WASHINGTON, D.C. 20549
(I.R.S. employer identification number)
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “accelerated filer,” “large"large accelerated filer”filer", “smaller"accelerated filer", "smaller reporting company”company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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 6, 2017,8, 2023, the Registrant had outstanding 29,949,07042,661,604 shares of common stock, $1.00 par value per share.
HEARTLAND FINANCIAL USA, INC.
PART I
ITEM 1. FINANCIAL STATEMENTS
| | | | | | | | | | | |
HEARTLAND FINANCIAL USA, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data) | | | |
| September 30, 2023 (Unaudited) | | December 31, 2022 |
ASSETS | | | |
Cash and due from banks | $ | 248,756 | | | $ | 309,045 | |
Interest bearing deposits with other banks and other short-term investments | 99,239 | | | 54,042 | |
Cash and cash equivalents | 347,995 | | | 363,087 | |
Time deposits in other financial institutions | 1,490 | | | 1,740 | |
Securities: | | | |
| | | |
Carried at fair value (cost of $6,229,280 at September 30, 2023, and $6,788,729 at December 31, 2022) | 5,482,687 | | | 6,147,144 | |
Held to maturity, net of allowance for credit losses of $0 at both September 30, 2023, and December 31, 2022 (fair value of $758,626 at September 30, 2023, and $776,557 at December 31, 2022) | 835,468 | | | 829,403 | |
Other investments, at cost | 90,001 | | | 74,567 | |
Loans held for sale | 6,262 | | | 5,277 | |
Loans receivable: | | | |
Held to maturity | 11,872,436 | | | 11,428,352 | |
| | | |
Allowance for credit losses | (110,208) | | | (109,483) | |
Loans receivable, net | 11,762,228 | | | 11,318,869 | |
Premises, furniture and equipment, net | 184,638 | | | 190,479 | |
Premises, furniture and equipment held for sale | 2,798 | | | 6,851 | |
Other real estate, net | 14,362 | | | 8,401 | |
Goodwill | 576,005 | | | 576,005 | |
Core deposit intangibles and customer relationship intangibles, net | 20,026 | | | 25,154 | |
Servicing rights, net | — | | | 7,840 | |
Cash surrender value on life insurance | 196,694 | | | 193,403 | |
| | | |
Other assets | 609,139 | | | 496,008 | |
TOTAL ASSETS | $ | 20,129,793 | | | $ | 20,244,228 | |
LIABILITIES AND EQUITY | | | |
LIABILITIES: | | | |
Deposits: | | | |
Demand | $ | 4,792,813 | | | $ | 5,701,340 | |
Savings | 8,754,911 | | | 9,994,391 | |
Time | 3,553,269 | | | 1,817,278 | |
Total deposits | 17,100,993 | | | 17,513,009 | |
| | | |
Short-term borrowings | 392,634 | | | 376,117 | |
Other borrowings | 372,059 | | | 371,753 | |
Accrued expenses and other liabilities | 438,577 | | | 248,294 | |
TOTAL LIABILITIES | 18,304,263 | | | 18,509,173 | |
STOCKHOLDERS' EQUITY: | | | |
| | | |
| | | |
Preferred stock (par value $1 per share; authorized 188,500 and 6,104 shares at September 30, 2023, and December 31, 2022; none issued or outstanding at both September 30, 2023, and December 31, 2022) | — | | | — | |
| | | |
| | | |
| | | |
| | | |
Series E Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 11,500 shares authorized at both September 30, 2023, and December 31, 2022; 11,500 shares issued and outstanding at both September 30, 2023 and December 31, 2022) | 110,705 | | | 110,705 | |
Common stock (par value $1 per share; 60,000,000 shares authorized at both September 30, 2023, and December 31, 2022; issued 42,656,303 shares at September 30, 2023, and 42,467,394 shares at December 31, 2022) | 42,656 | | | 42,467 | |
Capital surplus | 1,088,267 | | | 1,080,964 | |
Retained earnings | 1,226,740 | | | 1,120,925 | |
Accumulated other comprehensive loss | (642,838) | | | (620,006) | |
| | | |
| | | |
| | | |
TOTAL STOCKHOLDERS' EQUITY | 1,825,530 | | | 1,735,055 | |
TOTAL LIABILITIES AND EQUITY | $ | 20,129,793 | | | $ | 20,244,228 | |
| | | |
See accompanying notes to consolidated financial statements. | | | |
|
| | | | | | | |
HEARTLAND FINANCIAL USA, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data) | | | |
| September 30, 2017 (Unaudited) | | December 31, 2016 |
ASSETS | | | |
Cash and due from banks | $ | 180,751 |
| | $ | 151,290 |
|
Interest bearing deposits with the Federal Reserve Bank and other banks and other short-term investments | 70,985 |
| | 7,434 |
|
Cash and cash equivalents | 251,736 |
| | 158,724 |
|
Time deposits in other financial institutions | 19,793 |
| | 2,105 |
|
Securities: | | |
|
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 |
|
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 |
|
Other investments, at cost | 23,176 |
| | 21,560 |
|
Loans held for sale | 35,795 |
| | 61,261 |
|
Loans receivable: | | |
|
Held to maturity | 6,373,415 |
| | 5,351,719 |
|
Allowance for loan losses | (54,885 | ) | | (54,324 | ) |
Loans receivable, net | 6,318,530 |
| | 5,297,395 |
|
Premises, furniture and equipment, net | 174,533 |
| | 163,614 |
|
Premises, furniture and equipment held for sale | 4,428 |
| | 414 |
|
Other real estate, net | 13,226 |
| | 9,744 |
|
Goodwill | 236,615 |
| | 127,699 |
|
Core deposit intangibles and customer relationship intangibles, net | 37,028 |
| | 22,775 |
|
Servicing rights, net | 26,599 |
| | 35,778 |
|
Cash surrender value on life insurance | 142,073 |
| | 112,615 |
|
Other assets | 122,355 |
| | 123,869 |
|
TOTAL ASSETS | $ | 9,755,627 |
| | $ | 8,247,079 |
|
LIABILITIES AND EQUITY | | | |
LIABILITIES: | | | |
Deposits: | | | |
Demand | $ | 3,009,940 |
| | $ | 2,202,036 |
|
Savings | 4,227,340 |
| | 3,788,089 |
|
Time | 994,604 |
| | 857,286 |
|
Total deposits | 8,231,884 |
| | 6,847,411 |
|
Short-term borrowings | 171,871 |
| | 306,459 |
|
Other borrowings | 301,473 |
| | 288,534 |
|
Accrued expenses and other liabilities | 68,715 |
| | 63,759 |
|
TOTAL LIABILITIES | 8,773,943 |
| | 7,506,163 |
|
STOCKHOLDERS' EQUITY: | | | |
Preferred stock (par value $1 per share; authorized 17,604 shares; none issued or outstanding at both September 30, 2017, and December 31, 2016) | — |
| | — |
|
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) | — |
| | — |
|
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) | — |
| | — |
|
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 |
|
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 |
|
Capital surplus | 503,262 |
| | 328,376 |
|
Retained earnings | 468,556 |
| | 416,109 |
|
Accumulated other comprehensive loss | (21,018 | ) | | (31,046 | ) |
Treasury stock at cost (0 shares at both September 30, 2017, and December 31, 2016) | — |
| | — |
|
TOTAL STOCKHOLDERS' EQUITY | 981,684 |
| | 740,916 |
|
TOTAL LIABILITIES AND EQUITY | $ | 9,755,627 |
| | $ | 8,247,079 |
|
| | | |
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, |
| 2023 | | 2022 | | 2023 | | 2022 |
INTEREST INCOME: | | | | | | | |
Interest and fees on loans | $ | 182,394 | | | $ | 122,913 | | | $ | 505,136 | | | $ | 334,000 | |
Interest on securities: | | | | | | | |
Taxable | 54,800 | | | 45,648 | | | 168,948 | | | 116,366 | |
Nontaxable | 6,584 | | | 6,164 | | | 18,990 | | | 17,874 | |
Interest on federal funds sold | 3 | | | — | | | 3 | | | — | |
Interest on interest bearing deposits in other financial institutions | 1,651 | | | 1,081 | | | 4,833 | | | 1,715 | |
TOTAL INTEREST INCOME | 245,432 | | | 175,806 | | | 697,910 | | | 469,955 | |
INTEREST EXPENSE: | | | | | | | |
Interest on deposits | 92,744 | | | 15,158 | | | 231,617 | | | 24,665 | |
Interest on short-term borrowings | 1,167 | | | 360 | | | 4,437 | | | 494 | |
Interest on other borrowings (includes $(63) and $189 of interest (income) expense related to derivatives reclassified from accumulated other comprehensive loss for the three months ended September 30, 2023 and 2022, respectively, and $638 and $552 of interest expense related to derivatives reclassified from accumulated other comprehensive income (loss) for the nine months ended September 30, 2023 and 2022, respectively) | 5,765 | | | 4,412 | | | 16,756 | | | 11,780 | |
TOTAL INTEREST EXPENSE | 99,676 | | | 19,930 | | | 252,810 | | | 36,939 | |
NET INTEREST INCOME | 145,756 | | | 155,876 | | | 445,100 | | | 433,016 | |
Provision for credit losses | 1,516 | | | 5,492 | | | 9,969 | | | 11,983 | |
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES | 144,240 | | | 150,384 | | | 435,131 | | | 421,033 | |
NONINTEREST INCOME: | | | | | | | |
Service charges and fees | 18,553 | | | 17,282 | | | 55,316 | | | 50,599 | |
Loan servicing income | 278 | | | 831 | | | 1,403 | | | 1,951 | |
Trust fees | 4,734 | | | 5,372 | | | 15,810 | | | 17,130 | |
Brokerage and insurance commissions | 692 | | | 649 | | | 2,065 | | | 2,357 | |
Capital markets fees | 1,845 | | | 1,809 | | | 8,331 | | | 9,719 | |
Securities losses, net (includes $59 and $(1,070) of net security gains (losses) reclassified from accumulated other comprehensive loss for the three months ended September 30, 2023 and 2022, respectively, and $(1,370) and $(1,720) of net security losses reclassified from accumulated other comprehensive income (loss) for the nine months ended September 30, 2023 and 2022, respectively) | (114) | | | (1,055) | | | (1,532) | | | (272) | |
| | | | | | | |
| | | | | | | |
Unrealized gain (loss) on equity securities, net | 13 | | | (211) | | | 165 | | | (615) | |
Net gains on sale of loans held for sale | 905 | | | 1,832 | | | 3,786 | | | 8,144 | |
Valuation adjustment on servicing rights | — | | | — | | | — | | | 1,658 | |
Income on bank owned life insurance | 858 | | | 694 | | | 3,042 | | | 1,741 | |
Other noninterest income | 619 | | | 1,978 | | | 2,489 | | | 5,877 | |
TOTAL NONINTEREST INCOME | 28,383 | | | 29,181 | | | 90,875 | | | 98,289 | |
NONINTEREST EXPENSES: | | | | | | | |
Salaries and employee benefits | 62,262 | | | 62,661 | | | 186,510 | | | 192,867 | |
Occupancy | 6,438 | | | 6,794 | | | 20,338 | | | 21,250 | |
Furniture and equipment | 2,720 | | | 2,928 | | | 8,698 | | | 9,480 | |
Professional fees | 13,616 | | | 14,289 | | | 41,607 | | | 42,286 | |
FDIC insurance assessments | 3,313 | | | 1,988 | | | 9,627 | | | 5,134 | |
Advertising | 1,633 | | | 1,554 | | | 6,670 | | | 4,392 | |
Core deposit and customer relationship intangibles amortization | 1,625 | | | 1,856 | | | 5,128 | | | 5,993 | |
Other real estate and loan collection expenses | 481 | | | 304 | | | 984 | | | 577 | |
Loss (gain) on sales/valuations of assets, net | 108 | | | (251) | | | (2,149) | | | (3,435) | |
Acquisition, integration and restructuring costs | 2,429 | | | 2,156 | | | 5,994 | | | 5,144 | |
Partnership investment in tax credit projects | 1,136 | | | 979 | | | 1,828 | | | 1,793 | |
Other noninterest expenses | 15,292 | | | 13,625 | | | 46,307 | | | 40,678 | |
TOTAL NONINTEREST EXPENSES | 111,053 | | | 108,883 | | | 331,542 | | | 326,159 | |
INCOME BEFORE INCOME TAXES | 61,570 | | | 70,682 | | | 194,464 | | | 193,163 | |
Income taxes (includes $9,877 and $302 of income tax benefit reclassified from accumulated other comprehensive loss for the three months ended September 30, 2023 and 2022, respectively, and $19,253 and $466 of income tax benefit reclassified from accumulated other comprehensive income (loss) for the nine months ended September 30, 2023 and 2022, respectively) | 13,479 | | | 14,118 | | | 44,181 | | | 41,637 | |
NET INCOME | 48,091 | | | 56,564 | | | 150,283 | | | 151,526 | |
| | | | | | | |
| | | | | | | |
Preferred dividends | (2,013) | | | (2,013) | | | (6,038) | | | (6,038) | |
| | | | | | | |
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS | $ | 46,078 | | | $ | 54,551 | | | $ | 144,245 | | | $ | 145,488 | |
EARNINGS PER COMMON SHARE - BASIC | $ | 1.08 | | | $ | 1.28 | | | $ | 3.38 | | | $ | 3.43 | |
EARNINGS PER COMMON SHARE - DILUTED | $ | 1.08 | | | $ | 1.28 | | | $ | 3.37 | | | $ | 3.42 | |
CASH DIVIDENDS DECLARED PER COMMON SHARE | $ | 0.30 | | | $ | 0.27 | | | $ | 0.90 | | | $ | 0.81 | |
| | | | | | | |
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, |
| 2017 | | 2016 | | 2017 | | 2016 |
INTEREST INCOME: | | | | | | | |
Interest and fees on loans | $ | 82,906 |
| | $ | 70,046 |
| | $ | 217,898 |
| | $ | 208,280 |
|
Interest on securities: | | | | | | | |
Taxable | 10,394 |
| | 7,917 |
| | 27,246 |
| | 24,604 |
|
Nontaxable | 5,086 |
| | 3,717 |
| | 15,297 |
| | 10,793 |
|
Interest on federal funds sold | 34 |
| | 1 |
| | 37 |
| | 12 |
|
Interest on interest bearing deposits in other financial institutions | 558 |
| | 6 |
| | 1,112 |
| | 13 |
|
TOTAL INTEREST INCOME | 98,978 |
| | 81,687 |
| | 261,590 |
|
| 243,702 |
|
INTEREST EXPENSE: | | | | | | | |
Interest on deposits | 5,073 |
| | 4,001 |
| | 12,966 |
| | 12,195 |
|
Interest on short-term borrowings | 271 |
| | 235 |
| | 498 |
| | 1,083 |
|
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 |
|
TOTAL 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: | | | | | | | |
Service charges and fees | 10,138 |
| | 8,278 |
| | 29,291 |
| | 23,462 |
|
Loan servicing income | 1,161 |
| | 873 |
| | 4,236 |
| | 3,433 |
|
Trust fees | 3,872 |
| | 3,689 |
| | 11,482 |
| | 11,127 |
|
Brokerage and insurance commissions | 950 |
| | 1,006 |
| | 2,962 |
| | 2,914 |
|
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 | 4,997 |
| | 11,459 |
| | 17,961 |
| | 33,794 |
|
Valuation allowance on commercial servicing rights | 5 |
| | 5 |
| | 29 |
| | (41 | ) |
Income on bank owned life insurance | 766 |
| | 620 |
| | 2,039 |
| | 1,733 |
|
Other noninterest income | 1,409 |
| | 1,028 |
| | 2,941 |
| | 2,992 |
|
TOTAL NONINTEREST INCOME | 24,977 |
| | 28,542 |
| | 76,494 |
|
| 89,146 |
|
NONINTEREST EXPENSES: | | | | | | | |
Salaries and employee benefits | 45,225 |
| | 40,733 |
| | 128,118 |
| | 124,432 |
|
Occupancy | 6,223 |
| | 5,099 |
| | 16,352 |
| | 15,322 |
|
Furniture and equipment | 2,826 |
| | 2,746 |
| | 7,913 |
| | 7,301 |
|
Professional fees | 8,450 |
| | 5,985 |
| | 24,342 |
| | 20,481 |
|
FDIC insurance assessments | 894 |
| | 1,180 |
| | 2,610 |
| | 3,468 |
|
Advertising | 1,358 |
| | 1,339 |
| | 5,141 |
| | 4,174 |
|
Core deposit intangibles and customer relationship intangibles amortization | 1,863 |
| | 1,291 |
| | 4,252 |
| | 4,483 |
|
Other real estate and loan collection expenses | 581 |
| | 640 |
| | 1,774 |
| | 1,871 |
|
Loss on sales/valuations of assets, net | 1,342 |
| | 794 |
| | 1,642 |
| | 1,064 |
|
Other noninterest expenses | 9,997 |
| | 8,620 |
| | 27,653 |
| | 27,160 |
|
TOTAL NONINTEREST EXPENSES | 78,759 |
| | 68,427 |
| | 219,797 |
|
| 209,756 |
|
INCOME BEFORE INCOME TAXES | 30,357 |
| | 28,468 |
| | 83,914 |
|
| 89,383 |
|
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 | 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 |
|
EARNINGS PER COMMON SHARE - BASIC | $ | 0.73 |
| | $ | 0.82 |
| | $ | 2.23 |
| | $ | 2.51 |
|
EARNINGS PER COMMON SHARE - DILUTED | $ | 0.72 |
| | $ | 0.81 |
| | $ | 2.21 |
| | $ | 2.48 |
|
CASH DIVIDENDS DECLARED PER COMMON SHARE | $ | 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) |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
NET INCOME | $ | 48,091 | | | $ | 56,564 | | | $ | 150,283 | | | $ | 151,526 | |
OTHER COMPREHENSIVE INCOME (LOSS) | | | | | | | |
Changes in available for sale ("AFS") securities: | | | | | | | |
Net change in unrealized loss on securities | (128,987) | | | (218,463) | | | (106,378) | | | (860,365) | |
Reclassification adjustment for net losses on hedged AFS securities | 36,362 | | | — | | | 65,872 | | | — | |
Reclassification adjustment for net (gains) losses realized in net income | (59) | | | 1,070 | | | 1,370 | | | 1,720 | |
Income tax benefit | 22,943 | | | 53,529 | | | 8,388 | | | 213,328 | |
Other comprehensive loss on AFS securities | (69,741) | | | (163,864) | | | (30,748) | | | (645,317) | |
Changes in securities held to maturity: | | | | | | | |
| | | | | | | |
Net amortization of unrealized losses on securities transferred from AFS | 2,893 | | | — | | | 8,401 | | | — | |
Income tax expense | (709) | | | — | | | (2,462) | | | — | |
Other comprehensive income on held to maturity securities | 2,184 | | | — | | | 5,939 | | | — | |
Change in cash flow hedges: | | | | | | | |
Net change in unrealized gain on derivatives | — | | | — | | | 1,952 | | | — | |
Reclassification adjustment for net (gains) losses on derivatives realized in net income | (63) | | | 189 | | | 638 | | | 552 | |
Income tax benefit (expense) | 22 | | | (43) | | | (613) | | | (119) | |
Other comprehensive income (loss) on cash flow hedges | (41) | | | 146 | | | 1,977 | | | 433 | |
Other comprehensive loss | (67,598) | | | (163,718) | | | (22,832) | | | (644,884) | |
TOTAL COMPREHENSIVE INCOME (LOSS) | $ | (19,507) | | | $ | (107,154) | | | $ | 127,451 | | | $ | (493,358) | |
| | | | | | | |
See accompanying notes to consolidated financial statements. | | | | | | | |
|
| | | | | | | | | | | | | | | |
HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Dollars in thousands) |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
NET INCOME | $ | 21,632 |
| | $ | 20,208 |
| | $ | 61,600 |
| | $ | 61,187 |
|
OTHER COMPREHENSIVE INCOME | | | | | | | |
Securities: | | | | | | | |
Net change in unrealized gain on securities | 6,940 |
| | (5,696 | ) | | 22,002 |
| | 18,274 |
|
Reclassification adjustment for net gains realized in net income | (1,679 | ) | | (1,586 | ) | | (5,553 | ) | | (9,964 | ) |
Net change in non-credit related other than temporary impairment | — |
| | — |
| | — |
| | 7 |
|
Income taxes | (2,084 | ) | | 2,871 |
| | (6,433 | ) | | (3,364 | ) |
Other comprehensive income (loss) on securities | 3,177 |
| | (4,411 | ) | | 10,016 |
| | 4,953 |
|
Derivatives used in cash flow hedging relationships: | | | | | | | |
Net change in unrealized loss on derivatives | 17 |
| | 844 |
| | (656 | ) | | (4,623 | ) |
Reclassification adjustment for net losses on derivatives realized in net income | 308 |
| | 492 |
| | 1,005 |
| | 1,463 |
|
Income taxes | (123 | ) | | (517 | ) | | (337 | ) | | 1,155 |
|
Other comprehensive income (loss) on cash flow hedges | 202 |
| | 819 |
| | 12 |
| | (2,005 | ) |
Other comprehensive income (loss) | 3,379 |
| | (3,592 | ) | | 10,028 |
| | 2,948 |
|
TOTAL COMPREHENSIVE INCOME | $ | 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, |
| 2023 | | 2022 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net income | $ | 150,283 | | | $ | 151,526 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 15,467 | | | 18,758 | |
Provision for credit losses | 9,969 | | | 11,983 | |
Net amortization of premium on securities | 23,332 | | | 50,886 | |
Securities losses, net | 1,532 | | | 272 | |
| | | |
Unrealized (gain) loss on equity securities, net | (165) | | | 615 | |
Stock based compensation | 7,742 | | | 7,411 | |
| | | |
Loans originated for sale | (122,764) | | | (244,908) | |
Proceeds on sales of loans held for sale | 138,603 | | | 263,904 | |
Net gains on sale of loans held for sale | (3,762) | | | (6,926) | |
Increase in accrued interest receivable | (9,203) | | | (5,348) | |
Decrease in prepaid expenses | 964 | | | 1,479 | |
Increase in accrued interest payable | 46,697 | | | 483 | |
| | | |
Capitalization of servicing rights | (24) | | | (1,218) | |
Valuation adjustment on servicing rights | — | | | (1,658) | |
Gain on sales/valuations of assets, net | (2,149) | | | (390) | |
Net excess tax benefit (expense) from stock based compensation | (115) | | | 129 | |
Other, net | 140,670 | | | 66,142 | |
NET CASH PROVIDED BY OPERATING ACTIVITIES | 397,077 | | | 313,140 | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
| | | |
Proceeds from the sale of securities available for sale | 331,196 | | | 1,031,521 | |
Proceeds from the sale of securities held to maturity | — | | | 2,337 | |
| | | |
| | | |
Proceeds from the maturity of and principal paydowns on securities available for sale | 480,362 | | | 758,453 | |
Proceeds from the maturity of and principal paydowns on securities held to maturity | 2,325 | | | 2,500 | |
Proceeds from the maturity of time deposits in other financial institutions | 250 | | | 1,154 | |
Proceeds from the sale, maturity of, redemption of and principal paydowns on other investments | 13,255 | | | 13,674 | |
Purchase of securities available for sale | (276,635) | | | (1,982,073) | |
| | | |
Purchase of other investments | (28,851) | | | (10,045) | |
Net increase in loans | (505,924) | | | (1,002,220) | |
Purchase of bank owned life insurance policies | (226) | | | (209) | |
Proceeds from bank owned life insurance policies | — | | | 502 | |
Proceeds from sale of mortgage servicing rights | 6,714 | | | — | |
Capital expenditures | (5,701) | | | (12,276) | |
| | | |
Proceeds from the sale of equipment | 4,446 | | | 6,789 | |
Net cash expended in divestitures | — | | | (50,616) | |
Proceeds on sale of OREO and other repossessed assets | 5,672 | | | 2,564 | |
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES | $ | 26,883 | | | $ | (1,237,945) | |
| | | |
|
| | | | | | | |
HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) | |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net income | $ | 61,600 |
| | $ | 61,187 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 22,738 |
| | 22,975 |
|
Provision for loan losses | 10,235 |
| | 9,513 |
|
Net amortization of premium on securities | 20,186 |
| | 24,093 |
|
Securities gains, net | (5,553 | ) | | (9,732 | ) |
Stock based compensation | 3,588 |
| | 3,073 |
|
Loans originated for sale | (548,768 | ) | | (863,354 | ) |
Proceeds on sales of loans held for sale | 586,202 |
| | 883,758 |
|
Net gains on sale of loans held for sale | (11,968 | ) | | (23,938 | ) |
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 | (5,993 | ) | | (9,856 | ) |
Valuation allowance on commercial servicing rights | (29 | ) | | 41 |
|
Write downs and losses on sales of assets, net | 1,642 |
| | 1,064 |
|
Net excess tax benefit from stock based compensation | 1,121 |
| | 1,121 |
|
Other, net | (5,637 | ) | | (2,419 | ) |
NET CASH PROVIDED BY OPERATING ACTIVITIES | 129,857 |
| | 96,676 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Proceeds from the sale of securities available for sale | 1,127,091 |
| | 768,617 |
|
Proceeds from the sale of securities held to maturity | — |
| | 4,557 |
|
Proceeds from the sale of other investments | — |
| | 4,722 |
|
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 | 161,827 |
| | 130,549 |
|
Proceeds from the maturity of and principal paydowns on securities held to maturity | 6,645 |
| | 8,271 |
|
Proceeds from the maturity of and principal paydowns on time deposits in other financial institutions | 24,931 |
| | 250 |
|
Proceeds from the maturity of and principal paydowns on other investments | 2,574 |
| | — |
|
Purchase of securities available for sale | (1,299,492 | ) | | (888,903 | ) |
Purchase of other investments | (1,012 | ) | | (1,875 | ) |
Net decrease in loans | 45,139 |
| | 138,725 |
|
Purchase of bank owned life insurance policies | (2,000 | ) | | — |
|
Proceeds from bank owned life insurance policies | — |
| | 111 |
|
Proceeds from sale of mortgage servicing rights | 5,137 |
| | — |
|
Capital expenditures | (6,876 | ) | | (8,318 | ) |
Net cash and cash equivalents received in acquisitions | 71,089 |
| | 8,084 |
|
Proceeds from the sale of equipment | 1,845 |
| | 686 |
|
Proceeds on sale of OREO and other repossessed assets | 7,578 |
| | 3,266 |
|
NET CASH PROVIDED BY INVESTING ACTIVITIES | $ | 156,647 |
| | $ | 168,742 |
|
| | | |
| | | | | | | | | | | |
HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (Unaudited) (Dollars in thousands) | | | |
| Nine Months Ended September 30, |
| 2023 | | 2022 |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Net decrease in demand deposits | $ | (908,527) | | | $ | (396,552) | |
Net (decrease) increase in savings deposits | (1,239,480) | | | 1,204,574 | |
Net increase in time deposit accounts | 1,735,991 | | | 105,695 | |
| | | |
| | | |
Net (decrease) increase in short-term borrowings | (285,255) | | | 14,003 | |
Proceeds from short term advances | 617,391 | | | 236,000 | |
Repayments of short term advances | (315,619) | | | (236,000) | |
| | | |
Repayments of other borrowings | (740) | | | (198) | |
| | | |
| | | |
| | | |
| | | |
| | | |
Proceeds from issuance of common stock | 1,527 | | | 1,896 | |
Dividends paid | (44,340) | | | (40,352) | |
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES | (439,052) | | | 889,066 | |
Net decrease in cash and cash equivalents | (15,092) | | | (35,739) | |
Cash and cash equivalents at beginning of year | 363,087 | | | 435,599 | |
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 347,995 | | | $ | 399,860 | |
Supplemental disclosures: | | | |
Cash paid for income/franchise taxes | $ | 47,240 | | | $ | 33,412 | |
Cash paid for interest | 206,113 | | | 36,456 | |
Loans transferred to OREO | 12,776 | | | 8,458 | |
Transfer of premises from premises, furniture and equipment, net, to premises, furniture and equipment held for sale | 4,091 | | | 4,555 | |
Transfer of premises from premises, furniture and equipment held for sale to premises, furniture and equipment, net | 5,825 | | | — | |
| | | |
| | | |
Dividends declared, not paid | 2,141 | | | 2,013 | |
| | | |
| | | |
| | | |
Transfer of available for sale securities to held to maturity securities | — | | | 748,252 | |
| | | |
| | | |
| | | |
See accompanying notes to consolidated financial statements. |
|
| | | | | | | |
HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (Unaudited) (Dollars in thousands) | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Net increase in demand deposits | $ | 181,206 |
| | $ | 160,313 |
|
Net increase (decrease) in savings deposits | (179,721 | ) | | 51,530 |
|
Net decrease in time deposit accounts | (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 | (168,667 | ) | | (101,409 | ) |
Proceeds from short term FHLB advances | 186,039 |
| | 243,100 |
|
Repayments of short term FHLB advances | (191,405 | ) | | (257,250 | ) |
Proceeds from other borrowings | — |
| | 40,000 |
|
Repayments of other borrowings | (8,573 | ) | | (15,562 | ) |
Redemption of preferred stock | — |
| | (81,698 | ) |
Purchase of treasury stock | (440 | ) | | (2,293 | ) |
Proceeds from issuance of common stock | 804 |
| | 1,863 |
|
Dividends paid | (9,153 | ) | | (7,638 | ) |
NET CASH USED BY FINANCING ACTIVITIES | (193,492 | ) | | (322,128 | ) |
Net increase (decrease) in cash and cash equivalents | 93,012 |
| | (56,710 | ) |
Cash and cash equivalents at beginning of year | 158,724 |
| | 258,799 |
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 251,736 |
| | $ | 202,089 |
|
Supplemental disclosures: | | | |
Cash paid for income/franchise taxes | $ | 10,775 |
| | $ | 16,550 |
|
Cash paid for interest | $ | 23,034 |
| | $ | 23,864 |
|
Loans transferred to OREO | $ | 4,955 |
| | $ | 1,359 |
|
Purchases of securities available for sale, accrued, not settled | $ | 2,063 |
| | $ | — |
|
Sales of securities available for sale, accrued, not settled | $ | 125 |
| | $ | 250 |
|
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. Stockholders' Equity | | | |
| Preferred Stock | | Common Stock | | Capital Surplus | | Retained Earnings | | Accumulated Other Comprehensive Loss | | | | | | Total Equity |
Balance at June 30, 2022 | $ | 110,705 | | | $ | 42,439 | | | $ | 1,076,766 | | | $ | 1,031,076 | | | $ | (486,918) | | | | | | | $ | 1,774,068 | |
Comprehensive (loss) income | | | | | | | 56,564 | | | (163,718) | | | | | | | (107,154) | |
| | | | | | | | | | | | | | | |
Cash dividends declared: | | | | | | | | | | | | | | | |
Preferred, $175.00 per share | | | | | | | (2,013) | | | | | | | | | (2,013) | |
Common, $0.27 per share | | | | | | | (11,459) | | | | | | | | | (11,459) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Issuance of 4,667 shares of common stock | | | 5 | | | 190 | | | | | | | | | | | 195 | |
Stock based compensation | | | | | 2,321 | | | | | | | | | | | 2,321 | |
Balance at September 30, 2022 | $ | 110,705 | | | $ | 42,444 | | | $ | 1,079,277 | | | $ | 1,074,168 | | | $ | (650,636) | | | | | | | $ | 1,655,958 | |
| | | | | | | | | | | | | | | |
Balance at January 1, 2022 | $ | 110,705 | | | $ | 42,275 | | | $ | 1,071,956 | | | $ | 962,994 | | | $ | (5,752) | | | | | | | $ | 2,182,178 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Comprehensive (loss) income | | | | | | | 151,526 | | | (644,884) | | | | | | | (493,358) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Cash dividends declared: | | | | | | | | | | | | | | | |
Preferred, $525.00 per share | | | | | | | (6,038) | | | | | | | | | (6,038) | |
| | | | | | | | | | | | | | | |
Common, $0.81 per share | | | | | | | (34,314) | | | | | | | | | (34,314) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Issuance of 168,842 shares of common stock | | | 169 | | | (90) | | | | | | | | | | | 79 | |
Stock based compensation | | | | | 7,411 | | | | | | | | | | | 7,411 | |
Balance at September 30, 2022 | $ | 110,705 | | | $ | 42,444 | | | $ | 1,079,277 | | | $ | 1,074,168 | | | $ | (650,636) | | | | | | | $ | 1,655,958 | |
| | | | | | | | | | | | | | | |
Balance at June 30, 2023 | $ | 110,705 | | | $ | 42,645 | | | $ | 1,087,358 | | | $ | 1,193,522 | | | $ | (575,240) | | | | | | | $ | 1,858,990 | |
Comprehensive (loss) income | | | | | | | 48,091 | | | (67,598) | | | | | | | (19,507) | |
| | | | | | | | | | | | | | | |
Cash dividends declared: | | | | | | | | | | | | | | | |
Preferred, $175.00 per share | | | | | | | (2,013) | | | | | | | | | (2,013) | |
Common, $0.30 per share | | | | | | | (12,860) | | | | | | | | | (12,860) | |
| | | | | | | | | | | | | | | |
Issuance of 11,759 shares of common stock | | | 11 | | | 60 | | | | | | | | | | | 71 | |
Stock based compensation | | | | | 849 | | | | | | | | | | | 849 | |
Balance at September 30, 2023 | $ | 110,705 | | | $ | 42,656 | | | $ | 1,088,267 | | | $ | 1,226,740 | | | $ | (642,838) | | | | | | | $ | 1,825,530 | |
| | | | | | | | | | | | | | | |
Balance at January 1, 2023 | $ | 110,705 | | | $ | 42,467 | | | $ | 1,080,964 | | | $ | 1,120,925 | | | $ | (620,006) | | | | | | | $ | 1,735,055 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Comprehensive (loss) income | | | | | | | 150,283 | | | (22,832) | | | | | | | 127,451 | |
| | | | | | | | | | | | | | | |
Cash dividends declared: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Preferred, $525.00 per share | | | | | | | (6,038) | | | | | | | | | (6,038) | |
Common, $0.90 per share | | | | | | | (38,430) | | | | | | | | | (38,430) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Issuance of 188,909 shares of common stock | | | 189 | | | (439) | | | | | | | | | | | (250) | |
Stock based compensation | | | | | 7,742 | | | | | | | | | | | 7,742 | |
Balance at September 30, 2023 | $ | 110,705 | | | $ | 42,656 | | | $ | 1,088,267 | | | $ | 1,226,740 | | | $ | (642,838) | | | | | | | $ | 1,825,530 | |
| | | | | | | | | | | | | | | |
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. Stockholders' Equity | |
| Preferred Stock | | Common Stock | | Capital Surplus | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total Equity |
Balance at January 1, 2016 | $ | 81,698 |
| | $ | 22,436 |
| | $ | 216,436 |
| | $ | 348,630 |
| | $ | (6,027 | ) | | $ | — |
| | $ | 663,173 |
|
Comprehensive income |
|
| |
|
|
|
|
|
| 61,187 |
| | 2,948 |
|
|
|
|
| 64,135 |
|
Cash dividends declared: |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| | |
Series C Preferred, $2.50 per share |
|
| |
|
|
|
|
|
| (168 | ) | |
|
|
|
|
|
| (168 | ) |
Series D Preferred, $35.00 per share | | | | | | | (105 | ) | | | | | | (105 | ) |
Common, $0.30 per share |
|
| |
|
|
|
|
|
| (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 | ) |
Purchase of 49,785 shares of common stock |
|
| |
|
|
|
|
|
|
|
| |
|
|
| (2,293 | ) |
| (2,293 | ) |
Issuance of 2,295,472 shares of common stock |
|
| | 2,247 |
|
| 59,807 |
|
|
|
| |
|
|
| 2,225 |
|
| 64,279 |
|
Stock based compensation |
|
| |
|
|
| 3,073 |
|
|
|
| |
|
|
|
|
|
| 3,073 |
|
Balance at September 30, 2016 | $ | 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. | | | | | | | | |
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, 2016,2022, included in the Annual Report on Form 10-K of Heartland Financial USA, Inc. ("Heartland"HTLF") filed with the Securities and Exchange Commission ("SEC") on March 1, 2017February 23, 2023. Footnote 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, 2017,2023, are not necessarily indicative of the results expected for the year ending December 31, 2017.2023.
During the first quarter of 2023, HTLF reclassified swap and loan syndication income (collectively, "capital markets fees") to capital markets fees from other noninterest income on the consolidated statements of income, and all prior periods have been adjusted.
During the second quarter of 2023, HTLF reclassified Federal Deposit Insurance Corporation ("FDIC") insurance premiums to FDIC insurance assessments from professional fees on the consolidated statements of income, and all prior periods have been adjusted.
In the second quarter of 2023, HTLF amended and restated its Certificate of Incorporation and filed Certificates of Elimination with the state of Delaware with respect to Series A, B, C, and D preferred stock issuances, which returned these previously designated shares to authorized but unissued. The following shows the details of Series A, B, C and D preferred stock at December 31, 2022:
•Series A Junior Participating preferred stock-par value $1 per share; authorized 16,000 shares; none issued or outstanding at December 31, 2022
•Series B Fixed Rate Cumulative Perpetual Preferred Stock-par value $1 per share; 81,698 shares authorized at December 31, 2022; none issued or outstanding at December 31, 2022
•Series C Senior Non-Cumulative Perpetual Preferred Stock-par value $1 per share; 81,698 shares authorized at December 31, 2022; none issued or outstanding at December 31, 2022
•Series D Senior Non-Cumulative Perpetual Convertible Preferred Stock-par value $1 per share; 3,000 shares authorized at December 31, 2022; none issued or outstanding at December 31, 2022
After the cancellation of Series A, B, C and D preferred shares, total undesignated preferred shares authorized increased to 188,500 from 6,104 at December 31, 2022, of which none were issued or outstanding at both September 30, 2023 and December 31, 2022.
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 periodsnine- months ended September 30, 20172023 and 2016,2022, are shown in the table below:
|
| | | | | | | |
| Three Months Ended September 30, |
(Dollars and number of shares in thousands, except per share data) | 2017 | | 2016 |
Net income | $ | 21,632 |
| | $ | 20,208 |
|
Preferred dividends and discount | (13 | ) | | (53 | ) |
Interest expense on convertible preferred debt | 3 |
| | 17 |
|
Net income available to common stockholders | $ | 21,622 |
| | $ | 20,172 |
|
Weighted average common shares outstanding for basic earnings per share | 29,648 |
| | 24,601 |
|
Assumed incremental common shares issued upon exercise of stock options and non-vested restricted stock units | 262 |
| | 322 |
|
Weighted average common shares for diluted earnings per share | 29,910 |
| | 24,923 |
|
Earnings per common share — basic | $ | 0.73 |
| | $ | 0.82 |
|
Earnings per common share — diluted | $ | 0.72 |
| | $ | 0.81 |
|
Number of antidilutive common stock equivalents excluded from diluted earnings per share computation | — |
| | — |
|
| | | |
| Nine Months Ended September 30, |
(Dollars and number of shares in thousands, except per share data) | 2017 | | 2016 |
Net income | $ | 61,600 |
| | $ | 61,187 |
|
Preferred dividends | (45 | ) | | (273 | ) |
Interest expense on convertible preferred debt | 12 |
| | 48 |
|
Net income available to common stockholders | $ | 61,567 |
| | $ | 60,962 |
|
Weighted average common shares outstanding for basic earnings per share | 27,569 |
| | 24,262 |
|
Assumed incremental common shares issued upon exercise of stock options and non-vested restricted stock units | 265 |
| | 319 |
|
Weighted average common shares for diluted earnings per share | 27,834 |
| | 24,581 |
|
Earnings per common share — basic | $ | 2.23 |
| | $ | 2.51 |
|
Earnings per common share — diluted | $ | 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 Nominatingbelow, dollars 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, 2017, 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" 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 Heartland's income tax expense was $1.1 million during the nine months ended September 30, 2017. Prior to the adoption of ASU 2016-09 on January 1, 2017, $1.1 million of tax benefit related to the exercise, vesting and 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 to selected officers and employees. The time-based RSUs represent the right, without payment, to receive shares of Heartland common stock on a specified future date in three equal installments starting in the year following the 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 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. These performance-based RSUs are earned based on satisfaction of performance targets for the fiscal years ended December 31, 2017, and December 31, 2016, respectively, and then fully vest on a specified date in the third calendar year following the year of the 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, 2019, and December 31, 2018, respectively. These performance-based RSUs or 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 may 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, 2017, and September 30, 2016, 16,804 and 24,153 time-based RSUs, respectively, were granted to directors and new employees.
A summary of the RSUs outstanding as of September 30, 2017 and 2016, and changes during the nine months ended September 30, 2017 and 2016, follows:
|
| | | | | | | | | | | | | |
| 2017 | | 2016 |
| Shares | | Weighted-Average Grant Date Fair Value | | Shares | | Weighted-Average Grant Date Fair Value |
Outstanding at January 1 | 346,817 |
| | $ | 27.61 |
| | 353,195 |
| | $ | 25.53 |
|
Granted | 109,071 |
| | 47.21 |
| | 143,721 |
| | 29.75 |
|
Vested | (136,428 | ) | | 26.66 |
| | (117,898 | ) | | 23.44 |
|
Forfeited | (12,923 | ) | | 31.57 |
| | (11,547 | ) | | 27.12 |
|
Outstanding at September 30 | 306,537 |
| | $ | 34.72 |
| | 367,471 |
| | $ | 27.60 |
|
Total compensation costs recorded for RSUs were $3.6 million and $3.1 million for the nine-month periods ended September 30, 2017 and 2016. As of September 30, 2017, there were $4.3 million of total unrecognized compensation costs related to the Plan for RSUs that are expected to be recognized through 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 2017 and 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, 2017 and 2016, and changes during the nine months ended September 30, 2017 and 2016, follows:
|
| | | | | | | | | | | | | |
| 2017 | | 2016 |
| Shares | | Weighted-Average Exercise Price | | Shares | | Weighted-Average Exercise Price |
Outstanding at January 1 | 26,400 |
| | $ | 18.60 |
| | 125,950 |
| | $ | 24.08 |
|
Granted | — |
| | — |
| | — |
| | — |
|
Exercised | (13,650 | ) | | 18.60 |
| | (55,250 | ) | | 24.82 |
|
Forfeited | (500 | ) | | 18.60 |
| | (1,500 | ) | | 21.10 |
|
Outstanding at September 30 | 12,250 |
| | $ | 18.60 |
| | 69,200 |
| | $ | 23.55 |
|
Options exercisable at September 30 | 12,250 |
| | $ | 18.60 |
| | 69,200 |
| | $ | 23.55 |
|
At September 30, 2017, the vested options totaled 12,250 shares with a weighted average exercise price of $18.60thousands, except per share and a weighted average remaining contractual life of 0.32 years. The intrinsic value (the difference between the market price and the aggregate exercise price) for the vested options as of September 30, 2017, was $377,000. The intrinsic value for the total of all options exercised during the nine months ended September 30, 2017, was $379,000.data:
| | | | | | | | | | | |
| Three Months Ended September 30, |
| 2023 | | 2022 |
Net income | $ | 48,091 | | | $ | 56,564 | |
Preferred dividends | (2,013) | | | (2,013) | |
| | | |
| | | |
Net income available to common stockholders | $ | 46,078 | | | $ | 54,551 | |
| | | |
Weighted average common shares outstanding for basic earnings per share | 42,761 | | | 42,575 | |
Assumed incremental common shares issued upon vesting of outstanding restricted stock units | 52 | | | 69 | |
Weighted average common shares for diluted earnings per share | 42,813 | | | 42,644 | |
Earnings per common share — basic | $ | 1.08 | | | $ | 1.28 | |
Earnings per common share — diluted | $ | 1.08 | | | $ | 1.28 | |
Number of antidilutive common stock equivalents excluded from diluted earnings per share computation | 204 | | | 4 | |
Number of antidilutive stock options excluded from diluted earnings per share computation | 58 | | — | |
| | | |
| Nine Months Ended September 30, |
| 2023 | | 2022 |
Net income | $ | 150,283 | | | $ | 151,526 | |
Preferred dividends | (6,038) | | | (6,038) | |
| | | |
Net income available to stockholders | $ | 144,245 | | | $ | 145,488 | |
| | | |
Weighted average common shares outstanding for basic earnings per share | 42,681 | | | 42,471 | |
Assumed incremental common shares issued upon vesting of outstanding restricted stock units | 89 | | | 125 | |
Weighted average common shares for diluted earnings per share | 42,770 | | | 42,596 | |
Earnings per common share — basic | $ | 3.38 | | | $ | 3.43 | |
Earnings per common share — diluted | $ | 3.37 | | | $ | 3.42 | |
Number of antidilutive common stock equivalents excluded from diluted earnings per share computation | 107 | | | 8 | |
Number of antidilutive stock options excluded from diluted earnings per share computation | 62 | | | — | |
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.
No compensation costs were recorded for options during the nine month periods ended September 30, 2017 and 2016. There are no unrecorded compensation costs related to options at September 30, 2017. No stock options vested during the nine-month periods ended September 30, 2017 and 2016.
Subsequent Events - HeartlandHTLF has evaluated subsequent events that may require recognition or disclosure through the filing date of this Quarterly Report on Form 10-Q with the SEC.
Subsequent to September 30, 2023, in late October and early November, in responses to changes in interest rates, HTLF sold investment securities with a combined yield of approximately 2.48% in a series of sale transactions, resulting in proceeds totaling approximately $667.9 million and a pre-tax loss of approximately $103.5 million or approximately $77.7 million after tax.
Effect of New Financial Accounting Standards
ASU 2022-01
In May 2014,March 2022, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2022-01, "Derivatives and Hedging (Topic 815): Fair Value Hedging-Portfolio Layer Method," which expands the current last-of-layer method by allowing multiple hedged layers to be designated for a single closed portfolio of financial assets or one or more beneficial interests secured by a portfolio of financial instruments. HTLF adopted this ASU on January 1, 2023, and these amendments were applied prospectively.
ASU 2022-02
In March 2022, the FASB issued ASU 2014-09, 2022-02, "Revenue from ContractsFinancial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures." These amendments eliminate the troubled debt restructurings ("TDR") recognition and measurement guidance and require instead that an entity evaluate (consistent with Customers." 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 customersother loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance existing disclosure requirements and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principleintroduce new requirements related to certain modifications of the revenue model isreceivables made to borrowers experiencing financial difficulty. These amendments also require 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 new guidance does not apply to certain contractsdisclose current-period gross charge-offs by year of origination for loans receivable within the scope of other ASC Topics, such as lease contracts, insurance contracts, financing arrangements, financial instruments, guarantees other than product or service warranties and nonmonetary exchanges betweenSubtopic 326-20. The guidance was effective for entities in the 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 largely consistent with existing guidance and current practices. Heartland intends to adopt the accounting standard in 2018, as required, which may require a change in the recognition of certain recurring revenue streams within trust and investment management fees; however, Heartland's preliminary analysis suggests the adoption of these amendments are not expected tothat have a significant effect on Heartland's results of operations, financial position and liquidity other than expanded disclosure requirements.
In January 2016, the FASB issuedadopted ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities." The amendments in ASU 2016-01 to Subtopic 825-10, Financial Instruments, make the following changes: (1) require equity investments to be measured at fair value with changes in fair value recognized in net income; (2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (3) eliminate 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) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (5) require 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) require 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) clarify 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 effective2016-13 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 leases on 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 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.
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 was permitted for any interim or annual period prior to the effective date. Heartland adopted this ASU on 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 the impact of applying 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 a 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 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)." The amendments 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 amendments are effective for fiscal years beginning after December 15, 2019,2022, including interim periods within those fiscal years. Early 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,HTLF adopted this ASU on January 1, 2023, as required. Heartland has formed a committee to review the standard, understand the potential impact of this guidance on its results of operations, financial positionrequired, and liquidity, and oversee the implementation of the standard.these amendments were applied prospectively.
ASU 2023-02
In August 2016,March 2023, the FASB issued ASU 2016-15, 2023-02 "StatementInvestments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of Cash Flows (Topic 230) - Classificationthe Emerging Issues Task Force)." ASU 2023-02 expands the permitted use of Certain Cash Receiptsthe proportional amortization method, which is currently only available to low-income housing tax credit investments, to other tax equity investments if certain conditions are met. Under the proportional amortization method, the initial cost of an investment is amortized in proportion to the income tax benefits received and Cash Payments."both the amortization of the investment and the income tax benefits received are recognized as a component of income tax expense. This ASU is effective on January 1, 2024 and may be applied on either a modified retrospective or retrospective basis or, for certain changes, on a prospective basis, and early adoption is permitted. The amendments in this update address eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendmentsASU 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 adopts the amendments early in an interim period, any adjustments must 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 must 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 effectmaterial impact on Heartland'sthe results of operations or financial position and liquidity.position.
ASU 2023-06
In January 2017,October 2023, the FASB issued ASU 2017-04, 2023-06, "Intangibles - GoodwillDisclosure Improvements: Codification Amendments in Response to the SEC's Disclosure Update and Other (Topic 350).Simplification Initiative." This amendment is to simplifyThe amendments in this Update modify 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 valuedisclosure or presentation requirements of a reporting unit with its carrying amount, and then recognizingvariety of Topics in the impairment charge forCodification. Certain of the amount by whichamendments represent clarifications to, or technical corrections of, the carrying amount exceedscurrent requirements. Each amendment in the reporting unit's fair value; however, the loss recognized cannot exceed the total amount of goodwill allocated to that reporting unit. An entityASU will still have the option to perform a qualitative assessment for a reporting unit to determineonly become effective if the quantitative step one impairment test is necessary. This amendment is effective for annualSEC removes the related disclosure or interim goodwill impairment testspresentation requirement from its existing regulations by June 30, 2027. The amendments 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 premiumare not expected 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:or financial position.
|
| | | | | | | |
(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.
NOTE 3:2: SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair values of debt securities available for sale and equity securities with a readily determinable fair value that are carried at fair value as of September 30, 2017,2023, and December 31, 2016,2022, are summarized in the table below, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
September 30, 2023 | | | | | | | |
U.S. treasuries | $ | 32,436 | | | $ | — | | | $ | (631) | | | $ | 31,805 | |
U.S. agencies | 48,022 | | | — | | | (6,918) | | | 41,104 | |
Obligations of states and political subdivisions | 982,570 | | | — | | | (207,883) | | | 774,687 | |
Mortgage-backed securities - agency | 1,910,725 | | | 48 | | | (316,378) | | | 1,594,395 | |
Mortgage-backed securities - non-agency | 2,058,422 | | | 20 | | | (163,362) | | | 1,895,080 | |
Commercial mortgage-backed securities - agency | 98,497 | | | — | | | (17,053) | | | 81,444 | |
Commercial mortgage-backed securities - non-agency | 621,163 | | | — | | | (18,730) | | | 602,433 | |
Asset-backed securities | 397,410 | | | — | | | (13,031) | | | 384,379 | |
Corporate bonds | 59,197 | | | — | | | (2,675) | | | 56,522 | |
Total debt securities | 6,208,442 | | | 68 | | | (746,661) | | | 5,461,849 | |
Equity securities with a readily determinable fair value | 20,838 | | | — | | | — | | | 20,838 | |
Total | $ | 6,229,280 | | | $ | 68 | | | $ | (746,661) | | | $ | 5,482,687 | |
December 31, 2022 | | | | | | | |
U.S. treasuries | $ | 32,369 | | | $ | 8 | | | $ | (678) | | | $ | 31,699 | |
U.S. agencies | 49,437 | | | — | | | (6,302) | | | 43,135 | |
Obligations of states and political subdivisions | 1,049,578 | | | 14 | | | (170,155) | | | 879,437 | |
Mortgage-backed securities - agency | 2,042,092 | | | 56 | | | (270,043) | | | 1,772,105 | |
Mortgage-backed securities - non-agency | 2,327,308 | | | 1,417 | | | (146,849) | | | 2,181,876 | |
Commercial mortgage-backed securities - agency | 100,518 | | | — | | | (15,395) | | | 85,123 | |
Commercial mortgage-backed securities - non-agency | 679,511 | | | — | | | (20,052) | | | 659,459 | |
Asset-backed securities | 428,397 | | | — | | | (12,343) | | | 416,054 | |
Corporate bonds | 59,205 | | | — | | | (1,263) | | | 57,942 | |
Total debt securities | 6,768,415 | | | 1,495 | | | (643,080) | | | 6,126,830 | |
Equity securities with a readily determinable fair value | 20,314 | | | — | | | — | | | 20,314 | |
Total | $ | 6,788,729 | | | $ | 1,495 | | | $ | (643,080) | | | $ | 6,147,144 | |
|
| | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
September 30, 2017 | | | | | | | |
U.S. government corporations and agencies | $ | 7,435 |
| | $ | 14 |
| | $ | (34 | ) | | $ | 7,415 |
|
Mortgage-backed securities | 1,593,677 |
| | 4,656 |
| | (32,933 | ) | | 1,565,400 |
|
Obligations of states and political subdivisions | 506,867 |
| | 4,307 |
| | (7,200 | ) | | 503,974 |
|
Total debt securities | 2,107,979 |
| | 8,977 |
| | (40,167 | ) | | 2,076,789 |
|
Equity securities | 16,253 |
| | 343 |
| | — |
| | 16,596 |
|
Total | $ | 2,124,232 |
| | $ | 9,320 |
| | $ | (40,167 | ) | | $ | 2,093,385 |
|
December 31, 2016 | | | | | | | |
U.S. government corporations and agencies | $ | 4,716 |
| | $ | 16 |
| | $ | (32 | ) | | $ | 4,700 |
|
Mortgage-backed securities | 1,321,760 |
| | 7,026 |
| | (38,286 | ) | | 1,290,500 |
|
Obligations of states and political subdivisions | 553,020 |
| | 2,436 |
| | (19,312 | ) | | 536,144 |
|
Total debt securities | 1,879,496 |
|
| 9,478 |
|
| (57,630 | ) |
| 1,831,344 |
|
Equity securities | 14,451 |
| | 69 |
| | — |
| | 14,520 |
|
Total | $ | 1,893,947 |
| | $ | 9,547 |
| | $ | (57,630 | ) | | $ | 1,845,864 |
|
The amortized cost, gross unrealized gains and losses and estimated fair values of held to maturity securities as of September 30, 2017,2023, and December 31, 2016,2022, are summarized in the table below, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | | |
September 30, 2023 | | | | | | | | | |
| | | | | | | | | |
Obligations of states and political subdivisions | $ | 835,468 | | | $ | 1,307 | | | (78,149) | | | $ | 758,626 | | | |
Total | $ | 835,468 | | | $ | 1,307 | | | $ | (78,149) | | | $ | 758,626 | | | |
December 31, 2022 | | | | | | | | | |
| | | | | | | | | |
Obligations of states and political subdivisions | $ | 829,403 | | | $ | 3,096 | | | $ | (55,942) | | | $ | 776,557 | | | |
Total | $ | 829,403 | | | $ | 3,096 | | | $ | (55,942) | | | $ | 776,557 | | | |
|
| | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
September 30, 2017 | | | | | | | |
Obligations of states and political subdivisions | $ | 256,355 |
| | $ | 14,722 |
| | $ | (691 | ) | | $ | 270,386 |
|
Total | $ | 256,355 |
| | $ | 14,722 |
| | $ | (691 | ) | | $ | 270,386 |
|
December 31, 2016 | | | | | | | |
Obligations of states and political subdivisions | $ | 263,662 |
| | $ | 12,282 |
| | $ | (1,145 | ) | | $ | 274,799 |
|
Total | $ | 263,662 |
| | $ | 12,282 |
| | $ | (1,145 | ) | | $ | 274,799 |
|
AtAs of September 30, 2017, approximately 74%2023, and December 31, 2022, HTLF had $30.1 million and $33.0 million, respectively, of Heartland's mortgage-backed securities were issued by government-sponsored enterprises.accrued interest receivable, which is included in other assets on the consolidated balance sheets. HTLF does not consider accrued interest receivable in the carrying amount of financial assets held at amortized cost basis or in the allowance for credit losses calculation.
The amortized cost and estimated fair value of debtinvestment securities available for salecarried at fair value at September 30, 2017,2023, 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, 2023 |
| Amortized Cost | | Estimated Fair Value |
Due in 1 year or less | $ | 22,124 | | | $ | 21,736 | |
Due in 1 to 5 years | 65,617 | | | 63,728 | |
Due in 5 to 10 years | 49,120 | | | 39,808 | |
Due after 10 years | 985,364 | | | 778,846 | |
Total debt securities | 1,122,225 | | | 904,118 | |
Mortgage and asset-backed securities | 5,086,217 | | | 4,557,731 | |
Equity securities with a readily determinable fair value | 20,838 | | | 20,838 | |
Total investment securities | $ | 6,229,280 | | | $ | 5,482,687 | |
|
| | | | | | | |
| September 30, 2017 |
| Amortized Cost | | Estimated Fair Value |
Due in 1 year or less | $ | 185 |
| | $ | 186 |
|
Due in 1 to 5 years | 40,716 |
| | 41,077 |
|
Due in 5 to 10 years | 93,240 |
| | 91,514 |
|
Due after 10 years | 380,161 |
| | 378,612 |
|
Total debt securities | 514,302 |
| | 511,389 |
|
Mortgage-backed securities | 1,593,677 |
| | 1,565,400 |
|
Equity securities | 16,253 |
| | 16,596 |
|
Total investment securities | $ | 2,124,232 |
| | $ | 2,093,385 |
|
The amortized cost and estimated fair value of debt securities held to maturity at September 30, 2017,2023, 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, 2023 |
| Amortized Cost | | Estimated Fair Value |
Due in 1 year or less | $ | 5,584 | | | $ | 5,573 | |
Due in 1 to 5 years | 86,908 | | | 85,469 | |
Due in 5 to 10 years | 156,899 | | | 147,931 | |
Due after 10 years | 586,077 | | | 519,653 | |
Total debt securities | $ | 835,468 | | | $ | 758,626 | |
| | | |
| | | |
|
| | | | | | | |
| September 30, 2017 |
| Amortized Cost | | Estimated Fair Value |
Due in 1 year or less | $ | 1,510 |
| | $ | 1,533 |
|
Due in 1 to 5 years | 21,157 |
| | 22,090 |
|
Due in 5 to 10 years | 105,030 |
| | 109,119 |
|
Due after 10 years | 128,658 |
| | 137,644 |
|
Total investment securities | $ | 256,355 |
| | $ | 270,386 |
|
As of September 30, 2017,2023, and December 31, 2016,2022, securities with a faircarrying value of $758.1 million$2.66 billion and $810.6 million,$1.49 billion, respectively, were pledged to secure public and trust deposits, short-term borrowings and for other purposes as required or permitted by law.
Gross gains and losses realized related to the sales of securities available for salecarried at fair value for the three-three and nine-month periodsnine months ended September 30, 20172023 and 2016,2022, are summarized as follows, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Proceeds from sales | $ | 44,457 | | | $ | 57,610 | | | $ | 331,196 | | | $ | 1,031,521 | |
Gross security gains | 803 | | | — | | | 1,286 | | | 7,298 | |
Gross security losses | 744 | | | 1,070 | | | 2,656 | | | 9,018 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Proceeds from sales | $ | 503,083 |
| | $ | 146,242 |
| | $ | 1,127,091 |
| | $ | 768,617 |
|
Gross security gains | 2,088 |
| | 1,763 |
| | 8,585 |
| | 11,416 |
|
Gross security losses | 409 |
| | 177 |
| | 3,023 |
| | 1,332 |
|
The following tables summarize,table summarizes, 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'sthe securities portfolio as of September 30, 2017,2023, and December 31, 2016.2022. 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. The reference point for determining how long an investment was in an unrealized loss position was September 30, 2016,2022, and December 31, 2015,2021, respectively. Securities for which Heartland has taken credit-related other-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 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Debt securities available for sale | Less than 12 months | | 12 months or longer | | Total |
| Fair Value | | Unrealized Losses | | Count | | Fair Value | | Unrealized Losses | | Count | | Fair Value | | Unrealized Losses | | Count |
September 30, 2023 | | | | | | | | | | | | | | | | | |
U.S. treasuries | $ | 5,917 | | | $ | (72) | | | 2 | | | $ | 25,888 | | | $ | (559) | | | 3 | | | $ | 31,805 | | | $ | (631) | | | 5 | |
U.S. agencies | — | | | — | | | — | | | 41,104 | | | (6,918) | | | 6 | | | 41,104 | | | (6,918) | | | 6 | |
Obligations of states and political subdivisions | 3,360 | | | (470) | | | 4 | | | 771,031 | | | (207,413) | | | 163 | | | 774,391 | | | (207,883) | | | 167 | |
Mortgage-backed securities - agency | 1,958 | | | (62) | | | 11 | | | 1,591,796 | | | (316,316) | | | 215 | | | 1,593,754 | | | (316,378) | | | 226 | |
Mortgage-backed securities - non-agency | 488,800 | | | (41,299) | | | 14 | | | 1,282,494 | | | (122,063) | | | 43 | | | 1,771,294 | | | (163,362) | | | 57 | |
Commercial mortgage-backed securities - agency | — | | | — | | | — | | | 81,444 | | | (17,053) | | | 19 | | | 81,444 | | | (17,053) | | | 19 | |
Commercial mortgage-backed securities - non-agency | 9,695 | | | (344) | | | 1 | | | 584,871 | | | (18,386) | | | 17 | | | 594,566 | | | (18,730) | | | 18 | |
Asset-backed securities | — | | | — | | | — | | | 139,217 | | | (13,031) | | | 11 | | | 139,217 | | | (13,031) | | | 11 | |
Corporate bonds | 48,634 | | | (1,365) | | | 1 | | | 7,888 | | | (1,310) | | | 7 | | | 56,522 | | | (2,675) | | | 8 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total temporarily impaired securities | $ | 558,364 | | | $ | (43,612) | | | 33 | | | $ | 4,525,733 | | | $ | (703,049) | | | 484 | | | $ | 5,084,097 | | | $ | (746,661) | | | 517 | |
December 31, 2022 | | |
U.S. treasuries | $ | 28,699 | | | $ | (678) | | | 4 | | | $ | — | | | $ | — | | | — | | | $ | 28,699 | | | $ | (678) | | | 4 | |
U.S. agencies | 16,487 | | | (222) | | | 5 | | | 26,648 | | | (6,080) | | | 2 | | | 43,135 | | | (6,302) | | | 7 | |
Obligations of states and political subdivisions | 288,457 | | | (28,378) | | | 69 | | | 589,641 | | | (141,777) | | | 113 | | | 878,098 | | | (170,155) | | | 182 | |
Mortgage-backed securities - agency | 241,288 | | | (21,420) | | | 99 | | | 1,528,951 | | | (248,623) | | | 126 | | | 1,770,239 | | | (270,043) | | | 225 | |
Mortgage-backed securities - non-agency | 950,054 | | | (70,213) | | | 25 | | | 693,531 | | | (76,636) | | | 25 | | | 1,643,585 | | | (146,849) | | | 50 | |
Commercial mortgage-backed securities - agency | 27,732 | | | (2,291) | | | 12 | | | 57,392 | | | (13,104) | | | 7 | | | 85,124 | | | (15,395) | | | 19 | |
Commercial mortgage-backed securities - non-agency | 530,541 | | | (16,830) | | | 15 | | | 84,619 | | | (3,222) | | | 4 | | | 615,160 | | | (20,052) | | | 19 | |
Asset-backed securities | 118,613 | | | (6,107) | | | 7 | | | 56,621 | | | (6,236) | | | 6 | | | 175,234 | | | (12,343) | | | 13 | |
Corporate bonds | 57,544 | | | (1,257) | | | 7 | | | 398 | | | (6) | | | 1 | | | 57,942 | | | (1,263) | | | 8 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total temporarily impaired securities | $ | 2,259,415 | | | $ | (147,396) | | | 243 | | | $ | 3,037,801 | | | $ | (495,684) | | | 284 | | | $ | 5,297,216 | | | $ | (643,080) | | | 527 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Securities held to maturity | Less than 12 months | | 12 months or longer | | Total |
| Fair Value | | Unrealized Losses | | Count | | Fair Value | | Unrealized Losses | | Count | | Fair Value | | Unrealized Losses | | Count |
September 30, 2023 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Obligations of states and political subdivisions | $ | 164,348 | | | $ | (14,240) | | | 38 | | | $ | 531,005 | | | $ | (63,909) | | | 129 | | | $ | 695,353 | | | $ | (78,149) | | | 167 | |
Total temporarily impaired securities | $ | 164,348 | | | (14,240) | | | 38 | | | $ | 531,005 | | | $ | (63,909) | | | 129 | | | $ | 695,353 | | | (78,149) | | | 167 | |
December 31, 2022 | | |
| | | | | | | | | | | | | | | | | |
Obligations of states and political subdivisions | $ | 697,424 | | | $ | (55,942) | | | 155 | | | $ | — | | | $ | — | | | — | | | $ | 697,424 | | | $ | (55,942) | | | 155 | |
Total temporarily impaired securities | $ | 697,424 | | | $ | (55,942) | | | 155 | | | $ | — | | | $ | — | | | — | | | $ | 697,424 | | | $ | (55,942) | | | 155 | |
| | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
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 | ) |
HeartlandHTLF reviews each security in 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 takesfor potential credit losses, taking into consideration numerous factors, and the relative significance of any single factor can vary by security. Some factors HeartlandHTLF 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 asand security and industry specific economic conditions. In addition, withWith regard to debt securities, HeartlandHTLF 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, HeartlandHTLF 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.
The remaining unrealized losses on Heartland's mortgage-backedHTLF's commercial mortgage, mortgage and asset-backed securities are the result of changes in market interest rates or widening of market spreads subsequent to the initialHTLF's 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, Heartlandas of September 30, 2023, HTLF 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, no credit losses were recognized on these investments are not considered other-than-temporarily impaired.securities during the three and nine months ended September 30, 2023 and 2022.
The remaining unrealized losses on Heartland'sHTLF's obligations of states and political subdivisions available for sale 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 declinedeclines in fair value isare attributable to changes in interest rates or widening market spreads due to insurance company downgrades and not underlying credit quality, and because, Heartlandas of September 30, 2023, HTLF 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, no credit losses were recognized on 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 forduring the nine-month periodthree and nine months ended September 30, 2017. There were no gross realized gains2023 and $85,000 of gross realized losses on the sale of available for sale securities with OTTI writedowns for the nine-month period ended September 30, 2016. Additionally, there were no gross realized gains and $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.
Based on HTLF's credit loss methodology applicable to held to maturity debt securities, no allowance for credit losses was required at both September 30, 2023, and December 31, 2022.
The following table showssummarizes, in thousands, the detailcarrying amount of OTTI write-downs onHTLF's held to maturity debt securities included in earningsby investment rating as of September 30, 2023, and December 31, 2022, which are updated quarterly and used to monitor the related changes in other accumulated comprehensive income ("AOCI") forcredit quality of the same securities, in thousands:securities:
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
Rating | | | |
AAA | $ | 88,254 | | | $ | 79,598 | |
AA, AA+, AA- | 583,188 | | | 588,354 | |
A+, A, A- | 138,885 | | | 136,624 | |
BBB | 20,113 | | | 20,623 | |
Not Rated | 5,028 | | | 4,204 | |
Total | $ | 835,468 | | | $ | 829,403 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 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 | ) |
Accretion of non-credit related impairment | — |
| | — |
| | — |
| | (7 | ) |
Total changes to AOCI for non-credit related impairment | — |
| | — |
| | — |
| | (127 | ) |
Total OTTI losses (accretion) recorded on debt securities, net | $ | — |
| | $ | — |
| | $ | — |
| | $ | (127 | ) |
Included in other securities at September 30, 2017, and December 31, 2016,investments were shares of stock in theeach Federal Home Loan BanksBank (the "FHLBs""FHLB") of Des Moines, Chicago, Dallas, San Francisco and Topekawhich each of its Banks is a member at an amortized cost of $14.0$24.9 million at September 30, 2023, and $14.4$12.3 million respectively.at December 31, 2022.
The HeartlandHTLF 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. HeartlandHTLF considers its FHLB stock as a long-term investment that provides access to competitive products and liquidity. HeartlandHTLF evaluates impairment in these investments based on the ultimate recoverability of the par value and, at September 30, 2017,2023, and December 31, 2022, did not consider the investments to be other than temporarily impaired.
NOTE 4:3: LOANS
Loans as of September 30, 2017,2023, and December 31, 2016,2022, were as follows, in thousands:
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
Loans receivable held to maturity: | | | |
Commercial and industrial | $ | 3,591,809 | | | $ | 3,464,414 | |
Paycheck Protection Program ("PPP") | 3,750 | | | 11,025 | |
Owner occupied commercial real estate | 2,429,659 | | | 2,265,307 | |
Non-owner occupied commercial real estate | 2,656,358 | | | 2,330,940 | |
Real estate construction | 1,029,554 | | | 1,076,082 | |
Agricultural and agricultural real estate | 842,116 | | | 920,510 | |
Residential real estate | 813,803 | | | 853,361 | |
Consumer | 505,387 | | | 506,713 | |
Total loans receivable held to maturity | 11,872,436 | | | 11,428,352 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Allowance for credit losses | (110,208) | | | (109,483) | |
Loans receivable, net | $ | 11,762,228 | | | $ | 11,318,869 | |
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Loans receivable held to maturity: | | | |
Commercial | $ | 1,613,903 |
| | $ | 1,287,265 |
|
Commercial real estate | 3,163,953 |
| | 2,538,582 |
|
Agricultural and agricultural real estate | 511,764 |
| | 489,318 |
|
Residential real estate | 635,611 |
| | 617,924 |
|
Consumer | 450,088 |
| | 420,613 |
|
Gross loans receivable held to maturity | 6,375,319 |
| | 5,353,702 |
|
Unearned discount | (605 | ) | | (699 | ) |
Deferred loan fees | (1,299 | ) | | (1,284 | ) |
Total net loans receivable held to maturity | 6,373,415 |
| | 5,351,719 |
|
Allowance for loan losses | (54,885 | ) | | (54,324 | ) |
Loans receivable, net | $ | 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 if 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 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 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, 2017, Heartland2023, and December 31, 2022, HTLF had $4.8$61.3 million and $49.1 million, respectively, of loans secured by residential real estate property that wereaccrued interest receivable, which is included 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 dependentother assets 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 securityconsolidated balance sheets. HTLF does not consider accrued interest with title insurance when necessary, is takenreceivable 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 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.credit losses calculation.
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 loancredit losses at September 30, 2017,2023, and December 31, 2016,2022, and the related loan balances, disaggregated on the basis of impairmentmeasurement methodology, in thousands. LoansIf a loan no longer shares similar risk characteristics with other loans in the pool, it is evaluated under ASC 310-10-35 include loanson an individual basis and is not included in the collective evaluation. Lending relationships on nonaccrual status and troubled debt restructurings, whichwith $500,000 or more of total exposure are individually evaluated for impairment, and other impaired loans deemed to have similar risk characteristics.assessed using a collateral dependency calculation. All other loans are collectively evaluated for impairment under ASC 450-20. Heartland has made no significant changeslosses.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance For Credit Losses | | Gross Loans Receivable Held to Maturity |
| Individually Evaluated for Credit Losses | | Collectively Evaluated for Credit Losses | | Total | | Loans Individually Evaluated for Credit Losses | | Loans Collectively Evaluated for Credit Losses | | Total |
September 30, 2023 | | | | | | | | | | | |
Commercial and industrial | $ | 6,712 | | | $ | 21,584 | | | $ | 28,296 | | | $ | 15,242 | | | $ | 3,576,567 | | | $ | 3,591,809 | |
PPP | — | | | — | | | — | | | — | | | 3,750 | | | 3,750 | |
Owner occupied commercial real estate | — | | | 14,674 | | | 14,674 | | | 4,411 | | | 2,425,248 | | | 2,429,659 | |
Non-owner occupied commercial real estate | 257 | | | 17,027 | | | 17,284 | | | 6,580 | | | 2,649,778 | | | 2,656,358 | |
Real estate construction | — | | | 28,979 | | | 28,979 | | | 910 | | | 1,028,644 | | | 1,029,554 | |
Agricultural and agricultural real estate | 2,021 | | | 2,383 | | | 4,404 | | | 6,964 | | | 835,152 | | | 842,116 | |
Residential real estate | — | | | 7,107 | | | 7,107 | | | 2,216 | | | 811,587 | | | 813,803 | |
Consumer | — | | | 9,464 | | | 9,464 | | | — | | | 505,387 | | | 505,387 | |
| | | | | | | | | | | |
Total | $ | 8,990 | | | $ | 101,218 | | | $ | 110,208 | | | $ | 36,323 | | | $ | 11,836,113 | | | $ | 11,872,436 | |
| | | | | | | | | | | |
December 31, 2022 | | | | | | | | | | | |
Commercial and industrial | $ | 6,670 | | | $ | 22,401 | | | $ | 29,071 | | | $ | 18,712 | | | $ | 3,445,702 | | | $ | 3,464,414 | |
PPP | — | | | — | | | — | | | — | | | 11,025 | | | 11,025 | |
Owner occupied commercial real estate | 376 | | | 13,572 | | | 13,948 | | | 7,932 | | | 2,257,375 | | | 2,265,307 | |
Non-owner occupied commercial real estate | — | | | 16,539 | | | 16,539 | | | 11,371 | | | 2,319,569 | | | 2,330,940 | |
Real estate construction | — | | | 29,998 | | | 29,998 | | | 1,518 | | | 1,074,564 | | | 1,076,082 | |
Agricultural and agricultural real estate | 63 | | | 2,571 | | | 2,634 | | | 3,851 | | | 916,659 | | | 920,510 | |
Residential real estate | — | | | 7,711 | | | 7,711 | | | 1,607 | | | 851,754 | | | 853,361 | |
Consumer | — | | | 9,582 | | | 9,582 | | | — | | | 506,713 | | | 506,713 | |
| | | | | | | | | | | |
Total | $ | 7,109 | | | $ | 102,374 | | | $ | 109,483 | | | $ | 44,991 | | | $ | 11,383,361 | | | $ | 11,428,352 | |
The following tables show the amortized cost basis as of September 30, 2023, of the loans modified during the three and nine months ended September 30, 2023, to the accounting for the allowance forborrowers experiencing financial difficulty by loan losses during 2017.category and type of concession granted, dollars in thousands.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
For the Three Months Ended September 30, 2023 | Loan Modifications Made to Borrowers Experiencing Financial Difficulty |
| Term Extension | | Term Extension and Interest Only Payments | |
| Amortized Cost Basis | | % of Loan Category | | Amortized Cost Basis | | % of Loan Category | | | |
Commercial | $ | — | | | — | % | | $ | — | | | — | % | | | |
| | | | | | | | | | |
Owner occupied commercial real estate | — | | | — | | | — | | | — | | | | |
| | | | | | | | | | |
Real estate construction | — | | | — | | | — | | | — | | | | |
Agricultural and agricultural real estate | 1,992 | | | 0.24 | | | — | | | — | | | | |
Residential real estate | — | | | — | | | — | | | — | | | | |
| | | | | | | | | | |
Total | $ | 1,992 | | | 0.02 | % | | $ | — | | | — | % | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
September 30, 2017 | | | | | | | | | | | |
Commercial | $ | 2,166 |
| | $ | 14,804 |
| | $ | 16,970 |
| | $ | 6,957 |
| | $ | 1,606,946 |
| | $ | 1,613,903 |
|
Commercial real estate | 864 |
| | 19,676 |
| | 20,540 |
| | 27,943 |
| | 3,136,010 |
| | 3,163,953 |
|
Agricultural and agricultural real estate | 2,353 |
| | 3,774 |
| | 6,127 |
| | 12,792 |
| | 498,972 |
| | 511,764 |
|
Residential real estate | 393 |
| | 1,873 |
| | 2,266 |
| | 29,833 |
| | 605,778 |
| | 635,611 |
|
Consumer | 1,267 |
| | 7,715 |
| | 8,982 |
| | 6,524 |
| | 443,564 |
| | 450,088 |
|
Total | $ | 7,043 |
| | $ | 47,842 |
| | $ | 54,885 |
| | $ | 84,049 |
| | $ | 6,291,270 |
| | $ | 6,375,319 |
|
December 31, 2016 | | | | | | | | | | | |
Commercial | $ | 1,318 |
| | $ | 13,447 |
| | $ | 14,765 |
| | $ | 3,712 |
| | $ | 1,283,553 |
| | $ | 1,287,265 |
|
Commercial real estate | 2,671 |
| | 21,648 |
| | 24,319 |
| | 45,217 |
| | 2,493,365 |
| | 2,538,582 |
|
Agricultural and agricultural real estate | 816 |
| | 3,394 |
| | 4,210 |
| | 16,730 |
| | 472,588 |
| | 489,318 |
|
Residential real estate | 497 |
| | 1,766 |
| | 2,263 |
| | 25,726 |
| | 592,198 |
| | 617,924 |
|
Consumer | 1,451 |
| | 7,316 |
| | 8,767 |
| | 5,988 |
| | 414,625 |
| | 420,613 |
|
Total | $ | 6,753 |
| | $ | 47,571 |
| | $ | 54,324 |
| | $ | 97,373 |
| | $ | 5,256,329 |
| | $ | 5,353,702 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
For the Nine Months Ended September 30, 2023 | Loan Modifications Made to Borrowers Experiencing Financial Difficulty |
| Term Extension | | Term Extension and Interest Only Payments | |
| Amortized Cost Basis | | % of Loan Category | | Amortized Cost Basis | | % of Loan Category | | | |
Commercial | $ | 4,233 | | | 0.12 | % | | $ | — | | | — | % | | | |
| | | | | | | | | | |
Owner occupied commercial real estate | — | | | — | | | 5,043 | | | 0.21 | | | | |
| | | | | | | | | | |
Real estate construction | 1,453 | | | 0.14 | | | — | | | — | | | | |
Agricultural and agricultural real estate | 3,546 | | | 0.42 | | | — | | | — | | | | |
Residential real estate | 741 | | | 0.09 | | | — | | | — | | | | |
| | | | | | | | | | |
Total | $ | 9,973 | | | 0.08 | % | | $ | 5,043 | | | 0.04 | % | | | |
The following table presents nonaccrual loans, accruing loans past due 90 days or more and troubled debt restructured loans atdescribes the financial effect of the modifications made to borrowers experiencing financial difficulty in the nine months ending September 30, 2017, and December 31, 2016, in thousands:2023.
| | | | | | | | | | | | | | |
Loan Type | | Weighted Average Term Extension (months) | | Weighted Average Term Extension and Interest Only Payments (months) |
Commercial and industrial | | 8 | | 0 |
| | | | |
Owner occupied commercial real estate | | 0 | | 12 |
| | | | |
Real estate construction | | 6 | | 0 |
Agricultural and agricultural real estate | | 11 | | 0 |
Residential real estate | | 12 | | 0 |
| | | | |
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Nonaccrual loans | $ | 59,451 |
| | $ | 62,591 |
|
Nonaccrual troubled debt restructured loans | 4,005 |
| | 1,708 |
|
Total nonaccrual loans | $ | 63,456 |
| | $ | 64,299 |
|
Accruing loans past due 90 days or more | $ | 2,348 |
| | $ | 86 |
|
Performing troubled debt restructured loans | $ | 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, 2017, and September 30, 2016, dollars in thousands:
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2017 | | 2016 |
| 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 | 8 |
| | 1,174 |
| | 1,174 |
| | 5 |
| | 651 |
| | 651 |
|
Consumer | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total | 8 |
| | $ | 1,174 |
| | $ | 1,174 |
| | 5 |
|
| $ | 651 |
| | $ | 651 |
|
|
| | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
| Number of Loans | | Pre- Modification Recorded Investment | | Post- Modification Recorded Investment | | Number of Loans | | Pre- Modification Recorded Investment | | Post- Modification Recorded Investment |
Commercial | 3 |
| | $ | 131 |
| | $ | 131 |
| | 1 |
| | $ | 100 |
| | $ | 100 |
|
Commercial real estate | — |
| | — |
| | — |
| | 1 |
| | 179 |
| | 179 |
|
Total commercial and commercial real estate | 3 |
| | 131 |
| | 131 |
| | 2 |
| | 279 |
| | 279 |
|
Agricultural and agricultural real estate | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Residential real estate | 22 |
| | 2,977 |
| | 2,977 |
| | 5 |
| | 651 |
| | 651 |
|
Consumer | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total | 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 of 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, 2017,2023, there were no$98,000 in unfunded commitments to extend credit to any of the borrowers with an existing troubled debt restructuring.experiencing financial difficulty.
The following table shows troubled debt restructuredHTLF had no loans for which there wasto borrowers experiencing financial difficulty that had a payment default during the three-three months and nine-month periodsnine months ended September 30, 2017, and September 30, 2016,2023, that had been modified duringin the twelve-month period prior to default,the default.
HTLF closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table shows the performance of loans that have been modified in thousands:the nine months ended September 30, 2023, dollars in thousands.
|
| | | | | | | | | | | | | |
| With Payment Defaults During the Following Periods |
| Three Months Ended September 30, |
| 2017 | | 2016 |
| Number of Loans | | Recorded Investment | | Number of Loans | | Recorded Investment |
Commercial | — |
| | $ | — |
| | — |
|
| $ | — |
|
Commercial real estate | — |
| | — |
| | — |
|
| — |
|
Total commercial and commercial real estate | — |
| | — |
| | — |
| | — |
|
Agricultural and agricultural real estate | — |
| | — |
| | — |
|
| — |
|
Residential real estate | 5 |
| | 1,221 |
| | — |
|
| — |
|
Consumer | — |
| | — |
| | — |
|
| — |
|
Total | 5 |
| | $ | 1,221 |
| | — |
|
| $ | — |
|
|
| | | | | | | | | | | | | |
| With Payment Defaults During the Following Periods |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
| Number of Loans | | Recorded Investment | | Number of Loans | | Recorded Investment |
Commercial | — |
| | $ | — |
|
| 1 |
|
| $ | 95 |
|
Commercial real estate | — |
| | — |
|
| — |
|
| — |
|
Total commercial and commercial real estate | — |
| | — |
| | 1 |
| | 95 |
|
Agricultural and agricultural real estate | — |
| | — |
|
| — |
|
| — |
|
Residential real estate | 8 |
| | 1,480 |
|
| — |
|
| — |
|
Consumer | — |
| | — |
|
| — |
|
| — |
|
Total | 8 |
| | $ | 1,480 |
| | 1 |
| | $ | 95 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Accruing Loans | | | | |
| 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or More Past Due | | | | Total Past Due | | Current | | Nonaccrual | | |
September 30, 2023 | | | | | | | | | | | | | | | |
Commercial and industrial | $ | — | | | $ | — | | | $ | — | | | | | $ | — | | | $ | 4,233 | | | $ | — | | | |
| | | | | | | | | | | | | | | |
Owner occupied commercial real estate | — | | | — | | | — | | | | | — | | | 5,043 | | | — | | | |
| | | | | | | | | | | | | | | |
Real estate construction | — | | | — | | | — | | | | | — | | | — | | | 1,453 | | | |
Agricultural and agricultural real estate | — | | | — | | | — | | | | | — | | | 3,546 | | | — | | | |
Residential real estate | — | | | — | | | — | | | | | — | | | — | | | 741 | | | |
| | | | | | | | | | | | | | | |
Total | $ | — | | | $ | — | | | $ | — | | | | | $ | — | | | $ | 12,822 | | | $ | 2,194 | | | |
HTLF's internal rating system is a series of grades reflecting management's credit 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 intoand consists of 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. deterioration and risk rating migration analysis.
The "nonpass" category consists of special mention,watch, substandard, doubtful and loss rated loans. The "special mention""watch" rating is attached to loans where the borrower exhibits negative trends in financial circumstances 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 net worth and payingrepaying 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 HeartlandHTLF will sustain some loss if deficiencies are not corrected. Substandard loans may exhibit some or all of the following weaknesses: deteriorating financial trends, lack ofinsufficient 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 loanthese loans 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, capital, and capital, as well asthe 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 the rating of the loan as "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, 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. HeartlandHTLF had no loans classified as doubtful"loss" or "doubtful" as of September 30, 2017. Loans2023, and December 31, 2022.
The following table shows the risk category of loans by loan category, year of origination and charge-offs as of September 30, 2023, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of September 30, 2023 | Amortized Cost Basis of Term Loans by Year of Origination | | | | |
| 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 and Prior | | Revolving | | Total |
Commercial and industrial | | | | | | | | | | | | | | | |
Pass | $ | 371,612 | | | $ | 844,387 | | | $ | 359,961 | | | $ | 207,736 | | | $ | 86,378 | | | $ | 331,567 | | | $ | 1,232,550 | | | $ | 3,434,191 | |
Watch | 4,078 | | | 23,685 | | | 253 | | | 3,266 | | | 3,200 | | | 10,002 | | | 26,000 | | | 70,484 | |
Substandard | 18,954 | | | 12,849 | | | 4,005 | | | 6,025 | | | 18,761 | | | 7,971 | | | 18,569 | | | 87,134 | |
Commercial and industrial total | $ | 394,644 | | | $ | 880,921 | | | $ | 364,219 | | | $ | 217,027 | | | $ | 108,339 | | | $ | 349,540 | | | $ | 1,277,119 | | | $ | 3,591,809 | |
Commercial and industrial charge-offs | $ | — | | | $ | 567 | | | $ | 196 | | | $ | 1,414 | | | $ | 554 | | | $ | 1,938 | | | $ | 1,812 | | | $ | 6,481 | |
| | | | | | | | | | | | | | | |
PPP | | | | | | | | | | | | | | | |
Pass | $ | — | | | $ | — | | | $ | 2,968 | | | $ | 59 | | | $ | — | | | $ | — | | | $ | — | | | $ | 3,027 | |
Watch | — | | | — | | | 636 | | | — | | | — | | | — | | | — | | | 636 | |
Substandard | — | | | — | | | 87 | | | — | | | — | | | — | | | — | | | 87 | |
PPP total | $ | — | | | $ | — | | | $ | 3,691 | | | $ | 59 | | | $ | — | | | $ | — | | | $ | — | | | $ | 3,750 | |
PPP charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of September 30, 2023 | Amortized Cost Basis of Term Loans by Year of Origination | | | | |
| 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 and Prior | | Revolving | | Total |
Owner occupied commercial real estate | | | | | | | | | | | | | | | |
Pass | $ | 283,766 | | | $ | 501,294 | | | $ | 770,707 | | | $ | 228,578 | | | $ | 242,952 | | | $ | 236,637 | | | $ | 43,522 | | | $ | 2,307,456 | |
Watch | 15,369 | | | 11,034 | | | 15,380 | | | 2,690 | | | 10,724 | | | 6,661 | | | — | | | 61,858 | |
Substandard | 23,354 | | | 12,824 | | | 3,479 | | | 12,050 | | | 4,132 | | | 4,506 | | | — | | | 60,345 | |
Owner occupied commercial real estate total | $ | 322,489 | | | $ | 525,152 | | | $ | 789,566 | | | $ | 243,318 | | | $ | 257,808 | | | $ | 247,804 | | | $ | 43,522 | | | $ | 2,429,659 | |
Owner occupied commercial real estate charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | 5 | | | $ | — | | | $ | 14 | | | $ | — | | | $ | 19 | |
| | | | | | | | | | | | | | | |
Non-owner occupied commercial real estate | | | | | | | | | | | | | | | |
Pass | $ | 479,766 | | | $ | 743,063 | | | $ | 480,475 | | | $ | 219,733 | | | $ | 242,084 | | | $ | 276,518 | | | $ | 43,226 | | | $ | 2,484,865 | |
Watch | 28,925 | | | 3,673 | | | 437 | | | 2,412 | | | 27,620 | | | 51,230 | | | — | | | 114,297 | |
Substandard | — | | | 6,697 | | | 690 | | | 652 | | | 14,816 | | | 34,341 | | | — | | | 57,196 | |
Non-owner occupied commercial real estate total | $ | 508,691 | | | $ | 753,433 | | | $ | 481,602 | | | $ | 222,797 | | | $ | 284,520 | | | $ | 362,089 | | | $ | 43,226 | | | $ | 2,656,358 | |
Non-owner occupied commercial real estate charge-offs | $ | — | | | $ | 62 | | | $ | — | | | $ | 29 | | | $ | 398 | | | $ | 147 | | | $ | — | | | $ | 636 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Real estate construction | | | | | | | | | | | | | | | |
Pass | $ | 207,371 | | | $ | 529,810 | | | $ | 207,672 | | | $ | 35,069 | | | $ | 11,885 | | | $ | 3,834 | | | $ | 8,438 | | | $ | 1,004,079 | |
Watch | — | | | 12,808 | | | 1,823 | | | 74 | | | — | | | 100 | | | — | | | 14,805 | |
Substandard | 394 | | | 9,275 | | | 665 | | | 336 | | | — | | | — | | | — | | | 10,670 | |
Real estate construction total | $ | 207,765 | | | $ | 551,893 | | | $ | 210,160 | | | $ | 35,479 | | | $ | 11,885 | | | $ | 3,934 | | | $ | 8,438 | | | $ | 1,029,554 | |
Real estate construction charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Agricultural and agricultural real estate | | | | | | | | | | | | | | | |
Pass | $ | 130,711 | | | $ | 231,769 | | | $ | 119,184 | | | $ | 68,386 | | | $ | 29,310 | | | $ | 49,609 | | | $ | 178,635 | | | $ | 807,604 | |
Watch | 2,626 | | | 359 | | | 740 | | | 2,033 | | | 150 | | | 438 | | | 2,292 | | | 8,638 | |
Substandard | 1,496 | | | 7,635 | | | 1,770 | | | 35 | | | 912 | | | 13,454 | | | 572 | | | 25,874 | |
Agricultural and agricultural real estate total | $ | 134,833 | | | $ | 239,763 | | | $ | 121,694 | | | $ | 70,454 | | | $ | 30,372 | | | $ | 63,501 | | | $ | 181,499 | | | $ | 842,116 | |
Agricultural and agricultural real estate charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | 9 | | | $ | — | | | $ | 1 | | | $ | 5,309 | | | $ | 5,319 | |
| | | | | | | | | | | | | | | |
Residential real estate | | | | | | | | | | | | | | | |
Pass | $ | 60,769 | | | $ | 183,291 | | | $ | 247,584 | | | $ | 75,960 | | | $ | 44,007 | | | $ | 166,554 | | | $ | 18,715 | | | $ | 796,880 | |
Watch | 63 | | | 1,479 | | | 1,666 | | | 614 | | | 674 | | | 4,194 | | | — | | | 8,690 | |
Substandard | 741 | | | — | | | 2,728 | | | 768 | | | 265 | | | 3,332 | | | 399 | | | 8,233 | |
Residential real estate total | $ | 61,573 | | | $ | 184,770 | | | $ | 251,978 | | | $ | 77,342 | | | $ | 44,946 | | | $ | 174,080 | | | $ | 19,114 | | | $ | 813,803 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Residential real estate charge-offs | $ | — | | | $ | 59 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 59 | |
| | | | | | | | | | | | | | | |
Consumer | | | | | | | | | | | | | | | |
Pass | $ | 41,649 | | | $ | 66,162 | | | $ | 38,254 | | | $ | 9,007 | | | $ | 4,167 | | | $ | 14,394 | | | $ | 325,015 | | | $ | 498,648 | |
Watch | 618 | | | 91 | | | 710 | | | 26 | | | 44 | | | 430 | | | 1,582 | | | 3,501 | |
Substandard | 2 | | | 282 | | | 320 | | | 69 | | | 145 | | | 2,039 | | | 381 | | | 3,238 | |
Consumer total | $ | 42,269 | | | $ | 66,535 | | | $ | 39,284 | | | $ | 9,102 | | | $ | 4,356 | | | $ | 16,863 | | | $ | 326,978 | | | $ | 505,387 | |
Consumer charge-offs | $ | — | | | $ | 210 | | | $ | 112 | | | $ | 23 | | | $ | 18 | | | $ | 27 | | | $ | 2,824 | | | $ | 3,214 | |
| | | | | | | | | | | | | | | |
Total Pass | $ | 1,575,644 | | | $ | 3,099,776 | | | $ | 2,226,805 | | | $ | 844,528 | | | $ | 660,783 | | | $ | 1,079,113 | | | $ | 1,850,101 | | | $ | 11,336,750 | |
Total Watch | 51,679 | | | 53,129 | | | 21,645 | | | 11,115 | | | 42,412 | | | 73,055 | | | 29,874 | | | 282,909 | |
Total Substandard | 44,941 | | | 49,562 | | | 13,744 | | | 19,935 | | | 39,031 | | | 65,643 | | | 19,921 | | | 252,777 | |
Total Loans | $ | 1,672,264 | | | $ | 3,202,467 | | | $ | 2,262,194 | | | $ | 875,578 | | | $ | 742,226 | | | $ | 1,217,811 | | | $ | 1,899,896 | | | $ | 11,872,436 | |
| | | | | | | | | | | | | | | |
Total Charge-offs | $ | — | | | $ | 898 | | | $ | 308 | | | $ | 1,480 | | | $ | 970 | | | $ | 2,127 | | | $ | 9,945 | | | $ | 15,728 | |
The following table shows the risk category of loans by loan category and year of origination as of December 31, 2022, in thousands.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2022 | Amortized Cost Basis of Term Loans by Year of Origination | | | | |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 and Prior | | Revolving | | Total |
Commercial and industrial | | | | | | | | | | | | | | | |
Pass | $ | 967,103 | | | $ | 442,001 | | | $ | 260,021 | | | $ | 101,998 | | | $ | 57,776 | | | $ | 421,312 | | | $ | 1,064,333 | | | $ | 3,314,544 | |
Watch | 12,638 | | | 1,370 | | | 685 | | | 5,487 | | | 2,882 | | | 3,315 | | | 21,984 | | | 48,361 | |
Substandard | 6,691 | | | 14,366 | | | 9,369 | | | 22,171 | | | 5,546 | | | 6,758 | | | 36,608 | | | 101,509 | |
Commercial and industrial total | $ | 986,432 | | | $ | 457,737 | | | $ | 270,075 | | | $ | 129,656 | | | $ | 66,204 | | | $ | 431,385 | | | $ | 1,122,925 | | | $ | 3,464,414 | |
PPP | | | | | | | | | | | | | | | |
Pass | $ | — | | | $ | 7,807 | | | $ | 526 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 8,333 | |
Watch | — | | | 7 | | | — | | | — | | | — | | | — | | | — | | | 7 | |
Substandard | — | | | 2,685 | | | — | | | — | | | — | | | — | | | — | | | 2,685 | |
PPP total | $ | — | | | $ | 10,499 | | | $ | 526 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 11,025 | |
Owner occupied commercial real estate | | | | | | | | | | | | | | | |
Pass | $ | 511,547 | | | $ | 781,946 | | | $ | 255,476 | | | $ | 266,228 | | | $ | 103,943 | | | $ | 179,503 | | | $ | 34,117 | | | $ | 2,132,760 | |
Watch | 22,079 | | | 3,410 | | | 12,346 | | | 8,520 | | | 3,645 | | | 11,899 | | | — | | | 61,899 | |
Substandard | 2,971 | | | 23,802 | | | 26,490 | | | 6,358 | | | 2,574 | | | 7,353 | | | 1,100 | | | 70,648 | |
Owner occupied commercial real estate total | $ | 536,597 | | | $ | 809,158 | | | $ | 294,312 | | | $ | 281,106 | | | $ | 110,162 | | | $ | 198,755 | | | $ | 35,217 | | | $ | 2,265,307 | |
Non-owner occupied commercial real estate | | | | | | | | | | | | | | | |
Pass | $ | 756,059 | | | $ | 515,075 | | | $ | 227,383 | | | $ | 261,964 | | | $ | 127,400 | | | $ | 210,289 | | | $ | 70,398 | | | $ | 2,168,568 | |
Watch | 8,131 | | | 792 | | | 2,849 | | | 38,218 | | | 38,510 | | | 16,180 | | | 547 | | | 105,227 | |
Substandard | 202 | | | 6,784 | | | 1,838 | | | 16,019 | | | 22,332 | | | 9,970 | | | — | | | 57,145 | |
Non-owner occupied commercial real estate total | $ | 764,392 | | | $ | 522,651 | | | $ | 232,070 | | | $ | 316,201 | | | $ | 188,242 | | | $ | 236,439 | | | $ | 70,945 | | | $ | 2,330,940 | |
Real estate construction | | | | | | | | | | | | | | | |
Pass | $ | 597,370 | | | $ | 328,391 | | | $ | 88,660 | | | $ | 21,221 | | | $ | 2,568 | | | $ | 6,274 | | | $ | 8,252 | | | $ | 1,052,736 | |
Watch | 665 | | | 16,218 | | | 1,257 | | | — | | | — | | | 122 | | | — | | | 18,262 | |
Substandard | 2,587 | | | 356 | | | 173 | | | 446 | | | 1,478 | | | 44 | | | — | | | 5,084 | |
Real estate construction total | $ | 600,622 | | | $ | 344,965 | | | $ | 90,090 | | | $ | 21,667 | | | $ | 4,046 | | | $ | 6,440 | | | $ | 8,252 | | | $ | 1,076,082 | |
| | | | | | | | | | | | | | | |
Agricultural and agricultural real estate | | | | | | | | | | | | | | | |
Pass | $ | 324,791 | | | $ | 140,252 | | | $ | 79,307 | | | $ | 34,447 | | | $ | 22,600 | | | $ | 38,672 | | | $ | 239,686 | | | $ | 879,755 | |
Watch | 3,795 | | | 515 | | | 3,865 | | | 641 | | | 444 | | | 672 | | | 902 | | | 10,834 | |
Substandard | 8,674 | | | 3,224 | | | 204 | | | 1,859 | | | 12,323 | | | 2,682 | | | 955 | | | 29,921 | |
Agricultural and agricultural real estate total | $ | 337,260 | | | $ | 143,991 | | | $ | 83,376 | | | $ | 36,947 | | | $ | 35,367 | | | $ | 42,026 | | | $ | 241,543 | | | $ | 920,510 | |
| | | | | | | | | | | | | | | |
Residential real estate | | | | | | | | | | | | | | | |
Pass | $ | 189,133 | | | $ | 268,561 | | | $ | 64,627 | | | $ | 39,468 | | | $ | 34,863 | | | $ | 217,489 | | | $ | 23,331 | | | $ | 837,472 | |
Watch | 706 | | | 1,095 | | | 88 | | | 957 | | | 2,296 | | | 2,237 | | | 399 | | | 7,778 | |
Substandard | 28 | | | 1,273 | | | 1,024 | | | 99 | | | 792 | | | 4,895 | | | — | | | 8,111 | |
Residential real estate total | $ | 189,867 | | | $ | 270,929 | | | $ | 65,739 | | | $ | 40,524 | | | $ | 37,951 | | | $ | 224,621 | | | $ | 23,730 | | | $ | 853,361 | |
| | | | | | | | | | | | | | | |
Consumer | | | | | | | | | | | | | | | |
Pass | $ | 80,592 | | | $ | 47,787 | | | $ | 11,722 | | | $ | 6,022 | | | $ | 4,840 | | | $ | 24,655 | | | $ | 325,247 | | | $ | 500,865 | |
Watch | 20 | | | 191 | | | 35 | | | 119 | | | 74 | | | 1,584 | | | 953 | | | 2,976 | |
Substandard | 188 | | | 331 | | | 242 | | | 303 | | | 75 | | | 1,539 | | | 194 | | | 2,872 | |
Consumer total | $ | 80,800 | | | $ | 48,309 | | | $ | 11,999 | | | $ | 6,444 | | | $ | 4,989 | | | $ | 27,778 | | | $ | 326,394 | | | $ | 506,713 | |
| | | | | | | | | | | | | | | |
Total Pass | $ | 3,426,595 | | | $ | 2,531,820 | | | $ | 987,722 | | | $ | 731,348 | | | $ | 353,990 | | | $ | 1,098,194 | | | $ | 1,765,364 | | | $ | 10,895,033 | |
Total Watch | 48,034 | | | 23,598 | | | 21,125 | | | 53,942 | | | 47,851 | | | 36,009 | | | 24,785 | | | 255,344 | |
Total Substandard | 21,341 | | | 52,821 | | | 39,340 | | | 47,255 | | | 45,120 | | | 33,241 | | | 38,857 | | | 277,975 | |
Total Loans | $ | 3,495,970 | | | $ | 2,608,239 | | | $ | 1,048,187 | | | $ | 832,545 | | | $ | 446,961 | | | $ | 1,167,444 | | | $ | 1,829,006 | | | $ | 11,428,352 | |
Included in the nonpass loans at September 30, 2023, and December 31, 2022, were $723,000 and $2.7 million, respectively, of nonpass PPP loans as a result of risk ratings on non-PPP related credits. HTLF's risk rating methodology assigns a risk rating to the whole lending relationship. HTLF has no allowance recorded related to the PPP loans because of the 100% government guarantee through the United States Small Business Administration.
Changes in credit risk are placedmonitored on "nonaccrual"a continuous basis as part of relationship management, and changes in risk ratings are made when management does not expect to collect paymentscredit quality improves or deteriorates in accordance with HTLF's credit risk rating framework. All individually assessed loans are reviewed at least annually.
As of principal and interest in
full or when principal or interest has been in default for a periodSeptember 30, 2023, HTLF had $63,000 of 90 days or more, unless the loan is both wellloans secured andby residential real estate property that were in the process of collection.foreclosure.
The following table presentssets forth information regarding accruing and nonaccrual loans by credit quality indicator at September 30, 2017,2023, and December 31, 2016,2022, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
September 30, 2023 | | | | | | | | | | | | | |
Commercial and industrial | $ | 2,736 | | | $ | 653 | | | $ | 152 | | | $ | 3,541 | | | $ | 3,568,215 | | | $ | 20,053 | | | $ | 3,591,809 | |
PPP | 597 | | | 35 | | | 20 | | | 652 | | | 3,098 | | | — | | | 3,750 | |
Owner occupied commercial real estate | 707 | | | — | | | 318 | | | 1,025 | | | 2,422,914 | | | 5,720 | | | 2,429,659 | |
Non-owner occupied commercial real estate | 125 | | | — | | | — | | | 125 | | | 2,649,460 | | | 6,773 | | | 2,656,358 | |
Real estate construction | 4,752 | | | — | | | — | | | 4,752 | | | 1,022,040 | | | 2,762 | | | 1,029,554 | |
Agricultural and agricultural real estate | — | | | 12 | | | — | | | 12 | | | 832,609 | | | 9,495 | | | 842,116 | |
Residential real estate | 1,310 | | | 777 | | | 21 | | | 2,108 | | | 806,638 | | | 5,057 | | | 813,803 | |
Consumer | 1,933 | | | 179 | | | — | | | 2,112 | | | 501,831 | | | 1,444 | | | 505,387 | |
Total gross loans receivable held to maturity | $ | 12,160 | | | $ | 1,656 | | | $ | 511 | | | $ | 14,327 | | | $ | 11,806,805 | | | $ | 51,304 | | | $ | 11,872,436 | |
December 31, 2022 | | | | | | | | | | | | | |
Commercial and industrial | $ | 1,099 | | | $ | 356 | | | $ | 131 | | | $ | 1,586 | | | $ | 3,440,062 | | | $ | 22,766 | | | $ | 3,464,414 | |
PPP | — | | | — | | | — | | | — | | | 11,006 | | | 19 | | | 11,025 | |
Owner occupied commercial real estate | 12 | | | 127 | | | — | | | 139 | | | 2,256,365 | | | 8,803 | | | 2,265,307 | |
Non-owner occupied commercial real estate | — | | | — | | | — | | | — | | | 2,319,282 | | | 11,658 | | | 2,330,940 | |
Real estate construction | 16 | | | 28 | | | — | | | 44 | | | 1,073,687 | | | 2,351 | | | 1,076,082 | |
Agricultural and agricultural real estate | 48 | | | — | | | 142 | | | 190 | | | 914,088 | | | 6,232 | | | 920,510 | |
Residential real estate | 1,206 | | | 152 | | | — | | | 1,358 | | | 846,739 | | | 5,264 | | | 853,361 | |
Consumer | 1,526 | | | 196 | | | — | | | 1,722 | | | 503,853 | | | 1,138 | | | 506,713 | |
Total gross loans receivable held to maturity | $ | 3,907 | | | $ | 859 | | | $ | 273 | | | $ | 5,039 | | | $ | 11,365,082 | | | $ | 58,231 | | | $ | 11,428,352 | |
|
| | | | | | | | | | | |
| Pass | | Nonpass | | Total |
September 30, 2017 | | | | | |
Commercial | $ | 1,523,080 |
| | $ | 90,823 |
| | $ | 1,613,903 |
|
Commercial real estate | 2,992,663 |
| | 171,290 |
| | 3,163,953 |
|
Total commercial and commercial real estate | 4,515,743 |
| | 262,113 |
| | 4,777,856 |
|
Agricultural and agricultural real estate | 445,554 |
| | 66,210 |
| | 511,764 |
|
Residential real estate | 597,987 |
| | 37,624 |
| | 635,611 |
|
Consumer | 437,831 |
| | 12,257 |
| | 450,088 |
|
Total gross loans receivable held to maturity | $ | 5,997,115 |
| | $ | 378,204 |
| | $ | 6,375,319 |
|
December 31, 2016 | | | | | |
Commercial | $ | 1,187,557 |
| | $ | 99,708 |
| | $ | 1,287,265 |
|
Commercial real estate | 2,379,632 |
| | 158,950 |
| | 2,538,582 |
|
Total commercial and commercial real estate | 3,567,189 |
| | 258,658 |
| | 3,825,847 |
|
Agricultural and agricultural real estate | 424,311 |
| | 65,007 |
| | 489,318 |
|
Residential real estate | 584,626 |
| | 33,298 |
| | 617,924 |
|
Consumer | 409,474 |
| | 11,139 |
| | 420,613 |
|
Total gross loans receivable held to maturity | $ | 4,985,600 |
| | $ | 368,102 |
| | $ | 5,353,702 |
|
The nonpass category in the table above is comprised of approximately 48% special mention loans and 52% substandard loans as of September 30, 2017. The percent of nonpass loans on nonaccrual status as of September 30, 2017, was 17%. As of December 31, 2016, the nonpass category in the table above was comprised of approximately 47% special mention loans and 53% substandard loans. The percent of nonpass loans on nonaccrual status as of December 31, 2016, was 17%. Loans delinquent 30 to 89 days as a percent of total loans were 0.33%0.12% at September 30, 2017,2023, compared to 0.37%0.04% at December 31, 2016. Changes in credit risk are monitored2022.
HTLF recognized $0 of interest income on a regular 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 atduring the three and nine months ended September 30, 2017,2023 and September 30, 2022. As of September 30, 2023, and December 31, 2016, in thousands:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
September 30, 2017 | | | | | | | | | | | | | |
Commercial | $ | 2,591 |
| | $ | 133 |
| | $ | 215 |
| | $ | 2,939 |
| | $ | 1,603,397 |
| | $ | 7,567 |
| | $ | 1,613,903 |
|
Commercial real estate | 6,140 |
| | 465 |
| | — |
| | 6,605 |
| | 3,140,672 |
| | 16,676 |
| | 3,163,953 |
|
Total commercial and commercial real estate | 8,731 |
| | 598 |
| | 215 |
| | 9,544 |
| | 4,744,069 |
| | 24,243 |
| | 4,777,856 |
|
Agricultural and agricultural real estate | 315 |
| | 782 |
| | 1,282 |
| | 2,379 |
| | 496,593 |
| | 12,792 |
| | 511,764 |
|
Residential real estate | 5,033 |
| | 449 |
| | — |
| | 5,482 |
| | 607,165 |
| | 22,964 |
| | 635,611 |
|
Consumer | 3,001 |
| | 1,813 |
| | 851 |
| | 5,665 |
| | 440,966 |
| | 3,457 |
| | 450,088 |
|
Total gross loans receivable held to maturity | $ | 17,080 |
| | $ | 3,642 |
| | $ | 2,348 |
| | $ | 23,070 |
| | $ | 6,288,793 |
| | $ | 63,456 |
| | $ | 6,375,319 |
|
December 31, 2016 | | | | | | | | | | | | | |
Commercial | $ | 1,127 |
| | $ | 219 |
| | $ | 77 |
| | $ | 1,423 |
| | $ | 1,281,241 |
| | $ | 4,601 |
| | $ | 1,287,265 |
|
Commercial real estate | 886 |
| | 3,929 |
| | — |
| | 4,815 |
| | 2,513,069 |
| | 20,698 |
| | 2,538,582 |
|
Total commercial and commercial real estate | 2,013 |
| | 4,148 |
| | 77 |
| | 6,238 |
| | 3,794,310 |
| | 25,299 |
| | 3,825,847 |
|
Agricultural and agricultural real estate | 199 |
| | 3,191 |
| | — |
| | 3,390 |
| | 472,597 |
| | 13,331 |
| | 489,318 |
|
Residential real estate | 4,986 |
| | 846 |
| | — |
| | 5,832 |
| | 590,626 |
| | 21,466 |
| | 617,924 |
|
Consumer | 3,455 |
| | 1,021 |
| | 9 |
| | 4,485 |
| | 411,925 |
| | 4,203 |
| | 420,613 |
|
Total gross loans receivable held to maturity | $ | 10,653 |
| | $ | 9,206 |
| | $ | 86 |
| | $ | 19,945 |
| | $ | 5,269,458 |
| | $ | 64,299 |
| | $ | 5,353,702 |
|
The majority2022, HTLF had $17.4 million and $26.7 million of Heartland's impairednonaccrual loans are on 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, 2017, and December 31, 2016; the outstanding loan balances recorded on the consolidated balance sheets at September 30, 2017, and December 31, 2016; anywith no related allowance, recorded for those loans as of September 30, 2017, and December 31, 2016; the average outstanding loan balances recorded on the consolidated balance sheets during the three- and nine-months ended September 30, 2017, and year ended December 31, 2016; and the interest income recognized on the impaired loans during the three- and nine-month periods ended September 30, 2017, and year ended December 31, 2016, in thousands:respectively.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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, 2017 | | | | | | | | | | | | | |
Impaired loans with a related allowance: | | | | | | | | | | | | | |
Commercial | $ | 3,190 |
| | $ | 3,190 |
| | $ | 2,166 |
| | $ | 4,885 |
| | $ | — |
| | $ | 3,829 |
| | $ | 1 |
|
Commercial real estate | 11,272 |
| | 9,416 |
| | 864 |
| | 10,637 |
| | — |
| | 12,106 |
| | 7 |
|
Total commercial and commercial real estate | 14,462 |
| | 12,606 |
| | 3,030 |
| | 15,522 |
| | — |
| | 15,935 |
| | 8 |
|
Agricultural and agricultural real estate | 10,289 |
| | 10,289 |
| | 2,353 |
| | 3,532 |
| | — |
| | 2,140 |
| | — |
|
Residential real estate | 1,640 |
| | 1,640 |
| | 393 |
| | 1,633 |
| | — |
| | 2,197 |
| | 10 |
|
Consumer | 2,179 |
| | 2,179 |
| | 1,267 |
| | 2,155 |
| | 10 |
| | 2,343 |
| | 32 |
|
Total impaired loans with a related allowance | $ | 28,570 |
| | $ | 26,714 |
| | $ | 7,043 |
| | $ | 22,842 |
| | $ | 10 |
| | $ | 22,615 |
| | $ | 50 |
|
Impaired loans without a related allowance: | | | | | | | | | | | | | |
Commercial | $ | 4,887 |
| | $ | 3,767 |
| | $ | — |
| | $ | 2,727 |
| | $ | — |
| | $ | 2,017 |
| | $ | 112 |
|
Commercial real estate | 19,132 |
| | 18,527 |
| | — |
| | 18,237 |
| | 201 |
| | 21,750 |
| | 536 |
|
Total commercial and commercial real estate | 24,019 |
| | 22,294 |
| | — |
| | 20,964 |
| | 201 |
| | 23,767 |
| | 648 |
|
Agricultural and agricultural real estate | 2,503 |
| | 2,503 |
| | — |
| | 8,343 |
| | — |
| | 10,858 |
| | — |
|
Residential real estate | 28,197 |
| | 28,193 |
| | — |
| | 27,556 |
| | 112 |
| | 26,006 |
| | 230 |
|
Consumer | 4,345 |
| | 4,345 |
| | — |
| | 4,222 |
| | 19 |
| | 3,849 |
| | 61 |
|
Total impaired loans without a related allowance | $ | 59,064 |
| | $ | 57,335 |
| | $ | — |
| | $ | 61,085 |
| | $ | 332 |
| | $ | 64,480 |
| | $ | 939 |
|
Total impaired loans held to maturity: | | | | | | | | | | | | | |
Commercial | $ | 8,077 |
| | $ | 6,957 |
| | $ | 2,166 |
| | $ | 7,612 |
| | $ | — |
| | $ | 5,846 |
| | $ | 113 |
|
Commercial real estate | 30,404 |
| | 27,943 |
| | 864 |
| | 28,874 |
| | 201 |
| | 33,856 |
| | 543 |
|
Total commercial and commercial real estate | 38,481 |
| | 34,900 |
| | 3,030 |
| | 36,486 |
| | 201 |
| | 39,702 |
| | 656 |
|
Agricultural and agricultural real estate | 12,792 |
| | 12,792 |
| | 2,353 |
| | 11,875 |
| | — |
| | 12,998 |
| | — |
|
Residential real estate | 29,837 |
| | 29,833 |
| | 393 |
| | 29,189 |
| | 112 |
| | 28,203 |
| | 240 |
|
Consumer | 6,524 |
| | 6,524 |
| | 1,267 |
| | 6,377 |
| | 29 |
| | 6,192 |
| | 93 |
|
Total impaired loans held to maturity | $ | 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 |
December 31, 2016 | | | | | | | | | |
Impaired loans with a related allowance: | | | | | | | | | |
Commercial | $ | 2,852 |
| | $ | 2,840 |
| | $ | 1,318 |
| | $ | 3,136 |
| | $ | 2 |
|
Commercial real estate | 14,221 |
| | 14,221 |
| | 2,671 |
| | 10,625 |
| | 21 |
|
Total commercial and commercial real estate | 17,073 |
| | 17,061 |
| | 3,989 |
| | 13,761 |
| | 23 |
|
Agricultural and agricultural real estate | 2,771 |
| | 2,771 |
| | 816 |
| | 912 |
| | 21 |
|
Residential real estate | 3,490 |
| | 3,490 |
| | 497 |
| | 3,371 |
| | 43 |
|
Consumer | 2,644 |
| | 2,644 |
| | 1,451 |
| | 3,082 |
| | 42 |
|
Total impaired loans with a related allowance | $ | 25,978 |
| | $ | 25,966 |
| | $ | 6,753 |
| | $ | 21,126 |
| | $ | 129 |
|
Impaired loans without a related allowance: | | | | | | | | | |
Commercial | $ | 925 |
| | $ | 872 |
| | $ | — |
| | $ | 5,329 |
| | $ | 251 |
|
Commercial real estate | 31,875 |
| | 30,996 |
| | — |
| | 39,632 |
| | 1,647 |
|
Total commercial and commercial real estate | 32,800 |
| | 31,868 |
| | — |
| | 44,961 |
| | 1,898 |
|
Agricultural and agricultural real estate | 13,959 |
| | 13,959 |
| | — |
| | 12,722 |
| | 157 |
|
Residential real estate | 22,408 |
| | 22,236 |
| | — |
| | 18,446 |
| | 202 |
|
Consumer | 3,344 |
| | 3,344 |
| | — |
| | 2,659 |
| | 68 |
|
Total impaired loans without a related allowance | $ | 72,511 |
| | $ | 71,407 |
| | $ | — |
| | $ | 78,788 |
| | $ | 2,325 |
|
Total impaired loans held to maturity: | | | | | | | | | |
Commercial | $ | 3,777 |
| | $ | 3,712 |
| | $ | 1,318 |
| | $ | 8,465 |
| | $ | 253 |
|
Commercial real estate | 46,096 |
| | 45,217 |
| | 2,671 |
| | 50,257 |
| | 1,668 |
|
Total commercial and commercial real estate | 49,873 |
| | 48,929 |
| | 3,989 |
| | 58,722 |
| | 1,921 |
|
Agricultural and agricultural real estate | 16,730 |
| | 16,730 |
| | 816 |
| | 13,634 |
| | 178 |
|
Residential real estate | 25,898 |
| | 25,726 |
| | 497 |
| | 21,817 |
| | 245 |
|
Consumer | 5,988 |
| | 5,988 |
| | 1,451 |
| | 5,741 |
| | 110 |
|
Total impaired loans held to maturity | $ | 98,489 |
| | $ | 97,373 |
| | $ | 6,753 |
| �� | $ | 99,914 |
| | $ | 2,454 |
|
NOTE 4: ALLOWANCE FOR CREDIT LOSSES
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.
Heartland uses 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.
At September 30, 2017, and December 31, 2016, the carrying amount of loans acquired since 2015 consist of purchased impaired and nonimpaired loans as summarized in the following table, in thousands:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
Commercial | $ | 968 |
| | $ | 270,241 |
| | $ | 271,209 |
| | $ | 2,198 |
| | $ | 99,082 |
| | $ | 101,280 |
|
Commercial real estate | 2,509 |
| | 1,181,333 |
| | 1,183,842 |
| | 2,079 |
| | 622,117 |
| | 624,196 |
|
Agricultural and agricultural real estate | — |
| | 1,251 |
| | 1,251 |
| | — |
| | 181 |
| | 181 |
|
Residential real estate | 211 |
| | 184,167 |
| | 184,378 |
| | 186 |
| | 157,468 |
| | 157,654 |
|
Consumer loans | — |
| | 62,491 |
| | 62,491 |
| | — |
| | 47,368 |
| | 47,368 |
|
Total loans | $ | 3,688 |
| | $ | 1,699,483 |
| | $ | 1,703,171 |
| | $ | 4,463 |
| | $ | 926,216 |
| | $ | 930,679 |
|
Changes in accretable yieldthe allowance for credit losses on acquired loans with evidence of credit deterioration at the date of acquisition for the three- and nine-month periodsnine- months ended September 30, 2017,2023, and September 30, 2016,2022, were as follows, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial and Industrial | | | | Owner Occupied Commercial Real Estate | | Non-Owner Occupied Commercial Real Estate | | Real Estate Construction | | Agricultural and Agricultural Real Estate | | Residential Real Estate | | Consumer | | | | | | Total |
Balance at June 30, 2023 | $ | 29,396 | | | | | $ | 14,709 | | | $ | 17,976 | | | $ | 28,246 | | | $ | 3,511 | | | $ | 7,644 | | | $ | 9,716 | | | | | | | $ | 111,198 | |
Charge-offs | (1,344) | | | | | — | | | (607) | | | — | | | (10) | | | — | | | (2,003) | | | | | | | (3,964) | |
Recoveries | 167 | | | | | 1 | | | — | | | 7 | | | — | | | — | | | 127 | | | | | | | 302 | |
Provision (benefit) | 77 | | | | | (36) | | | (85) | | | 726 | | | 903 | | | (537) | | | 1,624 | | | | | | | 2,672 | |
Balance at September 30, 2023 | $ | 28,296 | | | | | $ | 14,674 | | | $ | 17,284 | | | $ | 28,979 | | | $ | 4,404 | | | $ | 7,107 | | | $ | 9,464 | | | | | | | $ | 110,208 | |
| | | | | | | | | | | | | | | | | | | | | |
| Commercial and Industrial | | | | Owner Occupied Commercial Real Estate | | Non-Owner Occupied Commercial Real Estate | | Real Estate Construction | | Agricultural and Agricultural Real Estate | | Residential Real Estate | | Consumer | | | | | | Total |
Balance at December 31, 2022 | $ | 29,071 | | | | | $ | 13,948 | | | $ | 16,539 | | | $ | 29,998 | | | $ | 2,634 | | | $ | 7,711 | | | $ | 9,582 | | | | | | | $ | 109,483 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Charge-offs | (6,481) | | | | | (19) | | | (636) | | | — | | | (5,319) | | | (59) | | | (3,214) | | | | | | | (15,728) | |
Recoveries | 2,007 | | | | | 113 | | | — | | | 26 | | | 11 | | | 19 | | | 1,592 | | | | | | | 3,768 | |
Provision (benefit) | 3,699 | | | | | 632 | | | 1,381 | | | (1,045) | | | 7,078 | | | (564) | | | 1,504 | | | | | | | 12,685 | |
Balance at September 30, 2023 | $ | 28,296 | | | | | $ | 14,674 | | | $ | 17,284 | | | $ | 28,979 | | | $ | 4,404 | | | $ | 7,107 | | | $ | 9,464 | | | | | | | $ | 110,208 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Balance at beginning of period | $ | 101 |
| | $ | 168 |
| | $ | 182 |
| | $ | 557 |
|
Original yield discount, net, at date of acquisitions | — |
| | — |
| | — |
| | 19 |
|
Accretion | (700 | ) | | (379 | ) | | (1,074 | ) | | (845 | ) |
Reclassification from nonaccretable difference(1) | 654 |
| | 331 |
| | 947 |
| | 389 |
|
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. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial and Industrial | | | | Owner Occupied Commercial Real Estate | | Non-Owner Occupied Commercial Real Estate | | Real Estate Construction | | Agricultural and Agricultural Real Estate | | Residential Real Estate | | Consumer | | | | | | Total |
Balance at June 30, 2022 | $ | 27,668 | | | | | $ | 17,658 | | | $ | 15,738 | | | $ | 19,391 | | | $ | 2,948 | | | $ | 8,571 | | | $ | 9,379 | | | | | | | $ | 101,353 | |
Charge-offs | (385) | | | | | — | | | — | | | (35) | | | (34) | | | (1) | | | (483) | | | | | | | (938) | |
Recoveries | 506 | | | | | — | | | 20 | | | 3 | | | 76 | | | — | | | 307 | | | | | | | 912 | |
Provision (benefit) | 2,474 | | | | | (686) | | | (949) | | | 4,911 | | | (423) | | | (1,144) | | | 205 | | | | | | | 4,388 | |
Balance at September 30, 2022 | $ | 30,263 | | | | | $ | 16,972 | | | $ | 14,809 | | | $ | 24,270 | | | $ | 2,567 | | | $ | 7,426 | | | $ | 9,408 | | | | | | | $ | 105,715 | |
| | | | | | | | | | | | | | | | | | | | | |
| Commercial and Industrial | | | | Owner Occupied Commercial Real Estate | | Non-Owner Occupied Commercial Real Estate | | Real Estate Construction | | Agricultural and Agricultural Real Estate | | Residential Real Estate | | Consumer | | | | | | Total |
Balance at December 31, 2021 | $ | 27,738 | | | | | $ | 19,214 | | | $ | 17,908 | | | $ | 22,538 | | | $ | 5,213 | | | $ | 8,427 | | | $ | 9,050 | | | | | | | $ | 110,088 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Charge-offs | (5,528) | | | | | — | | | (322) | | | (35) | | | (3,163) | | | (138) | | | (6,442) | | | | | | | (15,628) | |
Recoveries | 1,157 | | | | | 40 | | | 53 | | | 12 | | | 653 | | | — | | | 779 | | | | | | | 2,694 | |
Provision (benefit) | 6,896 | | | | | (2,282) | | | (2,830) | | | 1,755 | | | (136) | | | (863) | | | 6,021 | | | | | | | 8,561 | |
Balance at September 30, 2022 | $ | 30,263 | | | | | $ | 16,972 | | | $ | 14,809 | | | $ | 24,270 | | | $ | 2,567 | | | $ | 7,426 | | | $ | 9,408 | | | | | | | $ | 105,715 | |
For 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 $22.2 million, and the estimated fair value of these loans was $13.1 million. At September 30, 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 such 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 $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.
For loans acquired since January 2015, the preliminary estimate on the acquisition dates of the contractually required payments receivable for all nonimpaired loans acquired was $2.66 billion, and the estimated fair value of the loans was $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, 2017, and September 30, 2016, were as follows, in thousands:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
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 |
|
Management allocates the allowance for loancredit 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 loancredit losses is available to absorb losses from any segment of the loan portfolio.
Changes in the allowance for credit losses for unfunded commitments for the three and nine months ended September 30, 2023, and September 30, 2022, were as follows: | | | | | | | | | | | |
| For the Three Months Ended September 30, |
| 2023 | | 2022 |
Balance at June 30, | $ | 18,636 | | | $ | 17,780 | |
Provision (benefit) | (1,156) | | | 1,104 | |
Balance at September 30, | $ | 17,480 | | | $ | 18,884 | |
| | | | | | | | | | | |
| For the Nine Months Ended September 30, |
| 2023 | | 2022 |
Balance at December 31, | $ | 20,196 | | | $ | 15,462 | |
| | | |
| | | |
Provision (benefit) | (2,716) | | | 3,422 | |
Balance at September 30, | $ | 17,480 | | | $ | 18,884 | |
NOTE 6:5: GOODWILL, CORE DEPOSIT PREMIUM AND OTHER INTANGIBLE ASSETS
HeartlandHTLF had goodwill of $236.6$576.0 million at both September 30, 2017,2023, and $127.7 million at December 31, 2016. Heartland2022. HTLF conducts its annual internal assessment of the goodwill both at the consolidated level and at its subsidiaries in the fourth quarter of every year as of September 30. There was no
The sustained decline in HTLF's stock price, which management deemed to be a triggering event, caused management to perform a quantitative impairment test on its goodwill impairment asin the second quarter of 2023. Management concluded that none of the most recent assessment.goodwill at any of HTLF's reporting units was impaired.
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. In addition, Heartland recognized core deposit intangibles of $6.4 million and 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.
Goodwill related to the Citywide Banks of Colorado, Inc., Founders Bancorp, and CIC Bancshares, Inc. acquisitions resulted from expected operational synergies, increased market presence, cross-selling opportunities, and expanded business lines and is not deductible for tax purposes.
Heartland's intangible assets consist of core deposit intangibles, mortgage servicing rights, customer relationship intangibles, and commercial servicing rights. The gross carrying amount of theseother intangible assets, which consisted of core deposit intangibles and mortgage servicing rights, and the associated accumulated amortization at September 30, 2017,2023, and December 31, 2016,2022, are presented in the table below, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Amortizing intangible assets: | | | | | | | | | | | |
Core deposit intangibles | $ | 101,185 | | | $ | 81,159 | | | $ | 20,026 | | | $ | 101,185 | | | $ | 76,031 | | | $ | 25,154 | |
| | | | | | | | | | | |
Mortgage servicing rights | — | | | — | | | — | | | 13,700 | | | 5,860 | | | 7,840 | |
| | | | | | | | | | | |
Total | $ | 101,185 | | | $ | 81,159 | | | $ | 20,026 | | | $ | 114,885 | | | $ | 81,891 | | | $ | 32,994 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Amortizing intangible assets: | | | | | | | | | | | |
Core deposit intangibles | $ | 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 | 41,903 |
| | 18,161 |
| | 23,742 |
| | 50,467 |
| | 18,379 |
| | 32,088 |
|
Commercial servicing rights | 6,719 |
| | 3,862 |
| | 2,857 |
| | 6,504 |
| | 2,814 |
| | 3,690 |
|
Total | $ | 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 | | | | | | | | |
Three months ending December 31, 2023 | $ | 1,611 | | | | | | | | | |
Year ending December 31, | | | | | | | | | |
2024 | 5,591 | | | | | | | | | |
2025 | 4,700 | | | | | | | | | |
2026 | 3,533 | | | | | | | | | |
2027 | 2,601 | | | | | | | | | |
2028 | 1,287 | | | | | | | | | |
Thereafter | 703 | | | | | | | | | |
Total | $ | 20,026 | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| Core Deposit Intangibles | | Customer Relationship Intangibles | | Mortgage Servicing Rights | | Commercial Servicing Rights | | Total |
Three months ending December 31, 2017 | $ | 1,815 |
| | $ | 10 |
| | $ | 2,463 |
| | $ | 184 |
| | $ | 4,472 |
|
Year ending December 31, | | | | | | | | | |
2018 | 6,712 |
| | 39 |
| | 5,319 |
| | 701 |
| | 12,771 |
|
2019 | 5,915 |
| | 38 |
| | 4,560 |
| | 566 |
| | 11,079 |
|
2020 | 5,191 |
| | 37 |
| | 3,800 |
| | 442 |
| | 9,470 |
|
2021 | 4,425 |
| | 35 |
| | 3,040 |
| | 380 |
| | 7,880 |
|
2022 | 3,391 |
| | 34 |
| | 2,280 |
| | 307 |
| | 6,012 |
|
Thereafter | 9,288 |
| | 98 |
| | 2,280 |
| | 277 |
| | 11,943 |
|
Total | $ | 36,737 |
| | $ | 291 |
| | $ | 23,742 |
| | $ | 2,857 |
| | $ | 63,627 |
|
ProjectionsOn March 31, 2023, First Bank & Trust, a division of amortization expense forHTLF Bank, closed on the sale of its mortgage servicing rights are based on existing asset balances and the existing interest rate environment as of September 30, 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 approximately $3.56 billion and $4.31 billion as of September 30, 2017, and December 31, 2016, respectively. Custodial escrow balances maintained in connection with the mortgage loan servicing portfolio were approximately $24.3 million and $21.4 million as of September 30, 2017, and December 31, 2016, respectively. The fair value of Heartland's mortgage servicing rights was estimated at $35.0 million at September 30, 2017, and $45.2 million at December 31, 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 ("FHLMC"). Prior to the third quarter of 2017, Heartland also serviced loans for the Government National Mortgage 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.$698.5 million, to two unrelated third-parties. The transaction qualifiesqualified as a sale, and $6.9$7.7 million of mortgage servicing rights have beenwere de-recognized on the consolidated balance sheet as of September 30, 2017.March 31, 2023. Cash of approximately $5.1$6.7 million was received during the third quarter,on March 31, 2023, and Heartland recorded an estimated loss on the sale
of this portfolio of approximately $183,000.$203,000 was recorded. A receivable of approximately $1.6 million$580,000 was recorded in other assets on the consolidated balance sheet as of March 31, 2023, 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 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 10.93% and 9.63% for the September 30, 2017, and December 31, 2016, valuations, respectively. The discount rate was 9.06% and 9.26% for the September 30, 2017, and December 31, 2016, valuations, respectively. The average capitalization rate for the firstninemonths of 2017 ranged from 91 to 150 basis points compared to the range of 88 to 135 basis points for 2016. Fees collected for theagreement. First Bank & Trust provided interim servicing of mortgagethe loans for others were $2.9 million and $3.1 million foruntil the quarters ended September 30, 2017, and September 30, 2016, respectively and $9.3 million and $9.0 million for the nine months ended September 30, 2017, and September 30, 2016, respectively.transfer date, which was May 1, 2023.
The following table summarizes, in thousands, the changes in capitalized mortgage servicing rights for the nine months ended September 30, 2017,2023, and September 30, 2016:2022:
| | | 2017 | | 2016 | | 2023 | | 2022 |
Balance at January 1, | $ | 32,088 |
| | $ | 30,314 |
| Balance at January 1, | $ | 7,840 | | | $ | 6,412 | |
Originations | 5,778 |
| | 9,323 |
| Originations | 24 | | | 1,218 | |
Amortization | (7,184 | ) | | (7,795 | ) | Amortization | (210) | | | (909) | |
| Sale of mortgage servicing rights | (6,940 | ) | | — |
| Sale of mortgage servicing rights | (7,654) | | | — | |
| Valuation adjustment | | Valuation adjustment | — | | | 1,658 | |
Balance at period end | $ | 23,742 |
| | $ | 31,842 |
| Balance at period end | $ | — | | | $ | 8,379 | |
Fair value of mortgage servicing rights | $ | 35,002 |
| | $ | 38,127 |
| |
| Mortgage servicing rights, net to servicing portfolio | 0.67 | % | | 0.75 | % | Mortgage servicing rights, net to servicing portfolio | — | % | | 1.14 | % |
Heartland's 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 $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. Fees collected for the servicing of commercial loans for others were $394,000 and $230,000 for the quarter ended September 30, 2017, and September 30, 2016, respectively, and $1.2 million and $685,000 for the nine months ended September 30, 2017, and September 30, 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 valuations was 6.66% to 7.99% as of September 30, 2017, compared to 6.96% to 7.88% as of December 31, 2016. The discount rate range was 12.52% to 14.65% for the September 30, 2017, valuations compared to 12.44% to 13.88% for the December 31, 2016, valuations. The capitalization rate for 2017 ranged from 310 to 445 basis points compared to 310 to 445 basis points for 2016. The total fair value of Heartland's commercial servicing rights was estimated at $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, 2017, and September 30, 2016:
|
| | | | | | | |
| 2017 | | 2016 |
Balance at January 1, | $ | 3,690 |
| | $ | 4,611 |
|
Purchased commercial servicing rights | — |
| | 190 |
|
Originations | 215 |
| | 533 |
|
Amortization | (1,077 | ) | | (1,229 | ) |
Valuation allowance on commercial servicing rights | 29 |
| | (41 | ) |
Balance at period end | $ | 2,857 |
| | $ | 4,064 |
|
Fair value of commercial servicing rights | $ | 3,458 |
| | $ | 4,397 |
|
Commercial servicing rights, net to servicing portfolio | 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 $33,000 valuation allowance was required on commercial servicing rights with a term greater than 20 years.
The following table summarizes, in thousands, the book value, the fair value of each tranche of the commercialmortgage servicing rights and any recorded valuation allowance at each respective subsidiary at September 30, 2017, and December 31, 2016:2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Book Value 15-Year Tranche | | Fair Value 15-Year Tranche | | Valuation Allowance 15-Year Tranche | | Book Value 30-Year Tranche | | Fair Value 30-Year Tranche | | Valuation Allowance 30-Year Tranche |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
December 31, 2022 | $ | 1,388 | | | $ | 1,388 | | | $ | — | | | $ | 6,452 | | | $ | 6,452 | | | $ | — | |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
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 | 95 |
| | 124 |
| | — |
| | 317 |
| | 313 |
| | 4 |
|
Wisconsin Bank & Trust | 515 |
| | 688 |
| | — |
| | 1,868 |
| | 2,257 |
| | — |
|
Total | $ | 622 |
| | $ | 827 |
| | $ | — |
| | $ | 2,239 |
| | $ | 2,631 |
| | $ | 4 |
|
December 31, 2016 | | | | | | | | | | | |
Citywide Banks | $ | 19 |
| | $ | 23 |
| | $ | — |
| | $ | 107 |
| | $ | 114 |
| | $ | — |
|
Premier Valley Bank | 156 |
| | 180 |
| | — |
| | 359 |
| | 326 |
| | 33 |
|
Wisconsin Bank & Trust | 833 |
| | 997 |
| | — |
| | 2,249 |
| | 2,487 |
| | — |
|
Total | $ | 1,008 |
| | $ | 1,200 |
| | $ | — |
| | $ | 2,715 |
| | $ | 2,927 |
| | $ | 33 |
|
NOTE 7:6: DERIVATIVE FINANCIAL INSTRUMENTS
HeartlandHTLF considers and uses derivative financial instruments as part of its interest rate risk management strategy. As part of the strategy, Heartland considers the use ofwhich may include interest rate swaps, fair value hedges, risk participation agreements, caps, floors, collars, and certain interest rate lock commitments and forward sales of securities related to mortgage banking activities. Heartland'sHTLF's current strategy includes the use of interest rate swaps, interest rate lock commitments and forward sales of mortgage securities. In addition, Heartland is facilitatingHTLF facilitates back-to-back loan swaps to assist customers in managing their interest rate risk. Heartland'srisk while executing offsetting interest rate swaps with dealer counterparties.
HTLF'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. HeartlandHTLF is exposed to credit risk in the event of nonperformance by counterparties to financial instruments. HeartlandHTLF minimizes this risk by entering into derivative contracts with counterparties that meet Heartland’sHTLF’s credit standards, and the contracts contain collateral provisions protecting the at-risk party. HeartlandHTLF has not experienced any losses from nonperformance by these counterparties. HeartlandHTLF 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 HTLF was required to pledge $2.2 millionpost $587,000 of cash as collateral at both September 30, 2017, and2023, compared to $793,000 as of December 31, 2016. No collateral was2022, related to derivative financial instruments. HTLF's counterparties were required to be pledged by Heartland's counterpartiespledge $179.4 million at both September 30, 2017, and2023, compared to $45.1 million at December 31, 2016.2022.
Heartland'sHTLF's derivative and hedging instruments are recorded at fair value on the consolidated balance sheets. See Note 8, “Fair7, "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 variousIn 2021, two interest rate swap agreements. Amounts reported in accumulated other comprehensive income relatedtransactions were terminated, and the debt was converted 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, 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 $1.0 million.variable rate subordinated debentures. For the next twelve months, HeartlandHTLF estimates that cash payments and reclassification from accumulated other comprehensive income (loss) to interest expense related to the terminated swaps will total $411,000.
In the first quarter of 2023, HTLF terminated its interest rate swap agreement, which effectively converted $500.0 million of variable rate loans to fixed rate loans. For the next twelve months, HTLF estimates cash payments and reclassification from accumulated other comprehensive income (loss) to interest expense will total $1.2 million.$985,000.
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 areHTLF had no derivative instruments 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 converted from a fixed interest rate subordinated debenture to a variable interest rate subordinated debenture effective on June 15, 2017. The forward starting swap transaction expires on June 15, 2024. The second forward starting interest rate swap was effective on March 1, 2017, and replaced the interest rate swap related to Heartland Statutory Trust VII upon its expiration on March 1, 2017.
at September 30, 2023. The table below identifies the balance sheet category and fair valuesvalue of Heartland'sHTLF's derivative instrumentsinstrument designated as a cash flow hedgeshedge at September 30, 2017, and December 31, 2016,2022, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| Notional Amount | | Fair Value | | Balance Sheet Category | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
December 31, 2022 | | | | | | | | | | | |
Interest rate swap | $ | 500,000 | | | $ | 13 | | | Other Assets | | | | | | |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| Notional Amount | | Fair Value | | Balance Sheet Category | | Receive Rate | | Weighted Average Pay Rate | | Maturity |
September 30, 2017 | | | | | | | | | | | |
Interest rate swap | $ | 25,000 |
| | $ | (346 | ) | | Other liabilities | | 1.321 | % | | 2.255 | % | | 03/17/2021 |
Interest rate swap | — |
| | — |
| | Other liabilities | | — | % | | 3.220 | % | | 03/01/2017 |
Interest rate swap | 20,000 |
| | (828 | ) | | Other liabilities | | 1.303 | % | | 3.355 | % | | 01/07/2020 |
Interest rate swap | 10,000 |
| | (6 | ) | | Other liabilities | | 1.329 | % | | 1.674 | % | | 03/26/2019 |
Interest rate swap | 10,000 |
| | (5 | ) | | Other liabilities | | 1.321 | % | | 1.658 | % | | 03/18/2019 |
Interest rate swap | 35,667 |
| | 557 |
| | Other assets | | 3.735 | % | | 3.674 | % | | 05/10/2021 |
Interest rate swap | 20,000 |
| | (393 | ) | | Other liabilities | | 1.320 | % | | 2.390 | % | | 06/15/2024 |
Interest rate swap | 20,000 |
| | (365 | ) | | Other liabilities | | 1.316 | % | | 2.352 | % | | 03/01/2024 |
December 31, 2016 | | | | | | | | | | | |
Interest rate swap | $ | 25,000 |
| | $ | (447 | ) | | Other liabilities | | 0.993 | % | | 2.255 | % | | 03/17/2021 |
Interest rate swap | 20,000 |
| | (114 | ) | | Other liabilities | | 0.931 | % | | 3.220 | % | | 03/01/2017 |
Interest rate swap | 20,000 |
| | (1,145 | ) | | Other liabilities | | 0.868 | % | | 3.355 | % | | 01/07/2020 |
Interest rate swap | 10,000 |
| | (42 | ) | | Other liabilities | | 0.997 | % | | 1.674 | % | | 03/26/2019 |
Interest rate swap | 10,000 |
| | (41 | ) | | Other liabilities | | 0.993 | % | | 1.658 | % | | 03/18/2019 |
Interest rate swap | 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(2) | 20,000 |
| | (262 | ) | | 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 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. |
The table below identifies the gains and losses recognized on Heartland'sHTLF's terminated derivative instruments designated as cash flow hedges for the three-three and nine-month periodsnine months ended September 30, 2017,2023, and September 30, 2016,2022, in thousands:
| | | | | | | | | | | | | | | | | | | | | |
| | | |
| Recognized in OCI | | Reclassified from AOCI into Income | | |
| Amount of Gain (Loss) | | Category | | Amount of Gain (Loss) | | | | |
Three Months Ended September 30, 2023 | | | | | | | | | |
Interest rate swap | $ | — | | | Interest income | | $ | 63 | | | | | |
Nine Months Ended September 30, 2023 | | | | | | | | | |
Interest rate swap | $ | 1,952 | | | Interest income | | $ | (638) | | | | | |
Three Months Ended September 30, 2022 | | | | | | | | | |
Interest rate swap | $ | — | | | Interest income | | $ | — | | | | | |
Nine Months Ended September 30, 2022 | | | | | | | | | |
Interest rate swap | $ | — | | | Interest income | | $ | — | | | | | |
|
| | | | | | | | | | | | | | | |
| Effective Portion | | Ineffective Portion |
| 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) |
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 | | $ | — |
|
Nine Months Ended September 30, 2016 | | | | | | | | | |
Interest rate swaps | $ | (3,160 | ) | | Interest expense | | $ | (1,463 | ) | | Other income | | $ | — |
|
Fair Value Hedges
HeartlandHTLF uses interest rate swaps to convert certain long term fixed rate loans to floating rates to hedge interest rate risk exposure. HeartlandHTLF also uses interest rate swaps to mitigate the risk of changes in the fair market value of certain municipal and mortgage-backed securities. The changes in the fair values of derivatives that have been designated and qualify for fair value hedge accounting are recorded 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 recordedsame line item in the consolidated statements of income. The ineffective portionsincome as the changes in the fair value of the unrealized gains or losses, if any, are recorded in interest income and interest expense inhedged items attributable to the consolidated statements of income. Heartlandrisk being hedged.
HTLF 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.
Heartland was required to pledge $4.5 million and $5.0 million of cashDuring 2023, HTLF entered into interest rate swaps designated as collateral for these fair value hedges at September 30, 2017,with initial notional amounts totaling $838.1 million primarily designed to provide protection for unrealized securities losses against the impact of higher mid-to-long term interest rates. HTLF also executed interest rate swaps designated as a fair value hedges with total original notional amounts of $2.5 billion to convert certain long-term fixed rate loans to floating rates to hedge interest rate risk exposure using the portfolio layer method, which allows HTLF to designate as the hedged item a stated amount of the assets that are not expected to be affected by prepayments, defaults and December 31, 2016, respectively.other factors that would affect the timing and amount of cash flow.
The table below identifies the notional amount, fair value of the interest rate swaps designated as fair value hedges and the balance sheet category of Heartland's fair value hedges atthe interest rate swaps as of September 30, 2017,2023 and December 31, 2016,2022, in thousands:
| | | | | | | | | | | |
| Fair Value | | Balance Sheet Category |
September 30, 2023 | | | |
Interest rate swaps-loans receivable held to maturity | $ | 24,998 | | | Other assets |
Interest rate swaps-securities carried at fair value | 66,853 | | | Other assets |
December 31, 2022 | | | |
Interest rate swaps-loans receivable held to maturity | 54 | | | Other assets |
|
| | | | | | | | | |
| Notional Amount | | Fair Value | | Balance Sheet Category |
September 30, 2017 | | | | | |
Fair value hedges | $ | 35,813 |
| | $ | (1,537 | ) | | Other liabilities |
December 31, 2016 | | | | | |
Fair value hedges | $ | 40,807 |
| | $ | (1,626 | ) | | Other liabilities |
The table below identifies the gainscarrying amount of the hedged assets and lossescumulative amount of fair value hedging adjustment included in the carrying amount of the hedged assets that are designated as fair value hedge accounting relationships at September 30, 2023, and December 31, 2022, in thousands:
| | | | | | | | | | | | | | | | | | | |
| Location in the consolidated balance sheet | | Carrying Amount of the Hedged Assets | | Cumulative Amount of Fair Value Hedging Adjustment Included in Carrying Amount of Hedged Assets | | |
September 30, 2023 | | | | | | | |
| | | | | | | |
Interest rate swap | Loans receivable held to maturity | | $ | 2,476,983 | | | $ | (23,707) | | | |
Interest rate swap | Securities carried at fair value | | 729,528 | | (64,820) | | | |
December 31, 2022 | | | | | | | |
| | | | | | | |
Interest rate swap | Loans receivable held to maturity | | $ | 1,185 | | | $ | (54) | | | |
The table below identifies the net impact to interest income recognized on Heartland'sHTLF's fair value hedges specific to the fair value remeasurements and the income statement classification where it is recorded in comparison to the total amount of interest income presented on the consolidated statements of income for the three- and nine-month periodsnine- months ended September 30, 2017,2023, and September 30, 2016,2022, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Gain (loss) recognized in interest income and fees on loans | $ | (375) | | | $ | 5 | | | $ | (371) | | | $ | 44 | |
Total amount of interest and fees on loans | 182,394 | | | 122,913 | | | 505,136 | | | 334,000 | |
Gain (loss) recognized in interest income on securities-taxable | (1,126) | | | — | | | (1,052) | | | — | |
Total amount of interest on securities-taxable | 54,800 | | | 45,648 | | | 168,948 | | | 116,366 | |
|
| | | | | | |
| | 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 |
Nine Months Ended September 30, 2016 | | | | |
Fair value hedges | | $ | (2,335 | ) | | Interest income |
The table below identifies the effect of fair value hedge accounting on the consolidated statements of income, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Hedged item (loans receivable held to maturity) | $ | (11,144) | | | $ | (34) | | | $ | (24,026) | | | $ | (117) | |
Hedged item (securities carried at fair value) | (36,362) | | | — | | | (65,872) | | | — | |
Derivatives designated as hedging instruments on loans receivable held to maturity | 10,769 | | | 39 | | | 23,655 | | | 161 | |
Derivatives designated as hedging instruments on securities carried at fair value | 35,236 | | | — | | | 64,820 | | | — | |
Embedded Derivatives
HeartlandHTLF has fixed rate loans with embedded derivatives. TheThese 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'sthe embedded derivatives at September 30, 2017,2023, and December 31, 2016,2022, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| Notional Amount | | Fair Value | | Balance Sheet Category | | | | | | |
September 30, 2023 | | | | | | | | | | | |
Embedded derivatives | $ | 4,185 | | | $ | 109 | | | Other assets | | | | | | |
| | | | | | | | | | | |
December 31, 2022 | | | | | | | | | | | |
Embedded derivatives | $ | 6,028 | | | $ | 135 | | | Other assets | | | | | | |
| | | | | | | | | | | |
|
| | | | | | | | | |
| Notional Amount | | Fair Value | | Balance Sheet Category |
September 30, 2017 | | | | | |
Embedded derivatives | $ | 14,175 |
| | $ | 923 |
| | Other assets |
December 31, 2016 | | | | | |
Embedded derivatives | $ | 14,549 |
| | $ | 1,104 |
| | Other assets |
The table below identifies the gains and losses recognized on Heartland'sHTLF's embedded derivatives for the three- and nine-month periodsnine- months ended September 30, 2017,2023, and September 30, 2016,2022, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Gain (loss) recognized in other noninterest income on embedded derivatives | $ | (9) | | | $ | 121 | | | $ | (26) | | | $ | 446 | |
|
| | | | | | |
| | 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 assumed 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 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. On February 5, 2016, the total number of shares to be issued upon conversion was 73,394.
At December 31, 2016, the remaining shares to be issued upon conversion 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 was 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 |
September 30, 2017 | | | | | |
Embedded conversion option | $ | — |
| | $ | — |
| | Other liabilities |
December 31, 2016 | | | | | |
Embedded conversion option | $ | 558 |
| | $ | (422 | ) | | Other liabilities |
The 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
HeartlandHTLF has loan interest rate swap loan relationships with customers to meetassist them in managing their financing needs.interest rate risk. Upon entering into these loan swaps, HeartlandHTLF enters into offsetting positions with counterparties in order to minimize interest rate risk.risk to HTLF. 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 $2.0 million and $1.8 million at both September 30, 2017, and December 31, 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, 20172023, and September 30, 2016,2022, no gain or loss was recognized. HTLF recognized $1.6 million and $6.7 million in fee income for the three and nine months ended September 30, 2023, respectively, compared to $1.3 million and $5.8 million for the three and nine months ended September 30, 2022, respectively.
The table below identifies the balance sheet category and fair values of Heartland'sthe derivative instruments designated as loan swaps at September 30, 2017,2023, and December 31, 2016,2022, in thousands:
| | | | | | | | | | | | | | | | | | | | | |
| Notional Amount | | Fair Value | | Balance Sheet Category | | | | |
September 30, 2023 | | | | | | | | | |
Customer interest rate swaps | $ | 1,500,715 | | | $ | 75,965 | | | Other assets | | | | |
Customer interest rate swaps | 1,500,715 | | | (75,965) | | | Other liabilities | | | | |
December 31, 2022 | | | | | | | | | |
Customer interest rate swaps | $ | 819,662 | | | $ | 46,091 | | | Other assets | | | | |
Customer interest rate swaps | 819,662 | | | (46,091) | | | Other liabilities | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | 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
HeartlandHTLF 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. HeartlandHTLF enters into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in orderand 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. HeartlandHTLF was required to pledge no collateral of $353,000 at both September 30, 2017,2023, and $0 at December 31, 2016. Heartland's2022. HTLF's counterparties were required to pledge $29,000 and $2.9 millionno collateral at both September 30, 2017,2023, and December 31, 2016, respectively,2022, as collateral for these forward commitments.
HeartlandHTLF acquired undesignated interest rate swaps in 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 sheetsheets 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'sHTLF's other free standing derivative instruments not designated as hedging instruments at September 30, 2017,2023, and December 31, 2016,2022, in thousands:
| | | | | | | | | | | | | | | | | |
| Balance Sheet Category | | Notional Amount | | Fair Value |
September 30, 2023 | | | | | |
Interest rate lock commitments (mortgage) | Other assets | | $ | 4,000 | | | $ | 99 | |
| | | | | |
Forward commitments | Other assets | | 7,500 | | | 41 | |
Forward commitments | Other liabilities | | 1,750 | | | (5) | |
Undesignated interest rate swaps | Other liabilities | | 4,185 | | | (109) | |
| | | | | |
December 31, 2022 | | | | | |
Interest rate lock commitments (mortgage) | Other assets | | $ | 9,340 | | | $ | 174 | |
| | | | | |
Forward commitments | Other assets | | 6,400 | | | 47 | |
Forward commitments | Other liabilities | | 5,750 | | | (99) | |
Undesignated interest rate swaps | Other liabilities | | 6,028 | | | (135) | |
| | | | | |
|
| | | | | | | | | |
| 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 | ) |
HTLF recognizes gains and losses on other free standing derivatives in two separate income statement categories. Interest rate lock commitments and forward commitments are recognized in net gains on sale of loans held for sale and undesignated interest rate swaps are recognized in other noninterest income. The table below identifies the income statement category of the gains and losses recognized in income on Heartland'sHTLF's other free standing derivative instruments not designated as hedging instruments for the three- and nine-month periodsnine- months ended September 30, 2017,2023, and September 30, 2016,2022, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Interest rate lock commitments (mortgage) | $ | (352) | | | $ | (1,337) | | | $ | (70) | | | $ | (2,009) | |
| | | | | | | |
Forward commitments | (4) | | | 813 | | | 87 | | | 881 | |
Undesignated interest rate swaps | 9 | | | (121) | | | 26 | | | (446) | |
|
| | | | | |
| 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) | Net gains on sale of loans held for sale | | $ | (1,344 | ) |
Forward commitments | Net gains on sale of loans held for sale | | 931 |
|
Undesignated interest rate swaps | Other noninterest income | | 269 |
|
Nine Months Ended September 30, 2016 | | | |
Interest rate lock commitments (mortgage) | Net gains on sale of loans held for sale | | $ | 4,464 |
|
Forward commitments | Net gains on sale of loans held for sale | | (1,311 | ) |
Undesignated interest rate swaps | Other noninterest income | | (101 | ) |
NOTE 8:7: FAIR VALUE
HeartlandHTLF utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities carried at fair value, which include available for sale, trading securities and equity securities with a readily determinable fair value, and derivatives are recorded in the consolidated balance sheets at fair value on a recurring basis. Additionally, from time to time, HeartlandHTLF 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.cost. 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-backedmortgage and asset-backed securities and private collateralized mortgage obligations, municipal bonds and corporate debt securities. Level 3 securities consisted primarily of Z-TRANCHE mortgage-backed securities and corporate debt securities. On a quarterly basis, a secondary independent pricing service is used for the securities portfolio to validate the pricing from Heartland'sHTLF's primary pricing service.
Equity Securities with a Readily Determinable Fair Value
Equity securities with a readily determinable fair value generally include Community Reinvestment Act mutual funds and are classified as Level 2 due to the infrequent trading of these securities. The fair value is based on the price per share.
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, HeartlandHTLF classifies loans held for sale subjected to nonrecurring fair value adjustments as Level 2.
Loans Held to Maturity
HeartlandHTLF does not record loans held to maturity at fair value on a recurring basis. However, from time to time, a loan iscertain loans are considered impairedcollateral dependent and an allowance for loancredit 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 impairedindividually assessed 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.collateral. In accordance with ASC 820, impairedindividually assessed 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-partyHTLF considers third party appraisals less estimated disposal costs. Heartland considers third party appraisals,costs, as well as independent fair value assessments from Realtorsrealtors or persons involved in selling bank premises, furniture and equipment, in determining the fair value of particular properties.properties held for sale. Accordingly, the valuation of premises, furniture and equipment held for sale is subject to significant external and internal judgment. HeartlandHTLF 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 the 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. HeartlandHTLF classifies mortgage servicing rights as nonrecurring with Level 3 measurement inputs.
Commercial Servicing Rights
CommercialOn March 31, 2023, HTLF sold its mortgage servicing rights assets representportfolio. The transaction qualified as a sale, and $7.7 million of mortgage servicing rights were de-recognized on the consolidated balance sheet as of March 31, 2023. The book 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 valuewere both $0 as 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.March 31, 2023.
Derivative Financial Instruments
Heartland'sHTLF'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, HeartlandHTLF 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, HeartlandHTLF has considered the impact of netting any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Although HeartlandHTLF 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, 2017,2023, and December 31, 2016, Heartland2022, HTLF 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, HeartlandHTLF has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
Interest rate lock commitments
HeartlandHTLF 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 HeartlandHTLF 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. HeartlandHTLF 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. HeartlandHTLF 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'sHTLF's assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2017,2023, and December 31, 2016,2022, 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 |
September 30, 2023 | | | | | | | |
Assets | | | | | | | |
| | | | | | | |
Securities available for sale | | | | | | | |
U.S. treasuries | $ | 31,805 | | | $ | 31,805 | | | $ | — | | | $ | — | |
U.S. agencies | 41,104 | | | — | | | 41,104 | | | — | |
Obligations of states and political subdivisions | 774,687 | | | — | | | 774,687 | | | — | |
Mortgage-backed securities - agency | 1,594,395 | | | — | | | 1,594,395 | | | — | |
Mortgage-backed securities - non-agency | 1,895,080 | | | — | | | 1,895,080 | | | — | |
Commercial mortgage-backed securities - agency | 81,444 | | | — | | | 81,444 | | | — | |
Commercial mortgage-backed securities - non-agency | 602,433 | | | — | | | 602,433 | | | — | |
Asset-backed securities | 384,379 | | | — | | | 384,379 | | | — | |
Corporate bonds | 56,522 | | | — | | | 56,522 | | | — | |
Equity securities with a readily determinable fair value | 20,838 | | | — | | | 20,838 | | | — | |
Derivative financial instruments(1) | 167,925 | | | — | | | 167,925 | | | — | |
Interest rate lock commitments | 99 | | | — | | | — | | | 99 | |
Forward commitments | 41 | | | — | | | 41 | | | — | |
Total assets at fair value | $ | 5,650,752 | | | $ | 31,805 | | | $ | 5,618,848 | | | $ | 99 | |
Liabilities | | | | | | | |
Derivative financial instruments(2) | $ | 76,074 | | | $ | — | | | $ | 76,074 | | | $ | — | |
Forward commitments | 5 | | | — | | | 5 | | | — | |
| | | | | | | |
Total liabilities at fair value | $ | 76,079 | | | $ | — | | | $ | 76,079 | | | $ | — | |
December 31, 2022 |
Assets | | | | | | | |
| | | | | | | |
Securities available for sale | | | | | | | |
U.S. treasuries | $ | 31,699 | | | $ | 31,699 | | | $ | — | | | $ | — | |
U.S. agencies | 43,135 | | | — | | | 43,135 | | | — | |
Obligations of states and political subdivisions | 879,437 | | | — | | | 879,437 | | | — | |
Mortgage-backed securities - agency | 1,772,105 | | | — | | | 1,772,105 | | | — | |
Mortgage-backed securities - non-agency | 2,181,876 | | | — | | | 2,181,876 | | | — | |
Commercial mortgage-backed securities - agency | 85,123 | | | — | | | 85,123 | | | — | |
Commercial mortgage-backed securities - non-agency | 659,459 | | | — | | | 659,459 | | | — | |
Asset-backed securities | 416,054 | | | — | | | 416,054 | | | — | |
Corporate bonds | 57,942 | | | — | | | 57,942 | | | — | |
Equity securities with a readily determinable fair value | 20,314 | | | — | | | 20,314 | | | — | |
Derivative financial instruments(2) | 46,293 | | | — | | | 46,293 | | | — | |
Interest rate lock commitments | 174 | | | — | | | — | | | 174 | |
Forward commitments | 47 | | | — | | | 47 | | | — | |
Total assets at fair value | $ | 6,193,658 | | | $ | 31,699 | | | $ | 6,161,785 | | | $ | 174 | |
Liabilities | | | | | | | |
Derivative financial instruments(1) | $ | 46,226 | | | $ | — | | | $ | 46,226 | | | $ | — | |
Forward commitments | 99 | | | — | | | 99 | | | — | |
| | | | | | | |
Total liabilities at fair value | $ | 46,325 | | | $ | — | | | $ | 46,325 | | | $ | — | |
| | | | | | | |
(1) Includes interest rate swaps, embedded derivatives and back-to-back loan swaps. |
(2) Includes back-to-back loan swaps and free standing derivatives. |
|
| | | | | | | | | | | | | | | |
| Total Fair Value | | Level 1 | | Level 2 | | Level 3 |
September 30, 2017 | | | | | | | |
Assets | | | | | | | |
Securities available for sale | | | | | | | |
U.S. government corporations and agencies | $ | 7,415 |
| | $ | 3,505 |
| | $ | 3,910 |
| | $ | — |
|
Mortgage-backed securities | 1,565,400 |
| | — |
| | 1,565,400 |
| | — |
|
Obligations of states and political subdivisions | 503,974 |
| | — |
| | 503,974 |
| | — |
|
Corporate debt securities | — |
| | — |
| | — |
| | — |
|
Equity securities | 16,596 |
| | — |
| | 16,596 |
| | — |
|
Derivative financial instruments(1) | 3,386 |
| | — |
| | 3,386 |
| | — |
|
Interest rate lock commitments | 2,463 |
| | — |
| | ��� |
| | 2,463 |
|
Forward commitments | 237 |
| | — |
| | 237 |
| | — |
|
Total assets at fair value | $ | 2,099,471 |
| | $ | 3,505 |
| | $ | 2,093,503 |
| | $ | 2,463 |
|
Liabilities | | | | | | | |
Derivative financial instruments(2) | $ | 6,309 |
| | $ | — |
| | $ | 6,309 |
| | $ | — |
|
Forward commitments | 261 |
| | — |
| | 261 |
| | — |
|
Total liabilities at fair value | $ | 6,570 |
| | $ | — |
| | $ | 6,570 |
| | $ | — |
|
December 31, 2016 | | | | | | | |
Assets | | | | | | | |
Securities available for sale | | | | | | | |
U.S. government corporations and agencies | $ | 4,700 |
| | $ | 517 |
| | $ | 4,183 |
| | $ | — |
|
Mortgage-backed securities | 1,290,500 |
| | — |
| | 1,288,276 |
| | 2,224 |
|
Obligations of states and political subdivisions | 536,144 |
| | — |
| | 536,144 |
| | — |
|
Equity securities | 14,520 |
| | — |
| | 14,520 |
| | — |
|
Derivative financial instruments(1) | 3,222 |
| | — |
| | 3,222 |
| | — |
|
Interest rate lock commitments | 2,790 |
| | — |
| | — |
| | 2,790 |
|
Forward commitments | 2,546 |
| | — |
| | 2,546 |
| | — |
|
Total assets at fair value | $ | 1,854,422 |
| | $ | 517 |
| | $ | 1,848,891 |
| | $ | 5,014 |
|
Liabilities | | | | | | | |
Derivative financial instruments(2) | $ | 7,027 |
| | $ | — |
| | $ | 7,027 |
| | $ | — |
|
Forward commitments | 266 |
| | — |
| | 266 |
| | — |
|
Total liabilities at fair value | $ | 7,293 |
| | $ | — |
| | $ | 7,293 |
| | $ | — |
|
| | | | | | | |
(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 |
The tables below present Heartland'sHTLF's assets that are measured at fair value on a nonrecurring basis, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at September 30, 2023 |
| 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 individually assessed loans: | | | | | | | | | |
Commercial and industrial | $ | 8,530 | | | $ | — | | | $ | — | | | $ | 8,530 | | | $ | 554 | |
Owner occupied commercial real estate | 4,411 | | | — | | | — | | | 4,411 | | | — | |
Non-owner occupied commercial real estate | 6,323 | | | — | | | — | | | 6,323 | | | — | |
Real estate construction | 910 | | | — | | | — | | | 910 | | | — | |
Agricultural and agricultural real estate | 4,943 | | | — | | | — | | | 4,943 | | | 5,309 | |
Residential real estate | 2,216 | | | — | | | — | | | 2,216 | | | — | |
| | | | | | | | | |
Total collateral dependent individually assessed loans | $ | 27,333 | | | $ | — | | | $ | — | | | $ | 27,333 | | | $ | 5,863 | |
Loans held for sale | $ | 6,262 | | | $ | — | | | $ | 6,262 | | | $ | — | | | $ | (121) | |
Other real estate owned | 14,362 | | | — | | | — | | | 14,362 | | | 1,010 | |
Premises, furniture and equipment held for sale | 2,798 | | | — | | | — | | | 2,798 | | | 1,455 | |
| | | | | | | | | |
| | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| 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 (Gains) Losses |
Collateral dependent impaired loans: | | | | | | | | | |
Commercial | $ | 3,556 |
| | $ | — |
| | $ | — |
| | $ | 3,556 |
| | $ | 1,119 |
|
Commercial real estate | 8,718 |
| | — |
| | — |
| | 8,718 |
| | 2,043 |
|
Agricultural and agricultural real estate | 7,936 |
| | — |
| | — |
| | 7,936 |
| | — |
|
Residential real estate | 1,365 |
| | — |
| | — |
| | 1,365 |
| | — |
|
Consumer | 912 |
| | — |
| | — |
| | 912 |
| | — |
|
Total collateral dependent impaired loans | $ | 22,487 |
| | $ | — |
| | $ | — |
| | $ | 22,487 |
| | $ | 3,162 |
|
Other real estate owned | $ | 13,226 |
| | $ | — |
| | $ | — |
| | $ | 13,226 |
| | $ | 594 |
|
Premises, furniture and equipment held for sale | $ | 4,428 |
| | $ | — |
| | $ | — |
| | $ | 4,428 |
| | $ | 404 |
|
Commercial servicing rights | $ | 313 |
| | $ | — |
| | $ | — |
| | $ | 313 |
| | $ | (29 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at December 31, 2022 |
| 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 individually assessed loans: | | | | | | | | | |
Commercial and industrial | $ | 12,042 | | | $ | — | | | $ | — | | | $ | 12,042 | | | $ | 4,186 | |
Owner occupied commercial real estate | 7,556 | | | — | | | — | | | 7,556 | | | — | |
Non-owner occupied commercial real estate | 11,371 | | | — | | | — | | | 11,371 | | | — | |
Real estate construction | 1,518 | | | — | | | — | | | 1,518 | | | — | |
Agricultural and agricultural real estate | 3,788 | | | — | | | — | | | 3,788 | | | — | |
Residential real estate | 1,607 | | | — | | | — | | | 1,607 | | | — | |
| | | | | | | | | |
Total collateral dependent individually assessed loans | $ | 37,882 | | | $ | — | | | $ | — | | | $ | 37,882 | | | $ | 4,186 | |
Loans held for sale | $ | 5,277 | | | $ | — | | | $ | 5,277 | | | $ | — | | | $ | (116) | |
| | | | | | | | | |
Other real estate owned | 8,401 | | | — | | | — | | | 8,401 | | | 180 | |
Premises, furniture and equipment held for sale | 6,851 | | | — | | | — | | | 6,851 | | | 1,562 | |
Servicing rights | 7,840 | | | — | | | — | | | 7,840 | | | 516 | |
|
| | | | | | | | | | | | | | | | | | | | |
| 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 (Gains) Losses |
Collateral dependent impaired loans: | | | | | | | | | |
Commercial | $ | 1,683 |
| | $ | — |
| | $ | — |
| | $ | 1,683 |
| | $ | 41 |
|
Commercial real estate | 3,026 |
| | — |
| | — |
| | 3,026 |
| | 527 |
|
Agricultural and agricultural real estate | 1,955 |
| | — |
| | — |
| | 1,955 |
| | — |
|
Residential real estate | 3,565 |
| | — |
| | — |
| | 3,565 |
| | 85 |
|
Consumer | 1,193 |
| | — |
| | — |
| | 1,193 |
| | — |
|
Total collateral dependent impaired loans | $ | 11,422 |
| | $ | — |
| | $ | — |
| — |
| $ | 11,422 |
| | $ | 653 |
|
Other real estate owned | $ | 9,744 |
| | $ | — |
| | $ | — |
| | $ | 9,744 |
| | $ | 1,341 |
|
Premises, furniture and equipment held for sale | $ | 414 |
| | $ | — |
| | $ | — |
| | $ | 414 |
| | $ | 35 |
|
Commercial servicing rights | $ | 326 |
| | $ | — |
| | $ | — |
| | $ | 326 |
| | $ | 33 |
|
The following tables present additional quantitative information about assets measured at fair value on a recurring and nonrecurring basis and for which HeartlandHTLF has utilized Level 3 inputs to determine fair value, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value at 9/30/2023 | | Valuation Technique | | Unobservable Input | | Range (Weighted Average) |
Interest rate lock commitments | $ | 99 | | | Discounted cash flows | | Closing ratio | | 0-99% (89%)(1) |
Other real estate owned | 14,362 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-10%(3) |
| | | | | | | |
| | | | | | | |
Premises, furniture and equipment held for sale | 2,798 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-10%(3) |
Collateral dependent individually assessed loans: | | | | | | | |
Commercial | 8,530 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-10%(3) |
Owner occupied commercial real estate | 4,411 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | | Appraisal discount | | 0-10%(3) |
Non-owner occupied commercial real estate | 6,323 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | | Appraisal discount | | 0-8%(3) |
Real estate construction | 910 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-10%(3) |
Agricultural and agricultural real estate | 4,943 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-10%(3) |
Residential real estate | 2,216 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-10%(3) |
| | | | | | | |
| | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
(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) 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 9/30/17 | | Valuation Technique | | Unobservable Input | | Range (Weighted Average) |
Z-TRANCHE Securities | $ | — |
| | Discounted cash flows | | Pretax discount rate | | — |
| | | | | Actual defaults | | — |
| | | | | Actual deferrals | | — |
Interest rate lock commitments | 2,463 |
| | Discounted cash flows | | Closing ratio | | 0-99% (89%)(1) |
Premises, furniture and equipment held for sale | 4,428 |
| | Modified appraised value | | Third party appraisal | | (2) |
| | | | | Appraisal discount | | 0-10%(4) |
Commercial servicing rights | 313 |
| | Discounted cash flows | | Third party valuation | | (3) |
Other real estate owned | 13,226 |
| | Modified appraised value | | Third party appraisal | | (2) |
| | | | | Appraisal discount | | 0-10% |
Collateral dependent impaired loans: | | | | | | | |
Commercial | 3,556 |
| | Modified appraised value | | Third party appraisal | | (2) |
| | | | | Appraisal discount | | 0-15%(4) |
Commercial real estate | 8,718 |
| | Modified appraised value | | Third party appraisal | | (2) |
| | | | | Appraisal discount | | 0-14%(4) |
Agricultural and agricultural real estate | 7,936 |
| | Modified appraised value | | Third party appraisal | | (2) |
| | | | | Appraisal discount | | 0-6%(4) |
Residential real estate | 1,365 |
| | Modified appraised value | | Third party appraisal | | (2) |
| | | | | Appraisal discount | | 0-13%(4) |
Consumer | 912 |
| | 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. |
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value at 12/31/2022 | | Valuation Technique | | Unobservable Input | | Range (Weighted Average) |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Interest rate lock commitments | $ | 174 | | | Discounted cash flows | | Closing ratio | | 0-99% (88%)(1) |
Other real estate owned | 8,401 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-10%(3) |
| | | | | | | |
Servicing rights | 7,840 | | | Discounted cash flows | | Discount rate | | 9.98 - 11.72% (10.02%)(4) |
| | | | | Constant prepayment rate | | 7.8 - 14.2% (7.9%)(4) |
Premises, furniture and equipment held for sale | 6,851 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-10%(3) |
| | | | | | | |
| | | | | | | |
| | | | | | |
Collateral dependent individually assessed loans: | | | | | | | |
Commercial and industrial | 12,042 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | | Appraisal discount | | 0-10%(3) |
Owner occupied commercial real estate | 7,556 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-10%(3) |
Non-owner occupied commercial real estate | 11,371 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-10%(3) |
Real estate construction | 1,518 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | | Appraisal discount | | 0-10%(3) |
Agricultural and agricultural real estate | 3,788 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-15%(3) |
Residential real estate | 1,607 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-10%(3) |
| | | | | | | |
| | | | | | |
| | | | | | | |
| | | | | | | |
(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) 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) The significant unobservable input used in the discounted cash flow analysis are the discount rate and constant prepayment rate. |
|
| | | | | | | | | |
| 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 securities, Level 3 assets that are measured on a recurring basis, are summarized in the following table, in thousands:
|
| | | | | | | |
| For the Nine Months Ended September 30, 2017 | | For the Year Ended December 31, 2016 |
Balance at January 1, | $ | 2,224 |
| | $ | 2,039 |
|
Total gains (losses): | | |
|
|
Included in earnings | 2,810 |
| | — |
|
Included in other comprehensive income | (2,166 | ) | | 185 |
|
Purchases, sales and settlements: | | |
|
Purchases | — |
| | — |
|
Sales | (2,868 | ) | | — |
|
Settlements | — |
| | — |
|
Balance at period end | $ | — |
| | $ | 2,224 |
|
The changes in fair value of the interest rate lock commitments, which are Level 3 financial instruments measured on a recurring basis, are summarized in the following table, in thousands:
| | | | | | | | | | | |
| For the Nine Months Ended September 30, 2023 | | For the Year Ended December 31, 2022 |
Balance at January 1, | $ | 174 | | | $ | 1,306 | |
| | | |
Total net gains included in earnings | (70) | | | (1,828) | |
Issuances | 1,678 | | | 3,683 | |
Settlements | (1,683) | | | (2,987) | |
Balance at period end | $ | 99 | | | $ | 174 | |
|
| | | | | | | |
| For the Nine Months Ended September 30, 2017 | | For the Year Ended December 31, 2016 |
Balance at January 1, | $ | 2,790 |
| | $ | 3,168 |
|
Total gains (losses) included in earnings | (587 | ) | | (1,564 | ) |
Issuances | 1,580 |
| | 5,373 |
|
Settlements | (1,320 | ) | | (4,187 | ) |
Balance at period end | $ | 2,463 |
| | $ | 2,790 |
|
Gains includedIncluded in gains (losses) on sale of loans held for sale attributable to interest rate lock commitments held at September 30, 2017,2023, and December 31, 2016,2022, were $2.5 millionlosses of $99,000 and $2.8 million,gains of $174,000, respectively.
The tablestable below summarizeis a summary of the estimated fair value of Heartland'sHTLF's financial instruments as(as defined by ASC 825825) as of September 30, 2017,2023, and December 31, 2016,2022, 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 asincluding the value of the mortgage servicing rights, premises, furniture and equipment, premises, furniture and equipment held for sale, OREO, goodwill, and other intangibles and other liabilities.
HTLF does not believe that the estimated information presented herein is representative of the earnings power or value of Heartland.HTLF. 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 HeartlandHTLF 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, 2023 |
| 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 | $ | 347,995 | | | $ | 347,995 | | | $ | 347,995 | | | $ | — | | | $ | — | |
Time deposits in other financial institutions | 1,490 | | | 1,490 | | | 1,490 | | | — | | | — | |
Securities: | | | | | | | | | |
| | | | | | | | | |
Carried at fair value | 5,482,687 | | | 5,482,687 | | | 31,805 | | | 5,450,882 | | | — | |
Held to maturity | 835,468 | | | 758,626 | | | — | | | 758,626 | | | — | |
Other investments | 90,001 | | | 90,001 | | | — | | | 90,001 | | | — | |
Loans held for sale | 6,262 | | | 6,262 | | | — | | | 6,262 | | | — | |
Loans, net: | | | | | | | | | |
Commercial and industrial | 3,563,513 | | | 3,371,432 | | | — | | | 3,362,902 | | | 8,530 | |
PPP | 3,750 | | | 3,750 | | | — | | | 3,750 | | | — | |
Owner occupied commercial real estate | 2,414,985 | | | 2,225,107 | | | — | | | 2,220,696 | | | 4,411 | |
Non-owner occupied commercial real estate | 2,639,074 | | | 2,493,314 | | | — | | | 2,486,991 | | | 6,323 | |
Real estate construction | 1,000,575 | | | 977,316 | | | — | | | 976,406 | | | 910 | |
Agricultural and agricultural real estate | 837,712 | | | 760,022 | | | — | | | 755,079 | | | 4,943 | |
Residential real estate | 806,696 | | | 699,081 | | | — | | | 696,865 | | | 2,216 | |
Consumer | 495,923 | | | 476,515 | | | — | | | 476,515 | | | — | |
Total Loans, net | 11,762,228 | | | 11,006,537 | | | — | | | 10,979,204 | | | 27,333 | |
Cash surrender value on life insurance | 196,694 | | | 196,694 | | | — | | | 196,694 | | | — | |
Derivative financial instruments(1) | 167,925 | | | 167,925 | | | — | | | 167,925 | | | — | |
Interest rate lock commitments | 99 | | | 99 | | | — | | | — | | | 99 | |
Forward commitments | 41 | | | 41 | | | — | | | 41 | | | — | |
Financial liabilities: | | | | | | | | | |
Deposits | | | | | | | | | |
Demand deposits | 4,792,813 | | | 4,792,813 | | | — | | | 4,792,813 | | | — | |
Savings deposits | 8,754,911 | | | 8,754,911 | | | — | | | 8,754,911 | | | — | |
Time deposits | 3,553,269 | | | 3,553,269 | | | — | | | 3,553,269 | | | — | |
| | | | | | | | | |
Short term borrowings | 392,634 | | | 392,634 | | | — | | | 392,634 | | | — | |
Other borrowings | 372,059 | | | 373,681 | | | — | | | 373,681 | | | — | |
Derivative financial instruments(2) | 76,074 | | | 76,074 | | | — | | | 76,074 | | | — | |
Forward commitments | 5 | | | 5 | | | — | | | 5 | | | — | |
|
(1) Includes interest rate swaps, embedded derivatives and back-to-back loan swaps. |
(2) Includes back-to-back loan swaps and free standing derivative instruments. |
| | | | | | | Fair Value Measurements at September 30, 2017 | | Fair Value Measurements at December 31, 2022 |
| 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: | | | | | | | | | | Financial assets: | | | | | | | | | |
Cash and cash equivalents | $ | 251,736 |
| | $ | 251,736 |
| | $ | 251,736 |
| | $ | — |
| | $ | — |
| Cash and cash equivalents | $ | 363,087 | | | $ | 363,087 | | | $ | 363,087 | | | $ | — | | | $ | — | |
Time deposits in other financial institutions | 19,793 |
| | 19,793 |
| | 19,793 |
| | — |
| | — |
| Time deposits in other financial institutions | 1,740 | | | 1,740 | | | 1,740 | | | — | | | — | |
Securities: | | | | | | | | | | Securities: | |
Available for sale | 2,093,385 |
| | 2,093,385 |
| | 3,505 |
| | 2,089,880 |
| | — |
| |
| Carried at fair value | | Carried at fair value | 6,147,144 | | | 6,147,144 | | | 31,699 | | | 6,115,445 | | | — | |
Held to maturity | 256,355 |
| | 270,386 |
| | — |
| | 270,386 |
| | — |
| Held to maturity | 829,403 | | | 776,557 | | | — | | | 776,557 | | | — | |
Other investments | 23,176 |
| | 23,176 |
| | — |
| | 22,981 |
| | 195 |
| Other investments | 74,567 | | | 74,567 | | | — | | | 74,567 | | | — | |
Loans held for sale | 35,795 |
| | 35,795 |
| | — |
| | 35,795 |
| | — |
| Loans held for sale | 5,277 | | | 5,277 | | | — | | | 5,277 | | | — | |
Loans, net: | | | | | | | | | | Loans, net: | |
Commercial | 1,596,934 |
| | 1,601,351 |
| | — |
| | 1,597,795 |
| | 3,556 |
| |
Commercial real estate | 3,143,414 |
| | 3,117,829 |
| | — |
| | 3,109,111 |
| | 8,718 |
| |
Commercial and industrial | | Commercial and industrial | 3,435,343 | | | 3,270,127 | | | — | | | 3,258,085 | | | 12,042 | |
PPP | | PPP | 11,025 | | | 11,025 | | | — | | | 11,025 | | | — | |
Owner occupied commercial real estate | | Owner occupied commercial real estate | 2,251,359 | | | 2,084,665 | | | — | | | 2,077,109 | | | 7,556 | |
Non-owner occupied commercial real estate | | Non-owner occupied commercial real estate | 2,314,401 | | | 2,184,796 | | | — | | | 2,173,425 | | | 11,371 | |
Real estate construction | | Real estate construction | 1,046,084 | | | 1,039,244 | | | — | | | 1,037,726 | | | 1,518 | |
Agricultural and agricultural real estate | 506,388 |
| | 507,974 |
| | — |
| | 500,038 |
| | 7,936 |
| Agricultural and agricultural real estate | 917,876 | | | 842,637 | | | — | | | 838,849 | | | 3,788 | |
Residential real estate | 632,306 |
| | 622,698 |
| | — |
| | 621,333 |
| | 1,365 |
| Residential real estate | 845,650 | | | 741,325 | | | — | | | 739,718 | | | 1,607 | |
Consumer | 441,079 |
| | 444,384 |
| | — |
| | 443,472 |
| | 912 |
| Consumer | 497,131 | | | 480,018 | | | — | | | 480,018 | | | — | |
Total Loans, net | 6,320,121 |
| | 6,294,236 |
| | — |
| | 6,271,749 |
| | 22,487 |
| Total Loans, net | 11,318,869 | | | 10,653,837 | | | — | | | 10,615,955 | | | 37,882 | |
Cash surrender value on life insurance | | Cash surrender value on life insurance | 193,403 | | | 193,403 | | | — | | | 193,403 | | | — | |
Derivative financial instruments(1) | 3,386 |
| | 3,386 |
| | — |
| | 3,386 |
| | — |
| Derivative financial instruments(1) | 46,293 | | | 46,293 | | | — | | | 46,293 | | | — | |
Interest rate lock commitments | 2,463 |
| | 2,463 |
| | — |
| | — |
| | 2,463 |
| Interest rate lock commitments | 174 | | | 174 | | | — | | | — | | | 174 | |
Forward commitments | 237 |
| | 237 |
| | — |
| | 237 |
| | — |
| Forward commitments | 47 | | | 47 | | | — | | | 47 | | | — | |
Financial liabilities: | | | | | | | | | | Financial liabilities: | |
Deposits | | | | | | | | | | Deposits | |
Demand deposits | 3,009,940 |
| | 3,009,940 |
| | — |
| | 3,009,940 |
| | — |
| Demand deposits | 5,701,340 | | | 5,701,340 | | | — | | | 5,701,340 | | | — | |
Savings deposits | 4,227,340 |
| | 4,227,340 |
| | — |
| | 4,227,340 |
| | — |
| Savings deposits | 9,994,391 | | | 9,994,391 | | | — | | | 9,994,391 | | | — | |
Time deposits | 994,604 |
| | 994,604 |
| | — |
| | 994,604 |
| | — |
| Time deposits | 1,817,278 | | | 1,817,278 | | | — | | | 1,817,278 | | | — | |
| Short term borrowings | 171,871 |
| | 171,871 |
| | — |
| | 171,871 |
| | — |
| Short term borrowings | 376,117 | | | 376,117 | | | — | | | 376,117 | | | — | |
Other borrowings | 301,473 |
| | 305,741 |
| | — |
| | 305,741 |
| | — |
| Other borrowings | 371,753 | | | 372,473 | | | — | | | 372,473 | | | — | |
Derivative financial instruments(2) | 6,309 |
| | 6,309 |
| | — |
| | 6,309 |
| | — |
| |
Derivative financial instruments(1) | | Derivative financial instruments(1) | 46,226 | | | 46,226 | | | — | | | 46,226 | | | — | |
Forward commitments | 261 |
| | 261 |
| | — |
| | 261 |
| | — |
| Forward commitments | 99 | | | 99 | | | — | | | 99 | | | — | |
| | |
(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 | |
(1) Includes interest rate swaps, fair value hedges, embedded derivatives and back-to-back loan swaps. | | (1) Includes interest rate swaps, fair value hedges, embedded derivatives and back-to-back loan swaps. |
(2) Includes back-to-back loan swaps and undesignated interest rate swaps. | | (2) Includes back-to-back loan swaps and undesignated interest rate swaps. |
|
| | | | | | | | | | | | | | | | | | | |
| | | | | 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) |
Financial assets: | | | | | | | | | |
Cash and cash equivalents | $ | 158,724 |
| | $ | 158,724 |
| | $ | 158,724 |
| | $ | — |
| | $ | — |
|
Time deposits in other financial institutions | 2,105 |
| | 2,105 |
| | 2,105 |
| | — |
| | — |
|
Securities: | | | | | | | | | |
Available for sale | 1,845,864 |
| | 1,845,864 |
| | 517 |
| | 1,843,123 |
| | 2,224 |
|
Held to maturity | 263,662 |
| | 274,799 |
| | — |
| | 274,799 |
| | — |
|
Other investments | 21,560 |
| | 21,560 |
| | — |
| | 21,365 |
| | 195 |
|
Loans held for sale | 61,261 |
| | 61,261 |
| | — |
| | 61,261 |
| | — |
|
Loans, net: | | | | | | | | | |
Commercial | 1,272,089 |
| | 1,258,754 |
| | — |
| | 1,257,071 |
| | 1,683 |
|
Commercial real estate | 2,513,446 |
| | 2,506,858 |
| | — |
| | 2,503,832 |
| | 3,026 |
|
Agricultural and agricultural real estate | 485,820 |
| | 487,001 |
| | — |
| | 485,046 |
| | 1,955 |
|
Residential real estate | 614,207 |
| | 604,233 |
| | — |
| | 600,668 |
| | 3,565 |
|
Consumer | 411,833 |
| | 414,266 |
| | — |
| | 413,073 |
| | 1,193 |
|
Total Loans, net | 5,297,395 |
| | 5,271,112 |
| | — |
| | 5,259,690 |
| | 11,422 |
|
Derivative financial instruments(1) | 3,222 |
| | 3,222 |
| | — |
| | 3,222 |
| | — |
|
Interest rate lock commitments | 2,790 |
| | 2,790 |
| | — |
| | — |
| | 2,790 |
|
Forward commitments | 2,546 |
| | 2,546 |
| | — |
| | 2,546 |
| | — |
|
Financial liabilities: | | | | | | | | | |
Deposits | | | | | | | | | |
Demand deposits | 2,202,036 |
| | 2,202,036 |
| | — |
| | 2,202,036 |
| | — |
|
Savings deposits | 3,788,089 |
| | 3,788,089 |
| | — |
| | 3,788,089 |
| | — |
|
Time deposits | 857,286 |
| | 857,286 |
| | — |
| | 857,286 |
| | — |
|
Short term borrowings | 306,459 |
| | 306,459 |
| | — |
| | 306,459 |
| | — |
|
Other borrowings | 288,534 |
| | 288,534 |
| | — |
| | 288,534 |
| | — |
|
Derivative financial instruments(2) | 7,027 |
| | 7,027 |
| | — |
| | 7,027 |
| | — |
|
Forward commitments | 266 |
| | 266 |
| | — |
| | 266 |
| | — |
|
|
(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 |
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 equity securities with a readily determinable fair value and debt 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, HeartlandHTLF 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 estimateddetermined using an entranceexit price concept by discountingmethodology. The exit price estimation of fair value is based on the futurepresent value of the expected cash flows. The projected cash flows usingare based on the current rates at which similarcontractual terms of the loans, would be made to borrowers with similaradjusted for prepayments and a discount rate based on the relative risk of the cash flows. Other considerations include the loan type, remaining life of the loan and credit ratings and for the same remaining maturities. risk.
The fair value of individually assessed or 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.
Cash surrender value on life insurance — Life insurance policies are held on certain officers. The carrying value of these policies approximates fair value as it is based on the cash surrender value adjusted for other charges or amounts due that are probable at settlement. As such, HTLF classifies the estimated fair value of the cash surrender value on life insurance as Level 2.
Derivative Financial Instruments — The fair value of all derivatives is estimated based on the amount that HTLF 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 counterparty.
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 HeartlandHTLF 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 REPORTING8: STOCK COMPENSATION
Heartland has identified two operating segmentsUnder its 2020 Long-Term Incentive Plan (the "Plan"), HTLF's Compensation and Human Capital Committee, (the "Compensation Committee"), may grant non-qualified and incentive stock options, stock appreciation rights, stock awards, restricted stock, restricted stock units and cash incentive awards. The Plan authorized 1,460,000 shares of common stock for purposesissuance, of financial reporting: communitywhich 739,466 shares of common stock were available as of September 30, 2023, for issuance of future awards to employees and other banking,directors of, and retail mortgage banking. These segments were determinedservice providers to, HTLF or its subsidiaries.
The cost each 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 products and services provided orfair value of the typeunderlying shares of customers served andcommon stock on the date of grant. Forfeitures are consistent withaccounted for as they occur.
HTLF's income tax expense included $115,000 of tax expense during 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 for Heartland's operating segments for the three- and nine-month periodsnine months ended September 30, 2017,2023, and a tax benefit of $129,000 during the nine months ended September 30, 2022, related to the exercise, vesting and forfeiture of equity-based awards.
Restricted Stock Units
The Plan permits the Compensation Committee to grant restricted stock units ("RSUs"). The time-based RSUs are generally granted in the first quarter of each year and represent the right, without payment, to receive shares of HTLF common stock on a specified date in the future. Generally, the time-based RSUs vest over three years in equal installments in March of each of the three years following the year of the grant.
The Compensation Committee has also granted three-year performance-based RSUs, generally in the first quarter of each year. These performance-based RSUs will be earned based on satisfaction of performance targets for the three-year performance period as defined in the RSU agreement. These performance-based RSUs or a portion thereof vest after measurement of performance in relation to the performance targets.
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), and the three-year performance-based RSUs may also vest to the extent that they are earned upon death, disability, upon a change in control or upon a "qualified retirement" (as defined in the RSU agreement).
All of HTLF's RSUs will be settled in common stock upon vesting. Most RSUs granted after March 2023 accrue dividends, which are paid without interest only upon vesting. Dividend equivalents with respect to RSUs forfeited are also forfeited. RSUs granted prior to 2023 are not entitled to dividend equivalents.
A summary of the RSUs outstanding as of September 30, 2023, and September 30, 2016,2022, and changes during the nine months ended September 30, 2023 and 2022, follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 |
| Shares | | Weighted-Average Grant Date Fair Value | | Shares | | Weighted-Average Grant Date Fair Value |
Outstanding at January 1, | 424,086 | | | $ | 46.15 | | | 389,885 | | | $ | 44.19 | |
Granted | 272,465 | | | 45.33 | | | 238,495 | | | 48.41 | |
Vested | (175,313) | | | 41.74 | | | (158,702) | | | 45.04 | |
Forfeited | (42,091) | | | 46.25 | | | (27,316) | | | 46.69 | |
Outstanding at September 30, | 479,147 | | | $ | 47.29 | | | 442,362 | | | $ | 46.01 | |
Total compensation costs recorded for RSUs were $7.4 million during both the nine months ended September 30, 2023 and 2022. As of September 30, 2023, there were $11.0 million of total unrecognized compensation costs related to the Plan for RSUs that are expected to be recognized through 2026.
Stock Options
The Plan provides the Compensation Committee the authority to grant stock options. During the year ended December 31, 2022, 64,518 options were granted, and the fair value of the options granted was determined using the Black-Scholes valuation model. The options granted generally vest over the first four years in thousands:equal installments on the anniversary date of the grant. The options may also vest upon death, disability, upon a change in control or upon a "qualified retirement" as defined in the stock option agreement.
The exercise price of the stock options was established by the Compensation Committee, but the exercise price may not be less than the fair market value of the shares on the date the options are granted.
A summary of the status of stock options as of September 30, 2023, and changes during the nine months ended September 30, 2023, is shown in the table below. There were no options outstanding at September 30, 2022.
| | | | | | | | | | | |
| 2023 |
| Shares | | Weighted Average Exercise Price |
Outstanding January 1, | 64,518 | | | $ | 48.79 | |
Granted | — | | | — | |
Exercised | — | | | — | |
Forfeited | (6,452) | | | 48.79 | |
Outstanding at September 30, | 58,066 | | | 48.79 | |
Options exercisable at September 30, | — | | | $ | — | |
At September 30, 2023, the options had a weighted average remaining contractual life of 9.17 years. The intrinsic value of the vested options as of September 30, 2023 was $0. The intrinsic value of the options exercised during the nine months ended September 30, 2023, was $0. The total fair value of the options that vested during the nine months ended September 30, 2023, was $0. Total compensation costs recorded for stock options during the nine months ended September 30, 2023 and 2022 were $165,000 and $0, respectively. As of September 30, 2023, there were $546,000 of total unrecognized compensation costs related to the Plan for options that are expected to be recognized through 2026.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2017 | | 2016 |
| Community and Other Banking | | Retail Mortgage Banking | | Total | | Community and Other Banking | | Retail Mortgage Banking | | Total |
Net interest income | $ | 88,778 |
| | $ | 1,066 |
| | $ | 89,844 |
| | $ | 72,694 |
| | $ | 987 |
| | $ | 73,681 |
|
Provision for loan losses | 5,705 |
| | — |
| | 5,705 |
| | 5,328 |
| | — |
| | 5,328 |
|
Total noninterest income | 19,680 |
| | 5,297 |
| | 24,977 |
| | 17,337 |
| | 11,205 |
| | 28,542 |
|
Total noninterest expense | 69,977 |
| | 8,782 |
| | 78,759 |
| | 57,988 |
| | 10,439 |
| | 68,427 |
|
Income (loss) before taxes | $ | 32,776 |
| | $ | (2,419 | ) | | $ | 30,357 |
| | $ | 26,715 |
| | $ | 1,753 |
| | $ | 28,468 |
|
Average Loans, for the period | $ | 6,245,445 |
| | $ | 40,839 |
| | $ | 6,286,284 |
| | $ | 5,464,304 |
| | $ | 73,784 |
| | $ | 5,538,088 |
|
Segment Assets, at period end | $ | 9,693,172 |
| | $ | 62,455 |
| | $ | 9,755,627 |
| | $ | 8,084,810 |
| | $ | 117,405 |
| | $ | 8,202,215 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
| Community and Other Banking | | Retail Mortgage Banking | | Total | | Community and Other Banking | | Retail Mortgage Banking | | Total |
Net interest income | $ | 234,406 |
| | $ | 3,046 |
| | $ | 237,452 |
| | $ | 216,172 |
| | $ | 3,334 |
| | $ | 219,506 |
|
Provision for loan losses | 10,235 |
| | — |
| | 10,235 |
| | 9,513 |
| | — |
| | 9,513 |
|
Total noninterest income | 56,964 |
| | 19,530 |
| | 76,494 |
| | 55,773 |
| | 33,373 |
| | 89,146 |
|
Total noninterest expense | 193,753 |
| | 26,044 |
| | 219,797 |
| | 177,421 |
| | 32,335 |
| | 209,756 |
|
Income (loss) before taxes | $ | 87,382 |
| | $ | (3,468 | ) | | $ | 83,914 |
| | $ | 85,011 |
| | $ | 4,372 |
| | $ | 89,383 |
|
Average Loans, for the period | $ | 5,641,641 |
| | $ | 37,979 |
| | $ | 5,679,620 |
| | $ | 5,422,843 |
| | $ | 70,344 |
| | $ | 5,493,187 |
|
Segment Assets, at period end | $ | 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 documentQuarterly Report on Form 10-Q (including any information incorporated herein by reference) contains, and future oral and written statements of Heartland Financial USA, Inc. ("HTLF") and its management may contain, forward-looking statements within the meaning of such term in Section 27A of the Private Securities Litigation Reform Act of 1995,1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") with respect to the business, financial condition, results of operations, plans, objectives and future performance of Heartland.HTLF. Any statements about HTLF's expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. Forward-looking statements whichmay include information about possible or assumed future results of HTLF's operations or performance, and may be based upon beliefs, expectations and assumptions of Heartland's management and on information currently available to management,HTLF's management. These forward-looking statements are generally identifiable by the use of words such as "believe," "expect," "anticipate," "plan," "intend," "estimate," "project," "may," "will," "would," "could," "should""should," "view," "opportunity," "potential," or other similar expressions. Although HeartlandHTLF has made these statements based on management's experience and best estimate of future events, the ability of HTLF to predict results or the actual effect or outcomes of plans or strategies is inherently uncertain, and there may be events or factors that management has not anticipated, andanticipated. Therefore, the accuracy and achievement of such forward-looking statements and estimates are subject to a number of risks, many of which are beyond the ability of management to control or predict, that could cause actual results to differ materially from those in its forward-looking statements. These factors, which HTLF currently believes could have a material adverse effect on its operations and future prospects include, among others, those described below and in the risk factors in HTLF's reports filed with the Securities and Exchange Commission ("SEC"), including those identified in ourthe "Risk Factors" section under Item 1A of Part I of the company’s Annual Report on Form 10-K for the year ended December 31, 2016. Additionally, all2022:
•Economic and Market Conditions Risks, including risks related to the deterioration of the U.S. economy in general and in the local economies in which HTLF conducts its operations and future civil unrest, natural disasters, pandemics and governmental measures addressing them, climate change and climate-related regulations, persistent inflation, higher interest rates, recession, supply chain issues, labor shortages, terrorist threats or acts of war;
•Credit Risks, including risks of increasing credit losses due to deterioration in the financial condition of HTLF's borrowers, changes in asset and collateral values due to climate and other borrower industry risks, which may impact the provision for credit losses and net charge-offs;
•Liquidity and Interest Rate Risks, including the impact of capital market conditions, rising interest rates and changes in monetary policy on our borrowings and net interest income;
•Operational Risks, including processing, information systems, cybersecurity, vendor, business interruption, and fraud risks;
•Strategic and External Risks, including economic, political, and competitive forces impacting our business;
•Legal, Compliance and Reputational Risks, including regulatory and litigation risks; and
•Risks of Owning Stock in HTLF, including stock price volatility and dilution as a result of future equity offerings and acquisitions.
These risks and uncertainties should be considered in evaluating forward-looking statements made by HTLF or on its behalf, and undue reliance should not be placed on these statements. There can be no assurance that other factors not currently anticipated by HTLF will not materially and adversely affect the company's business, financial condition and results of operations. All statements in this document,Quarterly Report on Form 10-Q, including forward-looking statements, speak only as of the date they are made,made. HTLF does not undertake and Heartland undertakes nospecifically disclaims any obligation to publicly release the results of any revisions which may be made or to correct or update any forward-looking statement to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events or to otherwise update any statement in light of new information or future events. Further information concerning HTLF and its business, including additional factors that could materially affect HTLF’s financial results, is included in the company’s filings with the SEC.
CRITICAL ACCOUNTING POLICIESESTIMATES
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'sHTLF's reported financial position and results of operations are described as critical accounting policies in Heartland'sthe company's Annual Report on Form 10-K for the year ended December 31, 2016.2022. There have
been no significant changes in the critical accounting policiesestimates or the assumptions and judgments utilized in applying these policiesestimates since the year ended December 31, 2016.2022.
OVERVIEW
Heartland'sHeartland Financial USA, Inc. is a bank holding company operating under the brand name "HTLF". HTLF's independently branded banks (referred to herein collectively as the "Banks", "Bank Markets") serve communities in Arizona, California, Colorado, Illinois, Iowa, Kansas, Minnesota, Missouri, Montana, New Mexico, Texas and Wisconsin. HTLF is committed to its core commercial business supported by a strong retail operation and provides a diversified line of financial services and products including treasury management, commercial credit cards, wealth management, investments and residential mortgages. As of September 30, 2023, HTLF had two Banks and operated under 11 local bank brands through a total of 116 locations.
HTLF's results of operations depend primarily on net interest income, which is the difference between interest income from interest earning assets and interest expense on interest bearing liabilities. Noninterest income, which includes service charges and fees, loan servicing income, trust income,fees, brokerage and insurance commissions, capital markets fees, net securities gains,gains/(losses), net gains on sale of loans held for sale, valuation adjustment on commercial servicing rights and income on bank owned life insurance, also affects Heartland'sthe results of operations. Heartland'sHTLF's principal operating expenses, aside from interest expense, consist of the provision for loancredit losses, salaries and employee benefits, occupancy, furniture and equipment costs, professional fees, FDIC insurance assessments, advertising, core deposit and customer relationship intangibles amortization, other real estate and loan collection expenses, (gains)/losses on sales/valuation of assets, partnership investment in tax credit projects and acquisition, integration and restructuring costs.
HTLF Response to Recent Banking Industry Disruptions
The banking industry experienced significant disruptions in March 2023, including bank failures, which has since caused industry-wide concerns related to deposit outflows, liquidity, continued interest rate increases and unrealized losses on securities. In response to the concerns, management continues to:
•help customers facilitate additional FDIC insurance through Insured Cash Sweep ("ICS") products and Certificate of Deposit Registry Service ("CDARS") products,
•monitor and adjust deposit pricing to address the highly competitive deposit environment, and
•maintain borrowing capacity through various federal programs, including the Federal Reserve's Bank Term Funding Program ("BTFP"), which totaled $3.09 billion as of September 30, 2023, of which no balance was drawn.
As of September 30, 2023:
•64% of HTLF's deposits were insured or collateralized.
•HTLF's capital ratios substantially exceeded the well-capitalized thresholds, and management believes that HTLF would remain well-capitalized in the event that regulatory rules were adopted requiring that unrealized losses in the total investment portfolio be included in the calculation of regulatory capital ratios.
The shift to work-from-home and hybrid work arrangements has caused decreased utilization of and demand for office space. HTLF is actively monitoring its exposure to office space in the non-owner occupied commercial real estate portfolio and securities portfolio. As of September 30, 2023:
•Outstanding loans totaling $425.9 million were collateralized by non-owner occupied office space, which represents 3.6% of the total loans held to maturity, and the average loan size was $1.5 million.
•There were no loans collateralized by office space on nonaccrual.
•The collateral consists primarily of multi-tenant, non-central business district properties.
Overview of Third Quarter and Year to Date results as of September 30, 2023
HTLF reported the following results for the quarter ended September 30, 2023, compared to the quarter ended September 30, 2022:
•net income available to common stockholders of $46.1 million compared to $54.6 million, a decrease of $8.5 million or 16%,
•earnings per diluted common share of $1.08 compared to $1.28, a decrease of $0.20 or 16%,
•earnings per diluted common share included $0.04 of acquisition, integration and restructuring costs in both quarters,
•net interest income of $145.8 million compared to $155.9 million, a decrease of $10.1 million or 6%,
•return on average assets was 0.94% compared to 1.13%,
•return on average common equity was 10.47% compared to 12.93%, and
•return on average tangible common equity (non-GAAP) was 16.34% compared to 20.76%.
HTLF reported the following results for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022:
•net income available to common stockholders of $144.2 million compared to $145.5 million, a decrease of $1.2 million or 1%.
•earnings per diluted common share of $3.37 compared to $3.42, a decrease of $0.05 or 1%,
•earnings per diluted common share included $0.11 of acquisition, integration and restructuring costs compared to $0.10,
•net interest income of $445.1 million compared to $433.0 million, an increase of $12.1 million or 3%,
•return on average assets was 1.00% compared to 1.04%,
•return on average common equity was 11.28% compared to 10.80%, and
•return on average tangible common equity (non-GAAP) was 17.83% compared to 16.79%.
During the first quarter of 2023, HTLF reclassified swap and loan syndication income (collectively, "capital markets fees") to capital markets fees from other noninterest income on the consolidated statements of income, and all prior periods have been adjusted.
During the second quarter of 2023, HTLF reclassified Federal Deposit Insurance Corporation ("FDIC") insurance premiums advertisingto FDIC insurance assessments from professional fees on the consolidated statements of income, and other real estate and loan collection expenses.all prior periods have been adjusted.
Net income availableFor the third quarter of 2023, net interest margin was 3.14% (3.18% on a fully tax-equivalent basis, non-GAAP), which compares to common stockholders3.19% (3.23% on a fully tax-equivalent basis, non-GAAP) for the second quarter ended September 30, 2017, was $21.6 million, or $0.72 per diluted common share, compared to $20.2 million, or $0.81 per diluted common share, for the quarter ended September 30, 2016. Returnof 2023, and 3.41% (3.45% on average common equity was 8.99% and return on average assets was 0.89%a fully tax-equivalent basis, non-GAAP) for the third quarter of 2017, compared2022. For the first nine months of 2023, net interest margin was 3.23% (3.27% on a fully tax-equivalent basis, non-GAAP) which compares to 11.64% and 0.98%, respectively, for the same quarter in 2016.
Net income available to common stockholders3.22% (3.27% on a fully tax equivalent basis, non-GAAP) for the first nine months of 20172022.
The efficiency ratio was $61.6 million, or $2.21 per diluted common share,63.77% (59.95% on an adjusted fully tax-equivalent basis, non-GAAP) for the third quarter of 2023 compared to $61.0 million, or $2.48 per diluted common share,58.84% (55.26% on an adjusted fully-tax equivalent basis, non-GAAP) for the same quarter of 2022. For the first nine months of 2023, the efficiency ratio was 61.86% (58.98% on an adjusted fully tax-equivalent basis, non-GAAP) compared to 61.39% (58.99% on an adjusted fully tax-equivalent basis, non-GAAP) for the first nine months of 2016. Return on average common equity was 9.88% and return on average assets was 0.94% for the first nine months of 2017, compared to 12.28% and 1.00%, respectively, for the same period in 2016.2022.
For the third quarter of 2017, Heartland's net interest margin 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 3.98% (4.15% on a fully tax-equivalent basis) for the same period in 2016. Heartland's efficiency ratio increased to 66.58% for the nine months ended September 30, 2017 compared to 66.23% for the same period in 2016.
On February 28, 2017, Heartland completed the acquisition of Founders Bancorp, parent company of Founders Community Bank, based in San Luis Obispo, California. Based on Heartland's closing common stock price of $49.55 per share as of February 28,
2017, the aggregate consideration was $31.0 million, with 30% of the consideration paid in cash and 70% by delivery of Heartland common stock. Simultaneous with the closing of the transaction, Founders Community Bank 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 completed the acquisition 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.
Total assets of Heartland were $9.76$20.13 billion at September 30, 2017, an increase2023, a decrease of $1.51 billion or 18% since year-end 2016. Excluding $213.9 million of assets acquired at fair value in the Founders 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$114.4 million or 2%1% since December 31, 2016.2022. Securities represented 24%32% and 35% of total assets at September 30, 2017,2023 and 26% of total assets at December 31, 2016.
2022, respectively. Total loans held to maturity were $6.37$11.87 billion at September 30, 2017,2023, compared to $5.35$11.43 billion at year-end 2016,December 31, 2022, an increase of $1.02 billion. This change includes $96.4$444.1 million or 4%.
The total allowance for lending related credit losses was $127.7 million or 1.08% of total loans heldat September 30, 2023, compared to maturity acquired at fair value in the Founders Bancorp transaction and $985.4$129.7 million or 1.13% 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, 2016.2022.
Total deposits were $8.23$17.10 billion as of September 30, 2017,2023, compared to $6.85$17.51 billion at year-end 2016, an increaseDecember 31, 2022, a decrease 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$412.0 million or less than 1% since December 31, 2016.2%.
Common stockholders'
Total equity was $980.7 million$1.83 billion at September 30, 2017,2023, compared to $739.6 million$1.74 billion at year-end 2016.December 31, 2022. Book value per common share was $32.75$40.20 at September 30, 2017,2023, compared to $28.31$38.25 at year-end 2016. Heartland's2022. The unrealized loss on securities available for sale including the unrealized gain on the fair value security hedges, net of applicable taxes, was $20.1$644.0 million at September 30, 2017,2023, compared to an unrealized loss of $30.2$619.2 million, net of applicable taxes, at December 31, 2016.2022.
FINANCIAL HIGHLIGHTS
Refer to "Non-GAAP Financial Measures" for additional information on the usage and presentation of the foregoing non-GAAP measures, and refer to the financial tables under "Financial Highlights" for the reconciliations to the most directly comparable GAAP measures.
|
| | | | | | | | | | | | | | | |
(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 | % |
2023 Developments
HTLF Retirement Plan Services
As of March 29, 2023, HTLF's subsidiary, Dubuque Bank & Trust, entered into an agreement to sell and transfer the recordkeeping and administration services component of HTLF’s Retirement Plan Services business to July Business Services ("July"). Through the new partnership with July, HTLF expects to augment the comprehensive retirement plan solutions offered to clients with enhanced technology and an expanded suite of product offerings that clients expect from a top retirement services provider. The transaction was completed and recordkeeping and administration services were transferred in the second quarter of 2023. The transaction resulted in a gain of $4.3 million.
First Bank & Trust Mortgage Servicing Rights
On March 31, 2023, First Bank & Trust, a division of HTLF Bank, closed on the sale of its mortgage servicing rights portfolio, which consisted of approximately 4,500 loans serviced for others with an unpaid principal balance of $698.5 million. First Bank & Trust provided interim servicing of the loans until the transfer date of May 1, 2023.
Goodwill Impairment Testing
The sustained decline in HTLF's stock price, which management deemed to be a triggering event, caused management to perform impairment testing on its goodwill in the second quarter of 2023. Management concluded that none of the goodwill at any of HTLF's reporting units was impaired.
Fair Value Hedges
During the second quarter of 2023, HTLF entered into interest rate swaps designated as fair value hedges with initial notional amounts of $838.1 million primarily designed to provide protection against unrealized securities losses due to the impact of higher mid-to-long term interest rates.
During the second and third quarters of 2023, HTLF also executed interest rate swaps designated as fair value hedges with original notional amounts totaling $2.5 billion to convert certain long term fixed rate loans to floating rates to hedge interest rate risk exposure.
Sale of Securities
Subsequent to September 30, 2023, in late October and early November, in responses to changes in interest rates, HTLF sold investment securities with a combined yield of approximately 2.48% and an average life of approximately 4.6 years in a series of sale transactions, resulting in proceeds totaling approximately $667.9 million and realized securities losses of approximately $103.5 million or approximately $77.7 million after tax. HTLF intends to utilize the proceeds to reduce its wholesale deposits and short-term borrowings, which carry an interest rate of approximately 5.52%.
These transactions decreased earning assets by approximately $667.9 million and tangible assets by approximately $693.7 million. Future net interest income is expected to increase approximately $20.3 million on an annualized basis. In addition, the net interest margin is expected to increase approximately 11 basis points due to the increase in net interest income and the decrease in earning assets. Because the securities sold were held on the balance sheet as available for sale, the incurred loss was included in tangible common equity at September 30, 2023, and with the decrease in tangible assets, management expects the tangible common equity ratio to immediately increase by approximately 36 basis points.
Depending on market conditions, HTLF may execute additional sales of this nature in the near future and intends to use the proceeds to further reduce high-cost wholesale deposits and short-term borrowings.
Charter Consolidation Update
During the third quarter of 2023, Rocky Mountain Bank and New Mexico Bank & Trust were consolidated into HTLF Bank. Subsequent to September 30, 2023, Dubuque Bank & Trust was consolidated into HTLF Bank, which completed the consolidation of member banks into HTLF Bank.
Total consolidation restructuring costs are projected to be $18-$19 million with approximately $2-$3 million of expenses remaining to be incurred in 2023. Total costs incurred since the project started in the fourth quarter of 2021 through September 30, 2023, were $15.3 million, of which $2.4 million were incurred in the third quarter of 2023. Total charter consolidation costs for the first nine months of 2023 totaled $6.0 million.
|
| | | | | | | | | | | | | | | |
(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 |
(Dollars in thousands, except per share data) | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
STATEMENT OF INCOME DATA | | | | | | | |
Interest income | $ | 245,432 | | | $ | 175,806 | | | $ | 697,910 | | | $ | 469,955 | |
Interest expense | 99,676 | | | 19,930 | | | 252,810 | | | 36,939 | |
Net interest income | 145,756 | | | 155,876 | | | 445,100 | | | 433,016 | |
Provision for credit losses | 1,516 | | | 5,492 | | | 9,969 | | | 11,983 | |
Net interest income after provision for credit losses | 144,240 | | | 150,384 | | | 435,131 | | | 421,033 | |
Noninterest income | 28,383 | | | 29,181 | | | 90,875 | | | 98,289 | |
Noninterest expenses | 111,053 | | | 108,883 | | | 331,542 | | | 326,159 | |
Income taxes | 13,479 | | | 14,118 | | | 44,181 | | | 41,637 | |
Net income | 48,091 | | | 56,564 | | | 150,283 | | | 151,526 | |
Preferred dividends | (2,013) | | | (2,013) | | | (6,038) | | | (6,038) | |
| | | | | | | |
Net income available to common stockholders | $ | 46,078 | | | $ | 54,551 | | | $ | 144,245 | | | $ | 145,488 | |
| | | | | | | |
KEY PERFORMANCE RATIOS | | | | | | | |
Annualized return on average assets | 0.94 | % | | 1.13 | % | | 1.00 | % | | 1.04 | % |
Annualized return on average common equity (GAAP) | 10.47 | | | 12.93 | | | 11.28 | | | 10.80 | |
Annualized return on average tangible common equity (non-GAAP)(1) | 16.34 | | | 20.76 | | | 17.83 | | | 16.79 | |
| | | | | | | |
Annualized ratio of net charge-offs to average loans | 0.12 | | | 0.00 | | | 0.14 | | | 0.17 | |
Annualized net interest margin (GAAP) | 3.14 | | | 3.41 | | | 3.23 | | | 3.22 | |
Annualized net interest margin, fully tax-equivalent (non-GAAP)(1) | 3.18 | | | 3.45 | | | 3.27 | | | 3.27 | |
Efficiency ratio (GAAP) | 63.77 | | | 58.84 | | | 61.86 | | | 61.39 | |
Adjusted efficiency ratio, fully tax-equivalent (non-GAAP)(1) | 59.95 | | | 55.26 | | | 58.98 | | | 58.99 | |
Total noninterest expenses to average assets | 2.18 | | | 2.18 | | | 2.20 | | | 2.23 | |
Core noninterest expenses to average assets (non-GAAP)(1) | 2.08 | | | 2.09 | | | 2.12 | | | 2.17 | |
| | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Dollars in thousands, expect per share data | As Of and For the Quarter Ended |
| 9/30/2023 | | 6/30/2023 | | 3/31/2023 | | 12/31/2022 | | 9/30/2022 |
BALANCE SHEET DATA | | | | | | | | | |
Investments | $ | 6,408,156 | | | $ | 6,705,005 | | | $ | 7,001,119 | | | $ | 7,051,114 | | | $ | 6,970,864 | |
Loans held for sale | 6,262 | | | 14,353 | | | 10,425 | | | 5,277 | | | 9,570 | |
Loans receivable held to maturity | 11,872,436 | | | 11,717,974 | | | 11,495,353 | | | 11,428,352 | | | 10,923,532 | |
Allowance for credit losses | 110,208 | | | 111,198 | | | 112,707 | | | 109,483 | | | 105,715 | |
Total assets | 20,129,793 | | | 20,224,716 | | | 20,182,544 | | | 20,244,228 | | | 19,682,950 | |
Total deposits | 17,100,993 | | | 17,663,543 | | | 17,681,346 | | | 17,513,009 | | | 17,267,121 | |
Long-term obligations | 372,059 | | | 372,403 | | | 372,097 | | | 371,753 | | | 371,446 | |
| | | | | | | | | |
Common equity | 1,714,825 | | | 1,748,285 | | | 1,718,700 | | | 1,624,350 | | | 1,545,253 | |
| | | | | | | | | |
COMMON SHARE DATA | | | | | | | | | |
Book value per common share (GAAP) | $ | 40.20 | | | $ | 41.00 | | | $ | 40.38 | | | $ | 38.25 | | | $ | 36.41 | |
Tangible book value per common share (non-GAAP)(1) | $ | 26.23 | | | $ | 26.98 | | | $ | 26.30 | | | $ | 24.09 | | | $ | 22.20 | |
ASC 320 effect on book value per common share | $ | (16.27) | | | $ | (14.04) | | | $ | (13.35) | | | $ | (14.58) | | | $ | (15.31) | |
Common shares outstanding, net of treasury stock | 42,656,303 | | | 42,644,544 | | | 42,558,726 | | | 42,467,394 | | | 42,444,106 | |
Tangible common equity ratio (non-GAAP)(1) | 5.73 | % | | 5.86 | % | | 5.72 | % | | 5.21 | % | | 4.94 | % |
Adjusted tangible common equity ratio (non-GAAP)(1) | 8.73 | % | | 8.54 | % | | 8.37 | % | | 8.11 | % | | 8.07 | % |
|
(1) Refer to "Non-GAAP Financial Measures" for additional information on the usage and presentation of these non-GAAP measures, and refer to these financial tables for the reconciliations to the most directly comparable GAAP measures. |
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. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Non-GAAP Reconciliations (Dollars in thousands, except per share data) |
| As Of and For the Quarter Ended |
| 9/30/2023 | | 6/30/2023 | | 3/31/2023 | | 12/31/2022 | | 9/30/2022 |
Reconciliation of Tangible Book Value Per Common Share (non-GAAP) | | | | | | | | | |
Common equity (GAAP) | $ | 1,714,825 | | | $ | 1,748,285 | | | $ | 1,718,700 | | | $ | 1,624,350 | | | $ | 1,545,253 | |
Less goodwill | 576,005 | | | 576,005 | | | 576,005 | | | 576,005 | | | 576,005 | |
Less core deposit and customer relationship intangibles, net | 20,026 | | | 21,651 | | | 23,366 | | | 25,154 | | | 26,995 | |
Tangible common equity (non-GAAP) | $ | 1,118,794 | | | $ | 1,150,629 | | | $ | 1,119,329 | | | $ | 1,023,191 | | | $ | 942,253 | |
| | | | | | | | | |
Common shares outstanding, net of treasury stock | 42,656,303 | | | 42,644,544 | | | 42,558,726 | | | 42,467,394 | | | 42,444,106 | |
Common equity (book value) per share (GAAP) | $ | 40.20 | | | $ | 41.00 | | | $ | 40.38 | | | $ | 38.25 | | | $ | 36.41 | |
Tangible book value per common share (non-GAAP) | $ | 26.23 | | | $ | 26.98 | | | $ | 26.30 | | | $ | 24.09 | | | $ | 22.20 | |
| | | | | | | | | |
Reconciliation of Tangible Common Equity Ratio (non-GAAP) | | | | | | | | | |
Tangible common equity (non-GAAP) | $ | 1,118,794 | | | $ | 1,150,629 | | | $ | 1,119,329 | | | $ | 1,023,191 | | | $ | 942,253 | |
| | | | | | | | | |
Total assets (GAAP) | $ | 20,129,793 | | | $ | 20,224,716 | | | $ | 20,182,544 | | | $ | 20,244,228 | | | $ | 19,682,950 | |
Less goodwill | 576,005 | | | 576,005 | | | 576,005 | | | 576,005 | | | 576,005 | |
Less core deposit and customer relationship intangibles, net | 20,026 | | | 21,651 | | | 23,366 | | | 25,154 | | | 26,995 | |
Total tangible assets (non-GAAP) | $ | 19,533,762 | | | $ | 19,627,060 | | | $ | 19,583,173 | | | $ | 19,643,069 | | | $ | 19,079,950 | |
Tangible common equity ratio (non-GAAP) | 5.73 | % | | 5.86 | % | | 5.72 | % | | 5.21 | % | | 4.94 | % |
| | | | | | | | | |
Reconciliation of Adjusted Tangible Common Equity Ratio (non-GAAP) | | | | | | | | | |
Tangible common equity (non-GAAP) | $ | 1,118,794 | | | $ | 1,150,629 | | | $ | 1,119,329 | | | $ | 1,023,191 | | | $ | 942,253 | |
Accumulated other comprehensive loss | 642,838 | | | 575,240 | | | 566,919 | | | 620,006 | | | 650,636 | |
Adjusted tangible common equity (non-GAAP) | $ | 1,761,632 | | | $ | 1,725,869 | | | $ | 1,686,248 | | | $ | 1,643,197 | | | $ | 1,592,889 | |
| | | | | | | | | |
Total tangible assets (non-GAAP) | $ | 19,533,762 | | | $ | 19,627,060 | | | $ | 19,583,173 | | | $ | 19,643,069 | | | $ | 19,079,950 | |
Fair value adjustment for securities and derivatives, net of deferred taxes | 642,838 | | | 575,240 | | | 566,919 | | | 620,006 | | | 650,636 | |
Total adjusted tangible assets (non-GAAP) | $ | 20,176,600 | | | $ | 20,202,300 | | | $ | 20,150,092 | | | $ | 20,263,075 | | | $ | 19,730,586 | |
Adjusted tangible common equity ratio (non-GAAP) | 8.73 | % | | 8.54 | % | | 8.37 | % | | 8.11 | % | | 8.07 | % |
| | | | | | | | | |
(1) Computed on a tax-equivalent basis using an effective tax rate of 21%. |
| | | | | | | | | | | | | | | | | | | | | | | |
Non-GAAP Reconciliations (Dollars in thousands, except per share data) | For the Quarter Ended September 30, | | For the Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Reconciliation of Annualized Return on Average Tangible Common Equity (non-GAAP) | | | | | | | |
Net income available to common stockholders (GAAP) | $ | 46,078 | | | $ | 54,551 | | | $ | 144,245 | | | $ | 145,488 | |
Plus core deposit and customer relationship intangibles amortization, net of tax(1) | 1,284 | | | 1,466 | | | 4,051 | | | 4,734 | |
Net income available to common stockholders excluding intangible amortization (non-GAAP) | $ | 47,362 | | | $ | 56,017 | | | $ | 148,296 | | | $ | 150,222 | |
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Average common equity (GAAP) | $ | 1,746,818 | | | $ | 1,674,306 | | | $ | 1,710,230 | | | $ | 1,801,835 | |
Less average goodwill | 576,005 | | | 576,005 | | | 576,005 | | | 576,005 | |
Less average core deposit and customer relationship intangibles, net | 20,821 | | | 27,902 | | | 22,501 | | | 29,878 | |
Average tangible common equity (non-GAAP) | $ | 1,149,992 | | | $ | 1,070,399 | | | $ | 1,111,724 | | | $ | 1,195,952 | |
Annualized return on average common equity (GAAP) | 10.47 | % | | 12.93 | % | | 11.28 | % | | 10.80 | % |
Annualized return on average tangible common equity (non-GAAP) | 16.34 | % | | 20.76 | % | | 17.83 | % | | 16.79 | % |
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Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP) | | | | | | | |
Net interest income (GAAP) | $ | 145,756 | | | $ | 155,876 | | | $ | 445,100 | | | $ | 433,016 | |
Plus tax-equivalent adjustment(1) | 2,152 | | | 2,151 | | | 6,497 | | | 6,247 | |
Net interest income, fully tax-equivalent (non-GAAP) | $ | 147,908 | | | $ | 158,027 | | | $ | 451,597 | | | $ | 439,263 | |
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Average earning assets | $ | 18,439,010 | | | $ | 18,157,795 | | | $ | 18,451,907 | | | $ | 17,969,001 | |
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Annualized net interest margin (GAAP) | 3.14 | % | | 3.41 | % | | 3.23 | % | | 3.22 | % |
Annualized net interest margin, fully tax-equivalent (non-GAAP) | 3.18 | | | 3.45 | | | 3.27 | | | 3.27 | |
Net purchase accounting discount accretion on loans included in annualized net interest margin | 0.01 | | | 0.03 | | | 0.02 | | | 0.05 | |
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Reconciliation of Adjusted Efficiency Ratio (non-GAAP) | | | | | | | |
Net interest income (GAAP) | $ | 145,756 | | | $ | 155,876 | | | $ | 445,100 | | | $ | 433,016 | |
Tax-equivalent adjustment(1) | 2,152 | | | 2,151 | | | 6,497 | | | 6,247 | |
Fully tax-equivalent net interest income | 147,908 | | | 158,027 | | | 451,597 | | | 439,263 | |
Noninterest income (GAAP) | 28,383 | | | 29,181 | | | 90,875 | | | 98,289 | |
Securities (gains)/losses, net | 114 | | | 1,055 | | | 1,532 | | | 272 | |
Unrealized (gain)/loss on equity securities, net | (13) | | | 211 | | | (165) | | | 615 | |
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Valuation adjustment on servicing rights | — | | | — | | | — | | | (1,658) | |
Adjusted revenue (non-GAAP) | $ | 176,392 | | | $ | 188,474 | | | $ | 543,839 | | | $ | 536,781 | |
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Total noninterest expenses (GAAP) | $ | 111,053 | | | $ | 108,883 | | | $ | 331,542 | | | $ | 326,159 | |
Less: | | | | | | | |
Core deposit and customer relationship intangibles amortization | 1,625 | | | 1,856 | | | 5,128 | | | 5,993 | |
Partnership investment in tax credit projects | 1,136 | | | 979 | | | 1,828 | | | 1,793 | |
(Gain)/loss on sales/valuation of assets, net | 108 | | | (251) | | | (2,149) | | | (3,435) | |
Acquisition, integration and restructuring costs | 2,429 | | | 2,156 | | | 5,994 | | | 5,144 | |
Core expenses (non-GAAP) | $ | 105,755 | | | $ | 104,143 | | | $ | 320,741 | | | $ | 316,664 | |
Efficiency ratio (GAAP) | 63.77 | % | | 58.84 | % | | 61.86 | % | | 61.39 | % |
Adjusted efficiency ratio, fully tax-equivalent (non-GAAP) | 59.95 | % | | 55.26 | % | | 58.98 | % | | 58.99 | % |
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(1) Computed on a tax-equivalent basis using an effective tax rate of 21%. |
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Non-GAAP Reconciliations (Dollars in thousands, except per share data) | For the Quarter Ended September 30, | | For the Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Reconciliation of Annualized Ratio of Core Expenses to Average Assets (non-GAAP) | | | | | | | |
Total noninterest expenses (GAAP) | $ | 111,053 | | | $ | 108,883 | | | $ | 331,542 | | | $ | 326,159 | |
Core expenses (non-GAAP) | 105,755 | | | 104,143 | | | 320,741 | | | 316,664 | |
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Average assets | $ | 20,207,920 | | | $ | 19,775,341 | | | $ | 20,182,808 | | | $ | 19,523,433 | |
Total noninterest expenses to average assets (GAAP) | 2.18 | % | | 2.18 | % | | 2.20 | % | | 2.23 | % |
Core expenses to average assets (non-GAAP) | 2.08 | % | | 2.09 | % | | 2.12 | % | | 2.17 | % |
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Acquisition, integration and restructuring costs | | | | | | | |
Salaries and employee benefits | $ | 94 | | | $ | 365 | | | $ | 261 | | | $ | 980 | |
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Professional fees | 1,617 | | | 1,480 | | | 3,619 | | | 3,495 | |
Advertising | 178 | | | 131 | | | 522 | | | 287 | |
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Other noninterest expenses | 540 | | | 180 | | | 1,592 | | | 382 | |
Total acquisition, integration and restructuring costs | $ | 2,429 | | | $ | 2,156 | | | $ | 5,994 | | | $ | 5,144 | |
After tax impact on diluted earnings per common share(1) | $ | 0.04 | | | $ | 0.04 | | | $ | 0.11 | | | $ | 0.10 | |
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(1) Computed on a tax-equivalent basis using an effective tax rate of 21%. |
Non-GAAP Financial Measures
This Quarterly Report on Form 10-Q contains references to financial measures which are not defined by generally accepted accounting principles ("GAAP"). Management believes the non-GAAP measures are helpful for investors to analyze and evaluate HTLF's financial condition and operating results. However, these non-GAAP measures have inherent limitations and should not be considered a substitute for operating results determined in accordance with GAAP. Additionally, because non-GAAP measures are not standardized, it may not be possible to compare the non-GAAP measures presented in this section with other companies' non-GAAP measures. Reconciliations of each non-GAAP measure to the most directly comparable GAAP measure may be found in the financial tables above.
The non-GAAP measures presented in this Quarterly Report on Form 10-Q, management's reason for including each measure and the method of calculating each measure are presented below:
•Annualized net interest margin, fully tax-equivalent, 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.
•Adjusted efficiency ratio, fully tax equivalent, expresses noninterest expenses as a percentage of fully tax-equivalent net interest income and noninterest income. This adjusted 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 as it enhances the comparability of income and expenses arising from taxable and nontaxable sources and excludes specific items as noted in the reconciliation contained in this Quarterly Report on Form 10-Q.
•Net interest income, fully tax equivalent, is net income adjusted 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.
•Tangible book value per common share is total common equity less goodwill and core deposit and customer relationship intangibles, net, divided by common shares outstanding, net of treasury. This measure is included as it is considered to be a critical metric to analyze and evaluate use of equity, financial condition and capital strength.
•Tangible common equity ratio is total common equity less goodwill and core deposit and customer relationship intangibles, net, divided by total assets less goodwill and core deposit and customer relationship intangibles, net. This measure is included as it is considered to be a critical metric to analyze and evaluate financial condition and capital strength.
•The adjusted tangible common equity ratio is calculated by subtracting goodwill, core deposit and customer relationship intangibles, net, and accumulated other comprehensive loss from total common equity and dividing it by total assets excluding goodwill, core deposit and customer relationship intangibles, net and the fair value adjustment on securities and derivatives, net of deferred taxes. This measure is included as it is considered to be a critical metric used by management, analysts, and investors to analyze and evaluate financial condition and capital strength,
composition and trends on a comparable basis by excluding the variability of the fair value of securities and derivatives, net of deferred taxes.
•Annualized return on average tangible common equity is net income excluding intangible amortization calculated as (1) net income excluding tax-effected core deposit and customer relationship intangibles amortization, divided by (2) average common equity less goodwill and core deposit and customer relationship intangibles, net. This measure is included as it is considered to be a critical metric to analyze and evaluate use of equity, financial condition and capital strength.
•Annualized ratio of core expenses to average assets adjusts noninterest expenses to exclude specific items noted in the reconciliation. Management includes this measure as it is considered to be a critical metric to analyze and evaluate controllable expenses related to primary business operations.
RESULTS OF OPERATIONS
Net Interest Margin and Net Interest Income
HTLF's management seeks to optimize net interest income and net interest margin through the growth of earning assets and customer deposits while managing asset and liability positions because they are key indicators of HTLF's profitability.
Net interest income is the difference between interest income on earning assets and interest expense paid on interest bearing liabilities. As such, net interest income is affected by changes in volumes and yields on earning assets and the volume and rates paid on interest bearing liabilities. Net interest margin is the ratio of net interest income to average earning assets.
For the Quarters ended September 30, 2023 and 2022
Net interest margin, expressed as a percentage of average earning assets, was 4.08% (4.26%3.14% (3.18% on a fully tax-equivalent basis)basis, non-GAAP) during the third quarter of 2017,2023 compared to 3.97% (4.14%3.41% (3.45% on a fully tax-equivalent basis)basis, non-GAAP) during the third quarter of 2016. Heartland's success in maintaining2022. For the quarters ended September 30, 2023 and 2022, net interest margin has been theincluded 1 basis point and 3 basis points, respectively, of net purchase accounting discount amortization. HTLF's net interest margin may be impacted in future periods as a result of improved yieldmarket pressures to increase deposit pricing due to competition. Management anticipates utilizing cash flow from the investment portfolio to pay down wholesale deposits and short-term borrowings, which would positively impact net interest margin.
Total interest income and average earning asset changes for the third quarter of 2023 compared to the third quarter of 2022 were:
•Total interest income was $245.4 million compared to $175.8 million, an increase of $69.6 million or 40% and primarily attributable to an increase in average earning assets and higher yields.
•Total interest income on a tax-equivalent basis (non-GAAP) was $247.6 million, an increase of $69.6 million or 39% from $178.0 million.
•Average earning assets increased $281.2 million or 2% to $18.44 billion compared to $18.16 billion.
•The average rate on earning assets increased 144 basis points to 5.33% compared to 3.89%, primarily due to recent interest rate increases.
Total interest expense and continuous loanaverage interest bearing liability changes for the third quarter of 2023 compared to the third quarter of 2022 were:
•Total interest expense was $99.7 million, an increase of $79.7 million from $19.9 million, due to increases in the average interest rate paid and deposit pricing discipline. Also contributingthe average balance of interest bearing liabilities.
•The average interest rate paid on interest bearing liabilities increased 234 basis points to Heartland's ability3.01% from 0.67%.
•Average interest bearing deposits increased $1.47 billion or 13% to maintain its$12.68 billion from $11.22 billion, including an increase of $1.36 billion in wholesale and institutional deposits.
•The average interest rate paid on interest bearing deposits increased 236 basis points to 2.90% from 0.54%, primarily due to recent interest rate increases and increased competition for deposits.
•Average borrowings decreased $30.8 million or 6% to $475.7 million from $506.5 million, and the average interest rate paid on borrowings was 5.78% compared to 3.74%.
Net interest income changes for the third quarter of 2023 compared to the third quarter of 2022 were:
•Net interest income totaled $145.8 million compared to $155.9 million, a decrease of $10.1 million or 6%.
•Net interest income on a tax-equivalent basis (non-GAAP) totaled $147.9 million compared to $158.0 million, which was a decrease of $10.1 million or 6%.
For the Nine Months ended September 30, 2023 and 2022
Net interest margin, expressed as a percentage of average earning assets, was 3.23% (3.27% on a fully tax-equivalent basis, non-GAAP) during the first nine months of 2023, compared to 3.22% (3.27% on a fully tax-equivalent basis, non-GAAP) during the first nine months of 2022. For the nine months ended September 30, 2023 and 2022, net interest margin has been the amortizationincluded 2 basis points and 5 basis points, respectively, of net purchase accounting discounts associated with acquisitions completed by Heartland. discount amortization.
Total interest income and average earning asset changes for the first nine months of 2023 compared to the first nine months of 2022 were:
•Total interest income was $697.9 million, an increase of $228.0 million or 49% from $470.0 million.
•Total interest income on a tax-equivalent basis (non-GAAP) was $704.4 million, an increase of $228.2 million or 48% from $476.2 million.
•Average earning assets increased $482.9 million or 3% to $18.45 billion from $17.97 billion.
Total interest expense and average interest bearing liability changes for the first nine months of 2023 compared to the first nine months of 2022 were:
•Total interest expense was $252.8 million, an increase of $215.9 million from $36.9 million, due to increases in the average interest rate paid and the average balance of interest bearing liabilities.
•The average interest rate paid on interest bearing liabilities increased to 2.60% from 0.44%.
•Average interest bearing deposits increased $1.72 billion or 16% to $12.48 billion from $10.76 billion which was primarily attributable to an increase in wholesale and institutional deposits. Average wholesale and institutional deposits totaled $2.79 billion for the first nine months of 2023 compared to $1.03 billion for the first nine months of 2022, an increase of $1.75 billion.
•The average interest rate paid on interest bearing deposits was 2.48% for the first nine months of 2023 compared to 0.31% for the first nine months of 2022, primarily due to recent interest rate increases and increased competition for deposits.
Net interest income changes for the first nine months of 2023 compared to first nine months of 2022 were:
•Net interest income totaled $445.1 million compared to $433.0 million, an increase of $12.1 million or 3%.
•Net interest income on a tax-equivalent basis (non-GAAP) totaled $451.6 million compared to $439.3 million, an increase of $12.3 million or 3%.
See "Analysis of Average Balances, Tax-Equivalent Yields and Rates" for a description of our use ofadditional information relating to net interest income on a fully tax-equivalent basis, which is not defined by GAAP, and a reconciliation of annualized net interest margin on a fully tax-equivalent basis to GAAP.
Interest income for the third quarter of 2017 was $99.0 million, an increase of $17.3 million or 21%, compared to $81.7 million recorded in the third quarter of 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. 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, was primarily due to the acquisitions completed in 2017. For the third quarter of 2017, 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 less than 1% from the third quarter of 2016. The average interest rate earned on average earning assets increased 10 basis points to 4.68% for the third quarter of 2017 compared to 4.58% for the same quarter in 2016.
For the first nine months of 2017, interest income increased $17.9 million or 7% to $261.6 million from $243.7 million for the first nine months of 2016. The tax-equivalent adjustments for income taxes saved on the interest earned on nontaxable securities and loans were $11.6 million and $9.4 million for the first nine months of 2017 and 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, an increase of $20.1 million or 8%. For the first nine months of 2017, average earning assets were $7.94 billion compared to $7.37 billion during the first nine months of 2016, an increase of $574.0 million or 8%. Excluding $521.2 million of average earning assets attributable to the acquisitions completed in 2017, average earning assets increased $52.8 million or 1% for the first nine months of 2017 compared to the same period in 2016.
Interest expense for the third quarter of 2017 was $9.1 million, an increase of $1.1 million or 14% from $8.0 million in the third quarter of 2016. For the quarter ended September 30, 2017, average interest bearing liabilities were $5.70 billion, an increase of $473.5 million or 9%, from $5.22 billion for the quarter ended September 30, 2016. 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 2016. 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 $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 2016.
Interest expense for the first nine months of 2017 was $24.1 million compared to $24.2 million for the first nine months of 2016, a 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 2016. 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 liabilities declined 1 basis point to 0.60% for the first nine months of 2017 from 0.61% for 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% for the first nine months of 2016, and the average interest rate paid on time deposits was 0.79% for the nine-month period ended September 30, 2017 compared to 0.80% for the same period in 2016. The average interest rate paid on Heartland's borrowings increased 37 basis points to 3.06% for the nine months ended September 30, 2017 compared to 2.69% for the nine months ended September 30, 2016.
Net interest income increased $16.2 million or 22% to $89.8 million in the third quarter of 2017 from $73.7 million in the third quarter of 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. For the first nine months of 2017, net interest income increased $17.9 million or 8% to $237.5 million from $219.5 million recorded in the first nine months of 2016. After the tax-equivalent adjustment discussed above, net interest income on a tax-equivalent basis totaled $249.0 million during the first nine months of 2017, an increase of $20.1 million or 9% from $228.9 million recorded during the first nine months of 2016.
HeartlandHTLF 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 continueincome. Management continues to work toward improving both its earning assets and funding mix through targeted organic growth strategies, which management believes will result in additional net interest income. Heartland believes itsIn addition, management continually monitors the balance sheet position for opportunities to increase net interest incomeincome. HTLF models and reviews simulations reflectusing various improving and deteriorating interest rate scenarios to assist in monitoring its exposure to interest rate risk. Based on these simulations, it is management's opinion that HTLF maintains a well-balanced and manageable interest rate 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, and approximately 9% of these floating rate loans have interest rate floors that are currently in effect. Item 3 of Part I of this Quarterly Report on Form 10-Q report contains additional information about the results of Heartland'sthe most recent net interest income simulations. Note 76 to the 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 setstables set forth certain information relating to Heartland's average consolidated balance sheets and reflectsreflect the yield on average earning assets and the cost of average interest bearing liabilities for the periods indicated, in thousands. Such yields and costs are calculated by dividing income or expense by the average balance of assets or liabilities. Average balances are derived from daily balances, and nonaccrual loans and loans held for sale are included in each respective loan category. Assets that receive favorable tax favorable treatment are evaluated on a tax-equivalent basis assuming a federal income tax rate of 35%21%. Tax favorableTax-favored 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 favorablefavored assets and dividing this amount by the average balance of the tax favorable assets.
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ANALYSIS OF AVERAGE BALANCES, TAX-EQUIVALENT YIELDS AND RATES(1) (Dollars in thousands) |
| For the Quarter Ended |
| September 30, 2017 | | September 30, 2016 |
| Average Balance | | Interest | | Rate | | Average Balance | | Interest | | Rate |
Earning Assets | | | | | | | | | | | |
Securities: | | | | | | | | | | | |
Taxable | $ | 1,667,076 |
| | $ | 10,394 |
| | 2.47 | % | | $ | 1,415,446 |
| | $ | 7,917 |
| | 2.23 | % |
Nontaxable(1) | 643,925 |
| | 7,825 |
| | 4.82 |
| | 473,152 |
| | 5,719 |
| | 4.81 |
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Total securities | 2,311,001 |
| | 18,219 |
| | 3.13 |
| | 1,888,598 |
| | 13,636 |
| | 2.87 |
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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 |
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Federal funds sold | 18,874 |
| | 34 |
| | 0.71 |
| | 1,409 |
| | 1 |
| | 0.28 |
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Loans:(2) | | | | | | | | | | | |
Commercial and commercial real estate(1) | 4,647,414 |
| | 59,121 |
| | 5.05 |
| | 3,908,623 |
| | 48,334 |
| | 4.92 |
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Residential mortgage | 683,186 |
| | 7,300 |
| | 4.24 |
| | 717,374 |
| | 7,248 |
| | 4.02 |
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Agricultural and agricultural real estate(1) | 504,970 |
| | 6,175 |
| | 4.85 |
| | 486,008 |
| | 5,719 |
| | 4.68 |
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Consumer | 450,694 |
| | 9,032 |
| | 7.95 |
| | 426,083 |
| | 8,256 |
| | 7.71 |
|
Fees on loans | | | 2,464 |
| | — |
| | — |
| | 1,708 |
| | — |
|
Less: allowance for loan losses | (54,720 | ) | | — |
| | — |
| | (52,261 | ) | | — |
| | — |
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Net loans | 6,231,544 |
| | 84,092 |
| | 5.35 |
| | 5,485,827 |
| | 71,265 |
| | 5.17 |
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Total earning assets | 8,726,228 |
| | 102,903 |
| | 4.68 | % | | 7,382,860 |
| | 84,908 |
| | 4.58 | % |
Nonearning Assets | 913,616 |
| | | | | | 789,823 |
| | | | |
Total Assets | $ | 9,639,844 |
| | | | | | $ | 8,172,683 |
| | | | |
Interest Bearing Liabilities | | | | | | | | | | | |
Savings | $ | 4,205,946 |
| | $ | 3,162 |
| | 0.30 | % | | $ | 3,697,426 |
| | $ | 2,066 |
| | 0.22 | % |
Time, $100,000 and over | 408,560 |
| | 787 |
| | 0.76 |
| | 399,498 |
| | 813 |
| | 0.81 |
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Other time deposits | 573,178 |
| | 1,124 |
| | 0.78 |
| | 570,445 |
| | 1,122 |
| | 0.78 |
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Short-term borrowings | 209,795 |
| | 271 |
| | 0.51 |
| | 258,783 |
| | 235 |
| | 0.36 |
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Other borrowings | 300,234 |
| | 3,790 |
| | 5.01 |
| | 298,020 |
| | 3,770 |
| | 5.03 |
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Total interest bearing liabilities | 5,697,713 |
| | 9,134 |
| | 0.64 | % | | 5,224,172 |
| | 8,006 |
| | 0.61 | % |
Noninterest Bearing Liabilities | | | | | | | | | | | |
Noninterest bearing deposits | 2,912,344 |
| | | | | | 2,171,965 |
| | | | |
Accrued interest and other liabilities | 74,338 |
| | | | | | 84,142 |
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Total noninterest bearing liabilities | 2,986,682 |
| | | | | | 2,256,107 |
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Stockholders' Equity | 955,449 |
| | | | | | 692,404 |
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Total Liabilities and Stockholders' Equity | $ | 9,639,844 |
| | | | | | $ | 8,172,683 |
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Net interest income, fully tax-equivalent (non-GAAP)(1) | | | $ | 93,769 |
| | | | | | $ | 76,902 |
| | |
Net interest spread(1) | | | | | 4.04 | % | | | | | | 3.97 | % |
Net interest income, fully tax-equivalent (non-GAAP) to total earning assets(3) | | | | | 4.26 | % | | | | | | 4.14 | % |
Interest bearing liabilities to earning assets | 65.29 | % | | | | | | 70.76 | % | | | | |
| | | | | | | | | | | |
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) | | | $ | 89,844 |
| | | | | | $ | 73,681 |
| | |
| | | | | | | | | | | |
Average Earning Assets | $ | 8,726,228 |
| | | | | | $ | 7,382,860 |
| | | | |
Annualized net interest margin (GAAP) | | | | | 4.08 | % | | | | | | 3.97 | % |
Annualized net interest margin, fully tax-equivalent (non-GAAP) | | | | | 4.26 | % | | | | | | 4.14 | % |
| | | | | | | | | | | |
(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 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 Quarter Ended |
| September 30, 2023 | | June 30, 2023 | | September 30, 2022 |
| Average Balance | | Interest | | Rate | | Average Balance | | Interest | | Rate | | Average Balance | | Interest | | Rate |
Earning Assets | | | | | | | | | | | | | | | | | |
Securities: | | | | | | | | | | | | | | | | | |
Taxable | $ | 5,726,057 | | | $ | 54,800 | | | 3.80 | % | | $ | 5,962,207 | | | $ | 58,172 | | | 3.91 | % | | $ | 6,303,278 | | | $ | 45,648 | | | 2.87 | % |
Nontaxable(1) | 881,162 | | | 8,085 | | | 3.64 | | | 895,458 | | | 7,896 | | | 3.54 | | | 951,232 | | | 7,802 | | | 3.25 | |
Total securities | 6,607,219 | | | 62,885 | | | 3.78 | | | 6,857,665 | | | 66,068 | | | 3.86 | | | 7,254,510 | | | 53,450 | | | 2.92 | |
Interest on deposits with other banks and short-term investments | 142,301 | | | 1,651 | | | 4.60 | | | 153,622 | | | 2,051 | | | 5.36 | | | 222,170 | | | 1,081 | | | 1.93 | |
Federal funds sold | 152 | | | 3 | | | 7.83 | | | — | | | — | | | — | | | 11 | | | — | | | — | |
Loans:(2) | | | | | | | | | | | | | | | | | |
Commercial and industrial(1) | 3,610,677 | | | 63,001 | | | 6.92 | | | 3,565,449 | | | 56,644 | | | 6.37 | | | 3,182,134 | | | 37,526 | | | 4.68 | |
PPP loans | 3,948 | | | 11 | | | 1.11 | | | 6,302 | | | 24 | | | 1.53 | | | 17,859 | | | 363 | | | 8.06 | |
Owner occupied commercial real estate | 2,412,501 | | | 30,127 | | | 4.95 | | | 2,366,107 | | | 28,031 | | | 4.75 | | | 2,272,666 | | | 23,601 | | | 4.12 | |
Non-owner occupied commercial real estate | 2,586,011 | | | 38,779 | | | 5.95 | | | 2,462,098 | | | 35,583 | | | 5.80 | | | 2,258,424 | | | 25,895 | | | 4.55 | |
Real estate construction | 1,027,544 | | | 19,448 | | | 7.51 | | | 1,028,109 | | | 18,528 | | | 7.23 | | | 914,520 | | | 12,382 | | | 5.37 | |
Agricultural and agricultural real estate | 822,957 | | | 12,582 | | | 6.07 | | | 848,554 | | | 12,256 | | | 5.79 | | | 799,823 | | | 8,966 | | | 4.45 | |
Residential mortgage | 827,402 | | | 9,482 | | | 4.55 | | | 840,741 | | | 9,383 | | | 4.48 | | | 858,119 | | | 8,665 | | | 4.01 | |
Consumer | 509,024 | | | 9,615 | | | 7.49 | | | 508,082 | | | 9,068 | | | 7.16 | | | 479,590 | | | 6,028 | | | 4.99 | |
Less: allowance for credit losses-loans | (110,726) | | | — | | | — | | | (113,177) | | | — | | | — | | | (102,031) | | | — | | | — | |
Net loans | 11,689,338 | | | 183,045 | | | 6.21 | | | 11,512,265 | | | 169,517 | | | 5.91 | | | 10,681,104 | | | 123,426 | | | 4.58 | |
Total earning assets | 18,439,010 | | | 247,584 | | | 5.33 | % | | 18,523,552 | | | 237,636 | | | 5.15 | % | | 18,157,795 | | | 177,957 | | | 3.89 | % |
Nonearning Assets | 1,768,910 | | | | | | | 1,697,959 | | | | | | | 1,617,546 | | | | | |
Total Assets | $ | 20,207,920 | | | | | | | $ | 20,221,511 | | | | | | | $ | 19,775,341 | | | | | |
Interest Bearing Liabilities | | | | | | | | | | | | | | | | | |
Savings | $ | 8,737,581 | | | $ | 49,195 | | | 2.23 | % | | $ | 8,935,775 | | | $ | 41,284 | | | 1.85 | % | | $ | 10,059,652 | | | $ | 12,907 | | | 0.51 | % |
Time deposits | 3,945,371 | | | 43,549 | | | 4.38 | | | 3,812,330 | | | 40,691 | | | 4.28 | | | 1,156,908 | | | 2,251 | | | 0.77 | |
Short-term borrowings | 103,567 | | | 1,167 | | | 4.47 | | | 89,441 | | | 848 | | | 3.80 | | | 134,974 | | | 360 | | | 1.06 | |
Other borrowings | 372,112 | | | 5,765 | | | 6.15 | | | 372,248 | | | 5,545 | | | 5.97 | | | 371,492 | | | 4,412 | | | 4.71 | |
Total interest bearing liabilities | 13,158,631 | | | 99,676 | | | 3.01 | % | | 13,209,794 | | | 88,368 | | | 2.68 | % | | 11,723,026 | | | 19,930 | | | 0.67 | % |
Noninterest Bearing Liabilities | | | | | | | | | | | | | | | | | |
Noninterest bearing deposits | 4,824,861 | | | | | | | 4,941,033 | | | | | | | 6,065,729 | | | | | |
Accrued interest and other liabilities | 366,905 | | | | | | | 232,966 | | | | | | | 201,575 | | | | | |
Total noninterest bearing liabilities | 5,191,766 | | | | | | | 5,173,999 | | | | | | | 6,267,304 | | | | | |
Equity | 1,857,523 | | | | | | | 1,837,718 | | | | | | | 1,785,011 | | | | | |
Total Liabilities and Equity | $ | 20,207,920 | | | | | | | $ | 20,221,511 | | | | | | | $ | 19,775,341 | | | | | |
Net interest income, fully tax-equivalent (non-GAAP)(1)(3) | | | $ | 147,908 | | | | | | | $ | 149,268 | | | | | | | $ | 158,027 | | | |
Net interest spread(1) | | | | | 2.32 | % | | | | | | 2.47 | % | | | | | | 3.22 | % |
Net interest income, fully tax-equivalent to total earning assets (non-GAAP)(1)(3) | | | | | 3.18 | % | | | | | | 3.23 | % | | | | | | 3.45 | % |
Interest bearing liabilities to earning assets | 71.36 | % | | | | | | 71.31 | % | | | | | | 64.56 | % | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
(1) Computed on a tax-equivalent basis using an effective tax rate of 21%. |
(2) Nonaccrual loans and loans held for sale are included in the average loans outstanding. |
(3) Refer to "Non-GAAP Financial Measures" for additional information on the usage and presentation of these non-GAAP measures, and refer to the financial tables under "Financial Highlights" for the reconciliations to the most directly comparable GAAP measures. |
| | ANALYSIS OF AVERAGE BALANCES, TAX-EQUIVALENT YIELDS AND RATES(1) (Dollars in thousands) | |
ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES (1) | | ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES (1) |
| For the Nine Months Ended | | For the Nine Months Ended |
| September 30, 2017 | | September 30, 2016 | | September 30, 2023 | | September 30, 2022 |
| Average Balance | | Interest | | Rate | | Average Balance | | Interest | | Rate | | Average Balance | | Interest | | Rate | | Average Balance | | Interest | | Rate |
Earning Assets | | | | | | | | | | | | Earning Assets | |
Securities: | | | | | | | | | | | | Securities: | |
Taxable | $ | 1,545,091 |
| | $ | 27,246 |
| | 2.36 | % | | $ | 1,464,080 |
| | $ | 24,604 |
| | 2.24 | % | Taxable | $ | 5,927,026 | | | $ | 168,948 | | | 3.81 | % | | $ | 6,407,459 | | | $ | 116,366 | | | 2.43 | % |
Nontaxable(1) | 638,119 |
| | 23,534 |
| | 4.93 |
| | 440,275 |
| | 16,605 |
| | 5.04 |
| Nontaxable(1) | 899,613 | | | 23,611 | | | 3.51 | | | 990,784 | | | 22,625 | | | 3.05 | |
Total securities | 2,183,210 |
| | 50,780 |
| | 3.11 |
| | 1,904,355 |
| | 41,209 |
| | 2.89 |
| Total securities | 6,826,639 | | | 192,559 | | | 3.77 | | | 7,398,243 | | | 138,991 | | | 2.51 | |
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 |
| |
Interest bearing deposits with other banks and other short-term investments | | Interest bearing deposits with other banks and other short-term investments | 133,910 | | | 4,833 | | | 4.83 | | | 238,819 | | | 1,715 | | | 0.96 | |
Federal funds sold | 6,885 |
| | 37 |
| | 0.72 |
| | 12,509 |
| | 12 |
| | 0.13 |
| Federal funds sold | 51 | | | 3 | | | 7.86 | | | 7 | | | — | | | — | |
Loans:(2) | | | | | | | | | | | | Loans:(2) | | | | | | | | | | | |
Commercial and commercial real estate(1) | 4,097,967 |
| | 151,946 |
| | 4.96 |
| | 3,840,060 |
| | 141,977 |
| | 4.94 |
| |
Commercial and industrial(1) | | Commercial and industrial(1) | 3,547,256 | | | 169,552 | | | 6.39 | | | 2,977,751 | | | 95,020 | | | 4.27 | |
PPP loans | | PPP loans | 6,718 | | | 61 | | | 1.21 | | | 63,342 | | | 6,487 | | | 13.69 | |
Owner occupied commercial real estate | | Owner occupied commercial real estate | 2,355,545 | | | 84,927 | | | 4.82 | | | 2,270,486 | | | 67,742 | | | 3.99 | |
Non-owner occupied commercial real estate | | Non-owner occupied commercial real estate | 2,459,965 | | | 105,111 | | | 5.71 | | | 2,166,873 | | | 69,929 | | | 4.31 | |
Real estate construction | | Real estate construction | 1,051,298 | | | 56,107 | | | 7.14 | | | 880,354 | | | 31,673 | | | 4.81 | |
Agricultural and agricultural real estate | | Agricultural and agricultural real estate | 835,673 | | | 36,191 | | | 5.79 | | | 776,127 | | | 23,905 | | | 4.12 | |
Residential mortgage | 654,488 |
| | 20,492 |
| | 4.19 |
| | 751,694 |
| | 23,133 |
| | 4.11 |
| Residential mortgage | 840,143 | | | 28,138 | | | 4.48 | | | 850,444 | | | 25,108 | | | 3.95 | |
Agricultural and agricultural real estate(1) | 492,170 |
| | 17,536 |
| | 4.76 |
| | 478,564 |
| | 16,952 |
| | 4.73 |
| |
Consumer | 434,995 |
| | 25,374 |
| | 7.80 |
| | 422,869 |
| | 24,452 |
| | 7.72 |
| Consumer | 506,143 | | | 26,925 | | | 7.11 | | | 452,032 | | | 15,632 | | | 4.62 | |
Fees on loans | | | 5,894 |
| | — |
| | | | 5,362 |
| | — |
| |
| Less: allowance for loan losses | (54,775 | ) | | — |
| | — |
| | (50,980 | ) | | — |
| | — |
| Less: allowance for loan losses | (111,434) | | | — | | | — | | | (105,477) | | | — | | | — | |
Net loans | 5,624,845 |
| | 221,242 |
| | 5.26 |
| | 5,442,207 |
| | 211,876 |
| | 5.20 |
| Net loans | 11,491,307 | | | 507,012 | | | 5.90 | | | 10,331,932 | | | 335,496 | | | 4.34 | |
Total earning assets | 7,942,810 |
| | 273,171 |
| | 4.60 | % | | 7,368,856 |
| | 253,110 |
| | 4.59 | % | Total earning assets | 18,451,907 | | | 704,407 | | | 5.10 | % | | 17,969,001 | | | 476,202 | | | 3.54 | % |
Nonearning Assets | 797,893 |
| | | | | | 767,636 |
| | | | | Nonearning Assets | 1,730,901 | | | | | | | 1,554,432 | | | | | |
Total Assets | $ | 8,740,703 |
| | | | | | $ | 8,136,492 |
| | | | | Total Assets | $ | 20,182,808 | | | $ | 19,523,433 | | |
Interest Bearing Liabilities | | | | | | | | | | | | Interest Bearing Liabilities | | | | |
Savings | $ | 3,976,403 |
| | $ | 7,772 |
| | 0.26 | % | | $ | 3,651,370 |
| | $ | 5,988 |
| | 0.22 | % | Savings | $ | 9,130,980 | | | $ | 128,372 | | | 1.88 | % | | $ | 9,652,651 | | | $ | 20,673 | | | 0.29 | % |
Time, $100,000 and over | 369,595 |
| | 2,239 |
| | 0.81 |
| | 439,609 |
| | 2,417 |
| | 0.73 |
| |
Other time deposits | 512,551 |
| | 2,955 |
| | 0.77 |
| | 599,745 |
| | 3,790 |
| | 0.84 |
| |
Time deposits | | Time deposits | 3,344,434 | | | 103,245 | | | 4.13 | | | 1,106,095 | | | 3,992 | | | 0.48 | |
Short-term borrowings | 199,503 |
| | 498 |
| | 0.33 |
| | 314,367 |
| | 1,083 |
| | 0.46 |
| Short-term borrowings | 138,157 | | | 4,437 | | | 4.29 | | | 124,459 | | | 494 | | | 0.53 | |
Other borrowings | 288,774 |
| | 10,674 |
| | 4.94 |
| | 281,617 |
| | 10,918 |
| | 5.18 |
| Other borrowings | 372,094 | | | 16,756 | | | 6.02 | | | 372,027 | | | 11,780 | | | 4.23 | |
Total interest bearing liabilities | 5,346,826 |
| | 24,138 |
| | 0.60 | % | | 5,286,708 |
| | 24,196 |
| | 0.61 | % | Total interest bearing liabilities | 12,985,665 | | | 252,810 | | | 2.60 | % | | 11,255,232 | | | 36,939 | | | 0.44 | % |
Noninterest Bearing Liabilities | | | | | | | | | | | | Noninterest Bearing Liabilities | | | | | | | | | | | |
Noninterest bearing deposits | 2,494,850 |
| | | | | | 2,084,379 |
| | | | | Noninterest bearing deposits | 5,092,200 | | | 6,172,984 | | |
Accrued interest and other liabilities | 64,824 |
| | | | | | 78,093 |
| | | | | Accrued interest and other liabilities | 284,008 | | | 182,677 | | |
Total noninterest bearing liabilities | 2,559,674 |
| | | | | | 2,162,472 |
| | | | | Total noninterest bearing liabilities | 5,376,208 | | | 6,355,661 | | |
Stockholders' Equity | 834,203 |
| | | | | | 687,312 |
| | | | | |
Total Liabilities and Stockholders' Equity | $ | 8,740,703 |
| | | | | | $ | 8,136,492 |
| | | | | |
Net interest income, fully tax-equivalent (non-GAAP)(1) | | | $ | 249,033 |
| | | | | | $ | 228,914 |
| | | |
Equity | | Equity | 1,820,935 | | | 1,912,540 | | |
Total Liabilities and Equity | | Total Liabilities and Equity | $ | 20,182,808 | | | $ | 19,523,433 | | |
Net interest income, fully tax-equivalent (non-GAAP)(1)(3) | | Net interest income, fully tax-equivalent (non-GAAP)(1)(3) | | | $ | 451,597 | | | | | $ | 439,263 | | |
Net interest spread(1) | | | | | 4.00 | % | | | | | | 3.98 | % | Net interest spread(1) | | | | 2.50 | % | | | | 3.10 | % |
Net interest income, fully tax-equivalent (non-GAAP) to total earning assets(3) | | | | | 4.19 | % | | | | | | 4.15 | % | |
Net interest income, fully tax-equivalent (non-GAAP) to total earning assets(1)(3) | | Net interest income, fully tax-equivalent (non-GAAP) to total earning assets(1)(3) | | 3.27 | % | | 3.27 | % |
Interest bearing liabilities to earning assets | 67.32 | % | | | | | | 71.74 | % | | | | | Interest bearing liabilities to earning assets | 70.38 | % | | 62.64 | % | |
| | | | | | | | | | | | |
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) | | | $ | 237,452 |
| | | | | | $ | 219,506 |
| | | |
| | | | | | | | | | | | |
Average Earning Assets | $ | 7,942,810 |
| | | | | | $ | 7,368,856 |
| | | | | |
Annualized net interest margin (GAAP) | | | | | 4.00 | % | | | | | | 3.98 | % | |
Annualized net interest margin, fully tax-equivalent (non-GAAP) | | | | | 4.19 | % | | | | | | 4.15 | % | |
| | | | | | | | | | | | |
(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 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. | |
| (1) Computed on a tax-equivalent basis using an effective tax rate of 21%. | | (1) Computed on a tax-equivalent basis using an effective tax rate of 21%. |
(2) Nonaccrual loans and loans held for sale are included in the average loans outstanding. | | (2) Nonaccrual loans and loans held for sale are included in the average loans outstanding. |
(3) Refer to "Non-GAAP Financial Measures" for additional information on the usage and presentation of these non-GAAP measures, and refer to the financial tables under "Financial Highlights" for the reconciliations to the most directly comparable GAAP measures. | | (3) Refer to "Non-GAAP Financial Measures" for additional information on the usage and presentation of these non-GAAP measures, and refer to the financial tables under "Financial Highlights" for the reconciliations to the most directly comparable GAAP measures. |
The following tables present the dollar amount of changes in interest income and interest expense for the major components of interest earning assets and interest bearing liabilities, in thousands, and quantify the changes in interest income and interest expense related to changes in the average outstanding balances (volume) and those changes caused by fluctuating interest rates. For each category of interest earning assets and interest bearing liabilities, information is provided on changes attributable to (i) changes in volume, calculated by multiplying the difference between the average balance for the current period and the average balance for the prior period by the rate for the prior period, and (ii) changes in rate, calculated by multiplying the difference between the rate for the current period and the rate for the prior period by the average balance for the prior period. The unallocated change has been allocated pro rata to volume and rate variances.
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| Three Months Ended |
| September 30, 2023 Compared to September 30, 2022 Change Due to | | September 30, 2023 Compared to June 30, 2023 Changes Due to | | September 30, 2022 Compared to September 30, 2021 Change Due to |
| Volume | | Rate | | Net | | Volume | | Rate | | Net | | Volume | | Rate | | Net |
Earnings Assets/Interest Income | | | | | | | | | | | | | | | | | |
Investment securities: | | | | | | | | | | | | | | | | | |
Taxable | $ | (23,787) | | | $ | 32,939 | | | $ | 9,152 | | | $ | (1,925) | | | $ | (1,447) | | | $ | (3,372) | | | $ | 310 | | | $ | 12,954 | | | $ | 13,264 | |
Nontaxable(1) | (2,705) | | | 2,988 | | | 283 | | | (587) | | | 776 | | | 189 | | | 1,555 | | | 412 | | | 1,967 | |
Interest bearing deposits | (2,330) | | | 2,900 | | | 570 | | | (138) | | | (262) | | | (400) | | | (290) | | | 1,239 | | | 949 | |
Federal funds sold | — | | | 3 | | | 3 | | | — | | | 3 | | | 3 | | | — | | | — | | | — | |
Loans(1)(2) | 12,520 | | | 47,099 | | | 59,619 | | | 3,093 | | | 10,435 | | | 13,528 | | | 10,198 | | | 678 | | | 10,876 | |
Total earning assets | (16,302) | | | 85,929 | | | 69,627 | | | 443 | | | 9,505 | | | 9,948 | | | 11,773 | | | 15,283 | | | 27,056 | |
Liabilities/Interest Expense | | | | | | | | | | | | | | | | | |
Interest bearing deposits: | | | | | | | | | | | | | | | | | |
Savings | (11,602) | | | 47,890 | | | 36,288 | | | (5,859) | | | 13,770 | | | 7,911 | | | 541 | | | 10,126 | | | 10,667 | |
Time deposits | 14,053 | | | 27,245 | | | 41,298 | | | 1,725 | | | 1,133 | | | 2,858 | | | 69 | | | 978 | | | 1,047 | |
Short-term borrowings | (566) | | | 1,373 | | | 807 | | | 151 | | | 168 | | | 319 | | | (20) | | | 282 | | | 262 | |
Other borrowings | 7 | | | 1,346 | | | 1,353 | | | (13) | | | 233 | | | 220 | | | 1,062 | | | 248 | | | 1,310 | |
Total interest bearing liabilities | 1,892 | | | 77,854 | | | 79,746 | | | (3,996) | | | 15,304 | | | 11,308 | | | 1,652 | | | 11,634 | | | 13,286 | |
Net interest income | $ | (18,194) | | | $ | 8,075 | | | $ | (10,119) | | | $ | 4,439 | | | $ | (5,799) | | | $ | (1,360) | | | $ | 10,121 | | | $ | 3,649 | | | $ | 13,770 | |
| | | | | | | | | | | | | | | | | |
(1) Computed on a tax-equivalent basis using an effective tax rate of 21%. |
(2) Nonaccrual loans and loans held for sale are included in average loans outstanding. |
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| Nine Months Ended |
| September 30, 2023 Compared to September 30, 2022 Change Due to | | September 30, 2022 Compared to September 30, 2021 Change Due to |
| Volume | | Rate | | Net | | Volume | | Rate | | Net |
Earnings Assets/Interest Income | | | | | | | | | | | |
Investment securities: | | | | | | | | | | | |
Taxable | $ | (14,500) | | | $ | 67,082 | | | $ | 52,582 | | | $ | 7,891 | | | $ | 14,102 | | | $ | 21,993 | |
Nontaxable(1) | (3,069) | | | 4,055 | | | 986 | | | 5,862 | | | (545) | | | 5,317 | |
Interest bearing deposits | (1,510) | | | 4,628 | | | 3,118 | | | (48) | | | 1,505 | | | 1,457 | |
Federal funds sold | — | | | 3 | | | 3 | | | — | | | (1) | | | (1) | |
Loans(1)(2) | 40,865 | | | 130,651 | | | 171,516 | | | 21,786 | | | (24,308) | | | (2,522) | |
Total earning assets | 21,786 | | | 206,419 | | | 228,205 | | | 35,491 | | | (9,247) | | | 26,244 | |
Liabilities/Interest Expense | | | | | | | | | | | |
Interest bearing deposits: | | | | | | | | | | | |
Savings | (1,923) | | | 109,622 | | | 107,699 | | | 154 | | | 13,616 | | | 13,770 | |
Time deposits | 20,972 | | | 78,281 | | | 99,253 | | | 178 | | | (912) | | | (734) | |
Short-term borrowings | 60 | | | 3,883 | | | 3,943 | | | 16 | | | 130 | | | 146 | |
Other borrowings | 2 | | | 4,974 | | | 4,976 | | | (11) | | | 2,413 | | | 2,402 | |
Total interest bearing liabilities | 19,111 | | | 196,760 | | | 215,871 | | | 337 | | | 15,247 | | | 15,584 | |
Net interest income | $ | 2,675 | | | $ | 9,659 | | | $ | 12,334 | | | $ | 35,154 | | | $ | (24,494) | | | $ | 10,660 | |
|
(1) Computed on a tax-equivalent basis using an effective tax rate of 21%. |
(2) Nonaccrual loans and loans held for sale are included in average loans outstanding. |
Provision For LoanCredit Losses
The allowance for loancredit losses is established through provision expense to provide, in Heartland management's opinion, an appropriate allowance for loancredit losses. The following table shows the components of provision for loancredit losses for the three- and nine- months ended September 30, 2023 and 2022, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Provision expense for credit losses-loans | $ | 2,672 | | | $ | 4,388 | | | $ | 12,685 | | | $ | 8,561 | |
(Benefit) provision expense for credit losses-unfunded commitments | (1,156) | | | 1,104 | | | (2,716) | | | 3,422 | |
| | | | | | | |
Total provision expense | $ | 1,516 | | | $ | 5,492 | | | $ | 9,969 | | | $ | 11,983 | |
The provision expense for credit losses for loans was $5.7$2.7 million for the third quarter of 2017 compared to $5.32023, which was a decrease of $1.7 million from provision expense of $4.4 million recorded in the third quarter of 2022. The provision expense for the third quarter of 2016. For2023 compared to the first nine monthsthird quarter of 2017, the provision for 2022 was impacted by several factors, including:
•loan losses was $10.2growth of $154.5 million compared to $9.5$254.8 million, and
•improvement in credit quality as indicated by the decrease of nonpass loans as a percentage of total loans. Nonpass loans were 4.5% at September 30, 2023 and 4.8% of loans at June 30, 2023. Nonpass loans were 5.3% of total loans at September 30, 2022 compared to 5.8% of total loans at June 30, 2022.
The provision expense for credit losses for loans was $12.7 million for the first nine months of 2016. In determining2023 compared to $8.6 million for the first nine months of 2022. The provision expense for the first nine months of 2023 and the first nine months of 2022 were impacted by several factors, including:
•net charge-offs of $12.0 million, which included a $5.3 million charge-off related to an overdraft of a single long-term customer compared to net charge-offs of $12.9 million, which included two charge-offs totaling $9.2 million due to customer fraud related to two lending relationships that had collateral deficiencies,
•provision expense totaling $2.6 million was recorded for an individually assessed loan in the allowance for first quarter of 2023,
•loan losses is appropriate, management uses factors that includegrowth of $444.1 million compared to $969.0 million, and
•stable credit quality during the overall compositionfirst nine months of 2023 compared to improved credit quality as indicated by nonpass loans as a percentage of total loans. Nonpass loans were 4.5% of loans at September 30, 2023 compared to 4.7% at December 31, 2022. Nonpass loans were 5.3% of total loans at September 30, 2022 compared to 7.4% of total loans at December 31, 2021.
The size 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 levellevels of organic loan growth acquiredincluding government guaranteed loans, that move out of the purchase accounting pool, changes in credit quality and the variability that can occur in the factors, including the impact of economic conditions, are all considered when determining the appropriateness of the allowance for loancredit losses Heartland's quarterlyand will contribute to the variability in the provision for loancredit losses will vary from quarter to quarter. For additional details on the specific factors considered in establishing the allowance for loancredit losses, refer to the discussion of critical accounting policiesestimates set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Heartland'sHTLF's Annual Report on Form 10-K for the year ended December 31, 2016, and the information under the caption2022, "Allowance For LoanCredit Losses" and "Provision for Credit Losses" in Item 2 of this Quarterly Report on Form 10-Q and Note 54, "Allowance for Credit Losses," 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.
HeartlandManagement believes that the allowance for loancredit losses as of September 30, 2017,2023, was at a level commensurate with the overall risk exposure of the loan portfolio. However, ifdeterioration in economic conditions, should become more unfavorable,including a recession, could cause certain borrowers mayto experience difficulty and impede their ability to meet debt service. Due to the leveluncertainty of nonperforming loans, charge-offsfuture economic conditions, including ongoing concerns regarding higher interest rates, supply chain challenges, workforce shortages and delinquencies could rise and require further increases inwage pressures, the provision for loan losses.credit losses could be volatile in future quarters.
Noninterest Income
The tables below show Heartland's noninterest income for the three- and nine-month periodsnine- months ended September 30, 20172023 and 2016,2022, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | |
| 2023 | | 2022 | | Change | | % Change |
Service charges and fees | $ | 18,553 | | | $ | 17,282 | | | $ | 1,271 | | | 7 | % |
Loan servicing income | 278 | | | 831 | | | (553) | | | (67) | |
Trust fees | 4,734 | | | 5,372 | | | (638) | | | (12) | |
Brokerage and insurance commissions | 692 | | | 649 | | | 43 | | | 7 | |
Capital markets fees | 1,845 | | | 1,809 | | | 36 | | | 2 | |
Securities losses, net | (114) | | | (1,055) | | | 941 | | | 89 | |
Unrealized gain/(loss) on equity securities, net | 13 | | | (211) | | | 224 | | | 106 | |
| | | | | | | |
Net gains on sale of loans held for sale | 905 | | | 1,832 | | | (927) | | | (51) | |
Valuation adjustment on servicing rights | — | | | — | | | — | | | — | |
Income on bank owned life insurance | 858 | | | 694 | | | 164 | | | 24 | |
Other noninterest income | 619 | | | 1,978 | | | (1,359) | | | (69) | |
Total noninterest income | $ | 28,383 | | | $ | 29,181 | | | $ | (798) | | | (3) | % |
|
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | | |
| 2017 | | 2016 | | Change | | % Change |
Service charges and fees | $ | 10,138 |
| | $ | 8,278 |
| | $ | 1,860 |
| | 22 | % |
Loan servicing income | 1,161 |
| | 873 |
| | 288 |
| | 33 |
|
Trust fees | 3,872 |
| | 3,689 |
| | 183 |
| | 5 |
|
Brokerage and insurance commissions | 950 |
| | 1,006 |
| | (56 | ) | | (6 | ) |
Securities gains, net | 1,679 |
| | 1,584 |
| | 95 |
| | 6 |
|
Net gains on sale of loans held for sale | 4,997 |
| | 11,459 |
| | (6,462 | ) | | (56 | ) |
Valuation adjustment on commercial servicing rights | 5 |
| | 5 |
| | — |
| | — |
|
Income on bank owned life insurance | 766 |
| | 620 |
| | 146 |
| | 24 |
|
Other noninterest income | 1,409 |
| | 1,028 |
| | 381 |
| | 37 |
|
Total noninterest income | $ | 24,977 |
| | $ | 28,542 |
| | $ | (3,565 | ) | | (12 | )% |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2023 | | 2022 | | Change | | % Change |
Service charges and fees | $ | 55,316 | | | $ | 50,599 | | | $ | 4,717 | | | 9 | % |
Loan servicing income | 1,403 | | | 1,951 | | | (548) | | | (28) | |
Trust fees | 15,810 | | | 17,130 | | | (1,320) | | | (8) | |
Brokerage and insurance commissions | 2,065 | | | 2,357 | | | (292) | | | (12) | |
Capital markets fees | 8,331 | | | 9,719 | | | (1,388) | | | (14) | |
Securities losses, net | (1,532) | | | (272) | | | (1,260) | | | 463 | |
Unrealized gain/(loss) on equity securities, net | 165 | | | (615) | | | 780 | | | 127 | |
| | | | | | | |
Net gains on sale of loans held for sale | 3,786 | | | 8,144 | | | (4,358) | | | (54) | |
Valuation adjustment on servicing rights | — | | | 1,658 | | | (1,658) | | | (100) | |
Income on bank owned life insurance | 3,042 | | | 1,741 | | | 1,301 | | | 75 | |
Other noninterest income | 2,489 | | | 5,877 | | | (3,388) | | | (58) | |
Total noninterest income | $ | 90,875 | | | $ | 98,289 | | | $ | (7,414) | | | (8) | % |
|
| | | | | | | | | | | | | | |
| 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 | )% |
NoninterestTotal noninterest income totaled $25.0was $28.4 million during the third quarter of 20172023 compared to $28.5$29.2 million during the third quarter of 2016,2022, a decrease of $3.6 million$798,000 or 12%3%. For the nine-month period ended on September 30,Total noninterest income totaled $76.5was $90.9 million during 2017for the first nine months of 2023 compared to $89.1$98.3 million during 2016,for the first nine months of 2022, a decrease of $12.7$7.4 million or 14%8%. DecreasesNotable changes in noninterest income categories for both the quarterlythree- and nine-month periods under comparison reflected lower net gains on sale of loans held for sale, the effect of which was partially offset by increased servicenine- months ended September 30, 2023 and 2022 are as follows:
Service charges and fees.
Service Charges and Feesfees
The following tables summarize the changes in service charges and fees for the three- and nine-month periodsnine- months ended September 30, 20172023 and 2016,2022, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | |
| 2023 | | 2022 | | Change | | % Change |
Service charges and fees on deposit accounts | $ | 5,431 | | | $ | 4,764 | | | $ | 667 | | | 14 | % |
Overdraft fees | 3,184 | | | 3,152 | | | 32 | | | 1 | |
Customer service and other service fees | 94 | | | 102 | | | (8) | | | (8) | |
Credit card fee income | 7,551 | | | 6,885 | | | 666 | | | 10 | |
Debit card income | 2,293 | | | 2,379 | | | (86) | | | (4) | |
Total service charges and fees | $ | 18,553 | | | $ | 17,282 | | | $ | 1,271 | | | 7 | % |
| | | | | | | |
| Nine Months Ended September 30, | | | | |
| 2023 | | 2022 | | Change | | % Change |
Service charges and fees on deposit accounts | $ | 15,571 | | | $ | 13,831 | | | $ | 1,740 | | | 13 | % |
Overdraft fees | 9,248 | | | 8,959 | | | 289 | | | 3 | |
Customer service and other service fees | 280 | | | 289 | | | (9) | | | (3) | |
Credit card fee income | 23,462 | | | 20,419 | | | 3,043 | | | 15 | |
Debit card income | 6,755 | | | 7,101 | | | (346) | | | (5) | |
Total service charges and fees | $ | 55,316 | | | $ | 50,599 | | | $ | 4,717 | | | 9 | % |
|
| | | | | | | | | | | | | | |
| 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 22% to $10.1 million during the third quarter of 2017 compared to $8.3 million recorded during the third quarter of 2016 and $5.8 million or 25% to $29.3 million during the first nine months of 2017 compared to $23.5 million for the first nine months of 2016. IncreasesThe increase in service charges and fees wereon deposit accounts was primarily attributable to a larger demand deposit customer base, a portion of which is attributable to the acquisitions completedbase. The increase in 2017. Fees associated with credit card services were $2.0 million duringfee income was primarily the third quarterresult of 2017 compared to $1.3 million during the third quarter of 2016, an increase of $704,000 or 55%. For the first nine months of 2017, these fees were $6.2 million compared to $3.4 million during the first nine months of 2016, an increase of $2.8 million or 81%. This increase resulted primarily from efforts to increase the level ofa larger commercial credit card services provided at Heartland's subsidiary banks, including atcustomer base and increased utilization.
Management expects to institute new policies regarding overdraft fees in the newly acquired banksfourth quarter of 2023, which will reduce overdraft fee income 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.future periods.
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 dependentdepend upon the aggregate outstanding balances of these loans, rather than quarterly production and sale of these loans. LoanThe following tables show the changes in loan servicing income for the three- and nine- months ended September 30, 2023, and 2022, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | |
| 2023 | | 2022 | | Change | | % Change |
Commercial and agricultural loan servicing fees(1) | $ | 274 | | | $ | 583 | | | $ | (309) | | | (53) | % |
Residential mortgage servicing fees | 4 | | | 471 | | | (467) | | | (99) | |
Mortgage servicing rights amortization | — | | | (223) | | | 223 | | | 100 | |
Total loan servicing income | $ | 278 | | | $ | 831 | | | $ | (553) | | | (67) | % |
|
| Nine Months Ended September 30, | | | | |
| 2023 | | 2022 | | Change | | % Change |
Commercial and agricultural loan servicing fees(1) | $ | 1,120 | | | $ | 1,469 | | | $ | (349) | | | (24) | % |
Residential mortgage servicing fees | 493 | | | 1,391 | | | (898) | | | (65) | |
Mortgage servicing rights amortization | (210) | | | (909) | | | 699 | | | 77 | |
Total loan servicing income | $ | 1,403 | | | $ | 1,951 | | | $ | (548) | | | (28) | % |
| | | | | | | |
(1) Includes servicing fees for commercial, commercial real estate, agricultural and agricultural real estate loans. |
Trust fees
Trust fees totaled $1.2$4.7 million duringfor the third quarter of 20172023 compared to $873,000 during$5.4 million for the same quarter of 2022, a decrease of $638,000 or 12%. For the first nine months of 2023, trust fees totaled $15.8 million compared to $17.1 million for the first nine months of 2022, a decrease of $1.3 million or 8%.
The decrease for both the quarterly and year-to-date comparisons was primarily attributable to the sale of the administrative and recordkeeping services component of HTLF’s Retirement Plan Services business that was completed in the second quarter of 2023. Retirement plan services income decreased $743,000 or 50% to $746,000 for the third quarter of 2016, an increase of $288,000 or 33%. On a nine-month comparative basis, loan servicing income totaled $4.2 million during 20172023 compared to $3.4$1.5 million during 2016, an increase of $803,000 or 23%.
Duringfor the third quarter of 2017, Heartland entered into an agreement2022. For the first nine months of 2023, retirement plan services income decreased $916,000 or 19% to sell substantially all$3.8 million from $4.7 million for the first nine months 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 $6.92022.
Capital markets fees
Capital markets fees totaled $1.8 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 duringfor the third quarter of both 2023 and Heartland recorded2022. For the first nine months of 2023, capital markets fees totaled $8.3 million, a decrease of $1.4 million or 14% from $9.7 million for the first nine months of 2022. Syndication income decreased $2.2 million or 58% to $1.7 million for the first nine months of 2023 compared to $3.9 million for the same period of 2022. Swap fee income increased $857,000 or 15% to $6.7 million for the first nine months of 2023 compared to $5.8 million for the first nine months of 2022.
Capital markets fees vary, in part, based upon the size of the transaction and are recognized upon the closing of the transaction.
Securities losses, net
For the third quarter of 2023, net security losses totaled $114,000 compared to net losses of $1.1 million for the third quarter of 2022, a decrease of $941,000 or 89%. For the first nine months of 2023, net security losses totaled $1.5 million compared to net losses of $272,000 during the first nine months of 2022, an estimated loss onincrease of $1.3 million. The realized losses in 2023 for both the sale of this portfolio of approximately $183,000. A receivable of approximately $1.6 million was recorded duequarterly and year-to-date results were primarily attributable to the timingsustained loss position of the servicing transfer persecurities portfolio. During the termssecond quarter of 2022, approximately $158.7 million of lower-yielding securities were sold, resulting in a net loss of $2.6 million, and the proceeds from this sale agreement andwere used to address indemnification claims and mortgage loan documentation deficiencies.purchase higher-yielding securities.
Net Gains on Sale of Loans Held for Sale
The following table shows the activity related to the net gains on sales of loans held for sale during the three- and nine-month periods ended September 30, 2017, and 2016, in thousands:
|
| | | | | | | | | | | | | | | |
| 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
For the third quarter of 2017 compared to $11.5 million during the third quarter of 2016, a decrease of $6.5 million or 56%. During the first nine months of 2017,2023, net gains on sale of loans held for sale totaled $18.0 million compared to $33.8 million during the same period in 2016,$905,000, a decrease of $15.8$927,000 or 51% from $1.8 million or 47%. These
gains result primarily fromin the gain or loss on sales of mortgage loans into the secondary market, related fees and fair value marks on the associated derivatives. Heartland has experienced weakened demand for mortgage loan refinancings as interest rates have increased. The percentage of residential mortgage loans that represented refinancings was 31% during the thirdsame quarter of 2017 compared to 38% in the third quarter of 2016.2022. 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. Net2023, net gains on sale of loans held for sale also includes gains ontotaled $3.8 million compared to $8.1 million for the salefirst nine months of commercial and agricultural loans, which totaled $176,0002022, a decrease of $4.4 million or 54%.
Loans sold to investors during the third quarter of 20172023 totaled $57.1 million compared to $398,000$74.1 million during the third quarter of 2016. During2022, a decrease of $17.0 million or 23%. Loans sold to investors in the first nine months of 2017, gains on sale of commercial and agricultural loans2023 totaled $565,000 compared to $1.7 million during the same period in 2016.
Securities Gains, Net
Securities gains, net, totaled $1.7 million for the third quarter of 2017 compared to $1.6 million for the third quarter of 2016, which is an increase of $95,000 or 6%. For the first nine months of 2017, securities gains, net, totaled $5.6$134.8 million compared to $9.7$257.0 million during the first nine months of 2016,2022, a decrease of $4.2$122.1 million or 43%48%.
The decrease for both the quarterly and year-to-date comparisons was primarily attributable to a reduction in residential mortgage activity due to increases in residential mortgage loan interest rates.
Valuation adjustment on servicing rights
The valuation adjustment on servicing rights was $0 for both the third quarter of 2023 and 2022. For the first nine months of 2023, the valuation adjustment on servicing rights was $0 compared to $1.7 million for the first nine months of 2022. HTLF sold its mortgage servicing rights portfolio in the first quarter of 2023. HTLF recovered its valuation allowance in the first quarter of 2022 due to increases in residential mortgage loan interest rates.
Income on bank owned life insurance
Income on bank owned life insurance totaled $858,000 for the third quarter of 2023, an increase of $164,000 or 24% from $694,000 recorded in the third quarter of 2022. For the first nine months of 2023, income on bank owned life insurance totaled $3.0 million, an increase of $1.3 million from $1.7 million for the first nine months of 2022. The increase for both the quarterly and year-to-date comparisons was attributable to market value changes.
Other Noninterest Incomenoninterest income
Other noninterest income totaled $1.4 million$619,000 for the third quarter of 20172023 compared to $1.0$2.0 million for the thirdsame quarter of 2016, an increase2022, a decrease of $381,000$1.4 million or 37%69%. For the nine months 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 recorded related to recoveries2022, HTLF received a $637,000 recovery on an acquired loansloan that had been charged off prior to acquisition.
For the acquisition dates.first nine months of 2023, other noninterest income was $2.5 million compared to $5.9 million for the first nine months of 2022, a decrease of $3.4 million or 58%. The decrease was primarily attributable to gains of $1.9 million recorded in the second quarter of 2022 on the sale of all VISA Class B shares held by two subsidiary banks and the $637,000 recovery noted above.
Noninterest Expenses
The tables below show Heartland's noninterest expenses for the three- and nine-month periodsnine- months ended September 30, 20172023, and 2016,2022, 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 | % |
| | | Nine Months Ended September 30, | | | | Three Months Ended September 30, | | |
| 2017 | | 2016 | | Change | | % Change | | 2023 | | 2022 | | Change | | % Change |
Salaries and employee benefits | $ | 128,118 |
| | $ | 124,432 |
| | $ | 3,686 |
| | 3 | % | Salaries and employee benefits | $ | 62,262 | | | $ | 62,661 | | | $ | (399) | | | (1) | % |
Occupancy | 16,352 |
| | 15,322 |
| | 1,030 |
| | 7 |
| Occupancy | 6,438 | | | 6,794 | | | (356) | | | (5) | |
Furniture and equipment | 7,913 |
| | 7,301 |
| | 612 |
| | 8 |
| Furniture and equipment | 2,720 | | | 2,928 | | | (208) | | | (7) | |
Professional fees | 24,342 |
| | 20,481 |
| | 3,861 |
| | 19 |
| Professional fees | 13,616 | | | 14,289 | | | (673) | | | (5) | |
FDIC insurance assessments | 2,610 |
| | 3,468 |
| | (858 | ) | | (25 | ) | FDIC insurance assessments | 3,313 | | | 1,988 | | | 1,325 | | | 67 | |
Advertising | 5,141 |
| | 4,174 |
| | 967 |
| | 23 |
| Advertising | 1,633 | | | 1,554 | | | 79 | | | 5 | |
Core deposit intangibles and customer relationship intangibles amortization | 4,252 |
| | 4,483 |
| | (231 | ) | | (5 | ) | |
Core deposit and customer relationship intangibles amortization | | Core deposit and customer relationship intangibles amortization | 1,625 | | | 1,856 | | | (231) | | | (12) | |
Other real estate and loan collection expenses | 1,774 |
| | 1,871 |
| | (97 | ) | | (5 | ) | Other real estate and loan collection expenses | 481 | | | 304 | | | 177 | | | 58 | |
Loss on sales/valuations of assets, net | 1,642 |
| | 1,064 |
| | 578 |
| | 54 |
| |
Loss/(gain) on sales/valuations of assets, net | | Loss/(gain) on sales/valuations of assets, net | 108 | | | (251) | | | 359 | | | 143 | |
Acquisition, integration and restructuring costs | | Acquisition, integration and restructuring costs | 2,429 | | | 2,156 | | | 273 | | | 13 | |
Partnership investment in tax credit projects | | Partnership investment in tax credit projects | 1,136 | | | 979 | | | 157 | | | 16 | |
Other noninterest expenses | 27,653 |
| | 27,160 |
| | 493 |
| | 2 |
| Other noninterest expenses | 15,292 | | | 13,625 | | | 1,667 | | | 12 | |
Total noninterest expenses | $ | 219,797 |
| | $ | 209,756 |
| | $ | 10,041 |
| | 5 | % | Total noninterest expenses | $ | 111,053 | | | $ | 108,883 | | | $ | 2,170 | | | 2 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2023 | | 2022 | | Change | | % Change |
Salaries and employee benefits | $ | 186,510 | | | $ | 192,867 | | | $ | (6,357) | | | (3) | % |
Occupancy | 20,338 | | | 21,250 | | | (912) | | | (4) | |
Furniture and equipment | 8,698 | | | 9,480 | | | (782) | | | (8) | |
Professional fees | 41,607 | | | 42,286 | | | (679) | | | (2) | |
FDIC insurance assessments | 9,627 | | | 5,134 | | | 4,493 | | | 88 | |
Advertising | 6,670 | | | 4,392 | | | 2,278 | | | 52 | |
Core deposit and customer relationship intangibles amortization | 5,128 | | | 5,993 | | | (865) | | | (14) | |
Other real estate and loan collection expenses | 984 | | | 577 | | | 407 | | | 71 | |
Loss/(gain) on sales/valuations of assets, net | (2,149) | | | (3,435) | | | 1,286 | | | (37) | |
Acquisition, integration and restructuring costs | 5,994 | | | 5,144 | | | 850 | | | 17 | |
Partnership investment in tax credit projects | 1,828 | | | 1,793 | | | 35 | | | 2 | |
Other noninterest expenses | 46,307 | | | 40,678 | | | 5,629 | | | 14 | |
Total noninterest expenses | $ | 331,542 | | | $ | 326,159 | | | $ | 5,383 | | | 2 | % |
For the third quarter of 2017,2023, total noninterest expenses totaled $78.8were $111.1 million compared to $68.4$108.9 million duringfor the third quarter of 2016,2022, an increase of $10.3$2.2 million or 15%2%. For the first nine months of 2017,2023, noninterest expenses totaled $219.8$331.5 million compared to $209.8$326.2 million during the first nine months of 2016,2022, an increase of $10.0$5.4 million or 5%2%.
Notable changes in noninterest expense categories for the three- and nine- months ended September 30, 2023 and 2022 are as follows:
Salaries and Employee Benefitsemployee benefits
The largest component of noninterest expenses, salariesSalaries 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$62.3 million for the third quarter of 20172023 compared to $5.1$62.7 million for the third quarter of 2016, an increase2022, a decrease of $1.1 million$399,000 or 22%1%. For the nine-month period ending September 30, 2017, occupancy expenseThe decrease was $16.4 million, an increase of $1.0 million or 7% from the same period in 2016. The increase for both the three- and nine-month periods is primarily attributable to the additional locations acquired in the Citywide Banksa reduction of Colorado, Inc. transaction.full-time equivalent employees and lower incentive compensation expense, mostly offset by higher salary expense driven by inflationary wage pressures and competition for talent.
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% duringFor the first nine months of 20172023, salaries and employee benefits totaled $186.5 million compared to $192.9 million for the first nine months of 2016,2022, a decrease of $6.4 million or 3%, primarily asattributable to a resultreduction of a higher level of services provided to Heartlandfull-time equivalent employees and lower incentive compensation expense and partially offset by third-party advisors, including services performed in connection with mergersinflationary wage pressures and acquisitions and cloud-based applications.competition for talent.
FDIC Insurance Assessmentsinsurance assessments
FDIC insurance assessments decreased $286,000 or 24% to $894,000 duringtotaled $3.3 million for the third quarter of 2017 from $1.22023 compared to $2.0 million during the same quarter in 2016. For the nine-month periods ended September 30, 2017, and 2016, the FDIC insurance assessments were $2.6 million and $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 those 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 2016,2022, 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 Customer 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, net totaled $1.3 million compared to $794,000 for the same quarter in 2016, which is an increase of $548,000 or 69%67%. For the first nine months of 2017, loss2023, FDIC insurance assessments totaled $9.6 million compared to $5.1 million, an increase of $4.5 million or 88%. The increase for both the quarterly and year-to-date comparisons were attributable to assessment rate changes that were effective with the first quarter 2023 assessment.
HTLF is expecting an additional FDIC assessment expense associated with the special assessment that was proposed by the FDIC in May 2023. The proposal would assess a 12.5 basis point annual special assessment on the uninsured deposits reported by HTLF at December 31, 2022, which was $7.70 billion. The special assessment excludes the first $5 billion of uninsured deposits and would be in place for two years. The full expense for the two year period would be recognized upon approval of the assessment and is estimated to be approximately $3.4 million.
Advertising
Advertising totaled $1.6 million for the third quarter of 2023, an increase of $79,000 or 5% from $1.6 million for the third quarter of 2022. Advertising totaled $6.7 million for the first nine months of 2023 compared to $4.4 million for the first nine months of 2022, an increase of $2.3 million or 52%, which was primarily driven by deposit acquisition campaigns launched in 2023.
Gain on sales/valuations of assets, net increased $578,000 or 54%
Net losses on sales/valuations of assets were $108,000 for the third quarter of 2023 compared to $1.6net gains of $251,000 for the third quarter of 2022. For the first nine months of 2023, net gains on sales/valuations of assets totaled $2.1 million compared to $1.1$3.4 million for the first nine months of 2022.
In the first nine months of 2023, HTLF recorded a gain of $4.3 million associated with the sale of HTLF's Retirement Plan Services recordkeeping and administrative services business, which was partially offset by losses on various other repossessed real estate properties. HTLF recorded $813,000 of losses on fixed assets associated with branch optimization activities and a loss of $203,000 associated with the sale of the mortgage servicing rights portfolio.
During the first nine months of 2022, two branches in Illinois were sold for a gain of $3.0 million, and a gain of $413,000 was recorded in conjunction with the sale of an insurance subsidiary.
Acquisition, integration and restructuring costs
Acquisition, integration and restructuring costs totaled $2.4 million in the third quarter of 2023 compared to $2.2 million in the third quarter of 2023, an increase of $273,000 or 13%. For the first nine months of 2023, acquisition, integration and restructuring costs totaled $6.0 million compared to $5.1 million for the same period of 2022, an increase of $850,000 or 17% primarily due to charter consolidation expenses that will continue through the end of 2023.
Other noninterest expenses
Other noninterest expenses totaled $15.3 million in 2016. the third quarter of 2023 compared to $13.6 million in the third quarter of 2022, an increase of $1.7 million or 12%. Credit card processing expenses increased $1.4 million or 49% to $4.3 million from $2.9 million.
For the first nine months of 2023, other noninterest expenses totaled $46.3 million compared to $40.7 million for the first nine months of 2022, an increase of $5.6 million or 14%. Credit card processing expenses increased $2.9 million or 30% to $12.7 million from $9.8 million. Fraud losses increased $1.1 million or 58% to $3.1 million from $2.0 million.
The increaseincreases in credit card processing expenses for both the three- and nine-month periods iscomparisons were primarily attributabledue to write-downs on fixed assets associated with the Citywide Banks of Colorado, Inc. transaction.higher volumes and increased rebate expense.
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
OneDuring the third quarter of Heartland's top priorities is2023, the efficiency ratio was 63.77% (59.95% on an adjusted fully tax-equivalent basis, non-GAAP) compared to 58.84% (55.26% on an adjusted fully tax-equivalent basis, non-GAAP) for the third quarter of 2022.
During the first nine months of 2023, the efficiency ratio was 61.86% (58.98% on an adjusted fully tax-equivalent basis, non-GAAP) compared to 61.39% (58.99% on an adjusted fully tax-equivalent basis, non-GAAP) for the first nine months of 2022.
HTLF continues to pursue strategies to improve operational efficiency and its adjusted efficiency ratio, on a fully tax-equivalent basis by reducing it(non-GAAP), which include the following initiatives:
Consolidation of bank charters
Charter consolidation is designed to 65% or less. Duringeliminate redundancies and improve HTLF’s operating efficiency and capacity to support ongoing product and service enhancements as well as current and future growth. Through the end of the third quarter of 2017, Heartland's efficiency ratio, on a fully tax-equivalent basis,2023, ten charters have been consolidated into HTLF Bank, and subsequent to September 30, 2023, the final charter was 64.54%consolidated. The consolidated charters operate as divisions of HTLF Bank.
Consolidation restructuring costs are projected to be $18-$19 million with approximately $2-$3 million of expenses remaining to be incurred in comparison with 63.88% during2023, which includes expenses to complete several span of control improvements. Total costs incurred since the project started in the fourth quarter of 2021 through September 30, 2023, were $15.3 million, of which $2.4 million was incurred in the third quarter of 2016. For the nine-month period ended September 30, 2017, the efficiency ratio on a fully tax-equivalent basis increased by 35 basis points to 66.58% when compared to the same 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 timing differences that are inherent in the residential mortgage business.
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. Federal low-income housing tax credits totaling $307,000 reduced Heartland's income taxes during the third quarter of 2017. For the third quarter of 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.
Heartland's effective tax rate was 26.59%2023. Total charter consolidation costs for the first nine months of 20172023 totaled $6.0 million.
Facilities optimization initiatives
HTLF continues to review its branch network and physical facilities as part of its facilities optimization strategy, which will likely result in write-downs of fixed assets and additional restructuring costs in future periods.
Income Taxes
The effective tax rate was 21.89% for the third quarter of 2023, compared to 31.55%19.97% for the first nine monthsthird quarter of 2016. 2022. The following items impacted the third quarter 2023 and 2022 tax calculations:
•Solar energy tax credits of $844,000 compared to $1.1 million.
•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 2017$311,000 compared to federal low-income housing$519,000.
•New markets 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$90,000 compared to a partnership investment in a historic$75,000.
•Historic rehabilitation tax credit project. The levelcredits of tax-exempt$362,000 compared to $63,000.
•Tax-exempt interest income as a percentage of pre-tax income was 25.63% during the first nine months of 201713.14% compared to 19.55% during the first nine months11.45%.
•Tax expense 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 2017 included a tax benefit of $1.1 million$41,000 compared to $0 resulting from the vesting of outstanding restricted stock unit awardsunits.
•Tax expense of $1.6 million compared to $258,000 resulting from the disallowed interest expense related to tax-exempt loans and the exercise of stock options. The majority of this tax benefit was recordedsecurities, aligning with increases in the first quarter of 2017. Exclusive of this tax benefit, Heartland'stotal interest expense.
The effective tax rate for the first nine months of 2017 was 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 others and loan origination fee income. See Note 9 to the consolidated financial statements included in this Quarterly Report on Form 10-Q for further information regarding Heartland's segment reporting.
Community and Other Banking Segment
Income before taxes for the community and other banking segment for the third quarter of 2017 was $32.8 million compared to $26.7 million for the third quarter of 2016, a $6.1 million or 23% increase. For the first nine months of 2017, income before taxes for the community and other banking segment was $87.4 million compared to $85.0 million for the first nine months of 2016, a $2.4 million or 3% increase.
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, an increase of $16.1 million or 22%. For the nine-month period ended September 30, 2017, net interest income from the community and other banking segment increased $18.2 million or 8% to $234.4 million compared to $216.2 million for the first nine months of 2016. This increase was primarily attributable to additional earning assets acquired in the Founders Bancorp and Citywide Banks of Colorado, Inc. transactions.
Provision for loan losses allocable to the community and other banking segment was $5.7 million for the third quarter of 2017 compared to $5.3 million during the third quarter of 2016. For the first nine months of 2017, the provision for loan losses was $10.2 million compared to $9.5 million for the first nine months of 2016. 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-offs22.72% for the nine months ended September 30, 2017, were $9.7 million2023, compared to $3.5 million21.56% 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.
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, an increase of $2.3 million or 14%. For the first nine months of 2017, noninterest income allocable to the community and other banking segment totaled $57.0 million compared to $55.8 million during 2016, an increase of $1.2 million or 2%. Increased service charges and 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, an increase of $12.0 million or 21%. For the nine-month period ended September 30, 2017, noninterest expenses allocable to the community and other banking segment increased by $16.3 million or 9% to $193.8 million compared to $177.4 million recorded during the first nine months of 2016.2022. 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 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, a decrease of $4.2 million or 238%. For the first nine months of 2017,
the retail mortgage banking segment recorded a loss before income taxes of $3.5 million compared to income before taxes of $4.4 million during the first nine months of 2016, a decrease of $7.8 million or 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, a $5.9 million or 53% decrease. Noninterest income from the retail mortgage banking segment totaled $19.5 millionfollowing items impacted HTLF's tax calculation for the first nine months of 2017 compared to $33.4 million for the first nine months2023 and 2022:
•Solar energy tax credits of 2016, a decrease of $13.8 million or 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$1.2 million compared to $1.29 billion during the first nine months$1.8 million.
•Federal low-income housing tax credits of 2016,$932,000 compared to $789,000.
•New markets tax credits of $270,000 compared to $225,000.
•Historic rehabilitation tax credits of $787,000 compared to $190,000.
•Tax-exempt interest income as a decreasepercentage of $464.8 million or 36%.The volumepre-tax income of mortgage loans sold totaled $188.5 million during the third quarter12.57% compared to 12.17%.
•Tax expense of 2017,$115,000 compared to a $127.4 million or 40% decreasetax benefit of $129,000 resulting from the $315.9 millionvesting of mortgage loans sold during the third quarterrestricted stock units.
•Tax expense of 2016. For the first nine months of 2017, the volume of mortgage loans sold totaled $541.3$3.6 million compared to $838.7 million during$425,000 resulting from the first nine months of 2016, a $297.4 million or 35% decrease. Decreasesdisallowed interest expense related to tax-exempt loans and securities, aligning with increases in the volume of mortgage loans sold was attributable to the higher mortgagetotal interest rates during the first nine months of 2017, which significantly reduced mortgage loan refinancing activity.expense.
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, a decrease of $1.7 million or 16%. For the first nine months of 2017, noninterest expenses allocable to the retail mortgage banking segment were $26.0 million compared to $32.3 million during the first nine months of 2016, a decrease of $6.3 million or 19%. Lower expenses during the third quarter and first nine months of 2017 in comparison with the third quarter and first nine months of 2016 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 2017. Additionally, in reaction to the lower volume of mortgage loan originations, a series of workforce reductions were implemented during the first six months of 2017.
FINANCIAL CONDITION
Total assets of Heartland were $9.76$20.13 billion at September 30, 2017, an increase2023, a decrease of $1.51 billion or 18% since year-end 2016. Excluding $213.9 million of assets acquired at fair value in the Founders 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$114.4 million or 2% since1% from $20.24 billion at December 31, 2016.2022. Securities represented 24%32% and 35% of total assets at September 30, 2017,2023, and 26% of total assets at December 31, 2016.2022, respectively.
Lending Activities
LENDING ACTIVITIES
Total loans held to maturity were $6.37$11.87 billion at September 30, 2017, compared to $5.352023, and $11.43 billion at year-end 2016,December 31, 2022, an increase of $1.02 billion$444.1 million or 19%4%. This change includes $96.4 million of total loans held to maturity, at fair value, acquired
The following table shows the changes in loan balances by loan category since December 31, 2022, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 | | Change | | % Change |
Commercial and industrial | $ | 3,591,809 | | | $ | 3,464,414 | | | $ | 127,395 | | | 4 | % |
Paycheck Protection Program ("PPP") | 3,750 | | 11,025 | | (7,275) | | | (66) | |
Owner occupied commercial real estate | 2,429,659 | | 2,265,307 | | 164,352 | | | 7 | |
Non-owner occupied commercial real estate | 2,656,358 | | 2,330,940 | | 325,418 | | | 14 | |
Real estate construction | 1,029,554 | | 1,076,082 | | (46,528) | | | (4) | |
Agricultural and agricultural real estate | 842,116 | | 920,510 | | (78,394) | | | (9) | |
Residential mortgage | 813,803 | | 853,361 | | (39,558) | | | (5) | |
Consumer | 505,387 | | 506,713 | | (1,326) | | | — | |
Total loans held to maturity | $ | 11,872,436 | | | $ | 11,428,352 | | | $ | 444,084 | | | 4 | % |
The loan growth in the Founders Bancorp transactionfirst nine months of 2023 was primarily in commercial and $985.4 million of total loans heldcommercial real estate, which was attributable 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 year-end 2016. Excluding the loans acquired in the Citywide Banks of Colorado, Inc. transaction, total loans held to maturity increased $62.9 million during the third quarter of 2017, and six of the Heartland bank subsidiaries experienced netan emphasis on organic loan growth during the quarter. Price competition for quality loans remains intense, and Heartland remains committed to its pricing strategy, disciplined credit approachfurther market penetration in various HTLF growth markets. The growth was partially offset by decreases in real estate construction, agricultural and emphasis on the client relationship.agricultural real estate and residential mortgage.
The table below presents the composition of the loan portfolio as of September 30, 2017,2023, and December 31, 2016,2022, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| Amount | | Percent | | Amount | | Percent |
Loans receivable held to maturity: | | | | | | | |
Commercial and industrial | $ | 3,591,809 | | | 30.27 | % | | $ | 3,464,414 | | | 30.31 | % |
PPP | 3,750 | | 0.03 | | | 11,025 | | 0.10 | |
Owner occupied commercial real estate | 2,429,659 | | 20.46 | | | 2,265,307 | | 19.82 | |
Non-owner occupied commercial real estate | 2,656,358 | | 22.37 | | | 2,330,940 | | 20.40 | |
Real estate construction | 1,029,554 | | 8.67 | | | 1,076,082 | | 9.42 | |
Agricultural and agricultural real estate | 842,116 | | | 7.09 | | | 920,510 | | | 8.05 | |
Residential mortgage | 813,803 | | | 6.85 | | | 853,361 | | | 7.47 | |
Consumer | 505,387 | | | 4.26 | | | 506,713 | | | 4.43 | |
Gross loans receivable held to maturity | 11,872,436 | | | 100.00 | % | | 11,428,352 | | | 100.00 | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Allowance for credit losses-loans | (110,208) | | | | | (109,483) | | | |
Loans receivable, net | $ | 11,762,228 | | | | | $ | 11,318,869 | | | |
|
| | | | | | | | | | | | | |
LOAN PORTFOLIO | September 30, 2017 | | December 31, 2016 |
| Amount | | Percent | | Amount | | Percent |
Loans receivable held to maturity: | | | | | | | |
Commercial | $ | 1,613,903 |
| | 25.31 | % | | $ | 1,287,265 |
| | 24.04 | % |
Commercial real estate | 3,163,953 |
| | 49.63 |
| | 2,538,582 |
| | 47.42 |
|
Agricultural and agricultural real estate | 511,764 |
| | 8.03 |
| | 489,318 |
| | 9.14 |
|
Residential mortgage | 635,611 |
| | 9.97 |
| | 617,924 |
| | 11.54 |
|
Consumer | 450,088 |
| | 7.06 |
| | 420,613 |
| | 7.86 |
|
Gross loans receivable held to maturity | 6,375,319 |
| | 100.00 | % | | 5,353,702 |
| | 100.00 | % |
Unearned discount | (605 | ) | | | | (699 | ) | | |
Deferred loan fees | (1,299 | ) | | | | (1,284 | ) | | |
Total net loans receivable held to maturity | 6,373,415 |
| | | | 5,351,719 |
| | |
Allowance for loan losses | (54,885 | ) | | | | (54,324 | ) | | |
Loans receivable, net | $ | 6,318,530 |
| | | | $ | 5,297,395 |
| |
|
|
ALLOWANCE FOR CREDIT LOSSES
Loans secured by real estate, either fully or partially, totaled $4.25 billion or 67% of gross loans at September 30, 2017. 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 are owner occupied. The largest categories of Heartland's real estate secured loans at September 30, 2017, and December 31, 2016, are listed below, in thousands:
|
| | | | | | | |
LOANS SECURED BY REAL ESTATE |
| September 30, 2017 | | December 31, 2016 |
Residential real estate, excluding residential construction and residential lot loans | $ | 989,112 |
| | $ | 1,030,190 |
|
Industrial, manufacturing, business and commercial | 461,281 |
| | 474,632 |
|
Agriculture | 254,315 |
| | 255,046 |
|
Retail | 350,888 |
| | 332,009 |
|
Office | 335,057 |
| | 347,334 |
|
Land development and lots | 132,625 |
| | 127,700 |
|
Hotel, resort and hospitality | 163,076 |
| | 151,571 |
|
Multi-family | 185,634 |
| | 185,559 |
|
Food and beverage | 107,846 |
| | 102,225 |
|
Warehousing | 125,231 |
| | 120,471 |
|
Health services | 132,785 |
| | 147,412 |
|
Residential construction | 93,968 |
| | 143,962 |
|
All other | 169,912 |
| | 172,617 |
|
Loans acquired in the quarter | 775,587 |
| | — |
|
Purchase accounting valuations | (30,806 | ) | | (17,559 | ) |
Total loans secured by real estate | $ | 4,246,511 |
| | $ | 3,573,169 |
|
Allowance For Loan Losses
The process utilized by HeartlandHTLF to determine the appropriateness of the allowance for loan andcredit losses is considered a critical accounting practice for Heartland and has remained consistent over the past several years.practice. The allowance for loancredit losses represents management's estimate of identified and unidentified probablelifetime losses in the existing loan portfolio. For additional details on the specific factors considered in determining the allowance for loancredit losses, refer to the critical accounting policiesestimates section of ourHTLF's Annual Report on Form 10-K for the year ended December 31, 2016.2022.
Nonperforming loans were $65.8
Total Allowance for Lending Related Credit Losses
The total allowance for lending related credit losses was $127.7 million or 1.03% of total loans at September 30, 2017,2023, which was 1.08% of loans, compared to $64.4$129.7 million or 1.20%1.13% of total loans at December 31, 2016. At2022. The following table shows, in thousands, the components of the allowance for lending related credit losses as of September 30, 2017, approximately $29.62023, and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 | |
| Amount | | % of Allowance | | Amount | | % of Allowance | |
Quantitative | $ | 88,482 | | | 69.30 | % | | $ | 84,409 | | | 65.09 | % | |
Qualitative/Economic Forecast | 39,206 | | | 30.70 | | | 45,270 | | | 34.91 | | |
| | | | | | | | |
Total | $ | 127,688 | | | 100.00 | % | | $ | 129,679 | | | 100.00 | % | |
Quantitative Allowance
The quantitative allowance increased $4.1 million or 45%5% to $88.5 million or 69% of Heartland's nonperformingthe total allowance for lending related credit losses at September 30, 2023, compared to $84.4 million or 65% of the total allowance at December 31, 2022. Specific reserves for individually assessed loans had individual loan balances exceeding $1.0 million and represented loans to eight borrowers. The portion of Heartland's
nonperforming loans covered by government guarantees was $23.2totaled $9.0 million at September 30, 2017, and $17.32023, an increase of $1.9 million or 26% from $7.1 million at December 31, 2016,2022.
Qualitative Allowance/Economic Forecast
The qualitative allowance totaled $39.2 million or 31% of the total allowance for lending related credit losses at September 30, 2023, compared to $45.3 million or 35% at December 31, 2022.
HTLF has access to various third-party economic forecast scenarios provided by Moody's, which includes $16.2 millionare updated quarterly in HTLF's methodology. HTLF continued to use a one year reasonable and $14.3 million, respectively, of repurchased residential real estate loans.supportable forecast period. At September 30, 2023, Moody's September 11, 2023, baseline forecast scenario was utilized, and management considered other downside forecast scenarios in addition to the baseline forecast to support the macroeconomic outlook used in the allowance for credit losses calculation.
During HTLF's annual methodology update in the third quarter of 2017, Heartland sold substantially all2023, management made some enhancements to the methodology, resulting in a shift of its GNMA loan servicing portfolio, which contained loans with an unpaid principal balance of approximately $773.9 million.allowance composition. The sale effectively eliminates Heartland's obligation, as a GNMA loan servicer, to repurchase any additional non-performing government guaranteed residential real estate loans fromquantitative calculation increased while 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.qualitative/economic forecast calculation decreased.
Allowance for Credit Losses-Loans
The allowance for loan losses was 0.86% of loans at September 30, 2017, compared to 1.02% at December 31, 2016, and 83.41% and 84.37% of nonperforming loans at September 30, 2017, and December 31, 2016, respectively. Excluding the acquired loans covered by the valuation reserves, the ratio of the allowance for loan losses to outstanding loans was 1.17% at September 30, 2017, and 1.22% at December 31, 2016. At September 30, 2017, valuation reserves totaled $42.8 million and covered $1.75 billion of acquired loans. At December 31, 2016, valuation reserves totaled $25.3 million and covered $956.0 million of acquired loans.
Loans delinquent 30 to 89 days as a percent of total loans was 0.33% at September 30, 2017, in comparison with 0.37% at December 31, 2016.
The tabletables below presentspresent the changes in the allowance for loancredit losses for loans during the three- and nine-month periodsnine- months ended September 30, 20172023 and 2016,2022, in thousands:
| | | | | | | | | | | |
| Three Months Ended September 30, |
| 2023 | | 2022 |
Balance at beginning of period | $ | 111,198 | | | $ | 101,353 | |
| | | |
Provision for credit losses | 2,672 | | | 4,388 | |
Recoveries on loans previously charged off | 302 | | | 912 | |
Charge-offs on loans | (3,964) | | | (938) | |
Balance at end of period | $ | 110,208 | | | $ | 105,715 | |
Allowance for credit losses for loans as a percent of loans | 0.93 | % | | 0.97 | % |
Annualized ratio of net charge-offs to average loans | 0.12 | % | | 0.00 | % |
| | | |
| | ANALYSIS OF ALLOWANCE FOR LOAN LOSSES | Three Months Ended September 30, | |
| 2017 | | 2016 | |
Balance at beginning of period | $ | 54,051 |
| | $ | 51,756 |
| |
Provision for loan losses | 5,705 |
| | 5,328 |
| |
Recoveries on loans previously charged off | 888 |
| | 852 |
| |
Charge-offs on loans | (5,759 | ) | | (3,283 | ) | |
Balance at end of period | $ | 54,885 |
| | $ | 54,653 |
| |
Annualized ratio of net charge offs to average loans | 0.31 | % | | 0.17 | % | |
| | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2023 | | 2022 |
Balance at beginning of period | $ | 54,324 |
| | $ | 48,685 |
| Balance at beginning of period | $ | 109,483 | | | $ | 110,088 | |
Provision for loan losses | 10,235 |
| | 9,513 |
| |
| Provision for credit losses | | Provision for credit losses | 12,685 | | | 8,561 | |
Recoveries on loans previously charged off | 2,569 |
| | 4,294 |
| Recoveries on loans previously charged off | 3,768 | | | 2,694 | |
Charge-offs on loans | (12,243 | ) | | (7,839 | ) | Charge-offs on loans | (15,728) | | | (15,628) | |
Balance at end of period | $ | 54,885 |
| | $ | 54,653 |
| Balance at end of period | $ | 110,208 | | | $ | 105,715 | |
Annualized ratio of net charge offs to average loans | 0.23 | % | | 0.09 | % | |
Allowance for credit losses for loans as a percent of loans | | Allowance for credit losses for loans as a percent of loans | 0.93 | % | | 0.97 | % |
Annualized ratio of net charge-offs to average loans | | Annualized ratio of net charge-offs to average loans | 0.14 | % | | 0.17 | % |
The allowance for credit losses for loans totaled $110.2 million at September 30, 2023, compared to $109.5 million at December 31, 2022, and $105.7 million at September 30, 2022. The allowance for credit losses for loans at September 30, 2023, was 0.93% of loans compared to 0.96% of loans at December 31, 2022. The following items impacted the allowance for credit losses for loans for the nine months ended September 30, 2023:
•Net charge-offs for the first nine months of 2023 totaled $12.0 million compared to net charge-offs of $12.9 million for the first nine months of 2022, a decrease of $974,000. Included in net charge-offs for the first nine months of 2023 was a $5.3 million charge-off related to an overdraft, the result of a fraud incident impacting the account of a single long-term customer. Included in net charge-offs for the first nine months of 2022 were two charge-offs due to customer fraud totaling $9.2 million related to two lending relationships which had collateral deficiencies.
•Provision expense totaling $2.6 million was recorded for an individually assessed loan in the first quarter of 2023.
•Loan growth totaled $444.1 million for the first nine months of 2023.
The following tables show, in thousands, the changes in the allowance for unfunded commitments for the three and nine months ended September 30, 2023 and 2022:
| | | | | | | | | | | | | |
| Three Months Ended September 30, | | |
| 2023 | | 2022 | | |
Balance at beginning of period | $ | 18,636 | | | $ | 17,780 | | | |
(Benefit) provision for credit losses | (1,156) | | | 1,104 | | | |
Balance at end of period | $ | 17,480 | | | $ | 18,884 | | | |
| | | | | |
| Nine Months Ended September 30, | | |
| 2023 | | 2022 | | |
Balance at beginning of period | $ | 20,196 | | | $ | 15,462 | | | |
| | | | | |
| | | | | |
(Benefit) provision for credit losses | (2,716) | | | 3,422 | | | |
Balance at end of period | $ | 17,480 | | | $ | 18,884 | | | |
The allowance for unfunded commitments totaled $17.5 million as of September 30, 2023, compared to $20.2 million as of December 31, 2022, and $18.9 million as of September 30, 2022. The decrease in the allowance for unfunded commitments in the first nine months of 2023 was primarily due to a reduction of $85.6 million in unfunded commitments for construction loans, which carry the highest loss rate. Total unfunded commitments increased $84.1 million or 2% to $4.81 billion at September 30, 2023, compared to $4.73 billion at December 31, 2022.
CREDIT QUALITY AND NONPERFORMING ASSETS
The internal rating system for the credit quality of its loans 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 and 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. For more information on this internal rating system, see Note 3, "Loans" of the consolidated financial statements in this Quarterly Report on Form 10-Q.
The nonpass loans totaled $535.7 million or 4.5% of total loans as of September 30, 2023, compared to $533.3 million or 4.7% of total loans as of December 31, 2022. As of September 30, 2023, the nonpass loans consisted of approximately 53% watch loans and 47% substandard loans compared to approximately 48% watch loans and 52% substandard loans as of December 31, 2022. The percent of nonpass loans on nonaccrual status as of September 30, 2023, was 10%.
The table below presents the amounts of nonperforming loans and other nonperforming assets on the dates indicated, in thousands:
| | | | | | | | | | | | September 30, | | December 31, |
NONPERFORMING ASSETS | September 30, | | December 31, | |
| 2017 | | 2016 | | 2016 | | 2015 | | 2023 | | 2022 | | 2022 | | 2021 |
Nonaccrual loans | $ | 63,456 |
| | $ | 57,799 |
| | $ | 64,299 |
| | $ | 39,655 |
| Nonaccrual loans | $ | 51,304 | | | $ | 64,560 | | | $ | 58,231 | | | $ | 69,369 | |
Loans contractually past due 90 days or more | 2,348 |
| | 105 |
| | 86 |
| | — |
| Loans contractually past due 90 days or more | 511 | | | 678 | | | 273 | | | 550 | |
Total nonperforming loans | 65,804 |
| | 57,904 |
| | 64,385 |
| | 39,655 |
| Total nonperforming loans | 51,815 | | | 65,238 | | | 58,504 | | | 69,919 | |
Other real estate | 13,226 |
| | 10,740 |
| | 9,744 |
| | 11,524 |
| Other real estate | 14,362 | | | 8,030 | | | 8,401 | | | 1,927 | |
Other repossessed assets | 773 |
| | 821 |
| | 663 |
| | 485 |
| Other repossessed assets | 1 | | | — | | | 26 | | | 43 | |
Total nonperforming assets | $ | 79,803 |
| | $ | 69,465 |
| | $ | 74,792 |
| | $ | 51,664 |
| Total nonperforming assets | $ | 66,178 | | | $ | 73,268 | | | $ | 66,931 | | | $ | 71,889 | |
Performing troubled debt restructured loans(1) | $ | 10,040 |
| | $ | 10,281 |
| | $ | 10,380 |
| | $ | 11,075 |
| |
| Nonperforming loans to total loans | 1.03 | % | | 1.06 | % | | 1.20 | % | | 0.79 | % | Nonperforming loans to total loans | 0.44 | % | | 0.60 | % | | 0.51 | % | | 0.70 | % |
Nonperforming assets to total loans plus repossessed property | 1.25 | % | | 1.27 | % | | 1.39 | % | | 1.03 | % | Nonperforming assets to total loans plus repossessed property | 0.56 | | | 0.67 | | | 0.59 | | | 0.72 | |
Nonperforming assets to total assets | 0.82 | % | | 0.85 | % | | 0.91 | % | | 0.67 | % | Nonperforming assets to total assets | 0.33 | | | 0.37 | | | 0.33 | | | 0.37 | |
| | | | | | | | |
(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 2017three- and the first ninenine- months of 2017,ended September 30, 2023, in thousands:
| | | | | | | | | | | | 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, 2017 | $ | 66,091 |
| | $ | 9,269 |
| | $ | 675 |
| | $ | 76,035 |
| |
June 30, 2023 | | June 30, 2023 | $ | 63,415 | | | $ | 2,677 | | | $ | 5 | | | $ | 66,097 | |
Loan foreclosures | (425 | ) | | 408 |
| | 17 |
| | — |
| Loan foreclosures | (12,542) | | | 12,537 | | | 5 | | | — | |
Net loan charge-offs | (4,871 | ) | | — |
| | — |
| | (4,871 | ) | Net loan charge-offs | (3,662) | | | — | | | — | | | (3,662) | |
Acquired nonperforming assets | 1,075 |
| | 6,916 |
| | — |
| | 7,991 |
| |
| New nonperforming loans | 9,117 |
| | — |
| | — |
| | 9,117 |
| New nonperforming loans | 19,295 | | | — | | | — | | | 19,295 | |
Reduction of nonperforming loans(1) | (5,183 | ) | | — |
| | — |
| | (5,183 | ) | Reduction of nonperforming loans(1) | (14,691) | | | — | | | — | | | (14,691) | |
OREO/Repossessed assets sales proceeds | — |
| | (3,315 | ) | | (13 | ) | | (3,328 | ) | OREO/Repossessed assets sales proceeds | — | | | (589) | | | (6) | | | (595) | |
OREO/Repossessed assets writedowns, net | — |
| | (52 | ) | | (4 | ) | | (56 | ) | OREO/Repossessed assets writedowns, net | — | | | (263) | | | (3) | | | (266) | |
Net activity at Citizens Finance Co. | — |
| | — |
| | 98 |
| | 98 |
| |
September 30, 2017 | $ | 65,804 |
| | $ | 13,226 |
| | $ | 773 |
| | $ | 79,803 |
| |
| September 30, 2023 | | September 30, 2023 | $ | 51,815 | | | $ | 14,362 | | | $ | 1 | | | $ | 66,178 | |
| | | | | | | | | | | | | | | |
(1) Includes principal reductions and transfers to performing status. | (1) Includes principal reductions and transfers to performing status. | (1) Includes principal reductions and transfers to performing status. |
|
| | | | | | | | | | | | | | | |
| Nonperforming Loans | | Other Real Estate Owned | | Other Repossessed Assets | | Total Nonperforming Assets |
December 31, 2016 | $ | 64,385 |
| | $ | 9,744 |
| | $ | 663 |
| | $ | 74,792 |
|
Loan foreclosures | (4,955 | ) | | 4,710 |
| | 245 |
| | — |
|
Net loan charge-offs | (9,674 | ) | | — |
| | — |
| | (9,674 | ) |
Acquired nonperforming assets | 1,075 |
| | 6,916 |
| | — |
| | 7,991 |
|
New nonperforming loans | 37,636 |
| | — |
| | — |
| | 37,636 |
|
Reduction of nonperforming loans(1) | (22,663 | ) | | — |
| | — |
| | (22,663 | ) |
OREO/Repossessed assets sales proceeds | — |
| | (7,560 | ) | | (217 | ) | | (7,777 | ) |
OREO/Repossessed assets writedowns, net | — |
| | (584 | ) | | (10 | ) | | (594 | ) |
Net activity at Citizens Finance Co. | — |
| | — |
| | 92 |
| | 92 |
|
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, 2022 | $ | 58,504 | | | $ | 8,401 | | | $ | 26 | | | $ | 66,931 | |
Loan foreclosures | (12,800) | | | 12,776 | | | 24 | | | — | |
Net loan charge-offs | (11,960) | | | — | | | — | | | (11,960) | |
| | | | | | | |
New nonperforming loans | 43,726 | | | — | | | — | | | 43,726 | |
Reduction of nonperforming loans(1) | (25,655) | | | — | | | — | | | (25,655) | |
OREO/Repossessed assets sales proceeds | — | | | (5,636) | | | (36) | | | (5,672) | |
OREO/Repossessed assets writedowns, net | — | | | (1,179) | | | (13) | | | (1,192) | |
| | | | | | | |
September 30, 2023 | $ | 51,815 | | | $ | 14,362 | | | $ | 1 | | | $ | 66,178 | |
| | | | | | | |
(1) Includes principal reductions and transfers to performing status. |
Securities
The composition of Heartland's securities portfolio is managedTotal nonperforming assets decreased $753,000 or 1% 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% $66.2 million or 0.33% of total assets at September 30, 2017,2023, compared to $66.9 million or 0.33% of total assets at December 31, 2022. Nonperforming loans were $51.8 million at September 30, 2023, compared to $58.5 million at December 31, 2022, which represented 0.44% and 0.51% of total loans at September 30, 2023, and December 31, 2016,2022, respectively. At September 30, 2023, approximately $33.6 million or 65% of HTLF's nonperforming loans had individual loan balances exceeding $1.0 million and represented loans to twelve borrowers. The portion of the nonperforming nonresidential real estate loans covered by government guarantees totaled $10.4 million and $12.5 million at September 30, 2023, and December 31, 2022, respectively.
Other real estate owned, net, increased $6.0 million or 71% to $14.4 million at September 30, 2023 from $8.4 million at December 31, 2022. HTLF added one property with a book value of $11.3 million to other real estate, net, during the third quarter of 2023.
SECURITIES
The composition of the securities portfolio is managed to meet liquidity needs while maximizing the return on the portfolio within the established HTLF risk appetite parameters and in consideration of the impact it has on HTLF's asset/liability position. Securities represented 32% and 35% of total assets at September 30, 2023, and December 31, 2022, respectively. Total available for sale securities carried at fair value as of September 30, 2017,2023, were $2.09$5.48 billion, an increasea decrease of $247.5$664.5 million or 13%11% from $1.85$6.15 billion at December 31, 2016. The increase is primarily attributable2022.
As of September 30, 2023, and December 31, 2022, securities with a carrying value of $2.66 billion and $1.49 billion, respectively, were pledged to the Citywide Bankssecure public and trust deposits, short-term borrowings and for other purposes as required or permitted by law. As of Colorado, Inc. transaction completed in the third quarterSeptember 30, 2023, approximately $3.64 billion of 2017.securities remained available to pledge.
The table below presents the composition of the securities portfolio, including available for sale,securities carried at fair value, held to maturity securities, net of allowance for credit losses, and other, by major category, as of September 30, 2017,2023, and December 31, 2016,2022, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 | |
| Amount | | Percent | | Amount | | Percent | |
U.S. treasuries | $ | 31,805 | | | 0.50 | % | | $ | 31,699 | | | 0.45 | % | |
U.S. agencies | 41,104 | | | 0.64 | | | 43,135 | | | 0.61 | | |
Obligations of states and political subdivisions | 1,610,155 | | | 25.13 | | | 1,708,840 | | | 24.24 | | |
Mortgage-backed securities - agency | 1,594,395 | | | 24.88 | | | 1,772,105 | | | 25.13 | | |
Mortgage-backed securities - non-agency | 1,895,080 | | | 29.57 | | | 2,181,876 | | | 30.94 | | |
Commercial mortgage-backed securities - agency | 81,444 | | | 1.27 | | | 85,123 | | | 1.21 | | |
Commercial mortgage-backed securities - non-agency | 602,433 | | | 9.40 | | | 659,459 | | | 9.35 | | |
Asset-backed securities | 384,379 | | | 6.00 | | | 416,054 | | | 5.90 | | |
Corporate bonds | 56,522 | | | 0.88 | | | 57,942 | | | 0.82 | | |
| | | | | | | | |
Equity securities with a readily determinable fair value | 20,838 | | | 0.33 | | | 20,314 | | | 0.29 | | |
Other securities | 90,001 | | | 1.40 | | | 74,567 | | | 1.06 | | |
Total securities | $ | 6,408,156 | | | 100.00 | % | | $ | 7,051,114 | | | 100.00 | % | |
|
| | | | | | | | | | | | | |
SECURITIES PORTFOLIO COMPOSITION | September 30, 2017 | | December 31, 2016 |
| Amount | | Percent | | Amount | | Percent |
U.S. government corporations and agencies | $ | 7,415 |
| | 0.31 | % | | $ | 4,700 |
| | 0.22 | % |
Mortgage-backed securities | 1,565,400 |
| | 65.97 |
| | 1,290,500 |
| | 60.56 |
|
Obligation of states and political subdivisions | 760,329 |
| | 32.04 |
| | 799,806 |
| | 37.53 |
|
Equity securities | 16,596 |
| | 0.70 |
| | 14,520 |
| | 0.68 |
|
Other securities | 23,176 |
| | 0.98 |
| | 21,560 |
| | 1.01 |
|
Total securities | $ | 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 September 30, 2017, compared to 61% at December 31, 2016. Approximately 74% of Heartland's mortgage-backed securities were issued by government-sponsored enterprises at September 30, 2017. Heartland'sHTLF's securities portfolio had an expected modified duration of 4.836.12 years as of September 30, 2017, compared to 4.342023, and 6.19 years at year-end 2016.as of December 31, 2022.
The Volcker Rule, which went into effect July 21, 2017, prohibits insured depository institutions and their holding companies from engaging in proprietary trading of securities, derivatives and certain other financial instruments for the entity's own account, and prohibits certain interests in, or relationships with, a hedge fund or private equity fund. Heartland did not engage in any significant amount of proprietary trading, as defined in the Volcker Rule, and 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 significant effect on its financial condition or results of operations.
At September 30, 2017, Heartland2023, HTLF had $23.2$90.0 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 thesestock. These securities were classified as other securities heldare recorded on the consolidated balance sheets in Securities: Other investments, at cost.
DepositsDEPOSITS
Total deposits were $8.23$17.10 billion as of September 30, 2017,2023, compared to $6.85$17.51 billion at December 31, 2022, a decrease of $412.0 million or 2%. As of September 30, 2023, 64% of HTLF's deposits were insured or collateralized.
HTLF maintains a granular and diverse deposit base. As of September 30, 2023, no Bank Market represented more than 13% of total customers deposits, and no major industry represented more than 10% of total commercial customer deposits.
The following table shows the changes in deposit balances by deposit type since year-end 2016, an increase2022, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 | | Change | | % Change |
Demand-customer | $ | 4,792,813 | | | $ | 5,701,340 | | | $ | (908,527) | | | (16) | % |
Savings-customer | 8,190,430 | | | 8,670,898 | | | (480,468) | | | (6) | |
Savings-wholesale and institutional | 564,481 | | | 1,323,493 | | | (759,012) | | | (57) | |
Total savings | 8,754,911 | | | 9,994,391 | | | (1,239,480) | | | (12) | |
Time-customer | 1,814,335 | | | 851,539 | | | 962,796 | | | 113 | |
Time-wholesale | 1,738,934 | | | 965,739 | | | 773,195 | | | 80 | |
Total time | 3,553,269 | | | 1,817,278 | | | 1,735,991 | | | 96 | |
Total deposits | $ | 17,100,993 | | | $ | 17,513,009 | | | $ | (412,016) | | | (2) | % |
| | | | | | | |
Total customer deposits | $ | 14,797,578 | | | $ | 15,223,777 | | | $ | (426,199) | | | (3) | % |
Total wholesale and institutional deposits | 2,303,415 | | | 2,289,232 | | | 14,183 | | | 1 | % |
Total deposits | $ | 17,100,993 | | | $ | 17,513,009 | | | $ | (412,016) | | | (2) | % |
At September 30, 2023, HTLF had $2.30 billion of $1.38wholesale and institutional deposits, of which $564.5 million was included in savings deposits and $1.74 billion or 20%. This increasewas included $181.5in time deposits. HTLF had $1.32 billion of wholesale savings and institutional deposits and $965.7 million of wholesale time 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, 2016.2022.
The table below presents in thousands, the composition of Heartland's deposits by category as of September 30, 2017,2023, and December 31, 2016:2022, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| Amount | | Percent | | Amount | | Percent |
Demand-customer | $ | 4,792,813 | | | 28.03 | % | | $ | 5,701,340 | | | 32.55 | % |
Savings-customer | 8,190,430 | | | 47.89 | | | 8,670,898 | | | 49.52 | |
Savings-wholesale and institutional | 564,481 | | | 3.30 | | | 1,323,493 | | | 7.56 | |
Time-customer | 1,814,335 | | | 10.61 | | | 851,539 | | | 4.86 | |
Time-wholesale | 1,738,934 | | | 10.17 | | | 965,739 | | | 5.51 | |
Total | $ | 17,100,993 | | | 100.00 | % | | $ | 17,513,009 | | | 100.00 | % |
|
| | | | | | | | | | | | | |
DEPOSITS | September 30, 2017 | | December 31, 2016 |
| Amount | | Percent | | Amount | | Percent |
Demand | $ | 3,009,940 |
| | 36.56 | % | | $ | 2,202,036 |
| | 32.16 | % |
Savings | 4,227,340 |
| | 51.36 |
| | 3,788,089 |
| | 55.32 |
|
Time | 994,604 |
| | 12.08 |
| | 857,286 |
| | 12.52 |
|
Total | $ | 8,231,884 |
| | 100.00 | % | | $ | 6,847,411 |
| | 100.00 | % |
SHORT-TERM BORROWINGS
Demand deposits totaled $3.01 billion at September 30, 2017, an increase of $807.9 million or 37% since year-end 2016, with $626.7 million of the increase attributable to the Founders Bancorp and Citywide Banks of Colorado, Inc. transactions. Excluding demand deposits acquired in these transactions, demand deposits increased $181.2 million or 8% since year-end 2016. Savings
deposits increased $439.3 million or 12% to $4.23 billion at September 30, 2017 from $3.79 billion at December 31, 2016. Excluding savings deposits of $619.0 million acquired in the Founders Bancorp and Citywide Banks of Colorado, Inc. transactions, savings deposits decreased $179.7 million or 5% since year-end 2016. Time deposits increased $137.3 million or 16% since December 31, 2016, and exclusive of $145.9 million of time deposits acquired in 2017, time deposits decreased $8.6 million or 1% since year-end 2016.
Short-Term Borrowings
Short-term borrowings, which HeartlandHTLF defines as borrowings with an original maturity of one year or less, were as follows as of September 30, 2017,2023, and December 31, 2016,2022, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 | | Change | | % Change |
Securities sold under agreement to repurchase | $ | 29,124 | | | $ | 95,303 | | | $ | (66,179) | | | (69) | % |
| | | | | | | |
Advances from the FHLB | 351,772 | | | 50,000 | | | 301,772 | | | 604 | |
Advances from the federal discount window | — | | | 224,000 | | | (224,000) | | | (100) | |
Other short-term borrowings | 11,738 | | | 6,814 | | | 4,924 | | | 72 | |
Total | $ | 392,634 | | | $ | 376,117 | | | $ | 16,517 | | | 4 | % |
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Securities sold under agreement to repurchase | $ | 133,985 |
| | $ | 229,555 |
|
Federal funds purchased | 2,400 |
| | 40,200 |
|
Advances from the FHLB | 25,000 |
| | 30,367 |
|
Notes payable to unaffiliated banks | 5,000 |
| | — |
|
Other short-term borrowings | 5,486 |
| | 6,337 |
|
Total | $ | 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 alternativessources are utilized in varying degrees depending on their pricing and availability. All of Heartland's bank subsidiariesThe Banks own FHLB stock in one ofeither the Chicago, Dallas,Topeka or Des Moines San Francisco or Topeka FHLBs,FHLB, enabling them to borrow funds from their respective FHLB for short-short-term or long-term purposes under a variety of programs. The amount of short-termShort-term borrowings of Heartland was $171.9totaled $392.6 million at September 30, 2017,2023, compared to $306.5$376.1 million at year-end 2016, a decreaseDecember 31, 2022, an increase of $134.6$16.5 million or 44%4%.
The Banks have pledged securities that provided borrowing capacity totaling $613.1 million as of September 30, 2023, to the BTFP, a Federal Reserve Bank program created in the first quarter of 2023 to assist banks in meeting all the liquidity needs of depositors. There have been no advances from the BTFP since the inception of the Heartland bank subsidiariesprogram.
The Banks 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.tool. 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 $134.0$29.1 million at September 30, 2017,2023, compared to $229.6$95.3 million at December 31, 2016,2022, a decrease of $95.6$66.2 million or 42%69%. In addition to seasonal fluctuations, these balances declined as a result
HTLF renewed its revolving credit line agreement with an unaffiliated bank on June 14, 2022. This revolving credit line agreement, which has $100.0 million 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.
Alsoborrowing capacity, is included in short-term borrowings, is a $25.0 million revolvingand the primary purpose of this credit line agreement Heartland has with an unaffiliated bank, primarilyis to provide liquidity to Heartland. The borrowing capacityliquidity. No advances occurred on this revolving credit line was increased from $20.0 million to $25.0 million on June 14, 2017. Duringduring the third quarterfirst nine months of 2017, Heartland had advances of $20.0 million2023, and repayments of $15.0 million on this line. Thethe outstanding balance was $0 at both September 30, 2017, was $5.0 million compared to $0 at2023, and December 31, 2016.2022.
OTHER BORROWINGS
Other Borrowings
The outstanding balances of other borrowings, which HeartlandHTLF 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, 2017,2023, and December 31, 2016:2022, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 | | Change | | % Change |
Advances from the FHLB | $ | — | | | $ | 740 | | | $ | (740) | | | (100) | % |
| | | | | | | |
Trust preferred securities | 148,595 | | | 148,284 | | | 311 | | | — | |
| | | | | | | |
| | | | | | | |
Contracts payable | 80 | | | 82 | | | (2) | | | (2) | |
Subordinated notes | 223,384 | | | 222,647 | | | 737 | | | — | |
| | | | | | | |
Total | $ | 372,059 | | | $ | 371,753 | | | $ | 306 | | | — | % |
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Advances from the FHLB | $ | 6,771 |
| | $ | 6,975 |
|
Wholesale repurchase agreements | 30,000 |
| | 30,000 |
|
Trust preferred securities | 137,222 |
| | 115,232 |
|
Senior notes | 11,000 |
| | 16,000 |
|
Note payable to unaffiliated bank | 34,667 |
| | 37,667 |
|
Contracts payable for purchase of real estate and other assets | 1,965 |
| | 2,339 |
|
Subordinated notes | 73,964 |
| | 73,857 |
|
Other borrowings | 5,884 |
| | 6,464 |
|
Total | $ | 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, 2017, the amount of other borrowings was $301.5 million, an increase of $12.9 million or 4% since year-end 2016.
At September 30, 2017, $137.2 million of trust preferred securities were outstanding compared to $115.2 million outstanding at December 31, 2016, which is an increase of $22.0 million or 19%. Heartland acquired $21.6 million of trust preferred securities at fair value in the Citywide Banks of Colorado, Inc. transaction.
Heartland has a non-revolving credit facility with an unaffiliated bank, which provides a borrowing capacity of up to $75.0 million. At September 30, 2017, $34.7 million was outstanding on this non-revolving credit line compared to $37.7 million outstanding at December 31, 2016. The balance of the $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.
Subordinated notes totaling $74.0 million and $73.9 million were outstanding at September 30, 2017, and December 31, 2016, respectively. During the first quarter of 2017, $167,000 of subordinated convertible notes were converted into 6,128 shares of Heartland common 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'sHTLF's trust preferred securities outstanding excluding deferred issuance costs as of September 30, 2017,2023, is as follows, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amount Issued | | Issuance Date | | Interest Rate | | Interest Rate as of 9/30/2023(1) | | Maturity Date | | Callable Date |
Heartland Financial Statutory Trust IV | $ | 10,310 | | | 03/17/2004 | | 2.75% over LIBOR | | 8.42% | | 03/17/2034 | | 12/17/2023 |
Heartland Financial Statutory Trust V | 20,619 | | | 01/27/2006 | | 1.33% over LIBOR | | 6.90 | | 04/07/2036 | | 01/07/2024 |
Heartland Financial Statutory Trust VI | 20,619 | | | 06/21/2007 | | 1.48% over LIBOR | | 7.15 | | 09/15/2037 | | 12/15/2023 |
Heartland Financial Statutory Trust VII | 18,042 | | | 06/26/2007 | | 1.48% over LIBOR | | 7.15 | | 09/01/2037 | | 12/01/2023 |
Morrill Statutory Trust I | 9,440 | | | 12/19/2002 | | 3.25% over LIBOR | | 8.91 | | 12/26/2032 | | 12/26/2023 |
Morrill Statutory Trust II | 9,170 | | | 12/17/2003 | | 2.85% over LIBOR | | 8.52 | | 12/17/2033 | | 12/17/2023 |
Sheboygan Statutory Trust I | 6,856 | | | 09/17/2003 | | 2.95% over LIBOR | | 8.62 | | 09/17/2033 | | 12/17/2023 |
CBNM Capital Trust I | 4,595 | | | 09/10/2004 | | 3.25% over LIBOR | | 8.92 | | 12/15/2034 | | 12/15/2023 |
Citywide Capital Trust III | 6,647 | | | 12/19/2003 | | 2.80% over LIBOR | | 8.43 | | 12/19/2033 | | 01/23/2024 |
Citywide Capital Trust IV | 4,512 | | | 09/30/2004 | | 2.20% over LIBOR | | 7.84 | | 09/30/2034 | | 11/23/2023 |
Citywide Capital Trust V | 12,593 | | | 05/31/2006 | | 1.54% over LIBOR | | 7.21 | | 07/25/2036 | | 12/15/2023 |
OCGI Statutory Trust III | 3,026 | | | 06/27/2002 | | 3.65% over LIBOR | | 9.22 | | 09/30/2032 | | 12/30/2023 |
OCGI Capital Trust IV | 5,553 | | | 09/23/2004 | | 2.50% over LIBOR | | 8.17 | | 12/15/2034 | | 12/15/2023 |
BVBC Capital Trust II | 7,349 | | | 04/10/2003 | | 3.25% over LIBOR | | 8.88 | | 04/24/2033 | | 01/24/2024 |
BVBC Capital Trust III | 9,716 | | | 07/29/2005 | | 1.60% over LIBOR | | 7.26 | | 09/30/2035 | | 12/30/2023 |
Total trust preferred securities | $ | 149,047 | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
(1) Effective weighted average interest rate as of September 30, 2023, was 8.35%. |
|
|
|
| | | | | | | | | | | | | |
| 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 | | 4.07%(2) | | 03/17/2034 | | 12/17/2017 |
Heartland Financial Statutory Trust V | 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 | | 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 | | 2.80%(5) | | 09/01/2037 | | 12/01/2017 |
Morrill Statutory Trust I | 8,876 |
| | 12/19/2002 | | 3.25% over LIBOR | | 4.58%(6) | | 12/26/2032 | | 12/26/2017 |
Morrill Statutory Trust II | 8,503 |
| | 12/17/2003 | | 2.85% over LIBOR | | 4.17%(7) | | 12/17/2033 | | 12/17/2017 |
Sheboygan Statutory Trust I | 6,331 |
| | 09/17/2003 | | 2.95% over LIBOR | | 4.27% | | 09/17/2033 | | 12/17/2017 |
CBNM Capital Trust I | 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 |
| $ | 137,358 |
| | | | | | | | | | |
| | | | | | | | | | | |
(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. |
(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. |
(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. |
(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
The Federal Reserve Board, which supervises bank holding companies, has adopted capital adequacy guidelines that are used to assess the adequacy of capital in supervisingof a bank holding company. The federal banking agencies implemented final rules to establish a new comprehensive regulatory capital framework 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 reforms and changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") and substantially amended the regulatory risk-based capital rules applicable to Heartland. Under Basel III, Heartland mustHTLF will be required to hold a conservation buffer above the adequately capitalized risk-based capital ratios. The capitalratios; however, the transition provisions related to the conservation buffer for 2017 is 1.25%.have been extended indefinitely.
The most recent notification from the FDIC categorized HeartlandHTLF and each of its bank subsidiariesBanks 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 the categorization of any of these entities.
Heartland'sHTLF's capital ratios are calculated in accordance with Federal Reserve Board instructions and are required regulatory financial measures. The following table illustrates Heartland'sthe capital ratios and the Federal Reserve'sReserve Board's current capital adequacy guidelines for the dates indicated, in thousands:thousands. Although the capital conservation buffer requirement transition provisions have been extended indefinitely, the table below also indicates the fully-phased in capital conservation buffer requirements.
| | | | | | | | | | | | | | | | | | | | | | | |
| 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, 2023 | 14.90 | % | | 12.08 | % | | 11.37 | % | | 9.59 | % |
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 | 10.50 | | | 8.50 | | | 7.00 | | | N/A |
Risk-weighted assets | $ | 15,579,756 | | | $ | 15,579,756 | | | $ | 15,579,756 | | | N/A |
Average assets | N/A | | N/A | | N/A | | $ | 19,621,072 | |
| | | | | | | |
December 31, 2022 | 14.76 | % | | 11.81 | % | | 11.07 | % | | 9.13 | % |
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 | 10.50 | | | 8.50 | | | 7.00 | | | N/A |
Risk-weighted assets | $ | 14,937,128 | | | $ | 14,937,128 | | | $ | 14,937,128 | | | N/A |
Average assets | N/A | | N/A | | N/A | | $ | 19,322,778 | |
|
| | | | | | | | | | | | | | | |
| 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 HeartlandHTLF from its banks totaled approximately $244.6$774.2 million and $182.1$702.2 million at September 30, 2017,2023, and December 31, 2016,2022, respectively, under the most restrictive minimum capital requirements to remain well capitalized. At September 30, 2017, and December 31, 2016, retainedrequirements. Retained earnings that could be available for the payment of dividends to HTLF from its banks while remaining above the well capitalized levels totaled approximately $463.7 million and $403.9 million at September 30, 2023, and December 31, 2022, respectively. These dividends are the principal source of funds to pay dividends on HTLF's common and preferred stock and to pay interest and principal on its debt.
As of September 30, 2023, management believes regulatory capital ratio buffers would withstand any changes in regulatory rules that require the inclusion of unrealized losses in the total investment portfolio and remain well capitalized.
On June 26, 2020, HTLF issued and sold 4.6 million depositary shares, each representing a 1/400th interest in a share of 7.00% Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, Series E. The depositary shares are listed on The Nasdaq Global Select Market under the most restrictive minimum capital requirements totaled $394.9 millionsymbol "HTLFP." If declared, dividends are paid quarterly in arrears at a rate of 7.00% per annum beginning on October 15, 2020. For the dividend period beginning on the first reset date of July 15, 2025, and $308.9 million, respectively.for dividend periods beginning every fifth anniversary thereafter, each a reset date, the rate per annum will be reset based on a recent five-year treasury rate plus 6.675%. The earliest redemption date for the preferred shares is July 15, 2025. Dividends payable on common shares are subject to quarterly dividends payable on these outstanding preferred shares at the applicable dividend rate.
On July 29, 2016, HeartlandAugust 8, 2022, HTLF filed a universal shelf registration statement with the SEC to register debt or equity securities. This shelf registration statement, which was effective immediately, provides HeartlandHTLF with the ability to raise capital, subject to market conditions and SEC rules and limitations, if Heartland'sthe board of directors decides to do so. This registration statement will permit Heartland, permits HTLF,
from time to time, in one or more public offerings, to offer debt securities, subordinated notes, common stock, preferred stock, depositary shares, warrants, rights or units of any combination of these securities. The amount of securities that may be offered iswas not specified in the registration statement, and the terms of any future offerings willare to 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 thisThe registration statement.statement expires on August 8, 2025.
On February 28, 2017, Heartland completed the acquisition of Founders Bancorp, parent company of Founders Community Bank, based in San 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 $31.0 million, which was paid by delivery of 455,877 shares of Heartland common stock and cash of $8.4 million.
During the first quarter of 2017, 333 shares of the Heartland Series D convertible preferred stock issued in the CIC Bancshares, Inc. acquisition were converted into 13,283 shares of Heartland common stock, and $167,000 of the subordinated convertible notes assumed in the acquisition were converted into 6,128 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 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.
Common stockholders' equity was $980.7 million at September 30, 2017, compared to $739.6 million at December 31, 2016. Book value per common share was $32.75 at September 30, 2017, compared to $28.31 at year-end 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, net of applicable taxes, of $20.1 million at September 30, 2017, compared to unrealized losses of $30.2 million at December 31, 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 subsidiariesThe Banks 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.customer. 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 subsidiariesthe Banks 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, 2017,2023, and December 31, 2016,2022, commitments to extend credit aggregated $2.03totaled $4.81 billion and $1.57$4.73 billion, respectively. Standby letters of credit aggregated $52.3totaled $75.8 million at September 30, 2017,2023, and $46.1$55.1 million at December 31, 2016.2022.
At September 30, 2023, and December 31, 2022, HTLF's banks had $832.6 million and $682.9 million, respectively, of standby letters of credit with the respective FHLB to secure public funds and municipal deposits.
Contractual obligations and other commitments were disclosed in Heartland'sHTLF's Annual Report on Form 10-K for the year ended December 31, 2016, and there2022. There have been no material changes in Heartland'sto HTLF's contractual obligations and other commitments since that reportthe Annual Report on Form 10-K was filed.
On a consolidated basis, Heartland maintains a large balance of short-term securities that, when combined with cash from operations, Heartland believesThere are adequate to meetcertain legal proceedings pending against HTLF and 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 paid by its bank subsidiaries and the issuance of debt and equity securities. On June 14, 2017, Heartland's revolving credit agreement with an unaffiliated bank was increased to $25.0 million from $20.0 million of maximum borrowing capacity. Atat September 30, 2017, $5.0 million was outstanding. Heartland also has a non-revolving credit line with the same unaffiliated bank. At September 30, 2017, $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, 2017.2023, that are ordinary routine litigation incidental to business.
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.
HeartlandHTLF continues to explore opportunities to expand the size of its banking footprint of independent community banks. In theby opportunistically identifying acquisition targets that complement its current banking industry environment, Heartland seeks these opportunities for growth through acquisitions. Heartland is primarily focusedstrategy. This includes transactions that increase penetration in existing geographic Bank Markets, as well as acquisitions of fee income businesses that complement and build on possible acquisitions inexisting businesses or further meet the markets it currently serves, in which there would be an opportunity to increase market share, achieve efficiencies and provide greater convenience for currentneeds of customers. Future expenditures relating to expansion efforts, in addition to those identified above, cannot be estimated at this time.
Derivative Financial Instruments
HeartlandHTLF 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 suchthese loans. We enterHTLF 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 interest rate changes on the commitments to fund these loans and on the residential mortgage loans held as available for sale. See Note 76 to the consolidated financial statements includeincluded in this Quarterly Report on Form 10-Q for additional information on our derivative financial instruments.
LIQUIDITY
Liquidity refers to Heartland'sthe ability to maintain a 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'customers’ credit needs. The liquidity of Heartland
HTLF 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 cashAt September 30, 2023, HTLF had $348.0 million of $129.9 million during the first nine months of 2017 compared to cash provided of $96.7 million during the first nine months of 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 provided cash of $25.5 million during the first nine months of 2017 compared to using $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 2017 compared to providing cash of $168.7 million during the first nine months of 2016. 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 $912.0 million during the first nine months of 2016. Cash used for the purchase of securities available 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. Net decreases in loans provided cash of $45.1 million and $138.7 million during the first nine months of 2017 and 2016, respectively. Also contributing to cash provided by investing activities was net cash and cash equivalents, received in acquisitions, which totaled $71.1 million during the first nine months of 2017 compared to $8.1 million during the first nine months of 2016.
Financing activities used cash of $193.5 million during the first nine months of 2017 compared to using cash of $322.1 million during the first nine months of 2016. A net increase in demand deposits provided cash of $181.2 million during the first nine months of 2017 compared to providing cash of $160.3 million during the first nine months of 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 usedin other financial institutions of $1.5 million and securities carried at fair value of $5.48 billion. Management expects the securities portfolio to produce principal cash flows of $8.6 million duringapproximately $1.2 billion over the first nine months of 2017 compared to using cash of $353.1 million during the first nine months of 2016. Short-term borrowings activity, including short-term FHLB activity and revolving credit line agreement activity, used cash of $169.0 million during the first nine months of 2017 compared to using cash of $115.6 million during the first nine months of 2016. Other borrowing activity used cash of $8.6 million during the first nine months of 2017 compared to providing cash of $24.4 million during the first nine months of 2016. Included in the use of cash during the first nine months of 2016 was cash of $81.7 million used for the redemption of Heartland's Series C Preferred Stock issued to the U.S. Treasury under the Small Business Lending Fund program.next twelve months.
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 increasesgrowth in net interest cash flows.
The Banks' FHLB memberships give them the ability to borrow funds for short- and long-term purposes under a variety of programs. Short-term borrowing balances are dependentdepend 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 heavilyfunds and has tested drawing on deposit growth and additional FHLB borrowings in the future.
these sources. In the event of short-term liquidity needs, Heartland's bank subsidiariesHTLF's banks may purchase federal funds from each other or from correspondent banks and may also borrow from the Federal Reserve Bank.Bank, including utilizing the BTFP.
Additional funding is provided by long-term debt and short-term borrowings. As of September 30, 2023, HTLF had $372.1 million of long-term debt outstanding, and it is an important funding source because of its multi-year borrowing structure.
HTLF's current liquidity strategy includes using overnight borrowings and reducing wholesale deposits. The use of overnight borrowings provides flexibility to make repayments on demand. As of September 30, 2023, pledged securities totaled $2.66 billion. As of September 30, 2023, approximately $3.64 billion of securities remained available to pledge.
The following table shows the source of funding, balance outstanding and available borrowing capacity as of September 30, 2023, dollars in thousands:
| | | | | | | | | | | |
| As of September 30, 2023 |
Source | Outstanding | | Available |
Federal Reserve Discount Window | $ | — | | | $ | 1,337,967 | |
Bank Term Funding Program | — | | | 613,065 | |
Federal Home Loan Bank | 351,772 | | | 1,142,180 | |
Federal Funds | — | | | 295,000 | |
Wholesale deposits/brokered CDs | 2,163,287 | | | 1,864,025 | |
Total | $ | 2,515,059 | | | $ | 5,252,237 | |
HTLF is focused on loan growth and strives to fund loan growth with the least expensive source of deposits, sales of securities or borrowings. Excluding any sales which management may pursue from time to time, the securities portfolio is expected to produce principal cash flows of approximately $1.2 billion over the next twelve months, which could be used to fund loan growth, as well as reduce wholesale deposits. Additionally, growing customer deposits will continue to be a focus. HTLF offers the bank subsidiaries’ FHLB memberships give themICS and CDARS products accessed through the abilityIntrafi network of financial institutions, which helps to borrow funds for short- and long-term purposes underreduce the amount of pledged securities.
On a varietyconsolidated basis, HTLF maintains a large balance of programs.short-term securities that, when combined with cash from operations, management believes are adequate to meet its funding obligations.
Heartland'sAt the parent company level, routine funding requirements consist primarily of dividends paid to stockholders, debt service on revolving credit linearrangements and trust preferred securities, repayment requirements under other debt obligations and payments for acquisitions. The parent company obtains the funding to meet these obligations from dividends paid by its Banks and the issuance of debt and equity securities.
At September 30, 2023, the parent company had cash of $301.5 million. Additionally, HTLF has a revolving credit agreement with an unaffiliated bank, provides awhich was renewed most recently on June 14, 2022. The revolving credit agreement has $100.0 million of maximum borrowing capacity, of $25.0 million. During the third quarter of 2017, Heartland had advances of $20.0 million and repayments of $15.0 million on this line. At September 30, 2017, $5.0 millionwhich none was outstanding on this agreement. Heartland also has a non-revolving credit line with the same unaffiliated bank, which had $39.3 million of borrowing capacity at September 30, 2017,2023. This credit agreement contains specific financial covenants, all of which no balance had been drawn.HTLF complied with as of September 30, 2023.
The ability of HTLF to pay dividends to its stockholders depends upon dividends paid to HTLF by its Banks. The Banks are subject to statutory and regulatory restrictions on the amount they may pay in dividends. To maintain acceptable capital ratios at HTLF's Banks, certain portions of their retained earnings are not available for the payment of dividends.
HTLF has filed a universal shelf registration statement with the SEC that provides HTLF the ability to raise both debt and capital, subject to SEC rules and limitations, if HTLF's board of directors decides to do so. This registration statement expires in August 2025.
Management believes that cash on hand, cash flows from operations and cash availability under existing borrower programs and facilities will be sufficient to meet any recurring and additional operating cash needs in 2023.
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'sHTLF's market risk is comprised primarily of interest rate risk resulting from its core banking activities of lending and 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'sHTLF's assets, liabilities and off-balance sheet contracts. Heartland'sHTLF's objective is to measure this risk and manage its 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 committeescommittee of Heartland's bank subsidiariesthe Bank, and, on a consolidated basis, by Heartland'sHTLF'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 HeartlandHTLF and each of its bank subsidiaries.Banks. 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'sHTLF'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 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)one) and a rate shock (year 2two and beyond) could have on Heartland's net interest income. Starting balances in the model reflect actual balances on the “as of”"as of" date, adjusted for material 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, 2017,2023, and September 30, 2016,2022, provided the following results, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 |
| Net Interest Margin | | % Change From Base | | Net Interest Margin | | % Change From Base |
Year 1 | | | | | | | |
Down 100 Basis Points | $ | 598,060 | | | (2.83) | % | | $ | 596,846 | | | (2.43) | % |
Base | 615,457 | | | — | | | 611,715 | | | — | |
Up 200 Basis Points | 648,671 | | | 5.40 | | | 628,011 | | | 2.66 | |
Year 2 | | | | | | | |
Down 100 Basis Points | $ | 609,155 | | | (1.02) | % | | $ | 590,415 | | | (3.48) | % |
Base | 657,034 | | | 6.76 | | | 646,665 | | | 5.71 | |
Up 200 Basis Points | 716,655 | | | 16.44 | | | 680,461 | | | 11.24 | |
|
| | | | | | | | | | | | | |
| 2017 | | 2016 |
| Net Interest Margin | | % Change From Base | | Net Interest Margin | | % Change From Base |
Year 1 | | | | | | | |
Down 100 Basis Points | $ | 343,033 |
| | (2.69 | )% | | $ | 278,279 |
| | (2.74 | )% |
Base | $ | 352,502 |
| | | | $ | 286,122 |
| | |
Up 200 Basis Points | $ | 351,265 |
| | (0.35 | )% | | $ | 286,325 |
| | 0.07 | % |
Year 2 | | | | | | | |
|
Down 100 Basis Points | $ | 326,965 |
| | (7.24 | )% | | $ | 264,054 |
| | (7.71 | )% |
Base | $ | 354,238 |
| | 0.49 | % | | $ | 286,429 |
| | 0.11 | % |
Up 200 Basis Points | $ | 369,712 |
| | 4.88 | % | | $ | 298,565 |
| | 4.35 | % |
HeartlandHTLF uses derivative financial instruments to manage the impact of changes in interest rates on its future interest income or interest expense. HeartlandHTLF 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 76 to the consolidated financial statements included in this Quarterly Report on Form 10-Q.
HeartlandHTLF 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 HeartlandHTLF 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 consolidated balance sheetsheets 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, 2017, and December 31, 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 reportQuarterly Report on Form 10-Q, under the supervision and with the participation of Heartland's management, including itsthe Chief Executive Officer and Chief Financial Officer, the Chief Executive Officer and Chief Financial Officer have concluded that Heartland'sthat:
•HTLF'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 quarterthree months ended September 30, 2017,2023, 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'sthe internal controlcontrols over financial reporting.
PART II
ITEM 1. LEGAL PROCEEDINGS
There are no material pendingcertain legal proceedings to which Heartland orpending against HTLF and its subsidiaries at September 30, 2023, that 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.HTLF's business.
ITEM 1A. RISK FACTORS
There have been no material changes in the risk factors applicable to HeartlandHTLF from those disclosed in Part I, Item 1A. “Risk Factors”"Risk Factors" in Heartland's 2016HTLF's 2022 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'sOn March 17, 2020, the board of directors has authorized management to acquire and hold up to 500,000 shares5% of common stockcapital or $85.7 million as of September 30, 2023, as treasury shares at any one time. HeartlandHTLF and its affiliated purchasers made no purchases of its common stock during the nine monthsquarter ended September 30, 2017.2023.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
Exhibits
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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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101 | | Financial statement formatted in Inline 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. | | |
104 | | Cover page formatted in Inline Extensible Business Reporting Language | | |
______________
(1) Management contract or compensatory plan or arrangement
(2) Certain confidential information contained in this agreement has been omitted because it is both not material and is the type that the registrant treats as private or confidential.
(3) Filed herewith.or furnished 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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HEARTLAND FINANCIAL USA, INC./s/ Bruce K. Lee |
(Registrant)By: Bruce K. Lee |
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/s/ Lynn B. Fuller |
By: Lynn B. Fuller |
ChairmanPresident 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 8, 20179, 2023 |