteran increase of 2015, a decrease of $495,000$288,000 or 36%33%. On a nine-month comparative basis, loan servicing income totaled $4.2 million during 2017 compared to $3.4 million during 2016, an increase of $803,000 or 23%.
During the first nine monthsthird quarter of 2016 compared2017, Heartland entered into an agreement to $3.6sell substantially all of its GNMA servicing portfolio, which contained loans with an unpaid principal balance of approximately $773.9 million. The transaction qualifies as a sale, and $6.9 million duringof mortgage servicing rights have been de-recognized on the first nine monthsconsolidated balance sheet as of 2015, a decreaseSeptember 30, 2017. Cash of $139,000 or 4%. Loan servicing income related to the servicing of commercial and agricultural loans totaled $730,000approximately $5.1 million was received during the third quarter, and Heartland recorded an estimated loss on the sale of 2016 comparedthis portfolio of approximately $183,000. A receivable of approximately $1.6 million was recorded due to $718,000 during the third quarter of 2015, an increase of $12,000 or 2%. For the first nine monthstiming of the year, fees collected for commercial and agricultural loan servicing totaled $2.2 million for both 2016 and 2015. Fees collected fortransfer per the servicing of mortgage loans, primarily for government sponsored entities, were $3.1 million during the third quarter of 2016 compared to $2.7 million during the third quarter of 2015, an increase of $373,000 or 14%. For the first nine monthsterms of the year, fees collected for the servicing ofsale agreement and to address indemnification claims and mortgage loans, primarily for government sponsored entities, were $9.0 million during 2016 compared to $7.8 million during 2015, an increase of $1.2 million or 16%. Included in and offsetting loan servicing income is the amortization of capitalized servicing rights, which was $3.4 million during the third quarter of 2016 compared to $2.4 million during the third quarter of 2015, an increase of $970,000 or 40%. For the first nine months of the year, the amortization of capitalized servicing rights was $9.0 million during 2016 compared to $7.2 million during 2015, an increase of $1.8 million or 25%. The portfolio of mortgage loans serviced primarily for government sponsored entities by Heartland totaled $4.26 billion at September 30, 2016, compared to $3.96 billion at September 30, 2015.documentation deficiencies.
Net Gains on Sale of Loans Held for Sale
The following table summarizes Heartland's residential mortgage loanshows the activity related to the net gains on sales of loans held for sale during the most recent five quarters,three- and nine-month periods ended September 30, 2017, and 2016, in thousands:
|
| | | | | | | | | | | | | | | | | | | |
| As Of and For the Quarter Ended |
| 9/30/2016 | | 6/30/2016 | | 3/31/2016 | | 12/31/2015 | | 9/30/2015 |
Mortgage Servicing Fees | $ | 3,111 |
| | $ | 2,989 |
| | $ | 2,931 |
| | $ | 2,921 |
| | $ | 2,738 |
|
Mortgage Servicing Rights Amortization | (2,968 | ) | | (2,567 | ) | | (2,259 | ) | | (2,154 | ) | | (2,088 | ) |
Total Residential Mortgage Loan Servicing Income | $ | 143 |
| | $ | 422 |
| | $ | 672 |
| | $ | 767 |
| | $ | 650 |
|
Net Gains On Sale of Residential Mortgage Loans | $ | 11,061 |
| | $ | 10,707 |
| | $ | 10,368 |
| | $ | 6,789 |
| | $ | 8,489 |
|
Total Residential Mortgage Loan Applications | $ | 445,107 |
| | $ | 440,907 |
| | $ | 406,999 |
| | $ | 307,163 |
| | $ | 443,294 |
|
Residential Mortgage Loans Originated | $ | 324,337 |
| | $ | 324,633 |
| | $ | 238,266 |
| | $ | 258,939 |
| | $ | 370,956 |
|
Residential Mortgage Loans Sold | $ | 315,917 |
| | $ | 302,448 |
| | $ | 220,381 |
| | $ | 260,189 |
| | $ | 360,172 |
|
Residential Mortgage Loan Servicing Portfolio | $ | 4,259,459 |
| | $ | 4,203,429 |
| | $ | 4,112,519 |
| | $ | 4,057,861 |
| | $ | 3,963,677 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Total residential mortgage loan applications | $ | 271,476 |
| | $ | 445,107 |
| | $ | 828,203 |
| | $ | 1,293,013 |
|
Residential mortgage loans originated | $ | 198,911 |
| | $ | 324,337 |
| | $ | 577,399 |
| | $ | 887,236 |
|
Residential mortgage loans sold | $ | 188,501 |
| | $ | 315,917 |
| | $ | 541,318 |
| | $ | 838,746 |
|
Net gains on sale of residential mortgage loans | $ | 4,821 |
| | $ | 11,061 |
| | $ | 17,396 |
| | $ | 32,136 |
|
Net gains on sale of commercial and agricultural loans(1) | $ | 176 |
| | $ | 398 |
| | $ | 565 |
| | $ | 1,658 |
|
Percentage of residential mortgage loans originated for refinancing | 31 | % | | 38 | % | | 30 | % | | 37 | % |
| | | | | | | |
(1) Includes net gains on sale of commercial, commercial real estate and agricultural and agricultural real estate loans |
Net gains on sale of loans held for sale totaled $5.0 million during the third quarter of 2017 compared to $11.5 million during the third quarter of 2016, compared to $9.8 million during the third quartera decrease of 2015, an increase of $1.6$6.5 million or 17%56%. During the first nine months of 2016,2017, net gains on sale of loans held for sale totaled $33.8$18.0 million compared to $38.2$33.8 million during the same period in 2015,2016, a decrease of $4.4$15.8 million or 11%47%. These
gains result primarily from the gain or loss on sales of mortgage loans into the secondary market, related fees and fair value marks on the associated derivatives. Mortgage loan applications were $445.1 million in the third quarter of 2016 compared to $443.3 million in the third quarter of 2015, an increase of $1.8 million or less than 1%. During the first nine months of 2016,Heartland has experienced weakened demand for mortgage loan applications were $1.29 billion compared to $1.71 billion during the same period in 2015, a decrease of $413.2 million or 24%. The volume of mortgage loans sold totaled $315.9 million during the third quarter of 2016, a $44.3 million or 12% decrease from the $360.2 million sold during the third quarter of 2015. During the first nine months of 2016, mortgage loans sold totaled $838.7 million compared to $1.03 billion during the same period in 2015, a decrease of $192.4 million or 19%. These decreases were attributable to the decreasingrefinancings as interest rate environment during the last quarter of 2014 through the second of quarter of 2015 compared to an interest rate environment that remained relatively flat during the last quarter of 2015 and first quarter of 2016.rates have increased. The percentage of residential mortgage loans that represented refinancings was 38%31% during the third quarter of 20162017 compared to 32%38% in the third quarter of 2015.2016. For the nine months ended September 30, 2017, mortgage loan refinancings were 30% of originations compared to 37% of originations during the first nine months of 2016. Net gains on sale of loans held for sale also includes gains on the sale of commercial and agricultural loans, which totaled $176,000 during the third quarter of 2017 compared to $398,000 during the third quarter of 2016 compared to $1.0 million during the third quarter of 2015.2016. During the first nine months of 2016,2017, gains on salessale of commercial and agricultural loans totaled $1.7 million,$565,000 compared to $2.0$1.7 million during the same period in 2015. An area of emphasis for Heartland's bank subsidiary, Wisconsin Bank & Trust, particularly after the acquisition of the Community Banc-Corp of Sheboygan, Inc. bank branches in January 2015, has been the origination for sale of small business loans written under the United States Small Business Administration and United States Department of Agriculture Rural Development Business and Industry loan programs.2016.
Income on bank owned life insurance increased $248,000 or 67% from $372,000 duringSecurities Gains, Net
Securities gains, net, totaled $1.7 million for the third quarter of 20152017 compared to $620,000 during the same quarter in 2016. For the nine-month period ended September 30, income on bank owned life insurance increased $378,000 or 28% from $1.4$1.6 million during 2015 to $1.7 million in 2016. These increases were primarily attributable to the acquisitions completed during the last half of 2015 and first quarter of 2016.
Other noninterest income was $1.0 million duringfor the third quarter of 2016, compared to $924,000 during the third quarter of 2015,which is an increase of $104,000$95,000 or 11%6%. For the first nine months of 2016, noninterest income2017, securities gains, net, totaled $3.0$5.6 million during 2016 compared to $2.4$9.7 million during the first nine months of 2015,2016, a decrease of $4.2 million or 43%.
Other Noninterest Income
Other noninterest income totaled $1.4 million for the third quarter of 2017 compared to $1.0 million for the third quarter of 2016, an increase of $586,000$381,000 or 24%37%. The increase duringFor the nine month comparativemonths ended September 30, 2017, other noninterest income decreased $51,000 or 2% to $2.9 million from $3.0 million recorded in the same period in 2016. During the third quarter of 2017, $357,000 of other noninterest income was primarily attributablerecorded related to the reimbursement from a customer for loan workout expensesrecoveries on acquired loans that had been incurred and paid incharged off prior years.to the acquisition dates.
Noninterest Expenses
The tables below show Heartland's noninterest expenses for the three- and nine-month periods ended September 30, 20162017 and 2015,2016, in thousands: |
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | | |
| 2017 | | 2016 | | Change | | % Change |
Salaries and employee benefits | $ | 45,225 |
| | $ | 40,733 |
| | $ | 4,492 |
| | 11 | % |
Occupancy | 6,223 |
| | 5,099 |
| | 1,124 |
| | 22 |
|
Furniture and equipment | 2,826 |
| | 2,746 |
| | 80 |
| | 3 |
|
Professional fees | 8,450 |
| | 5,985 |
| | 2,465 |
| | 41 |
|
FDIC insurance assessments | 894 |
| | 1,180 |
| | (286 | ) | | (24 | ) |
Advertising | 1,358 |
| | 1,339 |
| | 19 |
| | 1 |
|
Core deposit intangibles and customer relationship intangibles amortization | 1,863 |
| | 1,291 |
| | 572 |
| | 44 |
|
Other real estate and loan collection expenses | 581 |
| | 640 |
| | (59 | ) | | (9 | ) |
Loss on sales/valuations of assets, net | 1,342 |
| | 794 |
| | 548 |
| | 69 |
|
Other noninterest expenses | 9,997 |
| | 8,620 |
| | 1,377 |
| | 16 |
|
Total noninterest expenses | $ | 78,759 |
| | $ | 68,427 |
| | $ | 10,332 |
| | 15 | % |
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | |
| 2016 | | 2015 | | Change | | % Change | 2017 | | 2016 | | Change | | % Change |
Salaries and employee benefits | $ | 40,733 |
| | $ | 37,033 |
| | $ | 3,700 |
| | 10 | % | $ | 128,118 |
| | $ | 124,432 |
| | $ | 3,686 |
| | 3 | % |
Occupancy | 5,099 |
| | 4,307 |
| | 792 |
| | 18 |
| 16,352 |
| | 15,322 |
| | 1,030 |
| | 7 |
|
Furniture and equipment | 2,746 |
| | 2,121 |
| | 625 |
| | 29 |
| 7,913 |
| | 7,301 |
| | 612 |
| | 8 |
|
Professional fees | 5,985 |
| | 5,251 |
| | 734 |
| | 14 |
| 24,342 |
| | 20,481 |
| | 3,861 |
| | 19 |
|
FDIC insurance assessments | 1,180 |
| | 1,018 |
| | 162 |
| | 16 |
| 2,610 |
| | 3,468 |
| | (858 | ) | | (25 | ) |
Advertising | 1,339 |
| | 1,327 |
| | 12 |
| | 1 |
| 5,141 |
| | 4,174 |
| | 967 |
| | 23 |
|
Intangible assets amortization | 1,291 |
| | 734 |
| | 557 |
| | 76 |
| |
Core deposit intangibles and customer relationship intangibles amortization | | 4,252 |
| | 4,483 |
| | (231 | ) | | (5 | ) |
Other real estate and loan collection expenses | 640 |
| | 496 |
| | 144 |
| | 29 |
| 1,774 |
| | 1,871 |
| | (97 | ) | | (5 | ) |
(Gain)/loss on sales/valuations of assets, net | 794 |
| | 721 |
| | 73 |
| | 10 |
| |
Loss on sales/valuations of assets, net | | 1,642 |
| | 1,064 |
| | 578 |
| | 54 |
|
Other noninterest expenses | 8,620 |
| | 8,988 |
| | (368 | ) | | (4 | ) | 27,653 |
| | 27,160 |
| | 493 |
| | 2 |
|
Total Noninterest Expenses | $ | 68,427 |
| | $ | 61,996 |
| | $ | 6,431 |
| | 10 | % | |
| | | | | | | | |
Efficiency ratio, fully taxable equivalent (non-GAAP)(1) | 63.88 | % | | 69.85 | % | | | | | |
| | | | | | | | |
(1) Refer to the "Reconciliation of Non-GAAP Measure-Efficiency Ratio" table that follows for details on this non-GAAP measure. | |
Total noninterest expenses | | $ | 219,797 |
| | $ | 209,756 |
| | $ | 10,041 |
| | 5 | % |
|
| | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2016 | | 2015 | | Change | | % Change |
Salaries and employee benefits | $ | 124,432 |
| | $ | 110,522 |
| | $ | 13,910 |
| | 13 | % |
Occupancy | 15,322 |
| | 12,594 |
| | 2,728 |
| | 22 |
|
Furniture and equipment | 7,301 |
| | 6,403 |
| | 898 |
| | 14 |
|
Professional fees | 20,481 |
| | 16,544 |
| | 3,937 |
| | 24 |
|
FDIC insurance assessments | 3,468 |
| | 2,873 |
| | 595 |
| | 21 |
|
Advertising | 4,174 |
| | 3,841 |
| | 333 |
| | 9 |
|
Intangible assets amortization | 4,483 |
| | 2,080 |
| | 2,403 |
| | 116 |
|
Other real estate and loan collection expenses | 1,871 |
| | 1,714 |
| | 157 |
| | 9 |
|
(Gain)/loss on sales/valuations of assets, net | 1,064 |
| | 2,583 |
| | (1,519 | ) | | (59 | ) |
Other noninterest expenses | 27,160 |
| | 25,938 |
| | 1,222 |
| | 5 |
|
Total Noninterest Expenses | $ | 209,756 |
| | $ | 185,092 |
| | $ | 24,664 |
| | 13 | % |
| | | | | | | |
Efficiency ratio, fully taxable equivalent (non-GAAP)(1) | 66.23 | % | | 69.37 | % | | | | |
| | | | | | | |
(1) Refer to the "Reconciliation of Non-GAAP Measure-Efficiency Ratio" table that follows for details on this non-GAAP measure. |
|
| | | | | | | | | | | | | | | |
Reconciliation of Non-GAAP Measure-Efficiency Ratio |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Net interest income | $ | 73,681 |
| | $ | 59,724 |
| | $ | 219,506 |
| | $ | 171,298 |
|
Taxable equivalent adjustment(1) | 3,221 |
| | 2,588 |
| | 9,408 |
| | 7,389 |
|
Fully taxable equivalent net interest income | 76,902 |
| | 62,312 |
| | 228,914 |
| | 178,687 |
|
Noninterest income | 28,542 |
| | 24,980 |
| | 89,146 |
| | 86,304 |
|
Securities gains, net | (1,584 | ) | | (1,767 | ) | | (9,732 | ) | | (9,230 | ) |
Adjusted income | $ | 103,860 |
| | $ | 85,525 |
| | $ | 308,328 |
| | $ | 255,761 |
|
| | | | | | | |
Total noninterest expenses | $ | 68,427 |
| | $ | 61,996 |
| | $ | 209,756 |
| | $ | 185,092 |
|
Less: | | | | | | | |
Intangible assets amortization | 1,291 |
| | 734 |
| | 4,483 |
| | 2,080 |
|
Partnership investment in historic rehabilitation tax credits | — |
| | 805 |
| | — |
| | 2,995 |
|
(Gain)/loss on sales/valuations of assets, net | 794 |
| | 721 |
| | 1,064 |
| | 2,583 |
|
Adjusted noninterest expenses | $ | 66,342 |
| | $ | 59,736 |
| | $ | 204,209 |
| | $ | 177,434 |
|
| | | | | | | |
Efficiency ratio, fully taxable equivalent (non-GAAP)(2) | 63.88 | % | | 69.85 | % | | 66.23 | % | | 69.37 | % |
| | | | | | | |
(1) Computed on a tax equivalent basis using an effective tax rate of 35%. |
(2) Efficiency ratio, fully taxable equivalent, expresses noninterest expenses as a percentage of fully taxable equivalent net interest income and noninterest income. This efficiency ratio is presented on a taxable equivalent basis, which adjusts net interest income and noninterest expenses for the tax favored status of certain loans, securities and historic rehabilitation tax credits. Management believes the presentation of this non-GAAP measure provides supplemental useful information for proper understanding of the financial results as it enhances the comparability of income and expenses arising from taxable and nontaxable sources and excludes specific items, as noted in the table. This measure should not be considered a substitute for operating results determined in accordance with GAAP. |
For the third quarter of 2016,2017, noninterest expenses totaled $68.4$78.8 million compared to $62.0$68.4 million during the third quarter of 2015,2016, an increase of $6.4$10.3 million or 10%15%. For the first nine months of 2016,2017, noninterest expenses totaled $209.8$219.8 million compared to $185.1$209.8 million during the first nine months of 2015,2016, an increase of $24.7$10.0 million or 13%5%.
Salaries and Employee Benefits
The largest component of noninterest expenses, salaries and employee benefits, increased $4.5 million or 11% during the third quarter of 2017 as compared to the same quarter in 2016. The increase is primarily attributable to the acquisition of Citywide Banks of Colorado, Inc. on July 7, 2017. When comparing the first nine months of 2017 to the first nine months of 2016, salaries and employee benefits increased $3.7 million or 3%. Heartland had total full-time equivalent employees of 2,024 on September 30, 2017, compared to 1,862 on June 30, 2017, and 1,846 on September 30, 2016.
Occupancy
Occupancy expense totaled $6.2 million for the third quarter of 2017 compared to $5.1 million for the third quarter of 2016, an increase of $1.1 million or 22%. For the nine-month period ending September 30, 2017, occupancy expense was $16.4 million, an increase of $1.0 million or 7% from the same period in 2016. The categories withincrease for both the most significantthree- and nine-month periods is primarily attributable to the additional locations acquired in the Citywide Banks of Colorado, Inc. transaction.
increases
Professional Fees
Professional fees increased $2.5 million or 41% during the third quarter of 2017 compared to the third quarter of 2016 and $3.9 million or 19% during the first nine months of 2017 compared to the first nine months of 2016, primarily as a result of a higher level of services provided to Heartland by third-party advisors, including services performed in connection with mergers and acquisitions and cloud-based applications.
FDIC Insurance Assessments
FDIC insurance assessments decreased $286,000 or 24% to $894,000 during the third quarter of 2017 from $1.2 million during the same quarter in 2016. For the nine-month periods ended September 30, 2017, and 2016, the FDIC insurance assessments were salaries$2.6 million and employee benefits, occupancy, furniture$3.5 million respectively, a decrease of $858,000 or 25%. Changes made to the assessment rate calculation by the FDIC went into effect on December 30, 2016, and equipment, professional feesthose changes have resulted in decreased assessments for Heartland's subsidiary banks.
Advertising Expenses
Advertising expenses were $1.4 million during the third quarter of 2017 compared to $1.3 million during the third quarter of 2016, an increase of $19,000 or 1%. Advertising expenses increased $967,000 or 23% during the first nine months of 2017 compared to the first nine months of 2016. This increase is primarily due to the costs of a deposit campaign promotion recorded during the first quarter of 2017.
Core Deposit Intangibles and intangibleCustomer Relationship Intangibles Amortization
Core deposit intangibles and customer relationship intangibles amortization increased $572,000 or 44% during the third quarter of 2017 compared to the third quarter of 2016 and decreased $231,000 or 5% during the first nine months of 2017 compared to the first nine months of 2016. Heartland recorded $18.5 million of core deposit intangibles and customer relationship intangibles in conjunction with the acquisitions of Founders Bancorp and Citywide Banks of Colorado, Inc. in 2017. During the first quarter of 2016, a $700,000 adjustment to the core deposit intangibles was recorded at Premier Valley Bank due to the loss of a significant deposit account relationship.
Loss on Sales/Valuations of Assets, Net
For the third quarter of 2017, loss on sales/valuations of assets, amortization. These increases werenet totaled $1.3 million compared to $794,000 for the same quarter in 2016, which is an increase of $548,000 or 69%. For the first nine months of 2017, loss on sales/valuations of assets, net, increased $578,000 or 54% to $1.6 million compared to $1.1 million recorded in the same period in 2016. The increase for both the three- and nine-month periods is primarily attributable to write-downs on fixed assets associated with the recent acquisitions.Citywide Banks of Colorado, Inc. transaction.
Other Noninterest Expenses
Other noninterest expenses increased $1.4 million or 16% to $10.0 million during the third quarter of 2017 compared to $8.6 million for the same quarter in 2016. Other noninterest expenses increased $493,000 or 2% to $27.7 million for the nine months ended September 30, 2017, from $27.2 million for the nine months ended September 30, 2016. The increase for the quarterly comparison is primarily related to the Citywide Banks of Colorado, Inc. transaction.
Efficiency Ratio
One of Heartland's top priorities is to improve its efficiency ratio, on a fully taxable equivalenttax-equivalent basis, by reducing it to 65% or less. During the third quarter of 2016,2017, Heartland's efficiency ratio, on a fully taxable equivalenttax-equivalent basis, was 63.88%64.54% in comparison with 67.95% during the second quarter of 2016, 66.90% during the first quarter of 2016, 68.53% during the fourth quarter of 2015 and 69.85%63.88% during the third quarter of 2015. In 2015 and 2016, Heartland has taken steps to improve its efficiency ratio. During2016. For the second and third quarters of 2015, management announcednine-month period ended September 30, 2017, the consolidation of two banking centers and the closing of seven under-performing loan production offices. During the first quarter of 2016, management announced the closing of one additional loan production office located outside of Heartland's geographic footprint. Heartland also expects to improve its efficiency ratio on a fully tax-equivalent basis increased by completing systems conversions of acquired banks as soon as possible after35 basis points to 66.58% when compared to the closing dates. The Premier Valley Bank systems conversion was completed during the first quarter of 2016, and the systems conversion for Centennial Bank was completed during the second quarter ofsame nine-month period in 2016. Heartland's efficiency ratio will show variability from quarter to quarter as a result of acquisition activities and also from the seasonality and related revenue and expense mismatchestiming differences that are inherent in the residential mortgage business.
The largest component of noninterest expenses, salaries and employee benefits, increased $3.7 million or 10% during the third quarter of 2016 as compared to the same quarter in 2015. For the first nine months of 2016 in comparison with the first nine months of 2015, salaries and employee benefits increased $13.9 million or 13%. These increases were primarily attributable to the additional salaries and employee benefits for employees of Premier Valley Bank, which was acquired in the fourth quarter of 2015, and Centennial Bank, which was acquired in the first quarter of 2016. Heartland had total full-time equivalent employees of 1,846 on September 30, 2016, compared to 1,736 on September 30, 2015. Included in the full-time equivalent employees on September 30, 2016, were approximately 67 employees at Premier Valley Bank and 100 employees at Centennial Bank. The closing of out-of-footprint mortgage loan production offices resulted in a reduction of approximately 45 full-time equivalent employees during the first quarter of 2016.
Occupancy expense increased $792,000 or 18% during the third quarter of 2016 compared to the third quarter of 2015 and $2.7 million or 22% during the first nine months of 2016 compared to the first nine months of 2015. These increases were primarily attributable to the acquisitions completed during the last half of 2015 and first quarter of 2016.
Furniture and equipment expense increased $625,000 or 29% during the third quarter of 2016 compared to the third quarter of 2015 and $898,000 or 14% during the first nine months of 2016 compared to the first nine months of 2015. These increases were primarily attributable to the acquisitions completed during the last half of 2015 and first quarter of 2016.
Professional fees increased $734,000 or 14% during the third quarter of 2016 compared to the third quarter of 2015 and $3.9 million or 24% during the first nine months of 2016 compared to the first nine months of 2015, primarily a result of additional services provided to Heartland by third-party advisors, including services performed in connection with acquisitions.
Intangible assets amortization increased $557,000 or 76% during the third quarter of 2016 compared to the third quarter of 2015 and $2.4 million or 116% during the first nine months of 2016 compared to the first nine months of 2015 as a result of the acquisitions completed during the last half of 2015 and first quarter of 2016.
Net losses on sales/valuation of assets was $794,000 for the third quarter of 2016 compared to $721,000 for the third quarter of 2015, an increase of $73,000 or 10%. For the first nine months of 2016, net losses on sales/valuation of assets were $1.1 million compared to $2.6 million during the first nine months of 2015, a decrease of $1.5 million or 59%. During the second quarter of 2016, gain/loss on sales/valuation of assets, net included a $415,000 gain resulting from the condemnation by the Wisconsin Department of Transportation of real property owned by Wisconsin Bank & Trust. For the first nine months of 2016, exclusive of the gain on disposition of the condemned land, net losses on sales/valuations of assets was $1.5 million compared to $2.6 million during the first nine months of 2015, a decrease of $1.1 million or 43%.
For the third quarter of 2016, other noninterest expenses decreased $368,000 or 4% over the third quarter of 2015. Included in other noninterest expenses for the third quarter of 2015 was $805,000 in costs associated with a partnership investment in a commercial and residential real estate project which qualified for historic rehabilitation tax credits. These credits were included as a reduction to income tax expense as further described in the Income Taxes section below. Excluding the effect of the cost associated with the tax credit investment, other noninterest expenses increased $437,000 or 5% for the third quarter of 2016 in comparison with the third quarter of 2015 and $2.0 million or 8% for the first nine months of 2016 in comparison with the first nine months of 2015. These increases were primarily a result of additional investments in technology and initial and ongoing costs associated with Heartland's acquisitions.
Income Taxes
Heartland's effective tax rate was 28.74% for the third quarter of 2017 compared to 29.02% for the third quarter of 2016 compared to 25.32% for the third quarter of 2015. Included in the determination of Heartland's income taxes for the third quarter of 2015 were federal historic rehabilitation tax credits totaling $1.1 million associated with Heartland's ownership interest in a qualifying real estate project.2016. Federal low-income housing tax credits included in the determination oftotaling $307,000 reduced Heartland's income taxes totaled $304,000 during the third quarter of 2016 compared to $145,000 during2017. For the third quarter of 2015.2016, Heartland's income taxes were reduced by federal low-income housing tax credits totaling $304,000. Heartland's effective tax rate was also affected by the level of tax-exempt interest income which, as a percentage of pre-tax income, was 24.01% during the third quarter of 2017 compared to 21.01% during the third quarter of 2016 compared to 24.61% during the third quarter of 2015.2016.
Heartland's effective tax rate was 26.59% for the first nine months of 2017 compared to 31.55% for the first nine months of 2016 compared to 26.67% for2016. Federal low-income housing tax credits totaling $921,000 and solar energy tax credits totaling $270,000 were included in the
determination of Heartland's income taxes during the first nine months of 2015. Included2017 compared to federal low-income housing tax credits of $912,000 during the first nine months of 2016. Heartland's effective tax rate for the nine months ended September 30, 2017, was impacted by a state tax credit of $830,000 related to a partnership investment in a historic rehabilitation tax credit project. The level of tax-exempt interest income, as a percentage of pre-tax income, was 25.63% during the determinationfirst nine months of 2017 compared to 19.55% during the first nine months of 2016.
As a result of the adoption of ASU 2016-09, "Compensation-Stock Compensation (Topic 718)" on January 1, 2017, Heartland's income taxes for the first nine months of 2015 were2017 included a tax benefit of $1.1 million resulting from the $4.0 million federal historic rehabilitationvesting of outstanding restricted stock unit awards and the exercise of stock options. The majority of this tax credits referred to above. Federal low-income housing tax credits includedbenefit was recorded in the determinationfirst quarter of 2017. Exclusive of this tax benefit, Heartland's income taxes totaled $912,000 duringeffective tax rate for the first nine months of 2016 compared to $435,000 during the first nine months of 2015. Tax-exempt interest income as a percentage of pre-tax income2017 was 19.55% during the first nine months of 2016 compared to 22.14% during the first nine months of 2015.27.93%.
Segment Reporting
Heartland has two reportable segments: community and other banking and retail mortgage banking. Revenues from community and other banking operations consist primarily of interest earned on loans and investment securities, fees from deposit and ancillary services and net security gains. Retail mortgage banking operating revenues consist of interest earned on mortgage loans held for sale, gains on sale of mortgage loans into the secondary market, the servicing of mortgage loans for various investorsothers and loan origination fee income. See Note 9 to ourthe consolidated financial statements included in this Quarterly Report on Form 10-Q for further information regarding ourHeartland's segment reporting.
Community and Other Banking Segment
Income before taxes for the community and other banking segment for the third quarter of 20162017 was $26.7$32.8 million compared to $21.8$26.7 million for the third quarter of 2015,2016, a $4.9$6.1 million or 23% increase. For the first nine months of 2016,2017, income before taxes for the community and other banking segment was $85.0$87.4 million compared to $59.5$85.0 million for the first nine months of 2015,2016, a $25.5$2.4 million or 43%3% increase. These increases resulted primarily from increased net interest income and noninterest income, the effect of which was partially offset by increased noninterest expenses.
Net interest income from the community and other banking segment was $88.8 million during the third quarter of 2017 compared to $72.7 million during the third quarter of 2016, compared to $58.1 million during the third quarteran increase of 2015, a $14.6$16.1 million or 25% improvement.22%. For the first nine months of 2016,nine-month period ended September 30, 2017, net interest income from the community and other banking segment was $216.2increased $18.2 million or 8% to $234.4 million compared to $167.0$216.2 million for the first nine months of 2015, an2016. This increase of $49.2 million or 29%. These increases in net interest income werewas primarily a result ofattributable to additional earning assets fromacquired in the four acquisitions completed during 2015Founders Bancorp and the CIC Bancshares,Citywide Banks of Colorado, Inc. acquisition completed during the first quarter of 2016, combined with strong loan growth experienced during the last half of 2015.transactions.
Provision for loan losses allocable to the community and other banking segment was $5.3$5.7 million for the third quarter of 20162017 compared to $3.2$5.3 million during the third quarter of 2015. A contributing factor to the higher provision for loan losses during the third quarter of 2016 was a $946,000 allowance for impairment recorded on two agricultural loans at New Mexico Bank & Trust classified as impaired during the quarter. Also affecting the provision for loan losses during the third quarter of 2016 were higher charge-offs at Citizens Finance Co., Heartland's consumer finance company.2016. For the first nine months of 2016,2017, the provision for loan losses allocable to the community and other banking segment was $9.5$10.2 million compared to $10.5$9.5 million for the first nine months of 2015. Contributing to the decrease for2016. During the first nine months of 2017, Heartland’s credit quality remained relatively stable as nonperforming loans increased $1.4 million or 2% to $65.8 million from $64.4 million at December 31, 2016, wasand delinquent loan levels improved to 0.33% from 0.37% at December 31, 2016. Net charge-offs for the nine months ended September 30, 2017, were $9.7 million compared to $3.5 million for the same period in 2016. Included in the net charge-offs recorded in 2017 were $3.0 million of charge-offs related to two commercial and industrial loan relationships at Dubuque Bank and Trust and Arizona Bank & Trust and $3.7 million of charge-offs at Heartland's consumer finance subsidiary. During the nine months ended September 30, 2016, a recovery of $2.3 million recoverywas recorded on a previously charged-off loan recorded during the second quarter of 2016.loan.
Noninterest income allocable to the community and other banking segment totaled $19.7 million during the third quarter of 2017 compared to $17.3 million during the third quarter of 2016, compared to $16.0 million during the third quarter of 2015, an increase of $1.3$2.3 million or 8%14%. For the first nine months of 2016,2017, noninterest income allocable to the community and other banking segment totaled $55.8$57.0 million compared to $48.7$55.8 million during 2015,2016, an increase of $7.1$1.2 million or 15%2%. These increases were primarily a result of increasedIncreased service charges and fees.fees income contributed to the majority of the change in noninterest income for both the three- and nine-month periods ended September 30, 2017, compared to the same periods in 2016.
Noninterest expenses allocable to the community and other banking segment totaled $70.0 million during the third quarter of 2017 compared to $58.0 million during the third quarter of 2016, compared to $49.2 million during the third quarter of 2015, an increase of $8.8$12.0 million or 18%21%. For the first nine months of 2016,nine-month period ended September 30, 2017, noninterest expenses allocable to the community and other banking segment totaled $177.4increased by $16.3 million or 9% to $193.8 million compared to $145.6$177.4 million recorded during 2015, an increasethe first nine months of $31.8 million or 22%. These2016. The categories of noninterest expenses with the most significant increases were salaries and employee benefits and professional fees. Professional fees increased primarily as a result of Heartland's recent acquisitions.additional services provided to Heartland by third-party advisors, including services performed in connection with mergers and acquisitions and the replacement of software applications with cloud-based applications.
Retail Mortgage Banking Segment
The retail mortgage banking segment recorded a loss before taxes of $2.4 million for the third quarter of 2017 compared to income before taxes of $1.8 million for the third quarter of 2016, compared to a loss before taxesdecrease of $2.3 million for the third quarter of 2015, an increase of $4.0$4.2 million or 177%238%. For the first nine months of 2017,
2016, the retail mortgage banking segment recorded a loss before income taxes of $3.5 million compared to income before taxes of $4.4 million compared to $2.4 million during the first nine months of 2015, an increase2016, a decrease of $1.9$7.8 million or 79%179%.
Noninterest income from the retail mortgage banking segment totaled $5.3 million during the third quarter of 2017 compared to $11.2 million during the third quarter of 2016, compared to $9.0 million during the third quarter of 2015, a $2.2$5.9 million or 25% increase. For the first nine months of 2016, noninterest53% decrease. Noninterest income from the retail mortgage banking segment totaled $33.4$19.5 million compared to $37.6 million duringfor the first nine months of 2015,2017 compared to $33.4 million for the first nine months of 2016, a $4.3decrease of $13.8 million or 11% decrease.41%. Retail mortgage banking income results primarily from net gains on sale of mortgage loans into the secondary market, related fees and fair value marks on the associated derivatives. Mortgage loan applications were $271.5 million in the third quarter of 2017 compared to $445.1 million in the third quarter of 2016, a decrease of $173.6 million or 39%. For the first nine months of 2017, mortgage loan applications were $828.2 million compared to $443.3 million in the third quarter of 2015, an increase of $1.8 million or less than 1%. During$1.29 billion during the first nine months of 2016, mortgage loan applications were $1.29 billion compared to $1.71 billion during the same period in 2015, a decrease of $413.2$464.8 million or 24%. The36%.The volume of mortgage loans sold totaled $315.9$188.5 million during the third quarter of 2016,2017, a $44.3$127.4 million or 12%40% decrease from the $360.2$315.9 million of mortgage loans sold during the third quarter of 2015. During2016. For the first nine months of 2017, the volume of mortgage loans sold totaled $541.3 million compared to $838.7 million during the first nine months of 2016, a $297.4 million or 35% decrease. Decreases in the volume of mortgage loans sold totaled $838.7 million compared to $1.03 billion during the same period in 2015, a decrease of $192.4 million or 19%. These decreases werewas attributable to the decreasinghigher mortgage interest rate environmentrates during the last quarterfirst nine months of 2014 through the second of quarter of 2015 compared to an interest rate environment that remained relatively flat during the last quarter of 2015 and first quarter of 2016.2017, which significantly reduced mortgage loan refinancing activity.
Noninterest expenses allocable to the retail mortgage banking segment were $8.8 million during the third quarter of 2017 compared to $10.4 million during the third quarter of 2016, compared to $12.8 million during the third quarter of 2015, a decrease of $2.4$1.7 million or 19%16%. For the first nine months of 2016,2017, noninterest expenses allocable to the retail mortgage banking segment were $32.3$26.0 million compared to $39.5$32.3 million during the first nine months of 2015,2016, a decrease of $7.1$6.3 million or 18%19%. During 2015, management refined its strategy with respect to its retail mortgage banking business by emphasizing growth in this line of business in bank subsidiary locations instead of out-of-footprint locations. To implement this strategy, seven under-performing mortgage loan production offices were closedLower expenses during the secondthird quarter and first nine months of 2017 in comparison with the third quartersquarter and first nine months of 2015, and an additional closure was announced during the first quarter of 2016. Lower expenses are attributed2016 were partially attributable to reduced transaction-based compensation paid to mortgage banking personnel as a result of the lower volume of residential mortgage loans underwritten during the first nine months of 20162017. Additionally, in comparison with first nine months of 2015. The office closures also contributedreaction to the reduction in noninterest expenseslower volume of mortgage loan originations, a series of workforce reductions were implemented during the first ninesix months of 2016 in comparison with the first nine months of 2015.2017.
FINANCIAL CONDITION
Total assets of Heartland were $8.20$9.76 billion at September 30, 2016,2017, an increase of $507.5 million$1.51 billion or 7%18% since year-end 2015. Included in this growth, at fair value, was $772.62016. Excluding $213.9 million of assets acquired at fair value in the CIC Bancshares,Founders Bancorp transaction and $1.49 billion of assets acquired at fair value in the Citywide Banks of Colorado, Inc. transaction.transaction, total assets decreased $199.1 million or 2% since December 31, 2016. Securities represented 24% of total assets at September 30, 2017, and 26% of total assets at December 31, 2016.
Lending Activities
Total net loans held to maturity were $5.44$6.37 billion at September 30, 2016,2017, compared to $5.00$5.35 billion at year-end 2015,2016, an increase of $437.2 million$1.02 billion or 9%19%. This increasechange includes $581.5$96.4 million of total loans held to maturity, at fair value, acquired in the CIC Bancshares,Founders Bancorp transaction and $985.4 million of total loans held to maturity acquired at fair value in the Citywide Banks of Colorado, Inc. transaction. Exclusive of thisthese transactions, total loans held to maturity decreased $60.2 million or 1% since year-end 2016. Excluding the loans acquired in the Citywide Banks of Colorado, Inc. transaction, total loans held to maturity decreased $43.5increased $62.9 million during the third quarter of 2016, $20.7 million2017, and six of the Heartland bank subsidiaries experienced net organic loan growth during the second quarter of 2016quarter. Price competition for quality loans remains intense, and $80.0 million during the first quarter of 2016. Some of the downward trend during the first nine months of 2016 was driven by a slowdown in demand in Heartland's markets which are highly competitiveHeartland remains committed to its pricing strategy, disciplined credit approach and where high quality clients require significant cultivation. Additionally, Heartland has placed a higher emphasis on commercial and industrial loans instead of commercial real estate loans.the client relationship.
The table below presents the composition of the loan portfolio as of September 30, 2016,2017, and December 31, 2015,2016, in thousands:
| | LOAN PORTFOLIO | September 30, 2016 | | December 31, 2015 | September 30, 2017 | | December 31, 2016 |
| Amount | | Percent | | Amount | | Percent | Amount | | Percent | | Amount | | Percent |
Loans receivable held to maturity: | | | | | | | | | | | | | | |
Commercial | $ | 1,295,316 |
| | 23.81 | % | | $ | 1,279,214 |
| | 25.56 | % | $ | 1,613,903 |
| | 25.31 | % | | $ | 1,287,265 |
| | 24.04 | % |
Commercial real estate | 2,605,296 |
| | 47.88 |
| | 2,326,360 |
| | 46.50 | % | 3,163,953 |
| | 49.63 |
| | 2,538,582 |
| | 47.42 |
|
Agricultural and agricultural real estate | 489,387 |
| | 8.99 |
| | 471,870 |
| | 9.43 |
| 511,764 |
| | 8.03 |
| | 489,318 |
| | 9.14 |
|
Residential mortgage | 625,965 |
| | 11.50 |
| | 539,555 |
| | 10.78 |
| 635,611 |
| | 9.97 |
| | 617,924 |
| | 11.54 |
|
Consumer | 425,582 |
| | 7.82 |
| | 386,867 |
| | 7.73 |
| 450,088 |
| | 7.06 |
| | 420,613 |
| | 7.86 |
|
Gross loans receivable held to maturity | 5,441,546 |
| | 100.00 | % | | 5,003,866 |
| | 100.00 | % | 6,375,319 |
| | 100.00 | % | | 5,353,702 |
| | 100.00 | % |
Unearned discount | (721 | ) | | | | (488 | ) | | | (605 | ) | | | | (699 | ) | | |
Deferred loan fees | (2,110 | ) | | | | (1,892 | ) | | | (1,299 | ) | | | | (1,284 | ) | | |
Total net loans receivable held to maturity | 5,438,715 |
| | | | 5,001,486 |
| | | 6,373,415 |
| | | | 5,351,719 |
| | |
Allowance for loan losses | (54,653 | ) | | | | (48,685 | ) | | | (54,885 | ) | | | | (54,324 | ) | | |
Loans receivable, net | $ | 5,384,062 |
| | | | $ | 4,952,801 |
| |
|
| $ | 6,318,530 |
| | | | $ | 5,297,395 |
| |
|
|
Loans secured by real estate, either fully or partially, totaled $3.66$4.25 billion or 67% of gross loans at September 30, 2016. Excluding2017. Exclusive of purchase accounting valuations and the loans acquired in the third quarter of 2017, 52% of the properties securing non-farm, nonresidential real estate loans 54% are owner occupied. The largest categories of Heartland's real estate secured loans at September 30, 2016,2017, and December 31, 2015,2016, are listed below, in thousands:
| | LOANS SECURED BY REAL ESTATE | | September 30, 2016 | | December 31, 2015 | September 30, 2017 | | December 31, 2016 |
Residential real estate, excluding residential construction and residential lot loans | $ | 1,057,902 |
| | $ | 849,296 |
| $ | 989,112 |
| | $ | 1,030,190 |
|
Industrial, manufacturing, business and commercial | 495,982 |
| | 429,891 |
| 461,281 |
| | 474,632 |
|
Agriculture | 249,548 |
| | 255,345 |
| 254,315 |
| | 255,046 |
|
Retail | 347,390 |
| | 239,975 |
| 350,888 |
| | 332,009 |
|
Office | 374,624 |
| | 275,289 |
| 335,057 |
| | 347,334 |
|
Land development and lots | 131,311 |
| | 122,551 |
| 132,625 |
| | 127,700 |
|
Hotel, resort and hospitality | 148,122 |
| | 115,083 |
| 163,076 |
| | 151,571 |
|
Multi-family | 173,636 |
| | 179,243 |
| 185,634 |
| | 185,559 |
|
Food and beverage | 105,207 |
| | 90,339 |
| 107,846 |
| | 102,225 |
|
Warehousing | 114,607 |
| | 82,356 |
| 125,231 |
| | 120,471 |
|
Health services | 150,226 |
| | 101,961 |
| 132,785 |
| | 147,412 |
|
Residential construction | 153,819 |
| | 97,205 |
| 93,968 |
| | 143,962 |
|
All other | 171,684 |
| | 164,255 |
| 169,912 |
| | 172,617 |
|
Loans acquired in the quarter | — |
| | 318,797 |
| 775,587 |
| | — |
|
Purchase accounting valuations | (17,863 | ) | | (20,994 | ) | (30,806 | ) | | (17,559 | ) |
Total loans secured by real estate | $ | 3,656,195 |
| | $ | 3,300,592 |
| $ | 4,246,511 |
| | $ | 3,573,169 |
|
Allowance For Loan Losses
The process utilized by Heartland to determine the appropriateness of the allowance for loan and losses is considered a critical accounting practice for Heartland and has remained consistent over the past several years. The allowance for loan losses represents management's estimate of identified and unidentified probable losses in the existing loan portfolio. For additional details on the specific factors considered in determining the allowance for loan losses, refer to the critical accounting policies section of our Annual Report on Form 10-K for the year ended December 31, 2015.2016.
Nonperforming loans were $57.9$65.8 million or 1.06%1.03% of total loans at September 30, 2016,2017, compared to $39.7$64.4 million or 0.79%1.20% of total loans at December 31, 2015, an increase of $18.2 million or 46%. Exclusive of $1.6 million of nonperforming loans acquired in the CIC Bancshares, Inc. transaction, nonperforming loans increased $16.7 million or 42% since year-end 2015. Contributing
to this increase was a $9.8 million agribusiness relationship at Dubuque Bank and Trust Company which is in the collection process. Based upon a current valuation of the collateral securing this loan relationship, no loss is anticipated on this credit. The increase in nonperforming loans during the first nine months of 2016 was also attributable to the loan portfolios of Heartland's recently acquired banks. Heartland's special assets group continues to work with these borrowers to obtain an appropriate resolution of these nonperforming loans.2016. At September 30, 2016,2017, approximately $23.2$29.6 million or 40%45% of Heartland's nonperforming loans had individual loan balances exceeding $1.0 million and represented loans to an aggregate of eight borrowers. The portion of Heartland's
nonperforming loans covered by government guarantees was $13.9$23.2 million at September 30, 2016,2017, and $8.9$17.3 million at December 31, 2015.2016, which includes $16.2 million and $14.3 million, respectively, of repurchased residential real estate loans.
During the third quarter of 2017, Heartland sold substantially all of its GNMA loan servicing portfolio, which contained loans with an unpaid principal balance of approximately $773.9 million. The sale effectively eliminates Heartland's obligation, as a GNMA loan servicer, to repurchase any additional non-performing government guaranteed residential real estate loans from the GNMA loan pools. In addition, any GNMA government guaranteed residential real estate loans originated after July 1, 2017, by Heartland's subsidiary banks are sold into the secondary market with servicing released.
The allowance for loan losses was 0.86% of loans at September 30, 2016, was 1.00% of loans and 94.39% of nonperforming loans2017, compared to 0.97% of loans and 122.77% of nonperforming loans1.02% at December 31, 2015. The decrease in the allowance for loan losses as a percent2016, and 83.41% and 84.37% of nonperforming loans at September 30, 2016, in comparison with2017, and December 31, 2015,2016, respectively. Excluding the acquired loans covered by the valuation reserves, the ratio of the allowance for loan losses to outstanding loans was the result of an increase in nonperforming loans as discussed above. Management does not believe the increase in nonperforming loans represents a trend for Heartland for the following reasons: (1) the new nonperforming agribusiness relationship discussed above demonstrated no impairment1.17% at September 30, 2016; (2) $8.6 million of nonperforming retail loans subject Heartland to minimal loss exposure due to government guarantees;2017, and (3) most of the balance of the increase in nonperforming loans are contained in the loan portfolios of the banks recently acquired by Heartland, which are covered by purchase accounting adjustments.1.22% at December 31, 2016. At September 30, 2016, these purchase accounting adjustments2017, valuation reserves totaled $28.5$42.8 million and covered $1.07$1.75 billion of acquired loans. At December 31, 2015, these purchase accounting adjustments2016, valuation reserves totaled $28.7$25.3 million and covered $811.0$956.0 million of acquired loans. Excluding those loans covered by the purchase accounting adjustments, the allowance to loans ratio was 1.23% at September 30, 2016, and 1.15% at December 31, 2015.
Loans delinquent 30 to 89 days as a percent of total loans was 0.40%0.33% at September 30, 2016,2017, in comparison with 0.31%0.37% at December 31, 2015.2016.
The tablestable below presentpresents the changes in the allowance for loan losses during the three- and nine-month periods ended September 30, 20162017 and 2015,2016, in thousands:
| | ANALYSIS OF ALLOWANCE FOR LOAN LOSSES | Three Months Ended September 30, | Three Months Ended September 30, |
| 2016 | | 2015 | 2017 | | 2016 |
Balance at beginning of period | $ | 51,756 |
| | $ | 45,614 |
| $ | 54,051 |
| | $ | 51,756 |
|
Provision for loan losses | 5,328 |
| | 3,181 |
| 5,705 |
| | 5,328 |
|
Recoveries on loans previously charged off | 852 |
| | 749 |
| 888 |
| | 852 |
|
Charge-offs on loans not covered by loss share agreements | (3,283 | ) | | (2,439 | ) | |
Charge-offs on loans | | (5,759 | ) | | (3,283 | ) |
Balance at end of period | $ | 54,653 |
| | $ | 47,105 |
| $ | 54,885 |
| | $ | 54,653 |
|
Annualized ratio of net charge offs to average loans | 0.17 | % | | 0.14 | % | 0.31 | % | | 0.17 | % |
| | | | | | |
| Nine Months Ended September 30, | Nine Months Ended September 30, |
| 2016 | | 2015 | 2017 | | 2016 |
Balance at beginning of period | $ | 48,685 |
| | $ | 41,449 |
| $ | 54,324 |
| | $ | 48,685 |
|
Provision for loan losses | 9,513 |
| | 10,526 |
| 10,235 |
| | 9,513 |
|
Recoveries on loans previously charged off | 4,294 |
| | 2,307 |
| 2,569 |
| | 4,294 |
|
Charge-offs on loans | (7,839 | ) | | (7,177 | ) | (12,243 | ) | | (7,839 | ) |
Balance at end of period | $ | 54,653 |
| | $ | 47,105 |
| $ | 54,885 |
| | $ | 54,653 |
|
Annualized ratio of net charge offs to average loans | 0.09 | % | | 0.15 | % | 0.23 | % | | 0.09 | % |
The table below presents the amounts of nonperforming loans and other nonperforming assets on the dates indicated, in thousands: | | NONPERFORMING ASSETS | September 30, | | December 31, | September 30, | | December 31, |
| 2016 | | 2015 | | 2015 | | 2014 | 2017 | | 2016 | | 2016 | | 2015 |
Not covered under loss share agreements: | | | | | | | | |
Nonaccrual loans | $ | 57,799 |
| | $ | 32,577 |
| | $ | 39,655 |
| | $ | 25,070 |
| $ | 63,456 |
| | $ | 57,799 |
| | $ | 64,299 |
| | $ | 39,655 |
|
Loans contractually past due 90 days or more | 105 |
| | 1,181 |
| | — |
| | — |
| 2,348 |
| | 105 |
| | 86 |
| | — |
|
Total nonperforming loans | 57,904 |
| | 33,758 |
| | 39,655 |
| | 25,070 |
| 65,804 |
| | 57,904 |
| | 64,385 |
| | 39,655 |
|
Other real estate | 10,740 |
| | 17,041 |
| | 11,524 |
| | 19,016 |
| 13,226 |
| | 10,740 |
| | 9,744 |
| | 11,524 |
|
Other repossessed assets | 821 |
| | 626 |
| | 485 |
| | 445 |
| 773 |
| | 821 |
| | 663 |
| | 485 |
|
Total nonperforming assets not covered under loss share agreements | $ | 69,465 |
| | $ | 51,425 |
| | $ | 51,664 |
| | $ | 44,531 |
| |
Covered under loss share agreements: | | | | | | | | |
Nonaccrual loans | $ | — |
| | $ | — |
| | $ | — |
| | $ | 278 |
| |
Total nonperforming assets covered under loss share agreements | $ | — |
| | $ | — |
| | $ | — |
| | $ | 278 |
| |
Total nonperforming assets | | $ | 79,803 |
| | $ | 69,465 |
| | $ | 74,792 |
| | $ | 51,664 |
|
Performing troubled debt restructured loans(1) | $ | 10,281 |
| | $ | 10,154 |
| | $ | 11,075 |
| | $ | 12,133 |
| $ | 10,040 |
| | $ | 10,281 |
| | $ | 10,380 |
| | $ | 11,075 |
|
Nonperforming loans not covered under loss share agreements to total loans | 1.06 | % | | 0.73 | % | | 0.79 | % | | 0.65 | % | |
Nonperforming assets not covered under loss share agreements to total loans plus repossessed property | 1.27 | % | | 1.10 | % | | 1.03 | % | | 1.14 | % | |
Nonperforming assets not covered under loss share agreements to total assets | 0.85 | % | | 0.76 | % | | 0.67 | % | | 0.74 | % | |
Nonperforming loans to total loans | | 1.03 | % | | 1.06 | % | | 1.20 | % | | 0.79 | % |
Nonperforming assets to total loans plus repossessed property | | 1.25 | % | | 1.27 | % | | 1.39 | % | | 1.03 | % |
Nonperforming assets to total assets | | 0.82 | % | | 0.85 | % | | 0.91 | % | | 0.67 | % |
| | | | | | | | | | | | | | |
(1) Represents accruing troubled debt restructured loans performing according to their restructured terms. |
The schedules below summarize the changes in Heartland's nonperforming assets during the third quarter of 20162017 and the first nine months of 2016,2017, in thousands:
|
| | | | | | | | | | | | | | | |
| Nonperforming Loans | | Other Real Estate Owned | | Other Repossessed Assets | | Total Nonperforming Assets |
June 30, 2017 | $ | 66,091 |
| | $ | 9,269 |
| | $ | 675 |
| | $ | 76,035 |
|
Loan foreclosures | (425 | ) | | 408 |
| | 17 |
| | — |
|
Net loan charge-offs | (4,871 | ) | | — |
| | — |
| | (4,871 | ) |
Acquired nonperforming assets | 1,075 |
| | 6,916 |
| | — |
| | 7,991 |
|
New nonperforming loans | 9,117 |
| | — |
| | — |
| | 9,117 |
|
Reduction of nonperforming loans(1) | (5,183 | ) | | — |
| | — |
| | (5,183 | ) |
OREO/Repossessed assets sales proceeds | — |
| | (3,315 | ) | | (13 | ) | | (3,328 | ) |
OREO/Repossessed assets writedowns, net | — |
| | (52 | ) | | (4 | ) | | (56 | ) |
Net activity at Citizens Finance Co. | — |
| | — |
| | 98 |
| | 98 |
|
September 30, 2017 | $ | 65,804 |
| | $ | 13,226 |
| | $ | 773 |
| | $ | 79,803 |
|
| | | | | | | |
(1) Includes principal reductions and transfers to performing status. |
| | | Nonperforming Loans | | Other Real Estate Owned | | Other Repossessed Assets | | Total Nonperforming Assets | Nonperforming Loans | | Other Real Estate Owned | | Other Repossessed Assets | | Total Nonperforming Assets |
June 30, 2016 | $ | 57,053 |
| | $ | 11,003 |
| | $ | 564 |
| | $ | 68,620 |
| |
December 31, 2016 | | $ | 64,385 |
| | $ | 9,744 |
| | $ | 663 |
| | $ | 74,792 |
|
Loan foreclosures | (619 | ) | | 598 |
| | 21 |
| | — |
| (4,955 | ) | | 4,710 |
| | 245 |
| | — |
|
Net loan charge-offs | (2,431 | ) | | — |
| | — |
| | (2,431 | ) | (9,674 | ) | | — |
| | — |
| | (9,674 | ) |
Acquired nonperforming assets | — |
| | — |
| | — |
| | — |
| 1,075 |
| | 6,916 |
| | — |
| | 7,991 |
|
New nonperforming loans | 10,884 |
| | — |
| | — |
| | 10,884 |
| 37,636 |
| | — |
| | — |
| | 37,636 |
|
Reduction of nonperforming loans(1) | (6,983 | ) | | — |
| | — |
| | (6,983 | ) | (22,663 | ) | | — |
| | — |
| | (22,663 | ) |
OREO/Repossessed assets sales proceeds | — |
| | (341 | ) | | (2 | ) | | (343 | ) | — |
| | (7,560 | ) | | (217 | ) | | (7,777 | ) |
OREO/Repossessed assets writedowns, net | — |
| | (520 | ) | | (1 | ) | | (521 | ) | — |
| | (584 | ) | | (10 | ) | | (594 | ) |
Net activity at Citizens Finance Co. | — |
| | — |
| | 239 |
| | 239 |
| — |
| | — |
| | 92 |
| | 92 |
|
September 30, 2016 | $ | 57,904 |
| | $ | 10,740 |
| | $ | 821 |
| | $ | 69,465 |
| |
September 30, 2017 | | $ | 65,804 |
| | $ | 13,226 |
| | $ | 773 |
| | $ | 79,803 |
|
| | | | | | | | | | | | | | |
(1) Includes principal reductions and transfers to performing status. |
|
| | | | | | | | | | | | | | | |
| Nonperforming Loans | | Other Real Estate Owned | | Other Repossessed Assets | | Total Nonperforming Assets |
December 31, 2015 | $ | 39,655 |
| | $ | 11,524 |
| | $ | 485 |
| | $ | 51,664 |
|
Loan foreclosures | (1,978 | ) | | 1,944 |
| | 34 |
| | — |
|
Net loan charge-offs | (3,545 | ) | | — |
| | — |
| | (3,545 | ) |
Acquired nonperforming assets | 1,582 |
| | 1,934 |
| | — |
| | 3,516 |
|
New nonperforming loans | 43,049 |
| | — |
| | — |
| | 43,049 |
|
Reduction of nonperforming loans(1) | (20,859 | ) | | — |
| | — |
| | (20,859 | ) |
OREO/Repossessed assets sales proceeds | — |
| | (3,594 | ) | | (78 | ) | | (3,672 | ) |
OREO/Repossessed assets writedowns, net | — |
| | (1,068 | ) | | 28 |
| | (1,040 | ) |
Net activity at Citizens Finance Co. | — |
| | — |
| | 352 |
| | 352 |
|
September 30, 2016 | $ | 57,904 |
| | $ | 10,740 |
| | $ | 821 |
| | $ | 69,465 |
|
| | | | | | | |
(1) Includes principal reductions and transfers to performing status. |
Securities
The composition of Heartland's securities portfolio is managed to maximize the return on the portfolio while considering the impact it has on Heartland's asset/liability position and liquidity needs. Securities represented 24% and 26% of total assets at both September 30, 20162017, and December 31, 2015.2016, respectively. Total available for sale securities as of September 30, 2016,2017, were $1.66$2.09 billion, an increase of $77.3$247.5 million or 5%13% from $1.58$1.85 billion at December 31, 2015.2016. The increase is primarily attributable to the Citywide Banks of Colorado, Inc. transaction completed in the third quarter of 2017.
The table below presents the composition of the securities portfolio, including trading, available for sale, and held to maturity securities and other, by major category, as of September 30, 2016,2017, and December 31, 2015,2016, in thousands:
| | SECURITIES PORTFOLIO COMPOSITION | September 30, 2016 | | December 31, 2015 | September 30, 2017 | | December 31, 2016 |
| Amount | | Percent | | Amount | | Percent | Amount | | Percent | | Amount | | Percent |
U.S. government corporations and agencies | $ | 4,955 |
| | 0.26 | % | | $ | 25,766 |
| | 1.37 | % | $ | 7,415 |
| | 0.31 | % | | $ | 4,700 |
| | 0.22 | % |
Mortgage-backed securities | 1,275,093 |
| | 65.61 |
| | 1,247,071 |
| | 66.37 |
| 1,565,400 |
| | 65.97 |
| | 1,290,500 |
| | 60.56 |
|
Obligation of states and political subdivisions | 627,409 |
| | 32.29 |
| | 570,730 |
| | 30.37 |
| 760,329 |
| | 32.04 |
| | 799,806 |
| | 37.53 |
|
Corporate debt securities | — |
| | — |
| | 846 |
| | 0.05 |
| |
Equity securities | 13,541 |
| | 0.70 |
| | 13,138 |
| | 0.70 |
| 16,596 |
| | 0.70 |
| | 14,520 |
| | 0.68 |
|
Other securities | 22,082 |
| | 1.14 |
| | 21,443 |
| | 1.14 |
| 23,176 |
| | 0.98 |
| | 21,560 |
| | 1.01 |
|
Total securities | $ | 1,943,080 |
| | 100.00 | % | | $ | 1,878,994 |
| | 100.00 | % | $ | 2,372,916 |
| | 100.00 | % | | $ | 2,131,086 |
| | 100.00 | % |
The percentage of Heartland's securities portfolio comprised of mortgage-backed securities was 66% at both September 30, 2016, and2017, compared to 61% at December 31, 2015.2016. Approximately 77%74% of Heartland's mortgage-backed securities were issued by government-sponsored enterprises at September 30, 2016.2017. Heartland's securities portfolio had an expected modified duration of 4.24.83 years as of September 30, 2016,2017, compared to 4.14.34 years at year-end 2015.2016.
The Volcker Rule, which is scheduled to be fully implemented inwent into effect July 21, 2017, prohibits insured depository institutions and their holding companies from engaging in proprietary trading except in limited circumstances,of securities, derivatives and certain other financial instruments for the entity's own account, and prohibits them from owning equitycertain interests in, excess of 3% of Tier 1 Capital inor relationships with, a hedge fund or private equity and hedge funds. Thefund. Heartland did not engage in any significant amount of proprietary trading, as defined in the Volcker Rule, willand the impact of the Volcker Rule on Heartland's business activities and investment portfolio was minimal. Heartland has reviewed its investment portfolio to determine if any investments meet the Volcker Rule's definition of covered funds. Based on the review, Heartland determined that the impact related to investments considered to be covered funds did not have a material impactsignificant effect on Heartland’s investment securities portfolio.its financial condition or results of operations.
At September 30, 2016,2017, Heartland had $22.1$23.2 million of other securities, including capital stock in each Federal Home Loan Bank ("FHLB") of which each of its bank subsidiaries is a member. All of these securities were classified as other securities held at cost.
Deposits
Total deposits were $6.91$8.23 billion as of September 30, 2016,2017, compared to $6.41$6.85 billion at year-end 2015,2016, an increase of $506.9$1.38 billion or 20%. This increase included $181.5 million of deposits, at fair value, acquired in the Founders Bancorp transaction and $1.21 billion of deposits, at fair value, acquired in the Citywide Banks of Colorado, Inc. transaction. Exclusive of these transactions, total deposits decreased $7.1 million or 8%.
less than 1% since December 31, 2016.
The table below presents, in thousands, the composition of Heartland's deposits by category as of September 30, 2016,2017, and December 31, 2015:2016:
| | DEPOSITS | September 30, 2016 | | December 31, 2015 | September 30, 2017 | | December 31, 2016 |
| Amount | | Percent | | Amount | | Percent | Amount | | Percent | | Amount | | Percent |
Demand | $ | 2,238,736 |
| | 32.39 | % | | $ | 1,914,141 |
| | 29.88 | % | $ | 3,009,940 |
| | 36.56 | % | | $ | 2,202,036 |
| | 32.16 | % |
Savings | 3,753,300 |
| | 54.29 |
| | 3,367,479 |
| | 52.57 |
| 4,227,340 |
| | 51.36 |
| | 3,788,089 |
| | 55.32 |
|
Time | 920,657 |
| | 13.32 |
| | 1,124,203 |
| | 17.55 |
| 994,604 |
| | 12.08 |
| | 857,286 |
| | 12.52 |
|
Total | $ | 6,912,693 |
| | 100.00 | % | | $ | 6,405,823 |
| | 100.00 | % | $ | 8,231,884 |
| | 100.00 | % | | $ | 6,847,411 |
| | 100.00 | % |
The increase in deposits includes $648.1 million of deposits, at fair value, acquired in the CIC Bancshares, Inc. transaction. Excluding deposits acquired in this transaction, total deposits increased $75.1 million during the third quarter of 2016, decreased $86.8 million during the second quarter of 2016 and decreased $129.6 million during the first quarter of 2016. Demand deposits totaled $2.24$3.01 billion at September 30, 2016,2017, an increase of $324.6$807.9 million or 17%37% since year-end 2015,2016, with $164.3$626.7 million of the increase attributable to the CIC Bancshares,Founders Bancorp and Citywide Banks of Colorado, Inc. transaction.transactions. Excluding demand deposits acquired in this transaction,these transactions, demand deposits increased $88.8$181.2 million during the third quarter of 2016, $70.4or 8% since year-end 2016. Savings
deposits increased $439.3 million during the second quarter of 2016 and $1.1 million during the first quarter of 2016. Deposit composition continuedor 12% to reflect a favorable mix with demand deposits at 32% of total deposits, savings deposits at 54% and time deposits at 13%$4.23 billion at September 30, 2016, compared to demand deposits at 30% of total deposits, savings deposits at 53% and time deposits at 17% of total deposits2017 from $3.79 billion at December 31, 2015. Contributing to the improvement in deposit mix were decreases2016. Excluding savings deposits of $619.0 million acquired in the levelFounders Bancorp and Citywide Banks of timeColorado, Inc. transactions, savings deposits which decreased $75.2$179.7 million during the third quarter of 2016, $146.5or 5% since year-end 2016. Time deposits increased $137.3 million during the second quarter ofor 16% since December 31, 2016, and $131.4 million during the first quarterexclusive of 2016 when excluding the $149.5$145.9 million of time deposits acquired in the CIC Bancshares, Inc. transaction. This trend of reduced2017, time deposits is partially a result of management's focus on building its demand and savings deposit customer base. Heartland does not plan to offer highly competitive interest rates on time deposits except to customers with which it has significant banking relationships. The decrease in time deposits during the first nine months of 2016 included the reduction in brokered time deposits which decreased $134.1$8.6 million or 70% from $190.7 million at December 31, 2015, to $56.6 million at September 30,1% since year-end 2016.
Short-Term Borrowings
Short-term borrowings, which Heartland defines as borrowings with an original maturity of one year or less, were as follows as of September 30, 2016,2017, and December 31, 2015,2016, in thousands:
| | | September 30, 2016 | | December 31, 2015 | September 30, 2017 | | December 31, 2016 |
Securities sold under agreement to repurchase | $ | 182,573 |
| | $ | 253,673 |
| $ | 133,985 |
| | $ | 229,555 |
|
Federal funds purchased | 2,700 |
| | 14,125 |
| 2,400 |
| | 40,200 |
|
Advances from the FHLB | 23,500 |
| | 11,100 |
| 25,000 |
| | 30,367 |
|
Notes payable to unaffiliated banks | — |
| | 15,000 |
| 5,000 |
| | — |
|
Other short-term borrowings | 5,332 |
| | — |
| 5,486 |
| | 6,337 |
|
Total | $ | 214,105 |
|
| $ | 293,898 |
| $ | 171,871 |
|
| $ | 306,459 |
|
Short-term borrowings generally include federal funds purchased, securities sold under agreements to repurchase, short-term FHLB advances and discount window borrowings from the Federal Reserve Bank. These funding alternatives are utilized in varying degrees depending on their pricing and availability. All of Heartland's bank subsidiaries own FHLB stock in one of the Chicago, Dallas, Des Moines, San Francisco or Topeka FHLBs, enabling them to borrow funds from their respective FHLB for short- or long-term purposes under a variety of programs. The amount of short-term borrowings of Heartland's bank subsidiariesHeartland was $214.1$171.9 million at September 30, 2016,2017, compared to $293.9$306.5 million at year-end 2015,2016, a decrease of $79.8$134.6 million or 27%44%. Short-term FHLB advances of $23.5 million were included in short-term borrowings at September 30, 2016, in comparison with $11.1 million at December 31, 2015.
All of the Heartland bank subsidiaries provide retail repurchase agreements to their customers as a cash management tool, which sweep excess funds from demand deposit accounts into these agreements. This source of funding does not increase the bank's reserve requirements. Although the aggregate balance of these retail repurchase agreements is subject to variation, the account relationships represented by these balances are principally local. The balances of retail repurchase agreements were $182.6$134.0 million at September 30, 2016,2017, compared to $253.7$229.6 million at December 31, 2015.
2016, a decrease of $95.6 million or 42%. In addition to seasonal fluctuations, these balances declined as a result of Heartland's focus on reducing the volume of retail repurchase agreement activity so that the securities pledged under these repurchase agreements would be unencumbered. The treasury management teams at the Heartland bank subsidiaries introduced other value-added cash management tools and loss prevention services to these customers to further enhance their cash management alternatives.
Also included in short-term borrowings is a $20.0$25.0 million revolving credit line agreement Heartland has with an unaffiliated bank, primarily to provide liquidity to Heartland. No balance was outstandingThe borrowing capacity on this revolving credit line was increased from $20.0 million to $25.0 million on June 14, 2017. During the third quarter of 2017, Heartland had advances of $20.0 million and repayments of $15.0 million on this line. The outstanding balance at September 30, 2016, and a balance of $15.02017, was $5.0 million was outstanding on this linecompared to $0 at December 31, 2015.2016.
Other Borrowings
The outstanding balances of other borrowings, which Heartland defines as borrowings with an original maturity date of more than one year, are shown in the table below, net of discount and issuance costs amortization, in thousands, as of September 30, 2016,2017, and December 31, 2015:2016:
| | | September 30, 2016 | | December 31, 2015 | September 30, 2017 | | December 31, 2016 |
Advances from the FHLB | $ | 12,044 |
| | $ | 17,242 |
| $ | 6,771 |
| | $ | 6,975 |
|
Wholesale repurchase agreements | 30,000 |
| | 30,000 |
| 30,000 |
| | 30,000 |
|
Trust preferred securities | 115,143 |
| | 114,877 |
| 137,222 |
| | 115,232 |
|
Senior notes | 16,000 |
| | 16,000 |
| 11,000 |
| | 16,000 |
|
Note payable to unaffiliated bank | 38,667 |
| | 8,947 |
| 34,667 |
| | 37,667 |
|
Contracts payable for purchase of real estate and other assets | 2,346 |
| | 2,434 |
| 1,965 |
| | 2,339 |
|
Subordinated notes | 79,739 |
| | 73,714 |
| 73,964 |
| | 73,857 |
|
Convertible debt | 554 |
| | — |
| |
Other borrowings | | 5,884 |
| | 6,464 |
|
Total | $ | 294,493 |
|
| $ | 263,214 |
| $ | 301,473 |
|
| $ | 288,534 |
|
Other borrowings include all debt arrangements Heartland and its subsidiaries have entered into with original maturities that extend beyond one year, including long-term FHLB borrowings, borrowings under term notes, subordinated notes and senior notes, convertible debt, and obligations under trust preferred capital securities. As of September 30, 2016,2017, the amount of other borrowings was $294.5$301.5 million, an increase of $31.3$12.9 million or 12%4% since year-end 2015.2016.
Long-term FHLB borrowings with an original term of more than one year totaled $12.0 million atAt September 30, 2016,2017, $137.2 million of trust preferred securities were outstanding compared to $17.2$115.2 million outstanding at December 31, 2015, a decrease2016, which is an increase of $5.2$22.0 million or 30%19%. Total long-term FHLB borrowingsHeartland acquired $21.6 million of trust preferred securities at September 30, 2016, had an average ratefair value in the Citywide Banks of 2.31% and an average maturity of 2.6 years.Colorado, Inc. transaction.
Structured wholesale repurchase agreements totaled $30.0 million at both September 30, 2016, and December 31, 2015. These wholesale repurchase agreements mature in 2018.
In April 2011, Heartland obtainedhas a $15.0 million amortizing term loan from an unaffiliated bank with a maturity date of April 20, 2016. At maturity, this amortizing term loan was repaid with an advance on Heartland's non-revolving credit line. The outstanding balance on this amortizing term loan was $8.9 million at December 31, 2015.
In addition to the revolving credit line described above, Heartland entered into another non-revolving credit facility with the samean unaffiliated bank, on December 15, 2015, which providedprovides a borrowing capacity notof up to exceed $50.0 million when combined with the outstanding balance on its then existing amortizing term loan with the same unaffiliated bank. On July 20, 2016, the borrowing capacity on this non-revolving credit facility was increased by $25.0$75.0 million. At September 30, 2016, $38.72017, $34.7 million was outstanding on this non-revolving credit line compared to no balance$37.7 million outstanding at December 31, 2015. Any outstanding2016. The balance onof the non-revolving credit line$34.7 million note is due in April 2021. At September 30, 2017, Heartland had $39.3 million available on this non-revolving credit facility, of which no balance was drawn. Any balance on this non-revolving credit facility is due in June 2018.
Heartland had seniorSubordinated notes totaling $16.0$74.0 million outstanding at both September 30, 2016, and December 31, 2015, and subordinated notes totaling $79.7$73.9 million were outstanding at September 30, 2016,2017, and $73.7 million at December 31, 2015. Effective with the acquisition of CIC Bancshares, Inc. on February 5, 2016, Heartland assumed $2.0 million of subordinated convertible notes and $6.0 million of subordinated debentures.respectively. During the thirdfirst quarter of 2016, $1.4 million2017, $167,000 of the subordinated convertible notes were converted into 52,9146,128 shares of Heartland common stock.stock, and the remaining balance of the subordinated convertible notes totaling $391,100 was converted into 14,353 shares of Heartland common stock during the third quarter of 2017.
A schedule of Heartland's trust preferred securities outstanding excluding deferred issuance costs, as of September 30, 2016,2017, is as follows, in thousands: | | | Amount Issued | | Issuance Date | | Interest Rate | | Interest Rate as of 9/30/16(1) | | Maturity Date | | Callable Date | Amount Issued | | Issuance Date | | Interest Rate | | Interest Rate as of 9/30/17(1) | | Maturity Date | | Callable Date |
Heartland Financial Statutory Trust IV | $ | 25,774 |
| | 03/17/2004 | | 2.75% over LIBOR | | 3.61%(2) | | 03/17/2034 | | 12/17/2016 | $ | 25,774 |
| | 03/17/2004 | | 2.75% over LIBOR | | 4.07%(2) | | 03/17/2034 | | 12/17/2017 |
Heartland Financial Statutory Trust V | 20,619 |
| | 01/27/2006 | | 1.33% over LIBOR | | 2.01%(3) | | 04/07/2036 | | 01/07/2017 | 20,619 |
| | 01/27/2006 | | 1.33% over LIBOR | | 2.63%(3) | | 04/07/2036 | | 01/07/2018 |
Heartland Financial Statutory Trust VI | 20,619 |
| | 06/21/2007 | | 6.75% | | 6.75%(4) | | 09/15/2037 | | 12/15/2016 | 20,619 |
| | 06/21/2007 | | 1.48% over LIBOR | | 2.80%(4) | | 09/15/2037 | | 12/15/2017 |
Heartland Financial Statutory Trust VII | 20,619 |
| | 06/26/2007 | | 1.48% over LIBOR | | 2.32%(5) | | 09/01/2037 | | 12/01/2016 | 20,619 |
| | 06/26/2007 | | 1.48% over LIBOR | | 2.80%(5) | | 09/01/2037 | | 12/01/2017 |
Morrill Statutory Trust I | 8,782 |
| | 12/19/2002 | | 3.25% over LIBOR | | 4.11%(6) | | 12/26/2032 | | 12/26/2016 | 8,876 |
| | 12/19/2002 | | 3.25% over LIBOR | | 4.58%(6) | | 12/26/2032 | | 12/26/2017 |
Morrill Statutory Trust II | 8,392 |
| | 12/17/2003 | | 2.85% over LIBOR | | 3.71%(7) | | 12/17/2033 | | 12/17/2016 | 8,503 |
| | 12/17/2003 | | 2.85% over LIBOR | | 4.17%(7) | | 12/17/2033 | | 12/17/2017 |
Sheboygan Statutory Trust I | 6,243 |
| | 9/17/2003 | | 2.95% over LIBOR | | 3.81% | | 09/17/2033 | | 12/17/2016 | 6,331 |
| | 09/17/2003 | | 2.95% over LIBOR | | 4.27% | | 09/17/2033 | | 12/17/2017 |
CBNM Capital Trust I | 4,247 |
| | 9/10/2004 | | 3.25% over LIBOR | | 4.10% | | 12/15/2034 | | 12/15/2016 | 4,297 |
| | 09/10/2004 | | 3.25% over LIBOR | | 4.57% | | 12/15/2034 | | 12/15/2017 |
Citywide Capital Trust III | | 6,313 |
| | 12/19/2003 | | 2.80% over LIBOR | | 4.11% | | 12/19/2033 | | 01/23/2018 |
Citywide Capital Trust IV
| | 4,166 |
| | 09/30/2004 | | 2.20% over LIBOR | | 3.51% | | 09/30/2034 | | 02/23/2018 |
Citywide Capital Trust V
| | 11,241 |
| | 05/31/2006 | | 1.54% over LIBOR | | 2.86% | | 07/25/2036 | | 12/15/2017 |
| $ | 115,295 |
| | | | | | | | | | | $ | 137,358 |
| | | | | | | | | | |
| | | | |
(1) Effective weighted average interest rate as of September 30, 2016, was 4.97% due to interest rate swap transactions on the variable rate securities as discussed in Note 7 to Heartland's consolidated financial statements. | |
(2) Effective interest rate as of September 30, 2016, was 5.01% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements. | |
(3) Effective interest rate as of September 30, 2016, was 4.69% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements. | |
(4) Interest rate is fixed at 6.75% through June 15, 2017, then resets to 1.48% over LIBOR for the remainder of the term. | |
(5) Effective interest rate as of September 30, 2016, was 4.70% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements. | |
(6) Effective interest rate as of September 30, 2016, was 4.92% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements. | |
(7) Effective interest rate as of September 30, 2016, was 4.51% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements. | |
(1) Effective weighted average interest rate as of September 30, 2017, was 5.08% due to interest rate swap transactions on the variable rate securities as discussed in Note 7 to Heartland's consolidated financial statements included herein. | | (1) Effective weighted average interest rate as of September 30, 2017, was 5.08% due to interest rate swap transactions on the variable rate securities as discussed in Note 7 to Heartland's consolidated financial statements included herein. |
(2) Effective interest rate as of September 30, 2017, was 5.01% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein. | | (2) Effective interest rate as of September 30, 2017, was 5.01% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein. |
(3) Effective interest rate as of September 30, 2017, was 4.69% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein. | | (3) Effective interest rate as of September 30, 2017, was 4.69% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein. |
(4) Effective interest rate as of September 30, 2017, was 3.87% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein. | | (4) Effective interest rate as of September 30, 2017, was 3.87% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein. |
(5) Effective interest rate as of September 30, 2017, was 3.83% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein. | | (5) Effective interest rate as of September 30, 2017, was 3.83% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein. |
(6) Effective interest rate as of September 30, 2017, was 4.92% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein. | | (6) Effective interest rate as of September 30, 2017, was 4.92% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein. |
(7) Effective interest rate as of September 30, 2017, was 4.51% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein. | | (7) Effective interest rate as of September 30, 2017, was 4.51% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein. |
CAPITAL REQUIREMENTS
Bank regulatory agencies haveThe Federal Reserve has adopted capital standards by which alladequacy guidelines that are used to assess the adequacy of capital in supervising a bank holding companies are evaluated, including requirementscompany. The federal banking agencies implemented final rules to maintain certain coreestablish a new comprehensive regulatory capital amounts included as Tierframework with a phase-in period beginning on January 1, 2015, and ending on January 1, 2019. The Final Rules implemented the third installment of the Basel Accords ("Basel III") regulatory capital at minimum levels relative to total assets (the "Tier 1 Leverage Capital Ratio"reforms and changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") and at minimum levels relativesubstantially amended the regulatory risk-based capital rules applicable to "risk-weighted assets" which are calculated by assigning value to assets, and off balance sheet commitments, based on their risk characteristics (the "Tier 1 Risk-Based Capital Ratio"), and to maintain total capital at minimum levels relative to risk-weighted assets (the "Total Risk-Based Capital Ratio"). Starting in 2015, bank holding companies became subject to a new Common Equity Tier 1 Capital Ratio, an increased Tier 1 Leverage Capital Ratio and an increased Tier 1 Risk-Based Capital Ratio under theHeartland. Under Basel III, rules and are required to include in Common Equity Tier 1Heartland must hold a conservation buffer above the adequately capitalized risk-based capital the effects of other comprehensive income adjustments, such as gains and losses on securities held to maturity, that were previously excluded from the definition of Tier 1ratios. The capital but were allowed to make a one-time election not to include those effects. Heartland and its bank subsidiaries have been, and will continue to be, managed so they meet the well-capitalized requirements under the regulatory frameworkconservation buffer for prompt corrective action and have made the one-time election to exclude the effects of other comprehensive income adjustments on their Tier 1 capital.2017 is 1.25%.
Under the Basel III rules, the requirements to be categorized as well-capitalized was established at 6.5% for the Common Equity Tier 1 Capital Ratio, and changed from 4% to 5% for the Tier 1 Leverage Capital Ratio, from 6% to 8% for the Tier 1 Risk-Based Capital Ratio and remained at 10% for the Total Risk-Based Capital Ratio. The most recent notification from the Federal Deposit Insurance CorporationFDIC categorized Heartland and each of its bank subsidiaries as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed each institution's category.
the categorization of any of these entities.
Heartland's capital ratios are calculated in accordance with Federal Reserve Board instructions and are required regulatory financial measures. The following table illustrates Heartland's capital ratios were as followsand the Federal Reserve's current capital adequacy guidelines for the dates indicated, in thousands:
|
| | | | | | | | | | | | | |
CAPITAL RATIOS | September 30, 2016 | | December 31, 2015 |
| Amount | | Ratio | | Amount | | Ratio |
Risk-Based Capital Ratio | | | | | | | |
Tier 1 capital | $ | 690,704 |
| | 10.79 | % | | $ | 683,706 |
| | 11.56 | % |
Tier 1 capital minimum requirement | 384,118 |
| | 6.00 | % | | 354,980 |
| | 6.00 | % |
Excess | $ | 306,586 |
| | 4.79 | % | | $ | 328,726 |
| | 5.56 | % |
| | | | | | | |
Common Equity Tier 1 capital | $ | 574,204 |
| | 8.97 | % | | $ | 487,132 |
| | 8.23 | % |
Common Equity Tier 1 minimum requirement | 288,089 |
| | 4.50 | % | | 266,324 |
| | 4.50 | % |
Excess | $ | 286,115 |
| | 4.47 | % | | $ | 220,808 |
| | 3.73 | % |
| | | | | | | |
Total capital | $ | 822,810 |
| | 12.85 | % | | $ | 812,568 |
| | 13.74 | % |
Total capital minimum requirement | 512,158 |
| | 8.00 | % | | 473,282 |
| | 8.00 | % |
Excess | $ | 310,652 |
| | 4.85 | % | | $ | 339,286 |
| | 5.74 | % |
Total risk-weighted assets | $ | 6,401,973 |
| | | | $ | 5,916,027 |
| | |
| | | | | | | |
Leverage Ratio | | | | | |
| | |
Tier 1 capital | $ | 690,704 |
| | 8.59 | % | | $ | 683,706 |
| | 9.58 | % |
Tier 1 capital minimum requirement | 321,580 |
| | 4.00 | % | | 285,606 |
| | 4.00 | % |
Excess | $ | 369,124 |
| | 4.59 | % | | $ | 398,100 |
| | 5.58 | % |
Average adjusted assets (less goodwill and other intangible assets) | $ | 8,039,489 |
| | | | $ | 7,140,152 |
| | |
|
| | | | | | | | | | | | | | | |
| Total Capital (to Risk- Weighted Assets) | | Tier 1 Capital (to Risk- Weighted Assets) | | Common Equity Tier 1 (to Risk- Weighted Assets) | | Tier 1 Capital (to Average Assets) |
September 30, 2017 | 13.58 | % | | 11.84 | % | | 10.01 | % | | 9.48 | % |
Minimum capital requirement | 8.00 | % | | 6.00 | % | | 4.50 | % | | 4.00 | % |
Well capitalized requirement | 10.00 | % | | 8.00 | % | | 6.50 | % | | 5.00 | % |
Minimum capital requirement, including fully-phased in capital conservation buffer (2019) | 10.50 | % | | 8.50 | % | | 7.00 | % | | N/A |
|
Risk-weighted assets | $ | 7,517,635 |
| | $ | 7,517,635 |
| | $ | 7,517,635 |
| | N/A |
|
Average Assets | N/A |
| | N/A |
| | N/A |
| | $ | 9,387,922 |
|
| | | | | | | |
December 31, 2016 | 14.01 | % | | 11.93 | % | | 10.09 | % | | 9.28 | % |
Minimum capital requirement | 8.00 | % | | 6.00 | % | | 4.50 | % | | 4.00 | % |
Well capitalized requirement | 10.00 | % | | 8.00 | % | | 6.50 | % | | 5.00 | % |
Minimum capital requirement, including fully-phased in capital conservation buffer (2019) | 10.50 | % | | 8.50 | % | | 7.00 | % | | N/A |
|
Risk-weighted assets | $ | 6,335,807 |
| | $ | 6,335,807 |
| | $ | 6,335,807 |
| | N/A |
|
Average Assets | N/A |
| | N/A |
| | N/A |
| | $ | 8,147,357 |
|
Retained earnings that could be available for the payment of dividends to Heartland filed a shelf registration statement withtotaled approximately $244.6 million and $182.1 million at September 30, 2017, and December 31, 2016, respectively under the SEC on August 28, 2013,capital requirements to register up to $75.0remain well capitalized. At September 30, 2017, and December 31, 2016, retained earnings that could be available for the payment of dividends under the most restrictive minimum capital requirements totaled $394.9 million in common stock, warrants or a combination of these securities, which became effective on September 9, 2013, and expired on September 9, 2016. In anticipation of the upcoming expiration of this shelf registration statement,$308.9 million, respectively.
On July 29, 2016, Heartland filed a universal shelf registration statement with the SEC to register debt or equity securities on July 29, 2016.securities. This shelf registration statement, which was effective immediately, provides Heartland with the ability to raise capital, subject to market conditions and SEC rules and limitations, if Heartland's board of directors decides to do so. This registration statement will permit Heartland, from time to time, in one or more public offerings, to offer debt securities, subordinated notes, common stock, preferred stock, rights or any combination of these securities. The amount of securities that may be offered is not specified in the registration statement, and the terms of any future offerings will be established at the time of the offering. In November 2016, Heartland offered and sold 1,379,690 shares of its common stock pursuant to this registration statement.
On February 5, 2016,28, 2017, Heartland completed the acquisition of CIC Bancshares, Inc.,Founders Bancorp, parent company of CentennialFounders Community Bank, headquarteredbased in Denver, Colorado, in a transaction valued atSan Luis Obispo, California. Based on Heartland's closing common stock price of $49.55 per share on February 28, 2017, the aggregate consideration was approximately $76.9 million. Of this amount, approximately $15.7$31.0 million, which was paid in cash and the remainder was provided by the issuancedelivery of 2,003,235455,877 shares of Heartland common stock and 3,000 sharescash of newly issued Heartland Series D convertible preferred stock. In addition, Heartland assumed convertible notes and subordinated debt totaling approximately $7.9$8.4 million.
During the thirdfirst quarter of 2016, 1,9222017, 333 shares of the Heartland Series D convertible preferred stock wasissued in the CIC Bancshares, Inc. acquisition were converted into 76,66513,283 shares of Heartland common stock, and $1.4 million$167,000 of the assumedsubordinated convertible notes assumed in the acquisition were converted into 52,9146,128 shares of Heartland common stock. The remaining subordinated convertible debt balance of $391,100 related to the CIC Bancshares, Inc., acquisition were converted to 14,353 shares of common stock during the third quarter of 2017.
On July 7, 2017, Heartland completed the acquisition of Citywide Banks of Colorado, Inc., parent company of Citywide Banks, headquartered in Aurora, Colorado. Simultaneous with closing of the transaction, Centennial Bankclose, Citywide Banks merged into Heartland’s Summit Bank & Trust subsidiary, with the resulting institution operating under the nameHeartland's Centennial Bank and Trust.Trust subsidiary. The aggregate consideration was approximately $211.2 million, of which $58.6 million was cash, and the remainder was settled by delivery of 3,216,161 shares of Heartland common stock.
Common stockholders' equity was $703.0$980.7 million at September 30, 2016,2017, compared to $581.5$739.6 million at December 31, 2015.2016. Book value per common share was $28.48$32.75 at September 30, 2016,2017, compared to $25.92$28.31 at year-end 2015.2016. Changes in common stockholders' equity and book value per common share are the result of earnings, dividends paid, stock transactions and mark-to-market adjustment for unrealized gains and losses on securities available for sale and derivative instruments. Heartland had
unrealized losses on securities available for sale, and derivative instruments, net of applicable taxes, of $3.1$20.1 million at September 30, 2016,2017, compared to unrealized losses of $6.0$30.2 million at December 31, 2015.2016.
COMMITMENTS AND CONTRACTUAL OBLIGATIONS
Commitments and Contractual Obligations
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Heartland's bank subsidiaries evaluate the creditworthiness of customers to which they extend a credit commitment on a case-by-case basis and may require collateral to secure any credit extended. The amount of collateral obtained is based upon management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties. Standby letters of credit and financial guarantees are conditional commitments issued by Heartland's bank subsidiaries to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. At September 30, 2016,2017, and December 31, 2015,2016, commitments to extend credit aggregated $1.68$2.03 billion and $1.56$1.57 billion, respectively. Standby letters of credit aggregated $44.7$52.3 million at September 30, 20162017, and $55.4$46.1 million at December 31, 2015.2016.
Contractual obligations and other commitments were disclosed in Heartland's Annual Report on Form 10-K for the year ended December 31, 2015. As part of the CIC Bancshares, Inc. transaction completed on February 5, 2016, Heartland assumed $2.0 million of subordinated convertible notes and $6.0 million of subordinated debentures. Except for the commitments with respect to the CIC Bancshares, Inc. acquisition and the Founders Bancorp acquisition described below, there have been no material changes in Heartland's contractual obligations and other commitments since that report was filed.
On October 29, 2016, Heartland entered into a definitive merger agreement for the acquisition of Founders Bancorp, parent company of Founders Community Bank, based in San Luis Obispo, California. The transaction is valued at approximately $29.1 million, subject to adjustment. Of the merger consideration, 70% will be in the form of shares of Heartland common stock, and 30% will be in cash. As of September 30, 2016, Founders Community Bank had total assets of $198.5 million, which includes gross loans of $106.6 million and total deposits of $180.5 million. The closing of the acquisition is subject to customary closing conditions, including approvals by the Founders Bancorp shareholders and banking regulators, and is expected to occur in the first quarter of 2017. Simultaneous with the close, Founders Community Bank will be merged into Heartland's Premier Valley Bank subsidiary. Heartland expects the acquisition to be accretive to its earning per share during 2018.
On a consolidated basis, Heartland maintains a large balance of short-term securities that, when combined with cash from operations, Heartland believes are adequate to meet its funding obligations.
At the parent company level, routine funding requirements consist primarily of dividends paid to stockholders, debt service on revolving credit arrangements and trust preferred securities issuances, repayment requirements under other debt obligations and payments for acquisitions. The parent company obtains the funding to meet these obligations from dividends collected frompaid by its bank subsidiaries and the issuance of debt and equity securities. At September 30, 2016, Heartland’sOn June 14, 2017, Heartland's revolving credit agreement with an unaffiliated bank provided a maximum borrowing capacity ofwas increased to $25.0 million from $20.0 million of which no balancemaximum borrowing capacity. At September 30, 2017, $5.0 million was outstanding. Heartland also has a non-revolving credit line with the same unaffiliated bank. At September 30, 2016, $27.12017, $39.3 million was available on this non-revolving credit line. These credit agreements contain specific financial covenants, all of which Heartland was in compliance with as of September 30, 2016.2017.
The ability of Heartland to pay dividends to its stockholders is dependent upon dividends paid by its subsidiaries. The bank subsidiaries are subject to statutory and regulatory restrictions on the amount they may pay in dividends. To maintain acceptable capital ratios in Heartland's bank subsidiaries, certain portions of their retained earnings are not available for the payment of dividends.
Heartland continues to explore opportunities to expand its footprint of independent community banks. In the current banking industry environment, Heartland seeks these opportunities for growth through acquisitions. Heartland is primarily focused on possible acquisitions in the markets it currently serves, in which there would be an opportunity to growincrease market share, achieve efficiencies and provide greater convenience for current customers. Future expenditures relating to expansion efforts, in addition to those identified above, cannot be estimated at this time.
Derivative Financial Instruments
Heartland enters into mortgage banking derivatives, which are classified as free standing derivatives. These derivatives include interest rate lock commitments provided to customers to fund certain mortgage loans to be sold into the secondary market and forward commitments for the future delivery of such loans. We enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of future interest rate changes on the commitments to fund thethese loans as well asand on the residential mortgage loans held as available for sale. See Note 7 "Derivative Financial Instruments,"to the consolidated financial statements include in this Quarterly Report on Form 10-Q for additional information on our derivative financial instruments.
LIQUIDITY
Liquidity refers to Heartland's ability to maintain cash flow that is adequate to meet maturing obligations and existing commitments, to withstand fluctuations in deposit levels, to fund operations and to provide for customers' credit needs. The liquidity of Heartland
principally depends on cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings, and its ability to borrow funds in the money or capital markets.
Operating activities provided $95.6cash of $129.9 million of cash during the first nine months of 2016. Operating activities2017 compared to cash provided $53.6of $96.7 million of cash during the first nine months of 2015.2016. The largest factor in this change was the activity in loans originated for sale and the proceeds on sales of loans held for sale, which usedprovided cash of $3.5$25.5 million during the first nine months of 20162017 compared to $31.3using $3.5 million in cash during the first nine months of 2016.
Investing activities provided cash of $156.6 million during the first nine months of 2015. Also affecting the change in cash provided from operating activities during the first nine months of 2016 was the $15.7 million increase in net income.
Investing activities provided2017 compared to providing cash of $168.7 million during the first nine months of 20162016. The proceeds from sales, paydowns and maturities of securities available for sale and held to maturity were $1.30 billion during the first nine months of 2017 compared to providing $3.9$912.0 million during the first nine months of 2015. The proceeds from2016. Cash used for the purchase of securities sales, paydowns and maturities were $917.0available for sale totaled $1.30 billion during the first nine months of 2017 compared to $888.9 million during the first nine months of 2016 compared to $1.02 billion during the first nine months2016. Net decreases in loans provided cash of 2015. Cash used for the purchase of securities totaled $890.8$45.1 million and $138.7 million during the first nine months of 2017 and 2016, comparedrespectively. Also contributing to $784.5cash provided by investing activities was net cash and cash equivalents received in acquisitions, which totaled $71.1 million during the first nine months of 2015. A net change in loans provided $138.7 million of cash during the first nine months of 20162017 compared to using $225.4$8.1 million during the first nine months of 2015.2016.
Financing activities used cash of $321.0$193.5 million during the first nine months of 20162017 compared to using cash of $40.3$322.1 million during the first nine months of 2015. The2016. A net increase in demand and savings deposits provided cash of $211.8$181.2 million during the first nine months of 20162017 compared to a net increase in demand and savings deposits providing $118.3cash of $160.3 million during the first nine months of 2015.2016. The net decrease in savings deposits used cash of $179.7 million for the first nine months of 2017 compared to providing cash of $51.5 million during the first nine months of 2016. A net decrease in time deposits used cash of $8.6 million during the first nine months of 2017 compared to using cash of $353.1 million during the first nine months of 2016 compared to a net decrease in time deposits using2016. Short-term borrowings activity, including short-term FHLB activity and revolving credit line agreement activity, used cash of $26.3$169.0 million during the first nine months of 2015. Short-term borrowings activity used2017 compared to using cash of $115.6 million during the first nine months of 2016 compared to using $19.82016. Other borrowing activity used cash of $8.6 million of cash during the first nine months of 2015. Other borrowing activity provided2017 compared to providing cash of $24.4 million during the first nine months of 2016 compared to using $105.8 million of cash during the first nine months of 2015.2016. Included in the use of cash during the first nine months of 2016 was cash of $81.7 million of cash used for the redemption of Heartland's Series C Preferred Stock issued to the U.S. Treasury under the Small Business Lending Fund.Fund program.
Management of investing and financing activities, and market conditions, determine the level and the stability of net interest cash flows. Management attempts to mitigate the impact of changes in market interest rates to the extent possible, so that balance sheet growth is the principal determinant of increases in net interest cash flows.
Heartland's short-term borrowing balances are dependent on commercial cash management and smaller correspondent bank relationships, and, as a result, short-term borrowing balances will normally fluctuate. Management believes these balances, on average, to be stable sources of funds; however, management intends to rely more heavily on deposit growth and additional FHLB borrowings in the future.
In the event of short-term liquidity needs, Heartland's bank subsidiaries may purchase federal funds from each other or from correspondent banks, and may also borrow from the Federal Reserve Bank. Additionally, the bank subsidiaries’ FHLB memberships give them the ability to borrow funds for short- and long-term purposes under a variety of programs.
Heartland's revolving credit line agreement with an unaffiliated bank provides a maximum borrowing capacity of $25.0 million. During the third quarter of 2017, Heartland had advances of $20.0 million and repayments of which no balance had been drawn at$15.0 million on this line. At September 30, 2016.2017, $5.0 million was outstanding on this agreement. Heartland also has a non-revolving credit line with the same unaffiliated bank, under which $27.1had $39.3 million was available forof borrowing capacity at September 30, 2016.
2017, of which no balance had been drawn.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market prices and rates. Heartland's market risk is comprised primarily of interest rate risk resulting from its core banking activities of lending and deposit gathering.accepting deposits. Interest rate risk measures the impact on earnings from changes in interest rates and the effect on the current fair market values of Heartland's assets, liabilities and off-balance sheet contracts. Heartland's objective is to measure this risk and manage theits balance sheet to avoid unacceptable potential for economic loss.
Management continually develops and applies strategies to mitigate market risk. Exposure to market risk is reviewed on a regular basis by the asset/liability committees of the banksHeartland's bank subsidiaries and, on a consolidated basis, by Heartland's executive management and board of directors. Darling Consulting Group, Inc. has been engaged to provide asset/liability management position assessment and strategy formulation services to Heartland and its bank subsidiaries. At least quarterly, a detailed review of the balance sheet risk profile is performed for Heartland and each of its bank subsidiaries. Included in these reviews are interest rate sensitivity analyses, which simulate changes in net interest income in response to various interest rate scenarios. These analyses consider current portfolio rates, existing maturities, repricing opportunities and market interest rates, in addition to prepayments and growth under different interest rate assumptions. Selected strategies are modeled prior to implementation to determine their effect on Heartland's interest rate risk profile and net interest income. Heartland believes its primary market risk exposures did not change significantly in the first nine months of 2016.2017.
The core interest rate risk analysis utilized by Heartland examines the balance sheet under increasing and decreasing interest rate scenarios that are neither too modest nor too extreme. All rate changes are ramped over a 12-month horizon based upon a parallel shift in the yield curve and then maintained at those levels over the remainder of the simulation horizon. Using this approach, management is able to see the effect that both a gradual change of rates (year 1) and a rate shock (year 2 and beyond) could have on Heartland's net interest income. Starting balances in the model reflect actual balances on the “as of” date, adjusted for material and significant transactions. Pro-forma balances remain static. This methodology enables interest rate risk embedded within the existing balance sheet structure to be isolated from the interest rate risk often caused by growth in assets and liabilities. Due to the low interest rate environment, the simulations under a decreasing interest rate scenario were prepared using a 100 basis point shift in rates. The most recent reviews at September 30, 2016,2017, and September 30, 2015,2016, provided the following results, in thousands:
| | | 2016 | | 2015 | 2017 | | 2016 |
| Net Interest Margin | | % Change From Base | | Net Interest Margin | | % Change From Base | Net Interest Margin | | % Change From Base | | Net Interest Margin | | % Change From Base |
Year 1 | | | | | | | | | | | | | | |
Down 100 Basis Points | $ | 278,279 |
| | (2.74 | )% | | $ | 226,875 |
| | (2.16 | )% | $ | 343,033 |
| | (2.69 | )% | | $ | 278,279 |
| | (2.74 | )% |
Base | $ | 286,122 |
| | | | $ | 231,875 |
| | | $ | 352,502 |
| | | | $ | 286,122 |
| | |
Up 200 Basis Points | $ | 286,325 |
| | 0.07 | % | | $ | 228,740 |
| | (1.35 | )% | $ | 351,265 |
| | (0.35 | )% | | $ | 286,325 |
| | 0.07 | % |
Year 2 | | | | | | | |
| | | | | | | |
|
Down 100 Basis Points | $ | 264,054 |
| | (7.71 | )% | | $ | 217,114 |
| | (6.37 | )% | $ | 326,965 |
| | (7.24 | )% | | $ | 264,054 |
| | (7.71 | )% |
Base | $ | 286,429 |
| | 0.11 | % | | $ | 232,015 |
| | 0.06 | % | $ | 354,238 |
| | 0.49 | % | | $ | 286,429 |
| | 0.11 | % |
Up 200 Basis Points | $ | 298,565 |
| | 4.35 | % | | $ | 236,465 |
| | 1.98 | % | $ | 369,712 |
| | 4.88 | % | | $ | 298,565 |
| | 4.35 | % |
Heartland uses derivative financial instruments to manage the impact of changes in interest rates on its future interest income or interest expense. Heartland is exposed to credit-related losses in the event of nonperformance by the counterparties to these derivative instruments, but believes it has minimized the risk of these losses by entering into the contracts with large, stable financial institutions. The estimated fair market values of these derivative instruments are presented in Note 7 to the consolidated financial statements.statements included in this Quarterly Report on Form 10-Q.
Heartland enters into financial instruments with off balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. Commitments to extend credit are agreements to lend funds to a customer as long as there is no violation of any condition established in the contract relating to the commitment. Commitments generally have fixed expiration dates and may require collateral from the borrower. Standby letters of credit are conditional commitments issued by Heartland to guarantee the performance of a customer to a third party up to a stated amount and subject to specified terms and conditions. These commitments to extend credit and standby letters of credit are not recorded on the balance sheet until the loan is made or the letter or credit is issued.
Heartland periodically holds a securities trading portfolio that would also be subject to elements of market risk. These securities are carried on the balance sheet at fair value. At both September 30, 2016,2017, and December 31, 2015,2016, Heartland held no securities in its securities trading portfolio.
ITEM 4. CONTROLS AND PROCEDURES
Based on an evaluation, as of the end of the period covered by this quarterly report on Form 10-Q, under the supervision and with the participation of Heartland's management, including its Chief Executive Officer and Chief Financial Officer, the Chief Executive Officer and Chief Financial Officer have concluded that Heartland's disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) were effective. During the quarter ended September 30, 2016,2017, there have been no changes in Heartland's internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) that have materially affected, or are reasonably likely to materially affect, Heartland's internal control over financial reporting.
PART II
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which Heartland or its subsidiaries are a party other than ordinary routine litigation incidental to their respective businesses. While the ultimate outcome of current legal proceedings cannot be predicted with certainty, it is the opinion of management that the resolution of these legal actions should not have a material effect on Heartland's consolidated financial position or results of operations.
ITEM 1A. RISK FACTORS
There have been no material changes in the risk factors applicable to Heartland from those disclosed in Part I, Item 1A. “Risk Factors” in Heartland's 20152016 Annual Report on Form 10-K. Please refer to that section of Heartland's Form 10-K report for disclosures regarding the risks and uncertainties related to Heartland's business.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Heartland's board of directors has authorized management to acquire and hold up to 500,000 shares of common stock as treasury shares at any one time. Heartland and its affiliated purchasers made no purchases of its common stock during the nine months ended September 30, 2016.2017.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
ITEM 5. OTHER INFORMATION
None.None
ITEM 6. EXHIBITS
Exhibits
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31.1 | (1) | |
31.2 | (1) | |
32.1 | (1) | |
32.2 | (1) | |
101 | | Financial statement formatted in Extensible Business Reporting Language: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Changes in Equity, and (vi) the Notes to Consolidated Financial Statements. |
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______________
(1) Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned there unto duly authorized.
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HEARTLAND FINANCIAL USA, INC. |
(Registrant) |
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/s/ Lynn B. Fuller |
By: Lynn B. Fuller |
Chairman and Chief Executive Officer |
(Principal Executive Officer and Duly Authorized Officer) |
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/s/ Bryan R. McKeag |
By: Bryan R. McKeag |
Executive Vice President and Chief Financial Officer |
(Principal Financial Officer and Duly Authorized Officer) |
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/s/ Janet M. Quick |
By: Janet M. Quick |
Executive Vice President and Deputy Chief Financial Officer |
(Principal Accounting Officer and Duly Authorized Officer) |
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Dated: November 9, 20168, 2017 |