0000920112us-gaap:BankTimeDepositsMemberus-gaap:FairValueInputsLevel1Member2020-09-30
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| | | | | |
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For quarterly period ended March 31,September 30, 2020
| | | | | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For transition period from __________ to __________
Commission File Number: 001-15393
HEARTLAND FINANCIAL USA, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
42-1405748
(I.R.S. employer identification number)
1398 Central Avenue, Dubuque, Iowa 52001
(Address of principal executive offices)(Zip Code)
(563) 589-2100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
| | | | | | | | |
| Title of Each Class | Trading Symbol | Name of each exchange on which registered |
| Common Stock, par value $1.00 per share | HTLF | Nasdaq Stock Market |
| Depositary Shares, each representing 1/400th interest in a share of 7.00% Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, Series E | HTLFP | Nasdaq Stock Market |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
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 "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | |
| Large accelerated filer | ☒ | | Accelerated Filer | ☐ |
| Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| Emerging growth company | ☐ | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Exchange Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $1.00 per share | HTLF | Nasdaq Stock Market |
Indicate the number of shares outstanding of each of the classes of Registrant's common stock as of the latest practicable date: As of May 5,November 4, 2020, the Registrant had outstanding 36,808,24936,885,807 shares of common stock, $1.00 par value per share.
HEARTLAND FINANCIAL USA, INC.
Form 10-Q Quarterly Report
Table of Contents
PART I
ITEM 1. FINANCIAL STATEMENTS
| HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data) | HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data) | | HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data) | |
| | | March 31, 2020 (Unaudited) | | December 31, 2019 | | September 30, 2020 (Unaudited) | | December 31, 2019 |
| ASSETS | ASSETS | | | | ASSETS | | | |
| Cash and due from banks | Cash and due from banks | $ | 175,587 | | | $ | 206,607 | | Cash and due from banks | $ | 175,284 | | | $ | 206,607 | |
| Interest bearing deposits with other banks and other short-term investments | Interest bearing deposits with other banks and other short-term investments | 64,156 | | | 172,127 | | Interest bearing deposits with other banks and other short-term investments | 156,371 | | | 172,127 | |
| Cash and cash equivalents | Cash and cash equivalents | 239,743 | | | 378,734 | | Cash and cash equivalents | 331,655 | | | 378,734 | |
| Time deposits in other financial institutions | Time deposits in other financial institutions | 3,568 | | | 3,564 | | Time deposits in other financial institutions | 3,129 | | | 3,564 | |
| Securities: | Securities: | | | | Securities: | | |
| | Carried at fair value (cost of $3,517,232 at March 31, 2020, and $3,311,433 at December 31, 2019) | 3,488,621 | | | 3,312,796 | | |
| Held to maturity, net of allowance for credit losses of $197 at March 31, 2020 (fair value of $101,375 at March 31, 2020, and $100,484 at December 31, 2019) | 91,875 | | | 91,324 | | |
| Carried at fair value (cost of $4,869,531 at September 30, 2020, and $3,311,433 at December 31, 2019) | | Carried at fair value (cost of $4,869,531 at September 30, 2020, and $3,311,433 at December 31, 2019) | 4,950,698 | | | 3,312,796 | |
| Held to maturity, net of allowance for credit losses of $61 at September 30, 2020 (fair value of $99,619 at September 30, 2020, and $100,484 at December 31, 2019) | | Held to maturity, net of allowance for credit losses of $61 at September 30, 2020 (fair value of $99,619 at September 30, 2020, and $100,484 at December 31, 2019) | 88,700 | | | 91,324 | |
| Other investments, at cost | Other investments, at cost | 35,370 | | | 31,321 | | Other investments, at cost | 35,940 | | | 31,321 | |
| Loans held for sale | Loans held for sale | 22,957 | | | 26,748 | | Loans held for sale | 65,969 | | | 26,748 | |
| Loans receivable: | Loans receivable: | | | | Loans receivable: | | |
| Held to maturity | Held to maturity | 8,374,236 | | | 8,367,917 | | Held to maturity | 9,099,646 | | | 8,367,917 | |
| | Allowance for credit losses | Allowance for credit losses | (97,350) | | | (70,395) | | Allowance for credit losses | (103,377) | | | (70,395) | |
| Loans receivable, net | Loans receivable, net | 8,276,886 | | | 8,297,522 | | Loans receivable, net | 8,996,269 | | | 8,297,522 | |
| Premises, furniture and equipment, net | Premises, furniture and equipment, net | 197,993 | | | 197,558 | | Premises, furniture and equipment, net | 199,461 | | | 197,558 | |
| Premises, furniture and equipment held for sale | Premises, furniture and equipment held for sale | 2,967 | | | 2,967 | | Premises, furniture and equipment held for sale | 567 | | | 2,967 | |
| Other real estate, net | Other real estate, net | 6,074 | | | 6,914 | | Other real estate, net | 5,050 | | | 6,914 | |
| Goodwill | Goodwill | 446,345 | | | 446,345 | | Goodwill | 446,345 | | | 446,345 | |
| Core deposit intangibles and customer relationship intangibles, net | Core deposit intangibles and customer relationship intangibles, net | 45,707 | | | 48,688 | | Core deposit intangibles and customer relationship intangibles, net | 40,520 | | | 48,688 | |
| Servicing rights, net | Servicing rights, net | 5,220 | | | 6,736 | | Servicing rights, net | 5,752 | | | 6,736 | |
| Cash surrender value on life insurance | Cash surrender value on life insurance | 172,140 | | | 171,625 | | Cash surrender value on life insurance | 173,111 | | | 171,625 | |
| | Other assets | Other assets | 259,043 | | | 186,755 | | Other assets | 269,498 | | | 186,755 | |
| TOTAL ASSETS | TOTAL ASSETS | $ | 13,294,509 | | | $ | 13,209,597 | | TOTAL ASSETS | $ | 15,612,664 | | | $ | 13,209,597 | |
| LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | | | | LIABILITIES AND EQUITY | | | |
| LIABILITIES: | LIABILITIES: | | | | LIABILITIES: | | | |
| Deposits: | Deposits: | | | | Deposits: | | | |
| Demand | Demand | $ | 3,696,974 | | | $ | 3,543,863 | | Demand | $ | 5,022,567 | | | $ | 3,543,863 | |
| Savings | Savings | 6,366,610 | | | 6,307,425 | | Savings | 6,742,151 | | | 6,307,425 | |
| Time | Time | 1,110,441 | | | 1,193,043 | | Time | 1,002,392 | | | 1,193,043 | |
| Total deposits | Total deposits | 11,174,025 | | | 11,044,331 | | Total deposits | 12,767,110 | | | 11,044,331 | |
| | Short-term borrowings | Short-term borrowings | 121,442 | | | 182,626 | | Short-term borrowings | 306,706 | | | 182,626 | |
| Other borrowings | Other borrowings | 276,150 | | | 275,773 | | Other borrowings | 524,045 | | | 275,773 | |
| Accrued expenses and other liabilities | Accrued expenses and other liabilities | 169,178 | | | 128,730 | | Accrued expenses and other liabilities | 203,199 | | | 128,730 | |
| TOTAL LIABILITIES | TOTAL LIABILITIES | 11,740,795 | | | 11,631,460 | | TOTAL LIABILITIES | 13,801,060 | | | 11,631,460 | |
| STOCKHOLDERS' EQUITY: | STOCKHOLDERS' EQUITY: | | | | STOCKHOLDERS' EQUITY: | | | |
| | Preferred stock (par value $1 per share; authorized 17,604 shares; 0ne issued or outstanding at both March 31, 2020, and December 31, 2019) | — | | | — | | |
| Series A Junior Participating preferred stock (par value $1 per share; authorized 16,000 shares; 0ne issued or outstanding at both March 31, 2020, and December 31, 2019) | — | | | — | | |
| Series C Senior Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares authorized at both March 31, 2020, and December 31, 2019, 0ne issued or outstanding at both March 31, 2020, and December 31, 2019) | — | | | — | | |
| Series D Senior Non-Cumulative Perpetual Convertible Preferred Stock (par value $1 per share; 3,000 shares authorized at both March 31, 2020, and December 31, 2019; 0ne issued or outstanding at both March 31, 2020, and December 31, 2019) | — | | | — | | |
| Common stock (par value $1 per share; 60,000,000 shares authorized at both March 31, 2020, and December 31, 2019; issued 36,807,217 shares at March 31, 2020, and 36,704,278 shares at December 31, 2019) | 36,807 | | | 36,704 | | |
| Preferred stock (par value $1 per share; authorized 6,104 shares; NaN issued or outstanding at both September 30, 2020, and December 31, 2019) | | Preferred stock (par value $1 per share; authorized 6,104 shares; NaN issued or outstanding at both September 30, 2020, and December 31, 2019) | 0 | | | 0 | |
| Series A Junior Participating preferred stock (par value $1 per share; authorized 16,000 shares; NaN issued or outstanding at both September 30, 2020, and December 31, 2019) | | Series A Junior Participating preferred stock (par value $1 per share; authorized 16,000 shares; NaN issued or outstanding at both September 30, 2020, and December 31, 2019) | 0 | | | 0 | |
| Series B Fixed Rate Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares authorized at both September 30, 2020 and December 31, 2019; NaN issued or outstanding at both September 30, 2020 and December 31, 2019) | | Series B Fixed Rate Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares authorized at both September 30, 2020 and December 31, 2019; NaN issued or outstanding at both September 30, 2020 and December 31, 2019) | 0 | | | 0 | |
| Series C Senior Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares authorized at both September 30, 2020, and December 31, 2019; NaN issued or outstanding at both September 30, 2020, and December 31, 2019) | | Series C Senior Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares authorized at both September 30, 2020, and December 31, 2019; NaN issued or outstanding at both September 30, 2020, and December 31, 2019) | 0 | | | 0 | |
| Series D Senior Non-Cumulative Perpetual Convertible Preferred Stock (par value $1 per share; 3,000 shares authorized at both September 30, 2020, and December 31, 2019; NaN issued or outstanding at both September 30, 2020, and December 31, 2019) | | Series D Senior Non-Cumulative Perpetual Convertible Preferred Stock (par value $1 per share; 3,000 shares authorized at both September 30, 2020, and December 31, 2019; NaN issued or outstanding at both September 30, 2020, and December 31, 2019) | 0 | | | 0 | |
| Series E Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 11,500 authorized at September 30, 2020 and NaN authorized at December 31, 2019; issued and outstanding 11,500 shares at September 30, 2020, and NaN issued or outstanding at December 31, 2019) | | Series E Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 11,500 authorized at September 30, 2020 and NaN authorized at December 31, 2019; issued and outstanding 11,500 shares at September 30, 2020, and NaN issued or outstanding at December 31, 2019) | 110,705 | | | 0 | |
| Common stock (par value $1 per share; 60,000,000 shares authorized at both September 30, 2020, and December 31, 2019; issued 36,885,390 shares at September 30, 2020, and 36,704,278 shares at December 31, 2019) | | Common stock (par value $1 per share; 60,000,000 shares authorized at both September 30, 2020, and December 31, 2019; issued 36,885,390 shares at September 30, 2020, and 36,704,278 shares at December 31, 2019) | 36,885 | | | 36,704 | |
| Capital surplus | Capital surplus | 842,780 | | | 839,857 | | Capital surplus | 847,377 | | | 839,857 | |
| Retained earnings | Retained earnings | 700,298 | | | 702,502 | | Retained earnings | 761,211 | | | 702,502 | |
| Accumulated other comprehensive income/(loss) | Accumulated other comprehensive income/(loss) | (26,171) | | | (926) | | Accumulated other comprehensive income/(loss) | 55,426 | | | (926) | |
| | TOTAL STOCKHOLDERS' EQUITY | TOTAL STOCKHOLDERS' EQUITY | 1,553,714 | | | 1,578,137 | | TOTAL STOCKHOLDERS' EQUITY | 1,811,604 | | | 1,578,137 | |
| TOTAL LIABILITIES AND EQUITY | TOTAL LIABILITIES AND EQUITY | $ | 13,294,509 | | | $ | 13,209,597 | | TOTAL LIABILITIES AND EQUITY | $ | 15,612,664 | | | $ | 13,209,597 | |
| | See accompanying notes to consolidated financial statements. | See accompanying notes to consolidated financial statements. | | See accompanying notes to consolidated financial statements. | |
| HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share data) | HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share data) | | | HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share data) | |
| | | | Three Months Ended
March 31, | | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| INTEREST INCOME: | INTEREST INCOME: | | | | | INTEREST INCOME: | | | | | | | |
| Interest and fees on loans | Interest and fees on loans | | $ | 106,414 | | | $ | 100,456 | | Interest and fees on loans | $ | 102,657 | | | $ | 110,566 | | | $ | 316,076 | | | $ | 317,049 | |
| Interest on securities: | Interest on securities: | | | Interest on securities: | |
| Taxable | Taxable | | 21,731 | | | 15,876 | | Taxable | 25,016 | | | 18,567 | | | 70,109 | | | 50,566 | |
| Nontaxable | Nontaxable | | 2,183 | | | 3,093 | | Nontaxable | 3,222 | | | 2,119 | | | 8,749 | | | 7,766 | |
| Interest on federal funds sold | Interest on federal funds sold | | — | | | 4 | | Interest on federal funds sold | 0 | | | 0 | | | 0 | | | 4 | |
| Interest on interest bearing deposits in other financial institutions | Interest on interest bearing deposits in other financial institutions | | 721 | | | 1,292 | | Interest on interest bearing deposits in other financial institutions | 72 | | | 2,151 | | | 847 | | | 5,742 | |
| TOTAL INTEREST INCOME | TOTAL INTEREST INCOME | | 131,049 | | | 120,721 | | TOTAL INTEREST INCOME | 130,967 | | | 133,403 | | | 395,781 | | | 381,127 | |
| INTEREST EXPENSE: | INTEREST EXPENSE: | | | | | INTEREST EXPENSE: | | | | | | | |
| Interest on deposits | Interest on deposits | | 14,582 | | | 13,213 | | Interest on deposits | 4,962 | | | 17,982 | | | 25,678 | | | 47,333 | |
| Interest on short-term borrowings | Interest on short-term borrowings | | 296 | | | 889 | | Interest on short-term borrowings | 78 | | | 250 | | | 435 | | | 1,477 | |
| Interest on other borrowings (includes $(183) and $165 of interest expense/(benefit) related to derivatives reclassified from accumulated other comprehensive income/(loss) for the three months ended March 31, 2020 and 2019, respectively. | | 3,660 | | | 3,664 | | |
| Interest on other borrowings (includes $(595) and $24 of interest expense/(benefit) related to derivatives reclassified from accumulated other comprehensive income for the three months ended September 30, 2020 and 2019, respectively, and $(1,195) and $276 of interest expense/(benefit) related to derivatives reclassified from accumulated other comprehensive income for the nine months ended September 30, 2020 and 2019, respectively) | | Interest on other borrowings (includes $(595) and $24 of interest expense/(benefit) related to derivatives reclassified from accumulated other comprehensive income for the three months ended September 30, 2020 and 2019, respectively, and $(1,195) and $276 of interest expense/(benefit) related to derivatives reclassified from accumulated other comprehensive income for the nine months ended September 30, 2020 and 2019, respectively) | 3,430 | | | 3,850 | | | 10,514 | | | 11,333 | |
| TOTAL INTEREST EXPENSE | TOTAL INTEREST EXPENSE | | 18,538 | | | 17,766 | | TOTAL INTEREST EXPENSE | 8,470 | | | 22,082 | | | 36,627 | | | 60,143 | |
| NET INTEREST INCOME | NET INTEREST INCOME | | 112,511 | | | 102,955 | | NET INTEREST INCOME | 122,497 | | | 111,321 | | | 359,154 | | | 320,984 | |
| Provision for credit losses | Provision for credit losses | | 21,520 | | | 1,635 | | Provision for credit losses | 1,678 | | | 5,201 | | | 49,994 | | | 11,754 | |
| NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES | NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES | | 90,991 | | | 101,320 | | NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES | 120,819 | | | 106,120 | | | 309,160 | | | 309,230 | |
| NONINTEREST INCOME: | NONINTEREST INCOME: | | | | | NONINTEREST INCOME: | | | | | | | |
| Service charges and fees | Service charges and fees | | 12,021 | | | 12,794 | | Service charges and fees | 11,749 | | | 12,366 | | | 34,742 | | | 39,789 | |
| Loan servicing income | Loan servicing income | | 963 | | | 1,729 | | Loan servicing income | 638 | | | 821 | | | 1,980 | | | 3,888 | |
| Trust fees | Trust fees | | 5,022 | | | 4,474 | | Trust fees | 5,357 | | | 4,959 | | | 15,356 | | | 14,258 | |
| Brokerage and insurance commissions | Brokerage and insurance commissions | | 733 | | | 734 | | Brokerage and insurance commissions | 649 | | | 962 | | | 1,977 | | | 2,724 | |
| Securities gains, net includes $1,658 and $1,575 of net security gains reclassified from accumulated other comprehensive income/(loss) for the three months ended March 31, 2020 and 2019, respectively. | | 1,658 | | | 1,575 | | |
| Securities gains, net (includes $1,099 and $2,013 of net security gains reclassified from accumulated other comprehensive income for the three months ended September 30, 2020 and 2019, respectively and $4,763 and $7,168 of net security gains reclassified from accumulated other comprehensive income for the nine months ended September 30, 2020 and 2019, respectively) | | Securities gains, net (includes $1,099 and $2,013 of net security gains reclassified from accumulated other comprehensive income for the three months ended September 30, 2020 and 2019, respectively and $4,763 and $7,168 of net security gains reclassified from accumulated other comprehensive income for the nine months ended September 30, 2020 and 2019, respectively) | 1,300 | | | 2,013 | | | 4,964 | | | 7,168 | |
| | Unrealized gain/(loss) on equity securities, net | | (231) | | | 258 | | |
| Unrealized gain on equity securities, net | | Unrealized gain on equity securities, net | 155 | | | 144 | | | 604 | | | 514 | |
| Net gains on sale of loans held for sale | Net gains on sale of loans held for sale | | 4,660 | | | 3,176 | | Net gains on sale of loans held for sale | 8,894 | | | 4,673 | | | 21,411 | | | 12,192 | |
| Valuation allowance on servicing rights | Valuation allowance on servicing rights | | (1,565) | | | (589) | | Valuation allowance on servicing rights | (120) | | | (626) | | | (1,676) | | | (1,579) | |
| Income on bank owned life insurance | Income on bank owned life insurance | | 498 | | | 899 | | Income on bank owned life insurance | 868 | | | 881 | | | 2,533 | | | 2,668 | |
| Other noninterest income | Other noninterest income | | 2,058 | | | 1,667 | | Other noninterest income | 1,726 | | | 3,207 | | | 5,779 | | | 6,556 | |
| TOTAL NONINTEREST INCOME | TOTAL NONINTEREST INCOME | | 25,817 | | | 26,717 | | TOTAL NONINTEREST INCOME | 31,216 | | | 29,400 | | | 87,670 | | | 88,178 | |
| NONINTEREST EXPENSES: | NONINTEREST EXPENSES: | | | | | NONINTEREST EXPENSES: | | | | | | | |
| Salaries and employee benefits | Salaries and employee benefits | | 49,957 | | | 50,285 | | Salaries and employee benefits | 50,978 | | | 49,927 | | | 151,053 | | | 150,107 | |
| Occupancy | Occupancy | | 6,471 | | | 6,607 | | Occupancy | 6,732 | | | 6,594 | | | 19,705 | | | 19,627 | |
| Furniture and equipment | Furniture and equipment | | 3,108 | | | 2,692 | | Furniture and equipment | 2,500 | | | 2,862 | | | 8,601 | | | 8,690 | |
| Professional fees | Professional fees | | 12,473 | | | 10,995 | | Professional fees | 12,802 | | | 11,276 | | | 38,951 | | | 36,642 | |
| | Advertising | Advertising | | 2,205 | | | 2,320 | | Advertising | 928 | | | 2,622 | | | 4,128 | | | 7,551 | |
| Core deposit intangibles and customer relationship intangibles amortization | Core deposit intangibles and customer relationship intangibles amortization | | 2,981 | | | 2,869 | | Core deposit intangibles and customer relationship intangibles amortization | 2,492 | | | 2,899 | | | 8,169 | | | 9,054 | |
| Other real estate and loan collection expenses | Other real estate and loan collection expenses | | 334 | | | 701 | | Other real estate and loan collection expenses | 335 | | | (89) | | | 872 | | | 774 | |
| (Gain)/loss on sales/valuations of assets, net | (Gain)/loss on sales/valuations of assets, net | | 16 | | | (3,004) | | (Gain)/loss on sales/valuations of assets, net | 1,763 | | | 356 | | | 2,480 | | | (20,934) | |
| Acquisition, integration and restructuring costs | Acquisition, integration and restructuring costs | | 1,376 | | | 3,614 | | Acquisition, integration and restructuring costs | 1,146 | | | 1,500 | | | 3,195 | | | 6,043 | |
| Partnership investment in tax credit projects | Partnership investment in tax credit projects | | 184 | | | 475 | | Partnership investment in tax credit projects | 927 | | | 3,052 | | | 1,902 | | | 4,992 | |
| Other noninterest expenses | Other noninterest expenses | | 11,754 | | | 10,676 | | Other noninterest expenses | 9,793 | | | 11,968 | | | 32,638 | | | 33,749 | |
| TOTAL NONINTEREST EXPENSES | TOTAL NONINTEREST EXPENSES | | 90,859 | | | 88,230 | | TOTAL NONINTEREST EXPENSES | 90,396 | | | 92,967 | | | 271,694 | | | 256,295 | |
| INCOME BEFORE INCOME TAXES | INCOME BEFORE INCOME TAXES | | 25,949 | | | 39,807 | | INCOME BEFORE INCOME TAXES | 61,639 | | | 42,553 | | | 125,136 | | | 141,113 | |
| Income taxes (includes $466 and $358 of income tax expense reclassified from accumulated other comprehensive income/(loss) for the three months ended March 31, 2020 and 2019, respectively.) | | 5,909 | | | 8,310 | | |
| Income taxes (includes $429 and $502 of income tax expense reclassified from accumulated other comprehensive income for the three months ended September 30, 2020 and 2019, respectively and $1,509 and $1,740 of income tax expense reclassified from accumulated other comprehensive income for the nine months ended September 30, 2020 and 2019, respectively) | | Income taxes (includes $429 and $502 of income tax expense reclassified from accumulated other comprehensive income for the three months ended September 30, 2020 and 2019, respectively and $1,509 and $1,740 of income tax expense reclassified from accumulated other comprehensive income for the nine months ended September 30, 2020 and 2019, respectively) | 13,681 | | | 7,941 | | | 27,007 | | | 29,835 | |
| NET INCOME | | NET INCOME | 47,958 | | | 34,612 | | | 98,129 | | | 111,278 | |
| | Preferred dividends | | Preferred dividends | (2,437) | | | 0 | | | (2,437) | | | 0 | |
| | NET INCOME AVAILABLE TO COMMON STOCKHOLDERS | NET INCOME AVAILABLE TO COMMON STOCKHOLDERS | | $ | 20,040 | | | $ | 31,497 | | NET INCOME AVAILABLE TO COMMON STOCKHOLDERS | $ | 45,521 | | | $ | 34,612 | | | $ | 95,692 | | | $ | 111,278 | |
| EARNINGS PER COMMON SHARE - BASIC | EARNINGS PER COMMON SHARE - BASIC | | $ | 0.54 | | | $ | 0.91 | | EARNINGS PER COMMON SHARE - BASIC | $ | 1.23 | | | $ | 0.94 | | | $ | 2.59 | | | $ | 3.12 | |
| EARNINGS PER COMMON SHARE - DILUTED | EARNINGS PER COMMON SHARE - DILUTED | | $ | 0.54 | | | $ | 0.91 | | EARNINGS PER COMMON SHARE - DILUTED | $ | 1.23 | | | $ | 0.94 | | | $ | 2.59 | | | $ | 3.11 | |
| CASH DIVIDENDS DECLARED PER COMMON SHARE | CASH DIVIDENDS DECLARED PER COMMON SHARE | | $ | 0.20 | | | $ | 0.16 | | CASH DIVIDENDS DECLARED PER COMMON SHARE | $ | 0.20 | | | $ | 0.18 | | | $ | 0.60 | | | $ | 0.50 | |
| | See accompanying notes to consolidated financial statements. | See accompanying notes to consolidated financial statements. | | | See accompanying notes to consolidated financial statements. | |
| HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) (Unaudited)
(Dollars in thousands) | | |
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands) | | HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands) |
| | | Three Months Ended
March 31, | | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| NET INCOME | NET INCOME | | $ | 20,040 | | | $ | 31,497 | | NET INCOME | $ | 47,958 | | | $ | 34,612 | | | $ | 98,129 | | | $ | 111,278 | |
| OTHER COMPREHENSIVE INCOME/(LOSS) | | | |
| OTHER COMPREHENSIVE INCOME | | OTHER COMPREHENSIVE INCOME | |
| Securities: | Securities: | | | Securities: | |
| Net change in unrealized gain/(loss) on securities | | (28,328) | | | 29,965 | | |
| Net change in unrealized gain on securities | | Net change in unrealized gain on securities | 31,340 | | | 19,851 | | | 84,564 | | | 78,238 | |
| | Reclassification adjustment for net gains realized in net income | Reclassification adjustment for net gains realized in net income | | (1,658) | | | (1,575) | | Reclassification adjustment for net gains realized in net income | (1,099) | | | (2,013) | | | (4,763) | | | (7,168) | |
| | Income taxes | Income taxes | | 7,797 | | | (7,281) | | Income taxes | (7,845) | | | (4,577) | | | (20,777) | | | (18,241) | |
| Other comprehensive income/(loss) on securities | | (22,189) | | | 21,109 | | |
| Other comprehensive income on securities | | Other comprehensive income on securities | 22,396 | | | 13,261 | | | 59,024 | | | 52,829 | |
| Derivatives used in cash flow hedging relationships: | Derivatives used in cash flow hedging relationships: | | | Derivatives used in cash flow hedging relationships: | |
| Net change in unrealized loss on derivatives | | (3,680) | | | (1,504) | | |
| Net change in unrealized gain/(loss) on derivatives | | Net change in unrealized gain/(loss) on derivatives | 1,199 | | | (800) | | | (2,164) | | | (4,568) | |
| Reclassification adjustment for net gains/(losses) on derivatives realized in net income | Reclassification adjustment for net gains/(losses) on derivatives realized in net income | | (190) | | | 158 | | Reclassification adjustment for net gains/(losses) on derivatives realized in net income | (601) | | | 27 | | | (1,214) | | | 279 | |
| Income taxes | Income taxes | | 814 | | | 282 | | Income taxes | (126) | | | 161 | | | 706 | | | 897 | |
| Other comprehensive loss on cash flow hedges | | (3,056) | | | (1,064) | | |
| Other comprehensive income/(loss) | | (25,245) | | | 20,045 | | |
| TOTAL COMPREHENSIVE INCOME/(LOSS) | | $ | (5,205) | | | $ | 51,542 | | |
| Other comprehensive income (loss) on cash flow hedges | | Other comprehensive income (loss) on cash flow hedges | 472 | | | (612) | | | (2,672) | | | (3,392) | |
| Other comprehensive income | | Other comprehensive income | 22,868 | | | 12,649 | | | 56,352 | | | 49,437 | |
| TOTAL COMPREHENSIVE INCOME | | TOTAL COMPREHENSIVE INCOME | $ | 70,826 | | | $ | 47,261 | | | $ | 154,481 | | | $ | 160,715 | |
| | See accompanying notes to consolidated financial statements. | See accompanying notes to consolidated financial statements. | | | See accompanying notes to consolidated financial statements. | |
| HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands) | HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands) | | | HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands) | |
| | Three Months Ended
March 31, | | | Nine Months Ended
September 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
| Net income | Net income | $ | 20,040 | | | $ | 31,497 | | Net income | $ | 98,129 | | | $ | 111,278 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | | Adjustments to reconcile net income to net cash provided by operating activities: | |
| Depreciation and amortization | Depreciation and amortization | 7,100 | | | 8,155 | | Depreciation and amortization | 20,726 | | | 23,561 | |
| Provision for credit losses | Provision for credit losses | 21,520 | | | 1,635 | | Provision for credit losses | 49,994 | | | 11,754 | |
| Net amortization of premium on securities | Net amortization of premium on securities | 3,685 | | | 5,692 | | Net amortization of premium on securities | 9,925 | | | 15,959 | |
| Securities gains, net | Securities gains, net | (1,658) | | | (1,575) | | Securities gains, net | (4,964) | | | (7,168) | |
| | Unrealized (gain)/loss on equity securities, net | 231 | | | (258) | | |
| Unrealized gain on equity securities, net | | Unrealized gain on equity securities, net | (604) | | | (514) | |
| Stock based compensation | Stock based compensation | 2,222 | | | 2,375 | | Stock based compensation | 5,551 | | | 4,833 | |
| | Loans originated for sale | Loans originated for sale | (91,974) | | | (61,348) | | Loans originated for sale | (461,723) | | | (289,877) | |
| Proceeds on sales of loans held for sale | Proceeds on sales of loans held for sale | 100,425 | | | 64,941 | | Proceeds on sales of loans held for sale | 443,913 | | | 289,769 | |
| Net gains on sale of loans held for sale | Net gains on sale of loans held for sale | (4,660) | | | (2,978) | | Net gains on sale of loans held for sale | (21,411) | | | (11,545) | |
| (Increase) decrease in accrued interest receivable | (Increase) decrease in accrued interest receivable | (667) | | | 682 | | (Increase) decrease in accrued interest receivable | (7,955) | | | 932 | |
| Increase in prepaid expenses | (157) | | | (1,708) | | |
| Increase in accrued interest payable | 316 | | | 1,261 | | |
| | (Increase) decrease in prepaid expenses | | (Increase) decrease in prepaid expenses | 408 | | | (3,611) | |
| Increase (decrease) in accrued interest payable | | Increase (decrease) in accrued interest payable | (1,461) | | | 1,905 | |
| Gain on extinguishment of debt | | Gain on extinguishment of debt | 0 | | | (375) | |
| Capitalization of servicing rights | Capitalization of servicing rights | (414) | | | (266) | | Capitalization of servicing rights | (2,633) | | | (756) | |
| Valuation allowance on servicing rights | Valuation allowance on servicing rights | 1,565 | | | 589 | | Valuation allowance on servicing rights | 1,676 | | | 1,579 | |
| Loss on sales/valuations of assets, net | 16 | | | 1,512 | | |
| (Gain) loss on sales/valuations of assets, net | | (Gain) loss on sales/valuations of assets, net | 2,480 | | | (10,378) | |
| Net excess tax (expense) benefit from stock based compensation | Net excess tax (expense) benefit from stock based compensation | (25) | | | 336 | | Net excess tax (expense) benefit from stock based compensation | (93) | | | 270 | |
| Other, net | Other, net | (40,513) | | | (16,493) | | Other, net | (48,914) | | | (40,706) | |
| NET CASH PROVIDED BY OPERATING ACTIVITIES | NET CASH PROVIDED BY OPERATING ACTIVITIES | 17,052 | | | 34,049 | | NET CASH PROVIDED BY OPERATING ACTIVITIES | 83,044 | | | 96,910 | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | CASH FLOWS FROM INVESTING ACTIVITIES: | | | | CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
| Purchase of time deposits in other financial institutions | Purchase of time deposits in other financial institutions | (4) | | | (248) | | Purchase of time deposits in other financial institutions | (8) | | | (254) | |
| Proceeds from the sale of securities available for sale | Proceeds from the sale of securities available for sale | 328,890 | | | 434,154 | | Proceeds from the sale of securities available for sale | 818,022 | | | 1,485,773 | |
| | Proceeds from the sale of securities held to maturity | | Proceeds from the sale of securities held to maturity | 1,056 | | | 0 | |
| | Proceeds from the maturity of and principal paydowns on securities available for sale | Proceeds from the maturity of and principal paydowns on securities available for sale | 92,413 | | | 86,727 | | Proceeds from the maturity of and principal paydowns on securities available for sale | 400,565 | | | 265,500 | |
| Proceeds from the maturity of and principal paydowns on securities held to maturity | Proceeds from the maturity of and principal paydowns on securities held to maturity | 55 | | | 2,156 | | Proceeds from the maturity of and principal paydowns on securities held to maturity | 3,235 | | | 2,938 | |
| Proceeds from the maturity of time deposits in other financial institutions | Proceeds from the maturity of time deposits in other financial institutions | 150 | | | 245 | | Proceeds from the maturity of time deposits in other financial institutions | 593 | | | 1,215 | |
| Proceeds from the sale, maturity of and principal paydowns on other investments | Proceeds from the sale, maturity of and principal paydowns on other investments | 5,613 | | | 2,730 | | Proceeds from the sale, maturity of and principal paydowns on other investments | 6,297 | | | 10,297 | |
| Purchase of securities available for sale | Purchase of securities available for sale | (627,246) | | | (299,105) | | Purchase of securities available for sale | (2,777,981) | | | (1,984,228) | |
| | Purchase of other investments | Purchase of other investments | (9,662) | | | (1,779) | | Purchase of other investments | (10,916) | | | (4,957) | |
| Net (increase) decrease in loans | (5,568) | | | 43,925 | | |
| Net increase in loans | | Net increase in loans | (746,723) | | | (47,023) | |
| Purchase of bank owned life insurance policies | Purchase of bank owned life insurance policies | (39) | | | (5) | | Purchase of bank owned life insurance policies | (208) | | | (16) | |
| | Proceeds from bank owned life insurance policies | | Proceeds from bank owned life insurance policies | 606 | | | 421 | |
| Proceeds from sale of mortgage servicing rights | | Proceeds from sale of mortgage servicing rights | 0 | | | 33,823 | |
| Capital expenditures | Capital expenditures | (3,723) | | | (1,123) | | Capital expenditures | (13,178) | | | (8,389) | |
| | Net cash and cash equivalents received in acquisitions | | Net cash and cash equivalents received in acquisitions | 0 | | | 38,650 | |
| Proceeds from the sale of equipment | Proceeds from the sale of equipment | — | | | 117 | | Proceeds from the sale of equipment | 3,339 | | | 1,277 | |
| Net cash expended in divestitures | Net cash expended in divestitures | — | | | 28,142 | | Net cash expended in divestitures | 0 | | | (49,264) | |
| Proceeds on sale of OREO and other repossessed assets | Proceeds on sale of OREO and other repossessed assets | 1,019 | | | 2,537 | | Proceeds on sale of OREO and other repossessed assets | 2,559 | | | 6,907 | |
| NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES | $ | (218,102) | | | $ | 298,473 | | |
| NET CASH USED BY INVESTING ACTIVITIES | | NET CASH USED BY INVESTING ACTIVITIES | $ | (2,312,742) | | | $ | (247,330) | |
|
| | | | | | | | | | | |
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (Unaudited)
(Dollars in thousands) | | | |
| Three Months Ended
March 31, | | |
| 2020 | | 2019 |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
| Net increase (decrease) in demand deposits | $ | 153,111 | | | $ | (131,876) | |
| Net increase in savings deposits | 59,185 | | | 74,016 | |
| Net increase (decrease) in time deposit accounts | (82,602) | | | 75,141 | |
| | | |
| | | |
| Net decrease in short-term borrowings | (34,987) | | | (43,000) | |
| Proceeds from short term FHLB advances | 491,545 | | | 430,888 | |
| Repayments of short term FHLB advances | (517,742) | | | (506,725) | |
| Proceeds from other borrowings | 1,930 | | | 50 | |
| Repayments of other borrowings | (1,832) | | | (6,868) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Proceeds from issuance of common stock | 804 | | | 253 | |
| Dividends paid | (7,353) | | | (5,530) | |
| NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES | 62,059 | | | (113,651) | |
| Net increase (decrease) in cash and cash equivalents | (138,991) | | | 218,871 | |
| Cash and cash equivalents at beginning of year | 378,734 | | | 273,630 | |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 239,743 | | | $ | 492,501 | |
| Supplemental disclosures: | | | |
| Cash paid for income/franchise taxes | $ | 12 | | | $ | 84 | |
| Cash paid for interest | $ | 18,222 | | | $ | 16,537 | |
| Loans transferred to OREO | $ | 245 | | | $ | 1,694 | |
| Transfer of premises from premises, furniture and equipment, net, to premises, furniture and equipment held for sale | $ | — | | | $ | 654 | |
| | | |
| Deposits transferred to held for sale | $ | — | | | $ | 76,968 | |
| Loans transferred to held for sale | $ | — | | | $ | 32,111 | |
| Securities transferred from held to maturity to available for sale | $ | — | | | $ | 148,030 | |
| Purchases of securities available for sale, accrued, not settled | $ | 14,035 | | | $ | 2,019 | |
| | | |
| Maturity of securities available for sale, accrued, not settled | $ | — | | | $ | 1,000 | |
| Transfer of available for sale securities to held to maturity securities | $ | 462 | | | $ | — | |
| | | |
| | | |
| | | |
| 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, |
| 2020 | | 2019 |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
| Net increase in demand deposits | $ | 1,478,704 | | | $ | 159,044 | |
| Net increase in savings deposits | 434,726 | | | 347,749 | |
| Net decrease in time deposit accounts | (190,651) | | | (397) | |
| | | |
| | | |
| Net increase (decrease) in short-term borrowings | 205,277 | | | (43,733) | |
| Proceeds from short term advances | 541,545 | | | 430,888 | |
| Repayments of short term advances | (622,742) | | | (531,725) | |
| Proceeds from other borrowings | 254,833 | | | 50 | |
| Repayments of other borrowings | (7,399) | | | (17,769) | |
| Payment for the redemption of debt | 0 | | | (2,125) | |
| | | |
| | | |
| Net proceeds from the issuance of preferred stock | 110,705 | | | 0 | |
| | | |
| Proceeds from issuance of common stock | 2,150 | | | 576 | |
| Dividends paid | (24,529) | | | (18,001) | |
| NET CASH PROVIDED BY FINANCING ACTIVITIES | 2,182,619 | | | 324,557 | |
| Net increase (decrease) in cash and cash equivalents | (47,079) | | | 174,137 | |
| Cash and cash equivalents at beginning of year | 378,734 | | | 273,630 | |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 331,655 | | | $ | 447,767 | |
| Supplemental disclosures: | | | |
| Cash paid for income/franchise taxes | $ | 26,701 | | | $ | 30,523 | |
| Cash paid for interest | 38,088 | | | 58,297 | |
| Loans transferred to OREO | 1,706 | | | 7,421 | |
| Transfer of premises from premises, furniture and equipment, net, to premises, furniture and equipment held for sale | 0 | | | 2,568 | |
| Transfer of premises from premises, furniture and equipment held for sale to premises, furniture and equipment, net | 450 | | | 1,564 | |
| Deposits transferred to held for sale | 0 | | | 76,968 | |
| Loans transferred to held for sale | 0 | | | 32,111 | |
| Securities transferred from held to maturity to available for sale | 0 | | | 148,030 | |
| Purchases of securities available for sale, accrued, not settled | 4,792 | | | 22,879 | |
| | | |
| | | |
| Transfer of available for sale securities to held to maturity securities | 462 | | | 0 | |
| Purchases of loans held to maturity accrued, not settled | 9,600 | | | 0 | |
| Stock consideration granted for acquisitions | $ | 0 | | | $ | 92,258 | |
| | | |
| See accompanying notes to consolidated financial statements. |
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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 |
| | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Balance at January 1, 2019 | $ | — | | | $ | 34,477 | | | $ | 743,095 | | | $ | 579,252 | | | $ | (31,649) | | | $ | — | | | | | $ | 1,325,175 | |
| Comprehensive income/(loss) | | | | | | | 31,497 | | | 20,045 | | | | | | | 51,542 | |
| | | | | | | | | | | | | | | |
| Cumulative effect adjustment from the adoption of ASU 2016-02 | | | | | | | | (1,713) | | | | | | | | | | (1,713) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Cash dividends declared: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Common, $0.16 per share | | | | | | | (5,530) | | | | | | | | | (5,530) | |
| | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | |
| Issuance of 126,112 shares of common stock | | | 127 | | | 126 | | | | | | | | | | | | 253 | |
| Stock based compensation | | | | | 2,375 | | | | | | | | | | | 2,375 | |
| Balance at March 31, 2019 | $ | — | | | $ | 34,604 | | | $ | 745,596 | | | $ | 603,506 | | | $ | (11,604) | | | $ | — | | | | | $ | 1,372,102 | |
| | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Balance at January 1, 2020 | $ | — | | | $ | 36,704 | | | $ | 839,857 | | | $ | 702,502 | | | $ | (926) | | | $ | — | | | | | $ | 1,578,137 | |
| Comprehensive income/(loss) | | | | | | | 20,040 | | | (25,245) | | | | | | | | (5,205) | |
| | | | | | | | | | | | | | | |
| Cumulative effect adjustment from the adoption of ASU 2016-13 | | | | | | | (14,891) | | | | | | | | | (14,891) | |
| Cash dividends declared: | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Common, $0.20 per share | | | | | | | (7,353) | | | | | | | | | | | (7,353) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Issuance of 102,939 shares of common stock | | | 103 | | | 701 | | | | | | | | | | | | | | 804 | |
| Stock based compensation | | | | | 2,222 | | | | | | | | | | | | | | 2,222 | |
| Balance at March 31, 2020 | $ | — | | | $ | 36,807 | | | $ | 842,780 | | | $ | 700,298 | | | $ | (26,171) | | | $ | — | | | | | $ | 1,553,714 | |
| | | | | | | | | | | | | | | |
| See accompanying notes to consolidated financial statements. | | | | | | | | | | | | | | | |
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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) | | | | | | Total
Equity |
| Balance at June 30, 2019 | $ | 0 | | | $ | 36,690 | | | $ | 837,150 | | | $ | 642,808 | | | $ | 5,139 | | | | | | | $ | 1,521,787 | |
| Comprehensive income | | | | | | | 34,612 | | | 12,649 | | | | | | | 47,261 | |
| | | | | | | | | | | | | | | |
| Cash dividends declared: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Common, $0.18 per share | | | | | | | (6,604) | | | | | | | | | (6,604) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Issuance of 6,129 shares of common stock | | | 6 | | | 162 | | | | | | | | | | | 168 | |
| Stock based compensation | | | | | 1,231 | | | | | | | | | | | 1,231 | |
| Balance at September 30, 2019 | $ | 0 | | | $ | 36,696 | | | $ | 838,543 | | | $ | 670,816 | | | $ | 17,788 | | | | | | | $ | 1,563,843 | |
| | | | | | | | | | | | | | | |
| Balance at January 1, 2019 | $ | 0 | | | $ | 34,477 | | | $ | 743,095 | | | $ | 579,252 | | | $ | (31,649) | | | | | | | $ | 1,325,175 | |
Cumulative effect adjustment from the adoption of ASU 2016-02 on January 1, 2019 | | | | | | | (1,713) | | | | | | | | | (1,713) | |
| Adjusted balance on January 1, 2019 | 0 | | | 34,477 | | | 743,095 | | | 577,539 | | | (31,649) | | | | | | | 1,323,462 | |
| Comprehensive income | | | | | | | 111,278 | | | 49,437 | | | | | | | 160,715 | |
| | | | | | | | | | | | | | | |
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| Cash dividends declared: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Common, $0.50 per share | | | | | | | (18,001) | | | | | | | | | (18,001) | |
| | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | |
| Issuance of 2,218,691 shares of common stock | | | 2,219 | | | 90,615 | | | | | | | | | | | 92,834 | |
| Stock based compensation | | | | | 4,833 | | | | | | | | | | | 4,833 | |
| Balance at September 30, 2019 | $ | 0 | | | $ | 36,696 | | | $ | 838,543 | | | $ | 670,816 | | | $ | 17,788 | | | | | | | $ | 1,563,843 | |
| | | | | | | | | | | | | | | |
| Balance at June 30, 2020 | $ | 110,705 | | | $ | 36,845 | | | $ | 844,202 | | | $ | 723,067 | | | $ | 32,558 | | | | | | | $ | 1,747,377 | |
| Comprehensive income | | | | | | | 47,958 | | | 22,868 | | | | | | | 70,826 | |
| | | | | | | | | | | | | | | |
| Cash dividends declared: | | | | | | | | | | | | | | | |
| Preferred, $211.94 per share | | | | | | | (2,437) | | | | | | | | | (2,437) | |
| Common, $0.20 per share | | | | | | | (7,377) | | | | | | | | | (7,377) | |
| | | | | | | | | | | | | | | |
| Issuance of 40,646 shares of common stock | | | 40 | | | 1,182 | | | | | | | | | | | 1,222 | |
| Stock based compensation | | | | | 1,993 | | | | | | | | | | | 1,993 | |
| Balance at September 30, 2020 | $ | 110,705 | | | $ | 36,885 | | | $ | 847,377 | | | $ | 761,211 | | | $ | 55,426 | | | | | | | $ | 1,811,604 | |
| | | | | | | | | | | | | | | |
| Balance at January 1, 2020 | $ | 0 | | | $ | 36,704 | | | $ | 839,857 | | | $ | 702,502 | | | $ | (926) | | | | | | | $ | 1,578,137 | |
Cumulative effect adjustment from the adoption of ASU 2016-13 on January 1, 2020 | | | | | | | (14,891) | | | | | | | | | (14,891) | |
| Adjusted balance on January 1, 2020 | 0 | | | 36,704 | | | 839,857 | | | 687,611 | | | (926) | | | | | | | 1,563,246 | |
| Comprehensive income | | | | | | | 98,129 | | | 56,352 | | | | | | | 154,481 | |
| | | | | | | | | | | | | | | |
| Cash dividends declared: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Preferred, $211.94 per share | | | | | | | (2,437) | | | | | | | | | (2,437) | |
| Common, $0.60 per share | | | | | | | (22,092) | | | | | | | | | (22,092) | |
| | | | | | | | | | | | | | | |
| Issuance of 11,500 shares of Series E preferred stock | 110,705 | | | | | | | | | | | | | | | 110,705 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Issuance of 181,112 shares of common stock | | | 181 | | | 1,969 | | | | | | | | | | | 2,150 | |
| Stock based compensation | | | | | 5,551 | | | | | | | | | | | 5,551 | |
| Balance at September 30, 2020 | $ | 110,705 | | | $ | 36,885 | | | $ | 847,377 | | | $ | 761,211 | | | $ | 55,426 | | | | | | | $ | 1,811,604 | |
| | | | | | | | | | | | | | | |
| 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, 2019, included in the Form 10-K of Heartland Financial USA, Inc. ("Heartland") filed with the Securities and Exchange Commission ("SEC") on February 26, 2020. 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 March 31,September 30, 2020, are not necessarily indicative of the results expected for the year ending December 31, 2020.
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-monththree- and nine-month periods ended March 31,September 30, 2020, and 2019, are shown in the table below:
| | | | Three Months Ended
March 31, | | | Three Months Ended
September 30, |
| (Dollars and number of shares in thousands, except per share data) | (Dollars and number of shares in thousands, except per share data) | 2020 | | 2019 | (Dollars and number of shares in thousands, except per share data) | 2020 | | 2019 |
| Net income | | Net income | $ | 47,958 | | | $ | 34,612 | |
| Preferred dividends | | Preferred dividends | (2,437) | | | 0 | |
| | Net income available to common stockholders | | Net income available to common stockholders | $ | 45,521 | | | $ | 34,612 | |
| | Weighted average common shares outstanding for basic earnings per share | | Weighted average common shares outstanding for basic earnings per share | 36,941 | | | 36,692 | |
| Assumed incremental common shares issued upon vesting of outstanding restricted stock units | | Assumed incremental common shares issued upon vesting of outstanding restricted stock units | 54 | | | 143 | |
| Weighted average common shares for diluted earnings per share | | Weighted average common shares for diluted earnings per share | 36,995 | | | 36,835 | |
| Earnings per common share — basic | | Earnings per common share — basic | $ | 1.23 | | | $ | 0.94 | |
| Earnings per common share — diluted | | Earnings per common share — diluted | $ | 1.23 | | | $ | 0.94 | |
| Number of antidilutive common stock equivalents excluded from diluted earnings per share computation | | Number of antidilutive common stock equivalents excluded from diluted earnings per share computation | 41 | | | 8 | |
| | | | Nine Months Ended
September 30, |
| (Dollars and number of shares in thousands, except per share data) | | (Dollars and number of shares in thousands, except per share data) | 2020 | | 2019 |
| Net income | | Net income | $ | 98,129 | | | $ | 111,278 | |
| Preferred dividends | | Preferred dividends | (2,437) | | | 0 | |
| | Net income available to stockholders | Net income available to stockholders | $ | 20,040 | | | $ | 31,497 | | Net income available to stockholders | $ | 95,692 | | | $ | 111,278 | |
| | Weighted average common shares outstanding for basic earnings per share | Weighted average common shares outstanding for basic earnings per share | 36,821 | | | 34,564 | | Weighted average common shares outstanding for basic earnings per share | 36,882 | | | 35,675 | |
| Assumed incremental common shares issued upon vesting of outstanding restricted stock units | Assumed incremental common shares issued upon vesting of outstanding restricted stock units | 75 | | | 136 | | Assumed incremental common shares issued upon vesting of outstanding restricted stock units | 74 | | | 143 | |
| Weighted average common shares for diluted earnings per share | Weighted average common shares for diluted earnings per share | 36,896 | | | 34,700 | | Weighted average common shares for diluted earnings per share | 36,956 | | | 35,818 | |
| Earnings per common share — basic | Earnings per common share — basic | $ | 0.54 | | | $ | 0.91 | | Earnings per common share — basic | $ | 2.59 | | | $ | 3.12 | |
| Earnings per common share — diluted | Earnings per common share — diluted | $ | 0.54 | | | $ | 0.91 | | Earnings per common share — diluted | $ | 2.59 | | | $ | 3.11 | |
| Number of antidilutive common stock equivalents excluded from diluted earnings per share computation | Number of antidilutive common stock equivalents excluded from diluted earnings per share computation | — | | | 2 | | Number of antidilutive common stock equivalents excluded from diluted earnings per share computation | 0 | | | 8 | |
Subsequent Events - Heartland 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.
Effect of New Financial Accounting Standards
ASU 2016-13
On January 1, 2020, Heartland adopted Accounting Standards Update ("ASU") 2016-13, "Financial Instruments - Credit Losses (Topic 326),", which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss ("CECL") methodology. Also on January 1, 2020, Heartland adopted ASU 2019-04, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments," which amended certain provisions contained in ASU 2016-13, particularly by including accrued interest in the definition of amortized cost, as well as by clarifying that loan extension and renewal options in the original or modified contract that are not unconditionally cancelable by the entity should be considered in the entity's determination of expected credit losses. Also on January 1, 2020, Heartland adopted ASU 2019-11, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses," which amended certain aspects of ASU 2016-13.
The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, which includes loans held to maturity and held to maturity debt securities. It also applies to available for sale
debt securities and off-balance sheet unfunded loan commitments. Heartland adopted ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized cost basis and off-balance sheet unfunded loan commitments. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP.
Heartland's adoption of ASU 2016-13 resulted in an increase of $12.1 million to the allowance for credit losses related to loans, which included the addition of $6.0 million of purchased credit impaired discount on previously acquired loans and a cumulative-effect adjustment to retained earnings totaling $4.6 million, net of taxes of $1.5 million. Heartland adopted ASU 2016-13 using the prospective transition approach for loans purchased with credit deterioration ("PCD") that were previously classified as purchased credit impaired ("PCI") and accounted for under Accounting Standards Codification ("ASC") 310-30. In accordance with ASC 326, Heartland did not reassess whether PCI loans met the criteria of PCD loans as of the adoption date.
The adoption of ASU 2016-13 resulted in an increase of $13.6 million to the allowance for unfunded commitments and a cumulative-effect adjustment to retained earnings totaling $10.2 million, net of taxes of $3.4 million.
The adoption of ASU 2016-13 also established an allowance for credit losses for Heartland's held to maturity debt securities of $158,000 and a cumulative-effect adjustment to retained earnings totaling $118,000, net of taxes of $40,000. Heartland did not record an allowance for credit losses for Heartland's available for sale debt securities upon adoption of ASU 2016-13.
The total result of the adoption of ASU 2016-13 was a cumulative-effect adjustment to Heartland's retained earnings of $14.9 million, net of taxes of $5.0 million.
Heartland elected to not measure an allowance for credit losses on accrued interest as such accrued interest is written off in a timely manner when deemed uncollectible. Any such write-off of accrued interest will reverse previously recognized interest income. Heartland elected to not include accrued interest within the presentation and disclosures of the carrying amount of financial assets held at amortized cost. This election is applicable to the various disclosures included within the consolidated financial statements and notes contained in this Quarterly Report on Form 10-Q.
The adoption of ASU 2019-04 did not have a material impact on Heartland's results of operation or financial condition.
Heartland elected not to utilize the regulatory transition relief issued by federal regulatory authorities in the first quarter of 2020, which allowed banking institutions to delay the impact of CECL on regulatory capital because the impact on the capital ratios of Heartland and its subsidiary banks was not significant.
Loans Held to Maturity
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost, which is the principal amount outstanding, net of cumulative charge-offs, unamortized net deferred loan origination fees and costs and unamortized premiums or discounts on purchased loans. Heartland has a loan policy which establishes the credit risk appetite, lending standards and underwriting criteria designed so that Heartland may extend credit in a
prudent and sound manner. The Heartland board of directors reviews and approves the loan policy 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 and nonperforming loans and potential problem loans.
Heartland originates commercial and industrial loans and owner occupied commercial real estate loans for a wide variety of business purposes, including lines of credit for capital and operating purposes and term loans for real estate and equipment purchases. Non-owner occupied commercial real estate loans provide financing for various non-owner occupied or income producing properties. Real estate construction loans are generally short-term or interim loans that provide financing for acquiring or developing commercial income properties, multi-family projects or single-family residential homes. Agricultural and agricultural real estate loans provide financing for capital improvements and farm operations, as well as livestock and machinery purchases. Residential real estate loans are originated for the purchase or refinancing of single family residential properties. Consumer loans include loans for motor vehicles, home improvement, home equity and personal lines of credit.
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 credit losses. A loan can be restored to accrual status if the borrower has resumed paying the full amount of the scheduled contractual interest and principal payments on the loan, and (1) all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within a
reasonable period of time, and (2) there is a sustained period of repayment performance (generally a minimum of six months) by the borrower in accordance with the scheduled contractual terms.
Allowance for Credit Losses on Loans
The allowance for credit losses is a valuation account that is deducted from the loans held to maturity amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of the amounts previously charged off.
Heartland's allowance model is designed to consider the current contractual term of the loan, defined as starting as of the most recent renewal date and ending at maturity date. Prepayments are implicit in the model.
Management's estimation of expected credit losses is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Historical loss experience is generally the starting point for estimating expected credit losses. Adjustments are made to historical loss experience to reflect differences in asset-specific risk characteristics, such as underwriting standards, portfolio mix or asset terms and differences in economic conditions, both current conditions and reasonable and supportable forecasts. If Heartland is not able to make or obtain reasonable and supportable forecasts for the entire life of the financial asset, it is required to estimate expected credit losses for the remaining life using an approach that reverts to historical credit loss information. The components of the allowance for credit losses are described more specifically below.
Quantitative Factors
The quantitative component of the allowance for credit losses is measured using historical loss experience using a look-back period, currently over the most recent 12 years, on a pool basis for loans with similar risk characteristics. Heartland utilizes third-party software to calculate the expected credit losses. The risks in the commercial and industrial loan portfolio include the unpredictability of the cash flow of the borrowers and the variability in the value of the collateral securing the loans. Owner occupied commercial real estate loans are dependent upon the cash flow of the borrowers and the collateral value of the real estate. Non-owner occupied commercial real estate loans are typically dependent, in large part, on sufficient income from the properties securing the loans to cover the operating expenses and debt service. Real estate construction loans involve additional risks because funds are advanced based upon estimates of costs and the estimated value of the completed project. Additionally, real estate construction loans have a greater risk of default in a weaker economy because the source of repayment is reliant on the successful and timely sale of the project. Agricultural and agricultural real estate loans are dependent upon the profitable operation or management of the farm property securing the loan. Loans secured by farm equipment, livestock or crops may not provide an adequate source of repayment because of damage or depreciation. Residential real estate loans are dependent upon the borrower's ability to repay the loan and the underlying collateral value. Consumer loans are dependent upon the borrower's personal financial circumstances and continued financial stability.
If a loan no longer shares similar risk characteristics with other loans in the pool and does not share similar risk characteristics with another pool, it is evaluated on an individual basis and is not included in the collective evaluation. Heartland will individually assess loans that are collateral dependent. A loan is collateral-dependent when the debtor is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. For those loans that are deemed collateral dependent and in foreclosure the impairment will be recognized by creating a specific reserve against the loan with a corresponding charge to provision expense. In most cases, the specific reserve will be charged off in the same quarter as the loss is probable. Individually assessed loans will be considered non-accrual since it is probable that the collection of all principal and interest will not occur. In some cases when foreclosure is not probable, but Heartland believes certain loans do not share the same risk characteristics with the like loans in the pool, the standard allows for these loans to be individually assessed. All individually assessed calculations are completed at least annually.
Qualitative Factors
Heartland's allowance methodology also has a qualitative component, the purpose of which is to provide management with a means to take into consideration changes in current conditions that could potentially have an effect, up or down, on the level of recognized loan losses, that, for whatever reason, fail to show up in the quantitative analysis performed in determining its base loan loss rates.
Heartland utilizes the following qualitative factors:
•changes in lending policies and procedures
•changes in the nature and volume of loans
•experience and ability of management
•changes in the credit quality of the loan portfolio
•quality of institution’s loan review systemrisk in acquired portfolios
•concentrations of credit
•other external factors
The qualitative adjustments are based on the comparison of the current condition to the average condition over the look back period. The adjustment amount can be either positive or negative depending on whether or not the current condition is better or worse than the historical average. Heartland incorporates the adjustments for changes in current conditions using an overlay method. The adjustments are applied as a percentage adjustment in addition to the calculated historical loss rates of each pool. These adjustments reflect the extent to which Heartland expects current conditions to differ from the conditions that existed for the period over which historical information was evaluated. Heartland utilizes anchoring to determine the minimum and maximum amount of qualitative allowance for credit losses, which is determined by comparing the highest and lowest historical rate to the average loss rate to calculate the rate for the adjustment.
Economic Forecasting
Heartland utilizes an overlay method for its economic forecasting component, similar to the method utilized for the qualitative factors. The length of the reasonable and supportable forecast period is a judgmental determination based on the level to which the entity can support its forecast of economic conditions that drive its estimate of expected loss. Heartland compares forecasted economic indices, such as unemployment and gross domestic product, to the economic conditions that existed over Heartland's look-back period.
It is expected that actual economic conditions will, in many circumstances, turn out differently than forecasted because the ultimate outcomes during the forecast period may be affected by events that were unforeseen, such as economic disruption and fiscal or monetary policy actions, which are exacerbated by longer forecasting periods. This uncertainty would be relevant to the entity’s confidence level as to the outcomes being forecasted. That is, an entity is likely less confident in the ultimate outcome of events that will occur at the end of the forecast period as compared to the beginning. As a result, actual future economic conditions may not be an effective indicator of the quality of management’s forecasting process, including the length of the forecast period.
Heartland has access to various third-party economic forecast scenarios provided by Moody's, which are updated quarterly in Heartland's methodology. Because Heartland is applying the economic forecast adjustment qualitatively, the concept of "reversion to the historical mean" does not apply. For Heartland's January 1, 2020 calculation, a two-year reasonable and supportable forecast period was used. Because of the economic uncertainty associated with COVID-19, Heartland utilized a one-year reasonable and supportable forecast period for the calculation of the March 31, 2020, June 30, 2020, and September 30, 2020, allowance for credit losses.
Allowance for Credit Losses on Unfunded Loan Commitments
Heartland estimates expected credit losses over the contractual term of the loan for the unfunded portion of the loan commitment that is not unconditionally cancellable by Heartland. Management uses an estimated average utilization rate to determine the exposure at default. The allowance for unfunded commitments is recorded in the Accrued Expenses and Other Liabilities section of the consolidated balance sheets.
Allowance for Credit Losses on Held to Maturity Debt Securities
Heartland measures expected credit losses on held to maturity debt securities on a collective basis based on security type. The estimate of expected credit losses considers historical credit information that is adjusted for current conditions and supportable forecasts. Heartland's held to maturity debt securities consist primarily of investment grade obligations of states and political subdivisions. The forecast and forecast period used in the calculation of allowance for credit losses on loans is used in calculating the allowance for credit losses on held to maturity debt securities, and Heartland utilizes a third-party to calculate the expected credit losses.
Allowance for Credit Losses on Available for Sale ("AFS") Debt Securities
ASU 2016-13 modifies the impairment model for AFS debt securities. AFS debt securities in unrealized loss positions are evaluated for credit related loss at least quarterly. The decline in fair value of an AFS debt security due to credit loss results in recording an allowance for credit losses to the extent the fair value is less than the amortized cost basis. Declines in fair value that have not been recorded through an allowance for credit losses, such as declines due to changes in market interest rates, are recorded through other comprehensive income, net of applicable taxes. Although these evaluations involve significant judgment, an unrealized loss in the fair value of a debt security is generally considered to not be related to credit when the fair value of the security is below the carrying value primarily due to changes in risk-free interest rates, there has not been
significant deterioration in the financial condition of the issuer, and Heartland does not intend to sell nor does it believe it will be required to sell the security before the recovery of its cost basis.
Heartland did not record an allowance for credit losses on AFS debt securities upon adoption of ASU 2016-13 or at March 31,September 30, 2020.
ASU 2017-04
In January 2017, the Financial Accounting Standards Board ("FASB") issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350)." The amendments in this ASU simplify the subsequent measurement of goodwill by eliminating step two from the goodwill impairment test. Instead, an entity performs only step one of its quantitative goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and then recognizing the impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized cannot exceed the total amount of goodwill allocated to that reporting unit. An entity has the option to perform a qualitative assessment for a reporting unit to determine if the quantitative step one impairment test is necessary. This ASU iswas effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and iswas applied prospectively. Early adoption was permitted, including in an interim period for impairment tests performed after January 1, 2017. Heartland adopted ASU 2017-04 in the first quarter of 2020.
Heartland used this approach to evaluate its goodwill during the second quarter of 2020, andas an unprecedented deterioration in economic conditions triggered by the adoption didCOVID-19 pandemic caused a significant decline in stock market valuations, including Heartland's common stock price. Based on this goodwill impairment assessment, Heartland concluded that its goodwill was not have a material impact on its results of operations, financial position and liquidity.impaired.
ASU 2018-13
In August 2018, the FASB issued ASU 2018-13, "Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." ASU 2018-13 eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities are no longer required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy but are required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 iswas effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption was permitted. Heartland adopted this ASU on January 1, 2020, as required, and because ASU 2018-13 only revised disclosure requirements, the adoption of this ASU did not have a material impact on its results of operations, financial position and liquidity.
ASU 2018-16
In October 2018, the FASB issued ASU 2018-16, "Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting." In the United States, eligible benchmark interest rates under Topic 815 are interest rates on direct Treasury obligations of the U.S.
government, the London Interbank Offered Rate ("LIBOR") swap rate, and the Overnight Index Swap ("OIS") Rate based on the Fed Funds Effective Rate. When the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, in August 2017, it introduced the Securities Industry and Financial Markets Association ("SIFMA") Municipal Swap Rate as the fourth permissible U.S. benchmark rate. ASU 2018-16 adds the OIS rate based on the Secured Overnight Financing Rate ("SOFR") as a U.S. benchmark interest rate to facilitate the LIBOR to SOFR transition and provide sufficient lead time for entities to prepare for changes to interest rate risk hedging strategies for both risk management and hedge accounting purposes. ASU 2018-16 became effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years and the financial statement impact immediately upon adoption was immaterial. The future financial statement impact will depend on any new contracts entered into using new benchmark rates, as well as any existing contracts that are migrated from LIBOR to new benchmark interest rates. Heartland is currently evaluating the impact of the transition from LIBOR as an interest rate benchmark to other potential alternative reference rates, including but not limited to the SOFR. Currently, Heartland has adjustable rate loans, several debt obligations and derivative instruments in place that reference LIBOR-based rates. The transition from LIBOR is expected to take place at the end of 2021, and management will continue to actively assess the related opportunities and risks involved in this transition.
ASU 2019-12
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes." ASU 2019-12 simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. ASU 2019-12 also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. Heartland intends to adopt this ASU on January 1, 2021, as required, and the adoption is not expected to have a material impact on its results of operations, financial position and liquidity.
ASU 2020-02
In February 2020, the FASB issued ASU 2020-02, "Financial Instruments - Credit losses (Topic 326) and Leases (Topic 842)," which incorporates SEC Staff Accounting Bulletin ("SAB") 119 (updated from SAB 102) into the ASC by aligning SEC recommended policies and procedures with ASC 326. ASU 2020-02 was effective immediately for Heartland and had no significant impact on its results of operations, financial position and liquidity.
ASU 2020-03
In March 2020, the FASB issued ASU 2020-03, "Codification Improvements to Financial Instruments," which revised a wide variety of topics in the ASC with the intent to make the ASC easier to understand and apply by eliminating inconsistencies and providing clarifications. ASU 2020-03 was effective immediately upon its release, and the adoption did not have a material impact on Heartland's results of operations, financial position and liquidity.
ASU 2020-04
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform," which provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For loan and lease agreements that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate, and the modifications would be considered "minor" with the result that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement, with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for derivative accounting. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-04 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic within the ASC, ASU 2020-04 must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. Heartland anticipates that ASU 2020-04 will simplify any modifications executed between the selected start date and December 31, 2022 that are directly related to LIBOR transition by allowing prospective recognition of the continuation of the contract, rather than extinguishment of the old contract that would result in writing off unamortized fees/costs. Management will continue to actively assess the impacts of ASU 2020-04 and the related opportunities and risks involved in the LIBOR transition.
NOTE 2: ACQUISITIONS
Pending Acquisition
Johnson Bank branches
On June 9, 2020, Arizona Bank & Trust ("AB&T"), which is a wholly-owned subsidiary of Heartland headquartered in Phoenix, Arizona, entered into a purchase and assumption agreement, pursuant to which AB&T will acquire certain assets and will assume substantially all of the deposits and certain other liabilities of Johnson Bank's Arizona operations, which includes four banking centers. Johnson Bank is a wholly-owned subsidiary of Johnson Financial Group, Inc., headquartered in Racine, Wisconsin. Johnson Insurance Services is not a part of this transaction.
Under the terms of the purchase and assumption agreement, AB&T will acquire Johnson Bank's Arizona banking centers, which had deposits of approximately $392.2 million and loans of approximately $183.8 million as of September 30, 2020. The actual amount of deposits assumed and loans acquired will be determined at closing. Heartland has received all regulatory approvals for this transaction. Because the purchase and assumption agreement was signed on June 9, 2020, and the transaction is expected to close in the fourth quarter of 2020, the transaction had no impact on Heartland's consolidated financial statements for the nine months ended September 30, 2020.
Pending Acquisition
AIM Bancshares, Inc.
On February 11,October 19, 2020, Heartland entered into a definitivean Amended and Restated Agreement and Plan of Merger (the "amended and restated merger agreementagreement") relating to acquirethe acquisition of AIM Bancshares, Inc., ("AIM") and its wholly-owned subsidiary, AimBank, headquartered in Levelland, Texas. ShareholdersThe amended and restated merger agreement amends and restates the Agreement and Plan of Merger dated February 11, 2020 between Heartland and AIM (the "original merger agreement"). The original merger agreement was amended and restated to address certain regulatory concerns raised by the Federal Reserve Board during its review of the transaction contemplated by the original merger agreement. In response to discussions with the Federal Reserve Board, AIM and Heartland agreed that they could better serve the goals of the transaction and more easily address regulatory concerns if they effected the transaction by completing the two sequential mergers described in the next paragraph. AIM and Heartland also agreed to adjust the cash component of the merger consideration based on increases in AIM’s adjusted tangible common equity as a result of gains in AIM’s "available-for-sale" securities portfolio, an increase in AIM’s retained earnings and gains in AIM’s "held-to-maturity" securities portfolio since the date of the original merger agreement. A holdback provision was added to the amended and restated merger agreement as a result of certain litigation proceedings against AimBank. Certain other provisions of the original merger agreement were revised to reflect other changes in economic terms and the significantly delayed closing date of the transaction.
In the first merger, AIM will merge with and into AimBank, and holders of shares of AIM Bancsharescommon stock will receive one share of AimBank common stock for each share of AIM common stock owned by such holders. In the second merger, which will occur immediately following the consummation of the AIM/AimBank merger, AimBank will merge with and into Heartland’s wholly owned subsidiary, First Bank & Trust. In the second merger transaction, all issued and outstanding shares of AimBank common stock will be exchanged for shares of Heartland common stock and cash. As a result, each share of AimBank common stock received by shareholders of AIM in the first merger will be exchanged for 207.0 shares of Heartland common stock and $685.00 of cash for each share of AIM Bancshares.cash. The transaction value will change due to fluctuations in the price of Heartland common stock and is subject to certain potential adjustments as set forth in the amended and restated merger agreement. SimultaneousThe transaction is structured as a tax-free reorganization with respect to the closingstock consideration received by shareholders of AIM.
The combined entity, resulting from the transaction,merger of AimBank will merge into Heartland's Texas-based subsidiary, First Bank & Trust, and the combined entity will operate as First Bank & Trust. As of March 31,September 30, 2020, AimBank had total assets of $1.82$1.85 billion, $1.16$1.14 billion of gross loans outstanding, and $1.58$1.60 billion of deposits. Because the amended and restated merger agreement was signed on February 11,October 19, 2020 and the transaction is expected to close in the thirdfourth quarter of 2020, the transaction hashad no impact on Heartland's first quarter 2020 consolidated financial statements.statements for the nine months ended September 30, 2020.
Rockford Bank and Trust Company
On November 30, 2019, Heartland's Illinois Bank & Trust subsidiary completed its acquisition of substantially all of the assets and substantially all of the deposits and certain other liabilities of Rockford Bank and Trust Company, headquartered in Rockford, Illinois. Rockford Bank and Trust Company was a wholly-owned subsidiary of Moline, Illinois-based QCR Holdings, Inc. As of the closing date, Rockford Bank and Trust Company had, at fair value, total assets of $495.7 million, which included $354.0 million of gross loans held to maturity, and $430.3 million of deposits. The all-cash payment was approximately $46.6 million.
Blue Valley Ban Corp.
On May 10, 2019, Heartland completed the acquisition of Blue Valley Ban Corp. ("BVBC") and its wholly-owned subsidiary, Bank of Blue Valley, headquartered in Overland Park, Kansas. Based on Heartland's closing common stock price of $44.78 per share on May 10, 2019, the aggregate consideration paid to BVBC common shareholders was $92.3 million, which was paid by delivery of 2,060,258 shares of Heartland common stock. On the closing date, in addition to this merger consideration,
Heartland provided BVBC the funds necessary to repay outstanding debt of $6.9 million, and Heartland assumed $16.1 million of trust preferred securities at fair value. Immediately following the closing of the transaction, Bank of Blue Valley was merged with and into Heartland's wholly-owned Kansas subsidiary, Morrill & Janes Bank and Trust Company, and the combined entity operates under the Bank of Blue Valley brand. As of the closing date, BVBC had, at fair value, total assets of $766.2 million, total loans held to maturity of $542.0 million, and total deposits of $617.1 million. The transaction was a tax-free reorganization with respect to the stock consideration received by the stockholders of BVBC.
NOTE 3: 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 March 31,September 30, 2020, and December 31, 2019, are summarized in the table below, in thousands:
| | | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Estimated
Fair
Value | | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Estimated
Fair
Value |
| March 31, 2020 | | | | | | | | |
| September 30, 2020 | | September 30, 2020 | | | | | | | |
| U.S. government corporations and agencies | U.S. government corporations and agencies | $ | 9,796 | | | $ | 120 | | | $ | — | | | $ | 9,916 | | U.S. government corporations and agencies | $ | 3,185 | | | $ | 87 | | | $ | 0 | | | $ | 3,272 | |
| Mortgage and asset-backed securities | Mortgage and asset-backed securities | 2,574,131 | | | 25,835 | | | (79,962) | | | 2,520,004 | | Mortgage and asset-backed securities | 3,719,747 | | | 46,959 | | | (24,198) | | | 3,742,508 | |
| Obligations of states and political subdivisions | Obligations of states and political subdivisions | 915,045 | | | 29,927 | | | (4,531) | | | 940,441 | | Obligations of states and political subdivisions | 1,127,030 | | | 60,974 | | | (2,655) | | | 1,185,349 | |
| | Total debt securities | Total debt securities | 3,498,972 | | | 55,882 | | | (84,493) | | | 3,470,361 | | Total debt securities | 4,849,962 | | | 108,020 | | | (26,853) | | | 4,931,129 | |
| Equity securities with a readily determinable fair value | Equity securities with a readily determinable fair value | 18,260 | | | — | | | — | | | 18,260 | | Equity securities with a readily determinable fair value | 19,569 | | | — | | | — | | | 19,569 | |
| Total | Total | $ | 3,517,232 | | | $ | 55,882 | | | $ | (84,493) | | | $ | 3,488,621 | | Total | $ | 4,869,531 | | | $ | 108,020 | | | $ | (26,853) | | | $ | 4,950,698 | |
| December 31, 2019 | December 31, 2019 | | | | | | | | December 31, 2019 | | | | | | | |
| U.S. government corporations and agencies | U.S. government corporations and agencies | $ | 9,844 | | | $ | 49 | | | $ | — | | | $ | 9,893 | | U.S. government corporations and agencies | $ | 9,844 | | | $ | 49 | | | $ | 0 | | | $ | 9,893 | |
| Mortgage and asset-backed securities | Mortgage and asset-backed securities | 2,579,081 | | | 17,200 | | | (19,003) | | | 2,577,278 | | Mortgage and asset-backed securities | 2,579,081 | | | 17,200 | | | (19,003) | | | 2,577,278 | |
| Obligations of states and political subdivisions | Obligations of states and political subdivisions | 704,073 | | | 12,516 | | | (9,399) | | | 707,190 | | Obligations of states and political subdivisions | 704,073 | | | 12,516 | | | (9,399) | | | 707,190 | |
| | Total debt securities | Total debt securities | 3,292,998 | | | 29,765 | | | (28,402) | | | 3,294,361 | | Total debt securities | 3,292,998 | | | 29,765 | | | (28,402) | | | 3,294,361 | |
| Equity securities with a readily determinable fair value | Equity securities with a readily determinable fair value | 18,435 | | | — | | | — | | | 18,435 | | Equity securities with a readily determinable fair value | 18,435 | | | — | | | — | | | 18,435 | |
| Total | Total | $ | 3,311,433 | | | $ | 29,765 | | | $ | (28,402) | | | $ | 3,312,796 | | Total | $ | 3,311,433 | | | $ | 29,765 | | | $ | (28,402) | | | $ | 3,312,796 | |
The amortized cost, gross unrealized gains and losses and estimated fair values of held to maturity securities as of March 31,September 30, 2020, and December 31, 2019, are summarized in the table below, in thousands:
| | | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Estimated
Fair
Value | | Allowance for Credit Losses | | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Estimated
Fair
Value | | Allowance for Credit Losses |
| March 31, 2020 | | | | | | | | | | |
| September 30, 2020 | | September 30, 2020 | | | | | | | | | |
| | Obligations of states and political subdivisions | Obligations of states and political subdivisions | $ | 92,072 | | | $ | 9,303 | | | $ | — | | | $ | 101,375 | | | $ | (197) | | Obligations of states and political subdivisions | $ | 88,761 | | | $ | 10,858 | | | $ | 0 | | | $ | 99,619 | | | $ | (61) | |
| Total | Total | $ | 92,072 | | | $ | 9,303 | | | $ | — | | | $ | 101,375 | | | $ | (197) | | Total | $ | 88,761 | | | $ | 10,858 | | | $ | 0 | | | $ | 99,619 | | | $ | (61) | |
| December 31, 2019 | December 31, 2019 | | | | | | | | | | December 31, 2019 | | | | | | | | | |
| | Obligations of states and political subdivisions | Obligations of states and political subdivisions | $ | 91,324 | | | $ | 9,160 | | | $ | — | | | $ | 100,484 | | | $ | — | | Obligations of states and political subdivisions | $ | 91,324 | | | $ | 9,160 | | | $ | 0 | | | $ | 100,484 | | | $ | 0 | |
| Total | Total | $ | 91,324 | | | $ | 9,160 | | | $ | — | | | $ | 100,484 | | | $ | — | | Total | $ | 91,324 | | | $ | 9,160 | | | $ | 0 | | | $ | 100,484 | | | $ | 0 | |
As of March 31,September 30, 2020, Heartland had $13.6$14.7 million of accrued interest receivable, which is included in other assets on the consolidated balance sheet. Heartland 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 investment securities carried at fair value at March 31,September 30, 2020, 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.
| | | March 31, 2020 | | | September 30, 2020 |
| | Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Estimated Fair Value |
| Due in 1 year or less | Due in 1 year or less | $ | 13,010 | | | $ | 13,115 | | Due in 1 year or less | $ | 6,756 | | | $ | 6,784 | |
| Due in 1 to 5 years | Due in 1 to 5 years | 28,459 | | | 28,965 | | Due in 1 to 5 years | 25,556 | | | 26,229 | |
| Due in 5 to 10 years | Due in 5 to 10 years | 77,800 | | | 80,445 | | Due in 5 to 10 years | 68,084 | | | 72,131 | |
| Due after 10 years | Due after 10 years | 805,572 | | | 827,832 | | Due after 10 years | 1,029,819 | | | 1,083,477 | |
| Total debt securities | Total debt securities | 924,841 | | | 950,357 | | Total debt securities | 1,130,215 | | | 1,188,621 | |
| Mortgage and asset-backed securities | Mortgage and asset-backed securities | 2,574,131 | | | 2,520,004 | | Mortgage and asset-backed securities | 3,719,747 | | | 3,742,508 | |
| Equity securities with a readily determinable fair value | Equity securities with a readily determinable fair value | 18,260 | | | 18,260 | | Equity securities with a readily determinable fair value | 19,569 | | | 19,569 | |
| Total investment securities | Total investment securities | $ | 3,517,232 | | | $ | 3,488,621 | | Total investment securities | $ | 4,869,531 | | | $ | 4,950,698 | |
The amortized cost and estimated fair value of debt securities held to maturity at March 31,September 30, 2020, 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.
| | | March 31, 2020 | | | September 30, 2020 |
| | Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Estimated Fair Value |
| Due in 1 year or less | Due in 1 year or less | $ | 3,357 | | | $ | 3,398 | | Due in 1 year or less | $ | 930 | | | $ | 944 | |
| Due in 1 to 5 years | Due in 1 to 5 years | 16,681 | | | 17,158 | | Due in 1 to 5 years | 18,694 | | | 19,855 | |
| Due in 5 to 10 years | Due in 5 to 10 years | 60,368 | | | 65,394 | | Due in 5 to 10 years | 59,367 | | | 65,371 | |
| Due after 10 years | Due after 10 years | 11,666 | | | 15,425 | | Due after 10 years | 9,770 | | | 13,449 | |
| Total debt securities | Total debt securities | 92,072 | | | 101,375 | | Total debt securities | 88,761 | | | 99,619 | |
| Allowance for credit losses | Allowance for credit losses | (197) | | | — | | Allowance for credit losses | (61) | | | 0 | |
| Total investment securities | Total investment securities | $ | 91,875 | | | $ | 101,375 | | Total investment securities | $ | 88,700 | | | $ | 99,619 | |
As of March 31,September 30, 2020, and December 31, 2019, securities with a carrying value of $1.02$1.91 billion and $509.6 million, 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 carried at fair value for the three-monththree- and nine-month periods ended March 31,September 30, 2020 and 2019, are summarized as follows, in thousands:
| | | | Three Months Ended
March 31, | | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| Proceeds from sales | Proceeds from sales | | $ | 328,890�� | | | $ | 434,154 | | Proceeds from sales | $ | 306,383 | | | $ | 290,877 | | | $ | 818,022 | | | $ | 1,485,773 | |
| Gross security gains | Gross security gains | | 2,904 | | | 2,408 | | Gross security gains | 1,825 | | | 2,371 | | | 8,687 | | | 10,301 | |
| Gross security losses | Gross security losses | | 1,246 | | | 833 | | Gross security losses | 726 | | | 358 | | | 3,924 | | | 3,133 | |
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's securities portfolio as of March 31,September 30, 2020, and December 31, 2019. 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
loss position for 12 months or more. The reference point for determining how long an investment was in an unrealized loss position was March 31,September 30, 2019, and December 31, 2018, respectively.
| | Debt securities available for sale | Debt securities available for sale | Less than 12 months | | | 12 months or longer | | | Total | | 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 | | Fair
Value | | Unrealized
Losses | | Count | | Fair
Value | | Unrealized
Losses | | Count | | Fair
Value | | Unrealized
Losses | | Count |
| March 31, 2020 | | | | | | | | | | | | | | | | | | |
| U.S. government corporations and agencies | $ | — | | | $ | — | | | — | | | $ | — | | | $ | — | | | — | | | $ | — | | | $ | — | | | — | | |
| September 30, 2020 | | September 30, 2020 | | | | | | | | | | | | | | | | | |
| | Mortgage and asset-backed securities | Mortgage and asset-backed securities | 1,255,628 | | | (65,624) | | | 129 | | | 168,360 | | | (14,338) | | | 44 | | | 1,423,988 | | | (79,962) | | | 173 | | Mortgage and asset-backed securities | $ | 1,277,625 | | | $ | (14,276) | | | 69 | | | $ | 544,573 | | | $ | (9,922) | | | 108 | | | $ | 1,822,198 | | | $ | (24,198) | | | 177 | |
| Obligations of states and political subdivisions | Obligations of states and political subdivisions | 202,240 | | | (4,531) | | | 29 | | | — | | | — | | | — | | | 202,240 | | | (4,531) | | | 29 | | Obligations of states and political subdivisions | 155,689 | | | (2,655) | | | 29 | | | 0 | | | 0 | | | 0 | | | 155,689 | | | (2,655) | | | 29 | |
| | Total temporarily impaired securities | Total temporarily impaired securities | $ | 1,457,868 | | | $ | (70,155) | | | 158 | | | $ | 168,360 | | | $ | (14,338) | | | 44 | | | $ | 1,626,228 | | | $ | (84,493) | | | 202 | | Total temporarily impaired securities | $ | 1,433,314 | | | $ | (16,931) | | | 98 | | | $ | 544,573 | | | $ | (9,922) | | | 108 | | | $ | 1,977,887 | | | $ | (26,853) | | | 206 | |
| December 31, 2019 | December 31, 2019 | | | | December 31, 2019 | | |
| U.S. government corporations and agencies | $ | — | | | $ | — | | | — | | | $ | — | | | $ | — | | | — | | | $ | — | | | $ | — | | | — | | |
| | Mortgage and asset-backed securities | Mortgage and asset-backed securities | 1,231,732 | | | (14,189) | | | 150 | | | 241,232 | | | (4,814) | | | 58 | | | 1,472,964 | | | (19,003) | | | 208 | | Mortgage and asset-backed securities | $ | 1,231,732 | | | $ | (14,189) | | | 150 | | | $ | 241,232 | | | $ | (4,814) | | | 58 | | | $ | 1,472,964 | | | $ | (19,003) | | | 208 | |
| Obligations of states and political subdivisions | Obligations of states and political subdivisions | 387,534 | | | (9,399) | | | 50 | | | — | | | — | | | — | | | 387,534 | | | (9,399) | | | 50 | | Obligations of states and political subdivisions | 387,534 | | | (9,399) | | | 50 | | | 0 | | | 0 | | | 0 | | | 387,534 | | | (9,399) | | | 50 | |
| | Total temporarily impaired securities | Total temporarily impaired securities | $ | 1,619,266 | | | $ | (23,588) | | | 200 | | | $ | 241,232 | | | $ | (4,814) | | | 58 | | | $ | 1,860,498 | | | $ | (28,402) | | | 258 | | Total temporarily impaired securities | $ | 1,619,266 | | | $ | (23,588) | | | 200 | | | $ | 241,232 | | | $ | (4,814) | | | 58 | | | $ | 1,860,498 | | | $ | (28,402) | | | 258 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 |
March 31, 2020 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Obligations of states and political subdivisions | | $ | — | | | $ | — | | | — | | | $ | — | | | $ | — | | | — | | | $ | — | | | $ | — | | | — | |
Total temporarily impaired securities | | $ | — | | | $ | — | | | — | | | $ | — | | | $ | — | | | — | | | $ | — | | | $ | — | | | — | |
December 31, 2019 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Obligations of states and political subdivisions | | $ | — | | | $ | — | | | — | | | $ | — | | | $ | — | | | — | | | $ | — | | | $ | — | | | — | |
Total temporarily impaired securities | | $ | — | | | $ | — | | | — | | | $ | — | | | $ | — | | | — | | | $ | — | | | $ | — | | | — | |
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Heartland had 0 securities held to maturity with unrealized losses at September 30, 2020, or December 31, 2019.
On January 1, 2020, Heartland adopted the amendments within ASU 2016-13, which replaced the legacy GAAP other-than-temporary impairment ("OTTI") model with a credit loss model. The credit loss model under ASC 326-30, applicable to AFS debt securities, requires the recognition of credit losses through an allowance account, but retains the concept from the OTTI model that credit losses are recognized once securities become impaired. See Note 1, "Basis of Presentation," to the consolidated financial statements included herein for a discussion of the impact of the adoption of ASU 2016-13. Heartland reviews the investment securities portfolio at the security level on a quarterly basis for potential credit losses, which takes into consideration numerous factors, and the relative significance of any single factor can vary by security. Some factors Heartland may consider include changes in security ratings, financial condition of the issuer, as well as security and industry specific economic conditions. In addition, with regard to debt securities, Heartland may also evaluate payment structure, whether there are defaulted payments or expected defaults, prepayment speeds and the value of any underlying collateral. For certain debt securities in unrealized loss positions, Heartland prepares cash flow analyses to compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security.
The remaining unrealized losses on Heartland's mortgage and asset-backed securities are the result of changes in market interest rates or widening of market spreads subsequent to the initial purchase of the securities. The losses are not related to concerns regarding the underlying credit of the issuers or the underlying collateral. It is expected that the securities will not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates
or widening market spreads and not credit quality, and because Heartland has the intent and ability to hold these investments until a market price recovery or to maturity and does not believe it will be required to sell the securities before maturity, no credit losses were recognized on these securities during the three and nine months ended March 31,September 30, 2020.
The remaining unrealized losses on Heartland's obligations of states and political subdivisions are the result of changes in market interest rates or widening of market spreads subsequent to the initial purchase of the securities. Management monitors the published credit ratings of these securities and the stability of the underlying municipalities. Because the decline in fair value is attributable to changes in interest rates or widening market spreads due to insurance company downgrades and not underlying credit quality, and because Heartland has the intent and ability to hold these investments until a market price recovery or to maturity and does not believe it will be required to sell the securities before maturity, no credit losses were recognized on these securities during the three and nine months ended March 31,September 30, 2020.
In the third quarter of 2020, Heartland sold two obligations of states and political subdivisions securities from the held to maturity portfolio. Because the underlying credit quality of the individual securities showed significant deterioration, it was unlikely Heartland would recover the remaining basis of the securities prior to maturity and therefore inconsistent with
Heartland's original intent upon purchase and classification of these held to maturity securities. The carrying value of these securities was $855,000, and the associated gross gains were $201,000.
The credit loss model under ASC 326-30, applicable to held to maturity debt securities, requires the recognition of lifetime expected credit losses through an allowance account at the time when the security is purchased. The following table presents, in thousands, the activity in the allowance for credit losses for securities held to maturity by major security type for the quarterthree- and nine months ended March 31,September 30, 2020:
| | | | | |
| Obligations of states and political subdivisions |
| Balance at June 30, 2020 | $ | 62 | |
| Provision for credit losses | (1) | |
| Balance at September 30, 2020 | $ | 61 | |
|
| Obligations of states and political subdivisions |
| Balance at December 31, 2019 | $ | —0 | |
| Impact of ASU 2016-13 adoption on January 1, 2020 | 158 | |
| Adjusted balance at January 1, 2020 | 158 | |
| Provision for credit losses | 39 (97) | |
Balance at March 31,September 30, 2020 | $ | 19761 | |
The following table summarizes, in thousands, the carrying amount of Heartland's held to maturity debt securities by investment rating as of March 31,September 30, 2020, which are updated quarterly and used to monitor the credit quality of the securities:
| | | | | |
| Rating | Obligations of states and political subdivisions |
| AAA | $ | 3,0600 | |
| AA, AA+, AA- | 22,92927,465 | |
| A+, A, A- | 11,26610,451 | |
| BBB | 6,0440 | |
| Not Rated | 48,77350,845 | |
| Total | $ | 92,07288,761 | |
Included in other securities were shares of stock in each Federal Home Loan Bank (the "FHLB") of Des Moines, Chicago, Dallas, San Francisco and Topeka at an amortized cost of $20.9 million at March 31,September 30, 2020 and $16.8 million at December 31, 2019.
The Heartland banks are required by federal law to maintain FHLB stock as members of the various FHLBs. These equity securities are "restricted" in that they can only be sold back to the respective institutions from which they were acquired or another member institution at par. Therefore, the FHLB stock is less liquid than other marketable equity securities, and the fair value approximates amortized cost. Heartland considers its FHLB stock as a long-term investment that provides access to competitive products and liquidity. Heartland evaluates impairment in these investments based on the ultimate recoverability of the par value and, at March 31,September 30, 2020, did not consider the investments to be other than temporarily impaired.
NOTE 4: LOANS
Loans as of March 31,September 30, 2020, and December 31, 2019, were as follows, in thousands:
| | | March 31, 2020 | | December 31, 2019 | | September 30, 2020 | | December 31, 2019 |
| Loans receivable held to maturity: | Loans receivable held to maturity: | | | | Loans receivable held to maturity: | | | |
| Commercial and industrial | Commercial and industrial | $ | 2,550,490 | | | $ | 2,530,809 | | Commercial and industrial | $ | 2,303,646 | | | $ | 2,530,809 | |
| Paycheck Protection Program ("PPP") | | Paycheck Protection Program ("PPP") | 1,128,035 | | | 0 | |
| Owner occupied commercial real estate | Owner occupied commercial real estate | 1,431,038 | | | 1,472,704 | | Owner occupied commercial real estate | 1,494,902 | | | 1,472,704 | |
| Non-owner occupied commercial real estate | Non-owner occupied commercial real estate | 1,551,787 | | | 1,495,877 | | Non-owner occupied commercial real estate | 1,659,683 | | | 1,495,877 | |
| Real estate construction | Real estate construction | 1,069,700 | | | 1,027,081 | | Real estate construction | 917,765 | | | 1,027,081 | |
| Agricultural and agricultural real estate | Agricultural and agricultural real estate | 550,107 | | | 565,837 | | Agricultural and agricultural real estate | 508,058 | | | 565,837 | |
| Residential real estate | Residential real estate | 792,540 | | | 832,277 | | Residential real estate | 701,899 | | | 832,277 | |
| Consumer | Consumer | 428,574 | | | 443,332 | | Consumer | 385,658 | | | 443,332 | |
| Total loans receivable held to maturity | Total loans receivable held to maturity | 8,374,236 | | | 8,367,917 | | Total loans receivable held to maturity | 9,099,646 | | | 8,367,917 | |
| | Allowance for credit losses | Allowance for credit losses | (97,350) | | | (70,395) | | Allowance for credit losses | (103,377) | | | (70,395) | |
| Loans receivable, net | Loans receivable, net | $ | 8,276,886 | | | $ | 8,297,522 | | Loans receivable, net | $ | 8,996,269 | | | $ | 8,297,522 | |
On January 1, 2020, Heartland adopted ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)," and results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. Additionally, Heartland reclassified its loan categories to align more closely with Federal Deposit Insurance Corporation ("FDIC") reporting requirements and classification codes, and all prior periods have been adjusted. As of March 31,September 30, 2020, Heartland had $31.8$38.0 million of accrued interest receivable, which is included in other assets on the consolidated balance sheet. Heartland does not consider accrued interest receivable in the allowance for credit losses calculation.
The following table shows the balance in the allowance for credit losses at March 31,September 30, 2020, and December 31, 2019, and the related loan balances, disaggregated on the basis of measurement methodology, in thousands. As of March 31,September 30, 2020, loans individually assessed are collateral dependent and in the process of foreclosure or no longer share the same risk characteristics of the other loans in the pool. All other loans are collectively evaluated for losses. Loans individually evaluated were considered impaired at December 31, 2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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, 2020 | | | | | | | | | | | |
| Commercial and industrial | $ | 5,745 | | | $ | 28,853 | | | $ | 34,598 | | | $ | 19,420 | | | $ | 2,284,226 | | | $ | 2,303,646 | |
| PPP | 0 | | | 0 | | | 0 | | | 0 | | | 1,128,035 | | | 1,128,035 | |
| Owner occupied commercial real estate | 263 | | | 10,966 | | | 11,229 | | | 11,833 | | | 1,483,069 | | | 1,494,902 | |
| Non-owner occupied commercial real estate | 0 | | | 12,127 | | | 12,127 | | | 3,644 | | | 1,656,039 | | | 1,659,683 | |
| Real estate construction | 74 | | | 20,713 | | | 20,787 | | | 1,284 | | | 916,481 | | | 917,765 | |
| Agricultural and agricultural real estate | 1,847 | | | 3,494 | | | 5,341 | | | 17,906 | | | 490,152 | | | 508,058 | |
| Residential real estate | 135 | | | 9,536 | | | 9,671 | | | 4,661 | | | 697,238 | | | 701,899 | |
| Consumer | 383 | | | 9,241 | | | 9,624 | | | 1,168 | | | 384,490 | | | 385,658 | |
| | | | | | | | | | | |
| Total | $ | 8,447 | | | $ | 94,930 | | | $ | 103,377 | | | $ | 59,916 | | | $ | 9,039,730 | | | $ | 9,099,646 | |
| | | | | | | | | | | |
| | | Allowance For Credit Losses | | | Gross Loans Receivable Held to Maturity | | | 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 | | Individually Evaluated for Credit Losses | | Collectively Evaluated for Credit Losses | | Total | | Loans Individually Evaluated for Credit Losses | | Loans Collectively Evaluated for Credit Losses | | Total |
| March 31, 2020 | | | | | | | | | | | | |
| Commercial and industrial | $ | 3,695 | | | $ | 28,768 | | | $ | 32,463 | | | $ | 19,449 | | | $ | 2,531,041 | | | $ | 2,550,490 | | |
| Owner occupied commercial real estate | 1,054 | | | 9,282 | | | 10,336 | | | 6,943 | | | 1,424,095 | | | 1,431,038 | | |
| Non-owner occupied commercial real estate | 29 | | | 8,292 | | | 8,321 | | | 1,402 | | | 1,550,385 | | | 1,551,787 | | |
| Real estate construction | 51 | | | 22,900 | | | 22,951 | | | 200 | | | 1,069,500 | | | 1,069,700 | | |
| Agricultural and agricultural real estate | 986 | | | 3,811 | | | 4,797 | | | 17,450 | | | 532,657 | | | 550,107 | | |
| Residential real estate | 413 | | | 8,312 | | | 8,725 | | | 2,910 | | | 789,630 | | | 792,540 | | |
| Consumer | 114 | | | 9,643 | | | 9,757 | | | 485 | | | 428,089 | | | 428,574 | | |
| | Total | $ | 6,342 | | | $ | 91,008 | | | $ | 97,350 | | | $ | 48,839 | | | $ | 8,325,397 | | | $ | 8,374,236 | | |
| December 31, 2019 | December 31, 2019 | | | | | | | | | | | | December 31, 2019 | |
| Commercial and industrial | Commercial and industrial | $ | 6,276 | | | $ | 24,511 | | | $ | 30,787 | | | $ | 31,814 | | | $ | 2,498,995 | | | $ | 2,530,809 | | Commercial and industrial | $ | 6,276 | | | $ | 24,511 | | | $ | 30,787 | | | $ | 31,814 | | | $ | 2,498,995 | | | $ | 2,530,809 | |
| Owner occupied commercial real estate | Owner occupied commercial real estate | 351 | | | 7,863 | | | 8,214 | | | 9,468 | | | 1,463,236 | | | 1,472,704 | | Owner occupied commercial real estate | 351 | | | 7,863 | | | 8,214 | | | 9,468 | | | 1,463,236 | | | 1,472,704 | |
| Non-owner occupied commercial real estate | Non-owner occupied commercial real estate | 33 | | | 7,769 | | | 7,802 | | | 1,730 | | | 1,494,147 | | | 1,495,877 | | Non-owner occupied commercial real estate | 33 | | | 7,769 | | | 7,802 | | | 1,730 | | | 1,494,147 | | | 1,495,877 | |
| Real estate construction | Real estate construction | — | | | 11,599 | | | 11,599 | | | 685 | | | 1,026,396 | | | 1,027,081 | | Real estate construction | 0 | | | 11,599 | | | 11,599 | | | 685 | | | 1,026,396 | | | 1,027,081 | |
| Agricultural and agricultural real estate | Agricultural and agricultural real estate | 916 | | | 4,757 | | | 5,673 | | | 18,554 | | | 547,283 | | | 565,837 | | Agricultural and agricultural real estate | 916 | | | 4,757 | | | 5,673 | | | 18,554 | | | 547,283 | | | 565,837 | |
| Residential real estate | Residential real estate | 176 | | | 1,328 | | | 1,504 | | | 20,678 | | | 811,599 | | | 832,277 | | Residential real estate | 176 | | | 1,328 | | | 1,504 | | | 20,678 | | | 811,599 | | | 832,277 | |
| Consumer | Consumer | 419 | | | 4,397 | | | 4,816 | | | 4,123 | | | 439,209 | | | 443,332 | | Consumer | 419 | | | 4,397 | | | 4,816 | | | 4,123 | | | 439,209 | | | 443,332 | |
| | Total | Total | $ | 8,171 | | | $ | 62,224 | | | $ | 70,395 | | | $ | 87,052 | | | $ | 8,280,865 | | | $ | 8,367,917 | | Total | $ | 8,171 | | | $ | 62,224 | | | $ | 70,395 | | | $ | 87,052 | | | $ | 8,280,865 | | | $ | 8,367,917 | |
The following tables present the amortized cost basis for loans on nonaccrual status and accruing loans past due 90 days or more at March 31,September 30, 2020, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| Nonaccrual
Loans with an
Allowance for
Credit Losses | | Nonaccrual Loans
with No Allowance
for Credit Losses | | Total
Nonaccrual
Loans | | Accruing Loans
Past Due 90+ Days |
| March 31, 2020 | | | | | | | |
| Commercial and industrial | $ | 15,541 | | | $ | 11,466 | | $ | 27,007 | | | $ | — | |
| Owner occupied commercial real estate | 5,675 | | | 3,761 | | 9,436 | | | — | |
| Non-owner occupied commercial real estate | 364 | | | 1,264 | | 1,628 | | | — | |
| Real estate construction | 1,062 | | | 17 | | 1,079 | | | — | |
| Agricultural and agricultural real estate | 7,225 | | | 14,485 | | 21,710 | | | — | |
| Residential mortgage | 11,541 | | | 2,061 | | 13,602 | | | — | |
| Consumer | 4,599 | | | 219 | | 4,818 | | | — | |
| Total | $ | 46,007 | | | $ | 33,273 | | | $ | 79,280 | | | $ | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nonaccrual
Loans with an
Allowance for
Credit Losses | | Nonaccrual Loans
with No Allowance
for Credit Losses | | Total
Nonaccrual
Loans | | Accruing Loans
Past Due 90+ Days |
| September 30, 2020 | | | | | | | |
| Commercial and industrial | $ | 10,654 | | | $ | 10,732 | | | $ | 21,386 | | | $ | 431 | |
| Owner occupied commercial real estate | 1,651 | | | 11,413 | | 13,064 | | | 0 | |
| Non-owner occupied commercial real estate | 0 | | | 3,644 | | 3,644 | | | 0 | |
| Real estate construction | 751 | | | 902 | | 1,653 | | | 0 | |
| Agricultural and agricultural real estate | 10,714 | | | 7,861 | | 18,575 | | | 0 | |
| Residential mortgage | 8,237 | | | 8,289 | | 16,526 | | | 1,250 | |
| Consumer | 3,569 | | | 623 | | 4,192 | | | 0 | |
| Total | $ | 35,576 | | | $ | 43,464 | | | $ | 79,040 | | | $ | 1,681 | |
Heartland recognized $0 of interest income on nonaccrual loans during the threethree- and nine months ended March 31,September 30, 2020.
Heartland had $6.5$15.9 million of troubled debt restructured loans at March 31,September 30, 2020, of which $3.6$4.1 million were classified as nonaccrual and $2.9$11.8 million were accruing according to the restructured terms. Heartland had $7.6 million of troubled debt
restructured loans at December 31, 2019, of which $3.8 million were classified as nonaccrual and $3.8 million were accruing according to the restructured terms.
The following tables provide information on troubled debt restructured loans that were modified during the three-monththree- and nine-month periods ended March 31,September 30, 2020, and March 31,September 30, 2019, dollars in thousands:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| Three Months Ended
September 30, |
| 2020 | | 2019 |
| Number
of Loans | | Pre-
Modification
Recorded
Investment | | Post-
Modification
Recorded
Investment | | Number
of Loans | | Pre-
Modification
Recorded
Investment | | Post-
Modification
Recorded
Investment |
| Commercial | 1 | | | $ | 20 | | | $ | 20 | | | 0 | | | $ | 0 | | | $ | 0 | |
| PPP | 0 | | | 0 | | | 0 | | 0 | | | 0 | | | 0 |
| Owner occupied commercial real estate | 0 | | | 0 | | | 0 | | 0 | | | 0 | | | 0 |
| Non-owner occupied commercial real estate | 1 | | | 9,434 | | | 9,434 | | 0 | | | 0 | | | 0 |
| Real estate construction | 0 | | | 0 | | | 0 | | 0 | | | 0 | | | 0 |
| Agricultural and agricultural real estate | 0 | | | 0 | | | 0 | | 0 | | | 0 | | | 0 |
| Residential real estate | 0 | | | 0 | | | 0 | | 0 | | | 0 | | | 0 |
| Consumer | 0 | | | 0 | | | 0 | | 0 | | | 0 | | | 0 |
| Total | 2 | | | $ | 9,454 | | | $ | 9,454 | | | 0 | | | $ | 0 | | | $ | 0 | |
| | | Three Months Ended
March 31, | | | Nine Months Ended
September 30, |
| | 2020 | | | 2019 | | | 2020 | | 2019 |
| | Number
of Loans | | Pre-
Modification
Recorded
Investment | | Post-
Modification
Recorded
Investment | | Number
of Loans | | Pre-
Modification
Recorded
Investment | | Post-
Modification
Recorded
Investment | | Number
of Loans | | Pre-
Modification
Recorded
Investment | | Post-
Modification
Recorded
Investment | | Number
of Loans | | Pre-
Modification
Recorded
Investment | | Post-
Modification
Recorded
Investment |
| Commercial and industrial | Commercial and industrial | — | | | $ | — | | | $ | — | | | — | | | $ | — | | | $ | — | | Commercial and industrial | 1 | | | $ | 20 | | | $ | 20 | | | 0 | | | $ | 0 | | | $ | 0 | |
| PPP | | PPP | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Owner occupied commercial real estate | Owner occupied commercial real estate | — | | | — | | | — | | | — | | | — | | | — | | Owner occupied commercial real estate | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Non-owner occupied commercial real estate | Non-owner occupied commercial real estate | — | | | — | | | — | | | — | | | — | | | — | | Non-owner occupied commercial real estate | 1 | | | 9,434 | | | 9,434 | | | 0 | | | 0 | | | 0 | |
| Real estate construction | Real estate construction | — | | | — | | | — | | | — | | | — | | | — | | Real estate construction | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Agricultural and agricultural real estate | Agricultural and agricultural real estate | — | | | — | | | — | | | — | | | — | | | — | | Agricultural and agricultural real estate | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Residential real estate | Residential real estate | 1 | | | 32 | | | 32 | | | 1 | | | 36 | | | 42 | | Residential real estate | 2 | | | 92 | | | 98 | | | 4 | | | 276 | | | 288 | |
| Consumer | Consumer | — | | | — | | | — | | | — | | | — | | | — | | Consumer | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | — | |
| Total | Total | 1 | | | $ | 32 | | | $ | 32 | | | 1 | | | $ | 36 | | | $ | 42 | | Total | 4 | | | $ | 9,546 | | | $ | 9,552 | | | 4 | | | $ | 276 | | | $ | 288 | |
The pre-modification and post-modification recorded investment represents amounts as of the date of loan modification. The difference between the pre-modification investment and post-modification investment amounts on Heartland's residential real estate troubled debt restructured loans for the threethree- and nine months ended March 31,September 30, 2020, is due to principal deferment collected from government guarantees and capitalized interest and escrow. At March 31,September 30, 2020, there were no commitments to extend credit to any of the borrowers with an existing troubled debt restructured loan. The tabletables above doesdo not include any loan modificationmodifications made under COVID-19 modification programs. Refer to the "Overview" section of Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," for further information on these modifications.
The following table shows troubled debt restructured loans for which there was a payment default during the three-monththree- and nine--month periods ended March 31,September 30, 2020, and March 31,September 30, 2019, that had been modified during the twelve-month period prior to default, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| With Payment Defaults During the Three Months Ended September 30, |
| 2020 | | 2019 |
| Number of Loans | | Recorded Investment | | Number of Loans | | Recorded Investment |
| Commercial and industrial | 0 | | | $ | 0 | | | 0 | | | $ | 0 | |
| PPP | 0 | | | 0 | | | 0 | | | 0 | |
| Owner occupied commercial real estate | 0 | | | 0 | | | 0 | | | 0 | |
| Non-owner occupied commercial real estate | 0 | | | 0 | | | 0 | | | 0 | |
| Real estate construction | 0 | | | 0 | | | 0 | | | 0 | |
| Agricultural and agricultural real estate | 0 | | | 0 | | | 0 | | | 0 | |
| Residential real estate | 0 | | | 0 | | | 0 | | | 0 | |
| Consumer | 0 | | | 0 | | | 0 | | | 0 | |
| Total | 0 | | | $ | 0 | | | 0 | | | $ | 0 | |
| | | With Payment Defaults During the
Three Months Ended
March 31, | | | With Payment Defaults During the Nine Months Ended September 30, |
| | 2020 | | | 2019 | | | 2020 | | 2019 |
| | Number of Loans | | Recorded Investment | | Number of Loans | | Recorded Investment | | Number of Loans | | Recorded Investment | | Number of Loans | | Recorded Investment |
| Commercial and industrial | Commercial and industrial | — | | | $ | — | | | — | | | $ | — | | Commercial and industrial | 0 | | | $ | 0 | | | 0 | | | $ | 0 | |
| PPP | | PPP | 0 | | | 0 | | | 0 | | | 0 | |
| Owner occupied commercial real estate | Owner occupied commercial real estate | — | | | — | | | — | | | — | | Owner occupied commercial real estate | 0 | | | 0 | | | 0 | | | 0 | |
| Non-owner occupied commercial real estate | Non-owner occupied commercial real estate | — | | | — | | | — | | | — | | Non-owner occupied commercial real estate | 0 | | | 0 | | | 0 | | | 0 | |
| Real estate construction | Real estate construction | — | | | — | | | — | | | — | | Real estate construction | 0 | | | 0 | | | 0 | | | 0 | |
| Agricultural and agricultural real estate | Agricultural and agricultural real estate | — | | | — | | | — | | | — | | Agricultural and agricultural real estate | 0 | | | 0 | | | 0 | | | 0 | |
| Residential real estate | Residential real estate | 1 | | | 241 | | | 1 | | | 42 | | Residential real estate | 1 | | | 236 | | | 3 | | | 253 | |
| Consumer | Consumer | — | | | — | | | — | | | — | | Consumer | 0 | | | 0 | | | 0 | | | 0 | |
| Total | Total | 1 | | | $ | 241 | | | 1 | | | $ | 42 | | Total | 1 | | | $ | 236 | | | 3 | | | $ | 253 | |
Heartland's internal rating system is a series of grades reflecting management's risk assessment, based on its analysis of the borrower's financial condition. The "pass" category consists of all loans that are not in the "nonpass" category 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.
The "nonpass" category consists of watch, substandard, doubtful and loss loans. The "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 repaying capacity of the borrower and that may be further at risk due to deterioration in the value of collateral pledged. Well-defined weaknesses jeopardize liquidation of the debt. These loans are still considered collectible; however, a distinct possibility exists that Heartland will sustain some loss if deficiencies are not corrected. Substandard loans may exhibit some or all of the following weaknesses: deteriorating financial trends, lack of earnings, inadequate debt service capacity, excessive debt and/or lack of liquidity.
The "doubtful" rating is assigned to loans where identified weaknesses in the borrowers' ability to repay the loan make collection or liquidation in full, on the basis of existing facts, conditions and values, highly questionable and improbable. These borrowers are usually in default, lack liquidity and capital, as well as resources necessary to remain as an operating entity. Specific pending events, such as capital injections, liquidations or perfection of liens on additional collateral, may strengthen the credit, thus deferring the rating of the loan as "loss" until the exact status of the loan can be determined. The loss rating is assigned to loans considered uncollectible. Heartland had 0 loans classified as loss or doubtful as of March 31,September 30, 2020 and December 31, 2019.
The following table shows the risk category of loans by loan category and year of origination as of March 31,September 30, 2020, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost Basis of Term Loans by Year of Origination | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 and Prior | | Revolving | | Total |
| Commercial and industrial | | | | | | | | | | | | | | | | |
| Pass | | $ | 115,467 | | | $ | 449,215 | | | $ | 248,480 | | | $ | 295,304 | | | $ | 138,032 | | | $ | 395,428 | | | $ | 746,177 | | | $ | 2,388,103 | |
| Watch | | 5,931 | | | 10,902 | | | 8,927 | | | 11,106 | | | 8,438 | | | 745 | | | 33,670 | | | 79,719 | |
| Substandard | | 89 | | | 12,855 | | | 13,769 | | | 16,599 | | | 13,411 | | | 11,242 | | | 14,703 | | | 82,668 | |
| Commercial and industrial total | | $ | 121,487 | | | $ | 472,972 | | | $ | 271,176 | | | $ | 323,009 | | | $ | 159,881 | | | $ | 407,415 | | | $ | 794,550 | | | $ | 2,550,490 | |
| Owner occupied commercial real estate | | | | | | | | | | | | | | | | |
| Pass | | $ | 75,869 | | | $ | 316,692 | | | $ | 296,556 | | | $ | 192,402 | | | $ | 134,910 | | | $ | 272,086 | | | $ | 40,197 | | | $ | 1,328,712 | |
| Watch | | 284 | | | 4,426 | | | 3,278 | | | 24,877 | | | 5,323 | | | 5,451 | | | 60 | | | 43,699 | |
| Substandard | | 1,322 | | | 11,678 | | | 18,301 | | | 6,093 | | | 4,044 | | | 13,828 | | | 3,361 | | | 58,627 | |
| Owner occupied commercial real estate total | | $ | 77,475 | | | $ | 332,796 | | | $ | 318,135 | | | $ | 223,372 | | | $ | 144,277 | | | $ | 291,365 | | | $ | 43,618 | | | $ | 1,431,038 | |
| Non-owner occupied commercial real estate | | | | | | | | | | | | | | | | |
| Pass | | $ | 98,574 | | | $ | 413,112 | | | $ | 280,142 | | | $ | 205,981 | | | $ | 130,152 | | | $ | 328,567 | | | $ | 30,433 | | | $ | 1,486,961 | |
| Watch | | 260 | | | 2,102 | | | 8,873 | | | 4,864 | | | 3,630 | | | 7,290 | | | — | | | 27,019 | |
| Substandard | | 19,435 | | | 3,345 | | | 1,621 | | | 3,831 | | | 847 | | | 8,728 | | | — | | | 37,807 | |
| Non-owner occupied commercial real estate total | | $ | 118,269 | | | $ | 418,559 | | | $ | 290,636 | | | $ | 214,676 | | | $ | 134,629 | | | $ | 344,585 | | | $ | 30,433 | | | $ | 1,551,787 | |
| Real estate construction | | | | | | | | | | | | | | | | |
| Pass | | $ | 52,053 | | | $ | 427,330 | | | $ | 338,112 | | | $ | 113,541 | | | $ | 38,848 | | | $ | 38,446 | | | $ | 13,395 | | | $ | 1,021,725 | |
| Watch | | — | | | 9,237 | | | 10,215 | | | 393 | | | 15,040 | | | 1,223 | | | 824 | | | 36,932 | |
| Substandard | | 5,762 | | | 1,995 | | | 921 | | | 1,496 | | | 175 | | | 694 | | | — | | | 11,043 | |
| Real estate construction total | | $ | 57,815 | | | $ | 438,562 | | | $ | 349,248 | | | $ | 115,430 | | | $ | 54,063 | | | $ | 40,363 | | | $ | 14,219 | | | $ | 1,069,700 | |
| Agricultural and agricultural real estate | | | | | | | | | | | | | | | | |
| Pass | | $ | 32,744 | | | $ | 109,410 | | | $ | 60,433 | | | $ | 44,231 | | | $ | 21,196 | | | $ | 47,884 | | | $ | 126,461 | | | $ | 442,359 | |
| Watch | | 770 | | | 9,672 | | | 7,048 | | | 1,376 | | | 2,451 | | | 5,702 | | | 10,788 | | | 37,807 | |
| Substandard | | 3,399 | | | 8,789 | | | 21,158 | | | 6,509 | | | 5,282 | | | 15,112 | | | 9,692 | | | 69,941 | |
| Agricultural and agricultural real estate total | | $ | 36,913 | | | $ | 127,871 | | | $ | 88,639 | | | $ | 52,116 | | | $ | 28,929 | | | $ | 68,698 | | | $ | 146,941 | | | $ | 550,107 | |
| Residential real estate | | | | | | | | | | | | | | | | |
| Pass | | $ | 21,366 | | | $ | 89,884 | | | $ | 136,425 | | | $ | 106,682 | | | $ | 65,243 | | | $ | 299,054 | | | $ | 37,805 | | | $ | 756,459 | |
| Watch | | — | | | 3,111 | | | 885 | | | 1,848 | | | 357 | | | 7,295 | | | — | | | 13,496 | |
| Substandard | | — | | | 313 | | | 1,102 | | | 398 | | | 1,791 | | | 17,878 | | | 1,103 | | | 22,585 | |
| Residential real estate total | | $ | 21,366 | | | $ | 93,308 | | | $ | 138,412 | | | $ | 108,928 | | | $ | 67,391 | | | $ | 324,227 | | | $ | 38,908 | | | $ | 792,540 | |
| Consumer | | | | | | | | | | | | | | | | |
| Pass | | $ | 8,972 | | | $ | 37,316 | | | $ | 25,875 | | | $ | 16,919 | | | $ | 5,593 | | | $ | 25,825 | | | $ | 295,687 | | | $ | 416,187 | |
| Watch | | — | | | 339 | | | 451 | | | 198 | | | 216 | | | 865 | | | 1,946 | | | 4,015 | |
| Substandard | | 249 | | | 646 | | | 2,582 | | | 786 | | | 990 | | | 2,472 | | | 647 | | | 8,372 | |
| Consumer Total | | $ | 9,221 | | | $ | 38,301 | | | $ | 28,908 | | | $ | 17,903 | | | $ | 6,799 | | | $ | 29,162 | | | $ | 298,280 | | | $ | 428,574 | |
| | | | | | | | | | | | | | | |
| Total Pass | | $ | 405,045 | | | $ | 1,842,959 | | | $ | 1,386,023 | | | $ | 975,060 | | | $ | 533,974 | | | $ | 1,407,290 | | | $ | 1,290,155 | | | $ | 7,840,506 | |
| Total Watch | | 7,245 | | | 39,789 | | | 39,677 | | | 44,662 | | | 35,455 | | | 28,571 | | | 47,288 | | | 242,687 | |
| Total Substandard | | 30,256 | | | 39,621 | | | 59,454 | | | 35,712 | | | 26,540 | | | 69,954 | | | 29,506 | | | 291,043 | |
| Total Loans | | $ | 442,546 | | | $ | 1,922,369 | | | $ | 1,485,154 | | | $ | 1,055,434 | | | $ | 595,969 | | | $ | 1,505,815 | | | $ | 1,366,949 | | | $ | 8,374,236 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost Basis of Term Loans by Year of Origination | | | | |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 and Prior | | Revolving | | Total |
| Commercial and industrial | | | | | | | | | | | | | | | |
| Pass | $ | 363,812 | | | $ | 355,625 | | | $ | 181,366 | | | $ | 229,869 | | | $ | 118,285 | | | $ | 348,709 | | | $ | 480,474 | | | $ | 2,078,140 | |
| Watch | 32,475 | | | 21,178 | | | 17,393 | | | 17,268 | | | 6,597 | | | 2,381 | | | 35,073 | | | 132,365 | |
| Substandard | 3,996 | | | 8,303 | | | 21,543 | | | 17,789 | | | 10,748 | | | 14,478 | | | 16,284 | | | 93,141 | |
| Commercial and industrial total | $ | 400,283 | | | $ | 385,106 | | | $ | 220,302 | | | $ | 264,926 | | | $ | 135,630 | | | $ | 365,568 | | | $ | 531,831 | | | $ | 2,303,646 | |
| PPP | | | | | | | | | | | | | | | |
| Pass | $ | 1,063,169 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 1,063,169 | |
| Watch | 34,691 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 34,691 | |
| Substandard | 30,175 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 30,175 | |
| PPP total | $ | 1,128,035 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 1,128,035 | |
| Owner occupied commercial real estate | | | | | | | | | | | | | | | |
| Pass | $ | 226,358 | | | $ | 313,472 | | | $ | 286,767 | | | $ | 165,497 | | | $ | 111,839 | | | $ | 227,090 | | | $ | 32,287 | | | $ | 1,363,310 | |
| Watch | 8,449 | | | 7,692 | | | 10,430 | | | 19,836 | | | 6,255 | | | 9,276 | | | 2,245 | | | 64,183 | |
| Substandard | 8,923 | | | 6,506 | | | 14,875 | | | 12,576 | | | 9,318 | | | 14,949 | | | 262 | | | 67,409 | |
| Owner occupied commercial real estate total | $ | 243,730 | | | $ | 327,670 | | | $ | 312,072 | | | $ | 197,909 | | | $ | 127,412 | | | $ | 251,315 | | | $ | 34,794 | | | $ | 1,494,902 | |
| Non-owner occupied commercial real estate | | | | | | | | | | | | | | | |
| Pass | $ | 256,678 | | | $ | 411,467 | | | $ | 252,071 | | | $ | 193,575 | | | $ | 105,474 | | | $ | 253,755 | | | $ | 26,598 | | | $ | 1,499,618 | |
| Watch | 14,535 | | | 9,949 | | | 14,788 | | | 20,394 | | | 7,648 | | | 18,171 | | | 475 | | | 85,960 | |
| Substandard | 25,671 | | | 4,280 | | | 19,889 | | | 15,737 | | | 3,636 | | | 4,892 | | | 0 | | | 74,105 | |
| Non-owner occupied commercial real estate total | $ | 296,884 | | | $ | 425,696 | | | $ | 286,748 | | | $ | 229,706 | | | $ | 116,758 | | | $ | 276,818 | | | $ | 27,073 | | | $ | 1,659,683 | |
| Real estate construction | | | | | | | | | | | | | | | |
| Pass | $ | 188,216 | | | $ | 351,522 | | | $ | 235,386 | | | $ | 34,641 | | | $ | 14,609 | | | $ | 23,189 | | | $ | 16,716 | | | $ | 864,279 | |
| Watch | 2,874 | | | 24,153 | | | 5,931 | | | 280 | | | 14,744 | | | 791 | | | 637 | | | 49,410 | |
| Substandard | 199 | | | 2,018 | | | 353 | | | 686 | | | 394 | | | 426 | | | 0 | | | 4,076 | |
| Real estate construction total | $ | 191,289 | | | $ | 377,693 | | | $ | 241,670 | | | $ | 35,607 | | | $ | 29,747 | | | $ | 24,406 | | | $ | 17,353 | | | $ | 917,765 | |
| Agricultural and agricultural real estate | | | | | | | | | | | | | | | |
| Pass | $ | 86,754 | | | $ | 76,196 | | | $ | 45,596 | | | $ | 29,713 | | | $ | 15,357 | | | $ | 33,322 | | | $ | 114,403 | | | $ | 401,341 | |
| Watch | 4,527 | | | 9,475 | | | 5,127 | | | 826 | | | 1,772 | | | 3,651 | | | 9,175 | | | 34,553 | |
| Substandard | 14,563 | | | 4,914 | | | 18,457 | | | 6,419 | | | 3,799 | | | 12,762 | | | 11,250 | | | 72,164 | |
| Agricultural and agricultural real estate total | $ | 105,844 | | | $ | 90,585 | | | $ | 69,180 | | | $ | 36,958 | | | $ | 20,928 | | | $ | 49,735 | | | $ | 134,828 | | | $ | 508,058 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost Basis of Term Loans by Year of Origination | | | | |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 and Prior | | Revolving | | Total |
| Residential real estate | | | | | | | | | | | | | | | |
| Pass | $ | 81,558 | | | $ | 72,198 | | | $ | 101,789 | | | $ | 78,394 | | | $ | 51,293 | | | $ | 250,936 | | | $ | 30,370 | | | $ | 666,538 | |
| Watch | 81 | | | 3,462 | | | 825 | | | 1,402 | | | 338 | | | 5,844 | | | 346 | | | 12,298 | |
| Substandard | 848 | | | 312 | | | 1,152 | | | 860 | | | 1,500 | | | 17,291 | | | 1,100 | | | 23,063 | |
| Residential real estate total | $ | 82,487 | | | $ | 75,972 | | | $ | 103,766 | | | $ | 80,656 | | | $ | 53,131 | | | $ | 274,071 | | | $ | 31,816 | | | $ | 701,899 | |
| Consumer | | | | | | | | | | | | | | | |
| Pass | $ | 24,864 | | | $ | 26,236 | | | $ | 18,451 | | | $ | 14,001 | | | $ | 3,955 | | | $ | 20,208 | | | $ | 265,699 | | | $ | 373,414 | |
| Watch | 8 | | | 370 | | | 599 | | | 235 | | | 236 | | | 754 | | | 2,218 | | | 4,420 | |
| Substandard | 487 | | | 696 | | | 2,234 | | | 652 | | | 762 | | | 2,152 | | | 841 | | | 7,824 | |
| Consumer total | $ | 25,359 | | | $ | 27,302 | | | $ | 21,284 | | | $ | 14,888 | | | $ | 4,953 | | | $ | 23,114 | | | $ | 268,758 | | | $ | 385,658 | |
| | | | | | | | | | | | | | | |
| Total Pass | $ | 2,291,409 | | | $ | 1,606,716 | | | $ | 1,121,426 | | | $ | 745,690 | | | $ | 420,812 | | | $ | 1,157,209 | | | $ | 966,547 | | | $ | 8,309,809 | |
| Total Watch | 97,640 | | | 76,279 | | | 55,093 | | | 60,241 | | | 37,590 | | | 40,868 | | | 50,169 | | | 417,880 | |
| Total Substandard | 84,862 | | | 27,029 | | | 78,503 | | | 54,719 | | | 30,157 | | | 66,950 | | | 29,737 | | | 371,957 | |
| Total Loans | $ | 2,473,911 | | | $ | 1,710,024 | | | $ | 1,255,022 | | | $ | 860,650 | | | $ | 488,559 | | | $ | 1,265,027 | | | $ | 1,046,453 | | | $ | 9,099,646 | |
Included in Heartland's nonpass loans at September 30, 2020 were $64.9 million of nonpass PPP loans as a result of risk ratings on related credits. Heartland's risk rating methodology assigns a risk rating to the whole lending relationship. Heartland has 0 allowance recorded related to the PPP loans because of the 100% SBA guarantee.
The following table shows Heartland's loan portfolio by credit quality indicator as of December 31, 2019, in thousands:
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| | | | | |
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| | | | | |
| | | | | |
| | | | | |
| Pass | | Nonpass | | Total |
| Commercial and industrial | $ | 2,352,131 | | | $ | 178,678 | | | $ | 2,530,809 | |
| Owner occupied commercial real estate | 1,369,290 | | | 103,414 | | | 1,472,704 | |
| Non-owner occupied commercial real estate | 1,429,760 | | | 66,117 | | | 1,495,877 | |
| Real estate construction | 984,736 | | | 42,345 | | | 1,027,081 | |
| Agricultural and agricultural real estate | 454,272 | | | 111,565 | | | 565,837 | |
| Residential real estate | 790,226 | | | 42,051 | | | 832,277 | |
| Consumer | 430,733 | | | 12,599 | | | 443,332 | |
| Total loans receivable held to maturity | $ | 7,811,148 | | | $ | 556,769 | | | $ | 8,367,917 | |
The nonpass category in the table above is comprised of approximately 60% watch loans and 40% substandard loans as of December 31, 2019. The percent of nonpass loans on nonaccrual status as of December 31, 2019, was 14%. Changes in credit risk are monitored on a continuous basis and changes in risk ratings are made when identified.
As of March 31,September 30, 2020, Heartland had $2.2$1.6 million of loans secured by residential real estate property that were in the process of foreclosure.
The following table sets forth information regarding Heartland's accruing and nonaccrual loans at March 31,September 30, 2020, and December 31, 2019, in thousands:
| | | Accruing Loans | | | | Accruing Loans | |
| | 30-59 Days
Past Due | | 60-89 Days
Past Due | | 90 Days or
More
Past Due | | Total
Past Due | | Current | | Nonaccrual | | Total Loans | | 30-59 Days
Past Due | | 60-89 Days
Past Due | | 90 Days or
More
Past Due | | Total
Past Due | | Current | | Nonaccrual | | Total Loans |
| March 31, 2020 | | | | | | | | | | | | | | |
| September 30, 2020 | | September 30, 2020 | | | | | | | | | | | | | |
| Commercial and industrial | Commercial and industrial | $ | 5,346 | | | $ | 500 | | | $ | — | | | $ | 5,846 | | | $ | 2,517,637 | | | $ | 27,007 | | | $ | 2,550,490 | | Commercial and industrial | $ | 3,200 | | | $ | 2,293 | | | $ | 431 | | | $ | 5,924 | | | $ | 2,276,336 | | | $ | 21,386 | | | $ | 2,303,646 | |
| PPP | | PPP | 0 | | | 0 | | | 0 | | | 0 | | | 1,128,035 | | | 0 | | | 1,128,035 | |
| Owner occupied commercial real estate | Owner occupied commercial real estate | 1,462 | | | 1,028 | | | — | | | 2,490 | | | 1,419,112 | | | 9,436 | | | 1,431,038 | | Owner occupied commercial real estate | 1,052 | | | 896 | | | 0 | | | 1,948 | | | 1,479,890 | | | 13,064 | | | 1,494,902 | |
| Non-owner occupied commercial real estate | Non-owner occupied commercial real estate | 2,736 | | | 7,154 | | | — | | | 9,890 | | | 1,540,269 | | | 1,628 | | | 1,551,787 | | Non-owner occupied commercial real estate | 863 | | | 1,685 | | | 0 | | | 2,548 | | | 1,653,491 | | | 3,644 | | | 1,659,683 | |
| Real estate construction | Real estate construction | 1,940 | | | 587 | | | — | | | 2,527 | | | 1,066,094 | | | 1,079 | | | 1,069,700 | | Real estate construction | 310 | | | 597 | | | 0 | | | 907 | | | 915,205 | | | 1,653 | | | 917,765 | |
| Agricultural and agricultural real estate | Agricultural and agricultural real estate | 2,789 | | | 280 | | | — | | | 3,069 | | | 525,328 | | | 21,710 | | | 550,107 | | Agricultural and agricultural real estate | 1,308 | | | 0 | | | 0 | | | 1,308 | | | 488,175 | | | 18,575 | | | 508,058 | |
| Residential real estate | Residential real estate | 5,637 | | | 147 | | | — | | | 5,784 | | | 773,154 | | | 13,602 | | | 792,540 | | Residential real estate | 1,820 | | | 86 | | | 1,250 | | | 3,156 | | | 682,217 | | | 16,526 | | | 701,899 | |
| Consumer | Consumer | 1,783 | | | 259 | | | — | | | 2,042 | | | 421,714 | | | 4,818 | | | 428,574 | | Consumer | 980 | | | 46 | | | 0 | | | 1,026 | | | 380,440 | | | 4,192 | | | 385,658 | |
| Total gross loans receivable held to maturity | Total gross loans receivable held to maturity | $ | 21,693 | | | $ | 9,955 | | | $ | — | | | $ | 31,648 | | | $ | 8,263,308 | | | $ | 79,280 | | | $ | 8,374,236 | | Total gross loans receivable held to maturity | $ | 9,533 | | | $ | 5,603 | | | $ | 1,681 | | | $ | 16,817 | | | $ | 9,003,789 | | | $ | 79,040 | | | $ | 9,099,646 | |
| December 31, 2019 | December 31, 2019 | | | | | | | | | | | | | | December 31, 2019 | | | | | | | | | | | | | |
| Commercial and industrial | Commercial and industrial | $ | 5,121 | | | $ | 904 | | | $ | 3,899 | | | $ | 9,924 | | | $ | 2,491,110 | | | $ | 29,775 | | | $ | 2,530,809 | | Commercial and industrial | $ | 5,121 | | | $ | 904 | | | $ | 3,899 | | | $ | 9,924 | | | $ | 2,491,110 | | | $ | 29,775 | | | $ | 2,530,809 | |
| Owner occupied commercial real estate | Owner occupied commercial real estate | 3,487 | | | 690 | | | — | | | 4,177 | | | 1,461,589 | | | 6,938 | | | 1,472,704 | | Owner occupied commercial real estate | 3,487 | | | 690 | | | 0 | | | 4,177 | | | 1,461,589 | | | 6,938 | | | 1,472,704 | |
| Non-owner occupied commercial real estate | Non-owner occupied commercial real estate | 614 | | | 81 | | | — | | | 695 | | | 1,493,619 | | | 1,563 | | | 1,495,877 | | Non-owner occupied commercial real estate | 614 | | | 81 | | | 0 | | | 695 | | | 1,493,619 | | | 1,563 | | | 1,495,877 | |
| Real estate construction | Real estate construction | 5,689 | | | 72 | | | — | | | 5,761 | | | 1,020,153 | | | 1,167 | | | 1,027,081 | | Real estate construction | 5,689 | | | 72 | | | 0 | | | 5,761 | | | 1,020,153 | | | 1,167 | | | 1,027,081 | |
| Agricultural and agricultural real estate | Agricultural and agricultural real estate | 3,734 | | | 79 | | | 26 | | | 3,839 | | | 541,455 | | | 20,543 | | | 565,837 | | Agricultural and agricultural real estate | 3,734 | | | 79 | | | 26 | | | 3,839 | | | 541,455 | | | 20,543 | | | 565,837 | |
| Residential real estate | Residential real estate | 4,166 | | | 24 | | | 180 | | | 4,370 | | | 814,840 | | | 13,067 | | | 832,277 | | Residential real estate | 4,166 | | | 24 | | | 180 | | | 4,370 | | | 814,840 | | | 13,067 | | | 832,277 | |
| Consumer | Consumer | 2,511 | | | 651 | | | — | | | 3,162 | | | 436,675 | | | 3,495 | | | 443,332 | | Consumer | 2,511 | | | 651 | | | 0 | | | 3,162 | | | 436,675 | | | 3,495 | | | 443,332 | |
| Total gross loans receivable held to maturity | Total gross loans receivable held to maturity | $ | 25,322 | | | $ | 2,501 | | | $ | 4,105 | | | $ | 31,928 | | | $ | 8,259,441 | | | $ | 76,548 | | | $ | 8,367,917 | | Total gross loans receivable held to maturity | $ | 25,322 | | | $ | 2,501 | | | $ | 4,105 | | | $ | 31,928 | | | $ | 8,259,441 | | | $ | 76,548 | | | $ | 8,367,917 | |
Loans delinquent 30 to 89 days as a percent of total loans were 0.38%0.17% at March 31,September 30, 2020, compared to 0.33% at December 31, 2019. Changes in credit risk are monitored on a continuous basis and changes in risk ratings are made when identified. All individually assessed loans are reviewed at least annually.
As of December 31, 2019, the majority of Heartland's impaired loans were those that were nonaccrual, were past due 90 days or more and still accruing or have had their terms restructured in a troubled debt restructuring. The following table presents the unpaid principal balance that was contractually due at December 31, 2019, the outstanding loan balance recorded on the consolidated balance sheetssheet at December 31, 2019, any related allowance recorded for those loans as of December 31, 2019, the
average outstanding loan balances recorded on the consolidated balance sheetssheet during the year ended December 31, 2019, and the interest income recognized on the impaired loans during the year ended December 31, 2019, in thousands:
| | | Unpaid
Principal
Balance | | Loan
Balance | | Related
Allowance
Recorded | | Year-to-
Date
Avg.
Loan
Balance | | Year-to-
Date
Interest
Income
Recognized | | Unpaid
Principal
Balance | | Loan
Balance | | Related
Allowance
Recorded | | Year-to-
Date
Avg.
Loan
Balance | | Year-to-
Date
Interest
Income
Recognized |
| December 31, 2019 | December 31, 2019 | | | | | | | | | | December 31, 2019 | | | | | | | | | |
| Impaired loans with a related allowance: | Impaired loans with a related allowance: | | Impaired loans with a related allowance: | |
| Commercial | Commercial | $ | 11,727 | | | $ | 11,710 | | | $ | 6,276 | | | $ | 11,757 | | | $ | 6 | | Commercial | $ | 11,727 | | | $ | 11,710 | | | $ | 6,276 | | | $ | 11,757 | | | $ | 6 | |
| Owner occupied commercial real estate | Owner occupied commercial real estate | 712 | | | 712 | | | 352 | | | 1,435 | | | 22 | | Owner occupied commercial real estate | 712 | | | 712 | | | 352 | | | 1,435 | | | 22 | |
| Non-owner occupied commercial real estate | Non-owner occupied commercial real estate | 138 | | | 138 | | | 33 | | | — | | | — | | Non-owner occupied commercial real estate | 138 | | | 138 | | | 33 | | | 0 | | | 0 | |
| Real estate construction | Real estate construction | 17 | | | 17 | | | — | | | — | | | — | | Real estate construction | 17 | | | 17 | | | 0 | | | 0 | | | 0 | |
| Agricultural and agricultural real estate | Agricultural and agricultural real estate | 2,751 | | | 2,237 | | | 916 | | | 2,739 | | | — | | Agricultural and agricultural real estate | 2,751 | | | 2,237 | | | 916 | | | 2,739 | | | 0 | |
| Residential real estate | Residential real estate | 1,378 | | | 1,378 | | | 176 | | | 1,116 | | | — | | Residential real estate | 1,378 | | | 1,378 | | | 176 | | | 1,116 | | | 0 | |
| Consumer | Consumer | 998 | | | 997 | | | 419 | | | 1,170 | | | 11 | | Consumer | 998 | | | 997 | | | 419 | | | 1,170 | | | 11 | |
| Total loans held to maturity | Total loans held to maturity | | $ | 17,721 | | | $ | 17,189 | | | $ | 8,172 | | | $ | 18,217 | | | $ | 39 | | Total loans held to maturity | $ | 17,721 | | | $ | 17,189 | | | $ | 8,172 | | | $ | 18,217 | | | $ | 39 | |
| Impaired loans without a related allowance: | Impaired loans without a related allowance: | | | | | | | | | | Impaired loans without a related allowance: | | | | | | | | | |
| Commercial | Commercial | $ | 22,525 | | | $ | 20,104 | | | $ | — | | | $ | 19,141 | | | $ | 782 | | Commercial | $ | 22,525 | | | $ | 20,104 | | | $ | — | | | $ | 19,141 | | | $ | 782 | |
| Owner occupied commercial real estate | Owner occupied commercial real estate | 8,756 | | | 8,756 | | | — | | | 8,337 | | | 341 | | Owner occupied commercial real estate | 8,756 | | | 8,756 | | | — | | | 8,337 | | | 341 | |
| Non-owner occupied commercial real estate | Non-owner occupied commercial real estate | 1,592 | | | 1,592 | | | — | | | 1,515 | | | 62 | | Non-owner occupied commercial real estate | 1,592 | | | 1,592 | | | — | | | 1,515 | | | 62 | |
| Real estate construction | Real estate construction | 668 | | | 668 | | | — | | | 636 | | | 26 | | Real estate construction | 668 | | | 668 | | | — | | | 636 | | | 26 | |
| Agricultural and agricultural real estate | Agricultural and agricultural real estate | 19,113 | | | 16,317 | | | — | | | 16,837 | | | 60 | | Agricultural and agricultural real estate | 19,113 | | | 16,317 | | | — | | | 16,837 | | | 60 | |
| Residential real estate | Residential real estate | 19,382 | | | 19,300 | | | — | | | 17,073 | | | 280 | | Residential real estate | 19,382 | | | 19,300 | | | — | | | 17,073 | | | 280 | |
| Consumer | Consumer | 3,135 | | | 3,126 | | | — | | | 4,182 | | | 45 | | Consumer | 3,135 | | | 3,126 | | | — | | | 4,182 | | | 45 | |
| Total loans held to maturity | Total loans held to maturity | | $ | 75,171 | | | $ | 69,863 | | | $ | — | | | $ | 67,721 | | | $ | 1,596 | | Total loans held to maturity | $ | 75,171 | | | $ | 69,863 | | | $ | — | | | $ | 67,721 | | | $ | 1,596 | |
| Total impaired loans held to maturity: | Total impaired loans held to maturity: | | | | | | | | | | Total impaired loans held to maturity: | | | | | | | | | |
| Commercial | Commercial | $ | 34,252 | | | $ | 31,814 | | | $ | 6,276 | | | $ | 30,898 | | | $ | 788 | | Commercial | $ | 34,252 | | | $ | 31,814 | | | $ | 6,276 | | | $ | 30,898 | | | $ | 788 | |
| Owner occupied commercial real estate | Owner occupied commercial real estate | 9,468 | | | 9,468 | | | 352 | | | 9,772 | | | 363 | | Owner occupied commercial real estate | 9,468 | | | 9,468 | | | 352 | | | 9,772 | | | 363 | |
| Non-owner occupied commercial real estate | Non-owner occupied commercial real estate | 1,730 | | | 1,730 | | | 33 | | | 1,515 | | | 62 | | Non-owner occupied commercial real estate | 1,730 | | | 1,730 | | | 33 | | | 1,515 | | | 62 | |
| Real estate construction | Real estate construction | 685 | | | 685 | | | — | | | 636 | | | 26 | | Real estate construction | 685 | | | 685 | | | 0 | | | 636 | | | 26 | |
| Agricultural and agricultural real estate | Agricultural and agricultural real estate | 21,864 | | | 18,554 | | | 916 | | | 19,576 | | | 60 | | Agricultural and agricultural real estate | 21,864 | | | 18,554 | | | 916 | | | 19,576 | | | 60 | |
| Residential real estate | Residential real estate | 20,760 | | | 20,678 | | | 176 | | | 18,189 | | | 280 | | Residential real estate | 20,760 | | | 20,678 | | | 176 | | | 18,189 | | | 280 | |
| Consumer | Consumer | 4,133 | | | 4,123 | | | 419 | | | 5,352 | | | 56 | | Consumer | 4,133 | | | 4,123 | | | 419 | | | 5,352 | | | 56 | |
| Total impaired loans held to maturity | Total impaired loans held to maturity | $ | 92,892 | | | $ | 87,052 | | | $ | 8,172 | | | $ | 85,938 | | | $ | 1,635 | | Total impaired loans held to maturity | $ | 92,892 | | | $ | 87,052 | | | $ | 8,172 | | | $ | 85,938 | | | $ | 1,635 | |
On November 30, 2019, Heartland's Illinois Bank & Trust subsidiary completed the acquisition of substantially all of the assets and substantially all of the deposits and certain other liabilities of Rockford Bank & Trust Company, headquartered in Rockford, Illinois. As of November 30, 2019, Rockford Bank & Trust had gross loans of $366.6 million, and the estimated fair value of the loans acquired was $354.0 million.
On May 10, 2019, Heartland completed the acquisition of Blue Valley Ban Corp., parent company of Bank of Blue Valley, headquartered in Overland Park, Kansas. As of May 10, 2019, Blue Valley Ban Corp. had gross loans of $558.2 million, and the estimated fair value of the loans acquired was $542.0 million.
NOTE 5: ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses on loans for the threethree- and nine- month periods ended March 31,September 30, 2020, and March 31,September 30, 2019, 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 Mortgage | | Consumer | | | | | | Total |
| Balance at December 31, 2019 | $ | 30,787 | | | $ | 8,214 | | | $ | 7,802 | | | $ | 11,599 | | | $ | 5,673 | | | $ | 1,504 | | | $ | 4,816 | | | | | | | $ | 70,395 | |
| Impact of ASU 2016-13 adoption | 3,147 | | | (407) | | | (2,834) | | | 3,413 | | | (380) | | | 4,817 | | | 4,315 | | | | | | | 12,071 | |
| Charge-offs | (5,596) | | | | | | — | | | (21) | | | (253) | | | (79) | | | (352) | | | | | | | (6,301) | |
| Recoveries | 352 | | | 1 | | | — | | | 5 | | | 826 | | | 3 | | | 133 | | | | | | | 1,320 | |
| Provision | 3,773 | | | 2,528 | | | 3,353 | | | 7,955 | | | (1,069) | | | 2,480 | | | 845 | | | | | | | 19,865 | |
| Balance at March 31, 2020 | $ | 32,463 | | | $ | 10,336 | | | $ | 8,321 | | | $ | 22,951 | | | $ | 4,797 | | | $ | 8,725 | | | $ | 9,757 | | | | | | | $ | 97,350 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial
and
Industrial | | PPP | | 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, 2020 | $ | 32,531 | | | $ | 0 | | | $ | 23,402 | | | $ | 10,162 | | | $ | 28,667 | | | $ | 5,701 | | | $ | 9,304 | | | $ | 10,170 | | | | | | | $ | 119,937 | |
| Charge-offs | (7,077) | | | 0 | | | (13,328) | | | (26) | | | 0 | | | (936) | | | (54) | | | (332) | | | | | | | (21,753) | |
| Recoveries | 369 | | | 0 | | | 0 | | | 10 | | | 2 | | | 0 | | | 2 | | | 69 | | | | | | | 452 | |
| Provision | 8,775 | | | 0 | | | 1,155 | | | 1,981 | | | (7,882) | | | 576 | | | 419 | | | (283) | | | | | | | 4,741 | |
| Balance at September 30, 2020 | $ | 34,598 | | | $ | 0 | | | $ | 11,229 | | | $ | 12,127 | | | $ | 20,787 | | | $ | 5,341 | | | $ | 9,671 | | | $ | 9,624 | | | | | | | $ | 103,377 | |
| | | | | | | | | | | | | | | | | | | | | |
| Commercial and Industrial | | PPP | | 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, 2019 | $ | 30,787 | | | $ | 0 | | | $ | 8,214 | | | $ | 7,802 | | | $ | 11,599 | | | $ | 5,673 | | | $ | 1,504 | | | $ | 4,816 | | | | | | | $ | 70,395 | |
Impact of ASU 2016-13 adoption on January 1, 2020 | 3,147 | | | 0 | | | (407) | | | (2,834) | | | 3,413 | | | (380) | | | 4,817 | | | 4,315 | | | | | | | 12,071 | |
| Adjusted balance at January 1, 2020 | 33,934 | | | 0 | | | 7,807 | | | 4,968 | | | 15,012 | | | 5,293 | | | 6,321 | | | 9,131 | | | | | | | 82,466 | |
| Charge-offs | (15,440) | | | 0 | | | (13,541) | | | (45) | | | (105) | | | (1,190) | | | (368) | | | (929) | | | | | | | (31,618) | |
| Recoveries | 1,153 | | | 0 | | | 192 | | | 18 | | | 217 | | | 826 | | | 97 | | | 413 | | | | | | | 2,916 | |
| Provision | 14,951 | | | 0 | | | 16,771 | | | 7,186 | | | 5,663 | | | 412 | | | 3,621 | | | 1,009 | | | | | | | 49,613 | |
| Balance at September 30, 2020 | $ | 34,598 | | | $ | 0 | | | $ | 11,229 | | | $ | 12,127 | | | $ | 20,787 | | | $ | 5,341 | | | $ | 9,671 | | | $ | 9,624 | | | | | | | $ | 103,377 | |
| | | | 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, 2019 | | Balance at June 30, 2019 | $ | 27,680 | | | 6,182 | | | 7,482 | | | 10,010 | | | $ | 5,986 | | | $ | 1,592 | | | $ | 4,918 | | | | | $ | 63,850 | |
| Charge-offs | | Charge-offs | (2,656) | | | (43) | | | (21) | | | 0 | | | (1,673) | | | (3) | | | (446) | | | | | (4,842) | |
| Recoveries | | Recoveries | 1,526 | | | 3 | | | 100 | | | 38 | | | 199 | | | 52 | | | 95 | | | | | 2,013 | |
| Provision | | Provision | 1,874 | | | 1,108 | | | 186 | | | 640 | | | 858 | | | 164 | | | 371 | | | | | 5,201 | |
| Balance at September 30, 2019 | | Balance at September 30, 2019 | $ | 28,424 | | | $ | 7,250 | | | $ | 7,747 | | | $ | 10,688 | | | $ | 5,370 | | | $ | 1,805 | | | $ | 4,938 | | | | | $ | 66,222 | |
| | | Commercial and Industrial | | Owner Occupied Commercial Real Estate | | Non-Owner Occupied Commercial Real Estate | | Real Estate Construction | | Agricultural and Agricultural
Real Estate | | Residential Mortgage | | Consumer | | | | Total | | 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, 2018 | Balance at December 31, 2018 | $ | 26,306 | | | $ | 6,525 | | | $ | 7,430 | | | $ | 9,679 | | | $ | 4,914 | | | $ | 1,813 | | | $ | 5,296 | | | | | $ | 61,963 | | Balance at December 31, 2018 | $ | 26,306 | | | $ | 6,525 | | | $ | 7,430 | | | $ | 9,679 | | | $ | 4,914 | | | $ | 1,813 | | | $ | 5,296 | | | | | $ | 61,963 | |
| Charge-offs | Charge-offs | (980) | | | (23) | | | — | | | (54) | | | (379) | | | (140) | | | (374) | | | | | (1,950) | | Charge-offs | (7,607) | | | (79) | | | (21) | | | (155) | | | (2,100) | | | (344) | | | (1,266) | | | | | (11,572) | |
| Recoveries | Recoveries | 308 | | | 89 | | | 40 | | | 4 | | | 328 | | | 52 | | | 170 | | | | | 991 | | Recoveries | 2,110 | | | 96 | | | 200 | | | 166 | | | 528 | | | 138 | | | 839 | | | | | 4,077 | |
| Provision | Provision | 1,616 | | | (261) | | | (344) | | | 365 | | | 655 | | | (102) | | | (294) | | | | | 1,635 | | Provision | 7,615 | | | 708 | | | 138 | | | 998 | | | 2,028 | | | 198 | | | 69 | | | | | 11,754 | |
| Balance at March 31, 2019 | $ | 27,250 | | | $ | 6,330 | | | $ | 7,126 | | | $ | 9,994 | | | $ | 5,518 | | | $ | 1,623 | | | $ | 4,798 | | | | | $ | 62,639 | | |
| Balance at September 30, 2019 | | Balance at September 30, 2019 | $ | 28,424 | | | $ | 7,250 | | | $ | 7,747 | | | $ | 10,688 | | | $ | 5,370 | | | $ | 1,805 | | | $ | 4,938 | | | | | $ | 66,222 | |
Changes in the allowance for credit losses on unfunded commitments for the threethree- and nine months ended March 31,September 30, 2020, were as follows:
| | | | | | | | |
| Balance at June 30, 2020 | | $ | 17,392 | |
| Provision | | (3,062) | |
| Balance at September 30, 2020 | | $ | 14,330 | |
| | |
| Balance at December 31, 2019 | | $ | 248 | |
| Impact of ASU 2016-13 adoption on January 1, 2020 | | 13,604 | |
| Adjusted balance at January 1, 2020 | | 13,852 | |
| Provision | | 1,616478 | |
Balance at March 31,September 30, 2020 | | $ | 15,46814,330 | |
Prior to the adoption of ASU 2016-13, the allowance for credit losses on unfunded commitments was considered immaterial.
Management allocates the allowance for credit losses by pools of risk within each loan portfolio. The allocation of the allowance for credit 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 credit losses is available to absorb losses from any segment of the loan portfolio.
NOTE 6: GOODWILL, CORE DEPOSIT PREMIUM AND OTHER INTANGIBLE ASSETS
Heartland had goodwill of $446.3 million at both March 31,September 30, 2020, and December 31, 2019. Heartland conducts its annual internal assessment of the goodwill both at the consolidated level and at its subsidiaries as of September 30. There was 0 goodwill impairment as of the most recent annual assessment. Due to the COVID-19 pandemic and economic conditions, an interim qualitativequantitative assessment of goodwill was performed during the firstsecond quarter of 2020, and no goodwill impairment was identified.
Heartland recorded $19.2 million of goodwill and $1.8 million of core deposit intangibles in connection with the acquisition of substantially all of the assets and substantially all of the deposits and certain other liabilities of Rockford Bank and Trust Company, headquartered in Rockford, Illinois on November 30, 2019.
Heartland recorded $35.4 million of goodwill and $11.4 million of core deposit intangibles in connection with the acquisition of Blue Valley Ban Corp., parent company of Bank of Blue Valley, headquartered in Overland Park, Kansas on May 10, 2019.
The core deposit intangibles recorded with the Blue Valley Ban Corp. acquisition is not deductible for tax purposes and is expected to be amortized over a period of 10 years on an accelerated basis.
Goodwill related to the Blue Valley Ban Corp. acquisition resulted from expected operational synergies, increased market presence, cross-selling opportunities, and expanded business lines and is not deductible for tax purposes.
The core deposit intangibles and goodwill recorded with the Rockford Bank and Trust Company acquisition of substantially all of the assets and substantially all of the deposits and certain other liabilities, is deductible for tax purposes and the core deposit intangibles are expected to be amortized over a period of 10 years on an accelerated basis.
Heartland's intangible assets consist of core deposit intangibles, mortgage servicing rights, customer relationship intangibles, and commercial servicing rights. The gross carrying amount of these intangible assets and the associated accumulated amortization at March 31,September 30, 2020, and December 31, 2019, are presented in the table below, in thousands:
| | | | March 31, 2020 | | | December 31, 2019 | | | September 30, 2020 | | December 31, 2019 |
| | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount |
| Amortizing intangible assets: | Amortizing intangible assets: | | | | | | | | | | | | Amortizing intangible assets: | | | | | | | | | | | |
| Core deposit intangibles | Core deposit intangibles | $ | 96,821 | | | $ | 51,309 | | | $ | 45,512 | | | $ | 96,821 | | | $ | 48,338 | | | $ | 48,483 | | Core deposit intangibles | $ | 96,821 | | | $ | 56,478 | | | $ | 40,343 | | | $ | 96,821 | | | $ | 48,338 | | | $ | 48,483 | |
| Customer relationship intangibles | Customer relationship intangibles | 1,177 | | | 982 | | | 195 | | | 1,177 | | | 972 | | | 205 | | Customer relationship intangibles | 1,177 | | | 1,000 | | | 177 | | | 1,177 | | | 972 | | | 205 | |
| Mortgage servicing rights | Mortgage servicing rights | 8,262 | | | 4,137 | | | 4,125 | | | 7,886 | | | 2,265 | | | 5,621 | | Mortgage servicing rights | 10,458 | | | 5,635 | | | 4,823 | | | 7,886 | | | 2,265 | | | 5,621 | |
| Commercial servicing rights | Commercial servicing rights | 6,990 | | | 5,895 | | | 1,095 | | | 6,952 | | | 5,837 | | | 1,115 | | Commercial servicing rights | 7,013 | | | 6,084 | | | 929 | | | 6,952 | | | 5,837 | | | 1,115 | |
| Total | Total | $ | 113,250 | | | $ | 62,323 | | | $ | 50,927 | | | $ | 112,836 | | | $ | 57,412 | | | $ | 55,424 | | Total | $ | 115,469 | | | $ | 69,197 | | | $ | 46,272 | | | $ | 112,836 | | | $ | 57,412 | | | $ | 55,424 | |
On April 30, 2019, Dubuque Bank and Trust Company closed on the sale of substantially all its servicing rights portfolio, which contained loans with an unpaid principal balance of $3.31 billion to PNC Bank, N.A. The transaction qualified as a sale, and $20.6 million of mortgage servicing rights were de-recognized on the consolidated balance sheet as of June 30, 2019. Cash of approximately $36.6 million was received during 2019, and Heartland recorded a gain on the sale of this portfolio of approximately $14.5 million. In the agreement, which included customary terms and conditions, Dubuque Bank and Trust Company provided interim servicing of the loans until the transfer date, which was August 1, 2019.
The following table shows the estimated future amortization expense for amortizable intangible assets, in thousands:
| | | | Core
Deposit
Intangibles | | Customer
Relationship
Intangibles | | Mortgage
Servicing
Rights | | Commercial
Servicing
Rights | |
Total | | Core
Deposit
Intangibles | | Customer
Relationship
Intangibles | | Mortgage
Servicing
Rights | | Commercial
Servicing
Rights | |
Total |
| Nine months ending December 31, 2020 | $ | 7,606 | | | $ | 27 | | | $ | 920 | | | $ | 223 | | | $ | 8,776 | | |
| Three months ending December 31, 2020 | | Three months ending December 31, 2020 | $ | 2,436 | | | $ | 9 | | | $ | 624 | | | $ | 69 | | | $ | 3,138 | |
| Year ending December 31, | Year ending December 31, | | | Year ending December 31, | | |
| 2021 | 2021 | 8,691 | | | 35 | | | 801 | | | 268 | | | 9,795 | | 2021 | 8,691 | | | 35 | | | 1,050 | | | 261 | | | 10,037 | |
| 2022 | 2022 | 7,102 | | | 34 | | | 687 | | | 239 | | | 8,062 | | 2022 | 7,102 | | | 34 | | | 900 | | | 232 | | | 8,268 | |
| 2023 | 2023 | 6,201 | | | 34 | | | 572 | | | 161 | | | 6,968 | | 2023 | 6,202 | | | 34 | | | 750 | | | 161 | | | 7,147 | |
| 2024 | 2024 | 5,108 | | | 33 | | | 458 | | | 94 | | | 5,693 | | 2024 | 5,108 | | | 33 | | | 600 | | | 103 | | | 5,844 | |
| 2025 | 2025 | 4,265 | | | 32 | | | 344 | | | 110 | | | 4,751 | | 2025 | 4,265 | | | 32 | | | 450 | | | 103 | | | 4,850 | |
| Thereafter | Thereafter | 6,539 | | | — | | | 343 | | | — | | | 6,882 | | Thereafter | 6,539 | | | 0 | | | 449 | | | 0 | | | 6,988 | |
| Total | Total | $ | 45,512 | | | $ | 195 | | | $ | 4,125 | | | $ | 1,095 | | | $ | 50,927 | | Total | $ | 40,343 | | | $ | 177 | | | $ | 4,823 | | | $ | 929 | | | $ | 46,272 | |
Projections of amortization expense for mortgage servicing rights are based on existing asset balances and the existing interest rate environment as of March 31,September 30, 2020. 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 $618.9$709.9 million at March 31,September 30, 2020 compared to $616.7 million at December 31, 2019. Custodial escrow balances maintained in connection with the mortgage loan servicing portfolio were approximately $8.2$16.9 million at March 31,September 30, 2020 and $5.0 million at December 31, 2019.
At March 31,September 30, 2020, the fair value of the mortgage servicing rights was estimated at $4.1$4.8 million compared to $5.6 million at December 31, 2019. The fair value of mortgage servicing rights is calculated based upon a discounted cash flow analysis. Cash flow assumptions, including prepayment speeds, servicing costs and escrow earnings of the mortgage servicing rights are considered in the calculation. The average constant prepayment rate was 17.50%16.90% for the March 31,September 30, 2020 valuation compared to 14.20% for the December 31, 2019 valuation. The discount rate was 9.02% for September 30, 2020 compared to 9.03% for both March 31, 2020 and December 31, 2019 valuations.2019. The average capitalization rate for the first three monthsnine months of 2020 ranged from 95 76 to 116 basisbasis points compared to a range of 9380 to 11798 basis points for the first threenine months of 2019. Fees collected for the servicing of mortgage loans for others were $409,000$443,000 and $427,000$422,000 for the quartersquarter ended March 31,September 30, 2020 and March 31,September 30, 2019, respectively.respectively, and $1.3 million for both the nine-month periods ended September 30, 2020 and September 30, 2019.
The following table summarizes, in thousands, the changes in capitalized mortgage servicing rights for the threenine months ended March 31,September 30, 2020, and March 31,September 30, 2019:
| | | | 2020 | | 2019 | | 2020 | | 2019 |
| Balance at January 1, | Balance at January 1, | $ | 5,621 | | | $ | 29,363 | | Balance at January 1, | $ | 5,621 | | | $ | 29,363 | |
| Originations | Originations | 376 | | | 198 | | Originations | 2,571 | | | 654 | |
| Amortization | Amortization | (307) | | | (1,500) | | Amortization | (1,693) | | | (2,867) | |
| | Sale of mortgage servicing rights | | Sale of mortgage servicing rights | 0 | | | (20,556) | |
| | Valuation allowance | Valuation allowance | (1,565) | | | (589) | | Valuation allowance | (1,676) | | | (1,572) | |
| Balance at period end | Balance at period end | $ | 4,125 | | | $ | 27,472 | | Balance at period end | $ | 4,823 | | | $ | 5,022 | |
| | Mortgage servicing rights, net to servicing portfolio | Mortgage servicing rights, net to servicing portfolio | 0.67 | % | | 0.68 | % | Mortgage servicing rights, net to servicing portfolio | 0.68 | % | | 0.81 | % |
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 $77.6$71.2 million at March 31,September 30, 2020 and $82.1 million at December 31, 2019. 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 $118,000$70,000 and $380,000$216,000 for the quarter ended March 31,September 30, 2020 and March 31,September 30, 2019, respectively.respectively, and $242,000 and $826,000 for the nine-months ended September 30, 2020 and September 30, 2019.
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 15.77%15.12% to 19.85%18.37% as of March 31,September 30, 2020 compared to 14.25% to 18.08% as of December 31, 2019. The discount rate range was 11.02%6.93% to 14.37%10.43% for the March 31,September 30, 2020, valuations compared to 10.65% to 13.94% for the December 31, 2019 valuations. The capitalization rate for both 2020 and 2019 ranged from 310 to 445 basis points. The total fair value of Heartland's commercial servicing rights was estimated at $1.4$1.5 million as of March 31,September 30, 2020, and $1.6 million as of December 31, 2019.
The following table summarizes, in thousands, the changes in capitalized commercial servicing rights for the three-monthsnine-months ended March 31,September 30, 2020, and March 31,September 30, 2019:
| | | 2020 | | 2019 | | 2020 | | 2019 |
| Balance at January 1, | Balance at January 1, | $ | 1,115 | | | $ | 1,709 | | Balance at January 1, | $ | 1,115 | | | $ | 1,709 | |
| | Originations | Originations | 38 | | | 68 | | Originations | 62 | | | 102 | |
| Amortization | Amortization | (58) | | | (281) | | Amortization | (248) | | | (555) | |
| | Valuation allowance on commercial servicing rights | | Valuation allowance on commercial servicing rights | 0 | | | (7) | |
| Balance at period end | Balance at period end | $ | 1,095 | | | $ | 1,496 | | Balance at period end | $ | 929 | | | $ | 1,249 | |
| Fair value of commercial servicing rights | Fair value of commercial servicing rights | $ | 1,407 | | | $ | 1,926 | | Fair value of commercial servicing rights | $ | 1,497 | | | $ | 1,827 | |
| Commercial servicing rights, net to servicing portfolio | Commercial servicing rights, net to servicing portfolio | 1.41 | % | | 1.58 | % | Commercial servicing rights, net to servicing portfolio | 1.31 | % | | 1.44 | % |
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 the carrying amount at each Heartland subsidiary. At March 31,September 30, 2020, a $524,000$534,000 valuation allowance was required on the mortgage servicing rights 15-year tranche and a $2.0$2.1 million valuation allowance was required on the mortgage servicing rights 30-year tranche. At December 31, 2019, a $114,000 valuation allowance was required on the mortgage servicing rights 15-year tranche and a $797,000 valuation allowance was required on the mortgage servicing rights 30-year tranche. At both March 31,September 30, 2020 and December 31, 2019, 0 valuation allowance was required on
commercial servicing rights with a term less than 20 years and 0 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 mortgage servicing rights and any recorded valuation allowance at each respective subsidiary at March 31,September 30, 2020, and December 31, 2019:
| | March 31, 2020 | Book Value 15-Year Tranche | | Fair Value 15-Year Tranche | | Impairment 15-Year Tranche | | Book Value 30-Year Tranche | | Fair Value 30-Year Tranche | | Impairment 30-Year Tranche | |
| September 30, 2020 | | September 30, 2020 | 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 |
| | First Bank & Trust | First Bank & Trust | 1,478 | | | 954 | | | 524 | | | 5,181 | | | 3,171 | | | 2,010 | | First Bank & Trust | 1,618 | | | 1,084 | | | 534 | | | 5,850 | | | 3,739 | | | 2,111 | |
| Total | Total | $ | 1,478 | | | $ | 954 | | | $ | 524 | | | $ | 5,181 | | | $ | 3,171 | | | $ | 2,010 | | Total | $ | 1,618 | | | $ | 1,084 | | | $ | 534 | | | $ | 5,850 | | | $ | 3,739 | | | $ | 2,111 | |
| December 31, 2019 | December 31, 2019 | | | | | | | | | | | | December 31, 2019 | | | | | | | | | | | |
| | First Bank & Trust | First Bank & Trust | 1,482 | | | 1,368 | | | 114 | | | 5,050 | | | 4,253 | | | 797 | | First Bank & Trust | 1,482 | | | 1,368 | | | 114 | | | 5,050 | | | 4,253 | | | 797 | |
| Total | Total | $ | 1,482 | | | $ | 1,368 | | | $ | 114 | | | $ | 5,050 | | | $ | 4,253 | | | $ | 797 | | Total | $ | 1,482 | | | $ | 1,368 | | | $ | 114 | | | $ | 5,050 | | | $ | 4,253 | | | $ | 797 | |
The following table summarizes, in thousands, the book value, the fair value of each tranche of the commercial servicing rights and any recorded valuation allowance at each respective subsidiary at March 31,September 30, 2020, and December 31, 2019:
| | March 31, 2020 | 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 | |
| September 30, 2020 | | September 30, 2020 | Book Value
Less than
20 Years | | Fair Value
Less than
20 Years | | Valuation Allowance
15-Year Tranche | | Book Value
More than
20 Years | | Fair Value
More than
20 Years | | Valuation Allowance
30-Year Tranche |
| | Premier Valley Bank | Premier Valley Bank | 1 | | | 12 | | | — | | | 125 | | | 145 | | | — | | Premier Valley Bank | 1 | | | 9 | | | 0 | | | 94 | | | 156 | | | 0 | |
| Wisconsin Bank & Trust | Wisconsin Bank & Trust | 132 | | | 237 | | | — | | | 837 | | | 1,013 | | | — | | Wisconsin Bank & Trust | 117 | | | 285 | | | 0 | | | 717 | | | 1,047 | | | 0 | |
| Total | Total | $ | 133 | | | $ | 249 | | | $ | — | | | $ | 962 | | | $ | 1,158 | | | $ | — | | Total | $ | 118 | | | $ | 294 | | | $ | 0 | | | $ | 811 | | | $ | 1,203 | | | $ | 0 | |
| December 31, 2019 | December 31, 2019 | | | | | | | | | | | | December 31, 2019 | | | | | | | | | | | |
| | Premier Valley Bank | Premier Valley Bank | 1 | | | 13 | | | — | | | 135 | | | 161 | | | — | | Premier Valley Bank | 1 | | | 13 | | | 0 | | | 135 | | | 161 | | | 0 | |
| Wisconsin Bank & Trust | Wisconsin Bank & Trust | 128 | | | 272 | | | — | | | 851 | | | 1,148 | | | — | | Wisconsin Bank & Trust | 128 | | | 272 | | | 0 | | | 851 | | | 1,148 | | | 0 | |
| Total | Total | $ | 129 | | | $ | 285 | | | $ | — | | | $ | 986 | | | $ | 1,309 | | | $ | — | | Total | $ | 129 | | | $ | 285 | | | $ | 0 | | | $ | 986 | | | $ | 1,309 | | | $ | 0 | |
NOTE 7: DERIVATIVE FINANCIAL INSTRUMENTS
Heartland uses derivative financial instruments as part of its interest rate risk management strategy. As part of the strategy, Heartland considers the use of interest rate swaps, caps, floors, collars, and certain interest rate lock commitments and forward sales of securities related to mortgage banking activities. Heartland's current strategy includes the use of interest rate swaps, interest rate lock commitments and forward sales of mortgage securities. In addition, Heartland is facilitating back-to-back loan swaps to assist customers in managing interest rate risk. Heartland's objectives are to add stability to its net interest margin and to manage its exposure to movements in interest rates. The contract or notional amount of a derivative is used to determine, along with the other terms of the derivative, the amounts to be exchanged between the counterparties. Heartland is exposed to credit risk in the event of nonperformance by counterparties to financial instruments. Heartland minimizes this risk by entering into derivative contracts with counterparties that meet Heartland’s credit standards, and the contracts contain collateral provisions protecting the at-risk party. Heartland has not experienced any losses from nonperformance by these counterparties. Heartland monitors counterparty risk in accordance with the provisions of ASC 815.
In addition, interest rate-related derivative instruments generally contain language outlining collateral pledging requirements for each counterparty. Collateral must be posted when the market value exceeds certain threshold limits which are determined by credit ratings of each counterparty. Heartland was required to pledge $3.9$4.2 million of cash as collateral at March 31,September 30, 2020 compared to $1.9 million at December 31, 2019. At both March 31,September 30, 2020 and December 31, 2019, 0 collateral was required to be pledged by Heartland's counterparties.
Heartland's derivative and hedging instruments are recorded at fair value on the consolidated balance sheets. See Note 8, “Fair Value,” for additional fair value information and disclosures.
Cash Flow Hedges
Heartland has variable rate funding which creates exposure to variability in interest payments due to changes in interest rates. To manage the interest rate risk related to the variability of interest payments, Heartland has entered into various interest rate swap agreements. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are received or made on Heartland's variable-rate liabilities. For the threenine months ended March 31,September 30, 2020, 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 $183,000.$1.2 million. For the next twelve months, Heartland estimates that cash payments and reclassification from accumulated other comprehensive income to interest expense will total $733,000.$2.4 million.
Heartland entered into 64 forward starting interest rate swap transactions to effectively convert Heartland Financial Statutory Trust IV, V, VI, and VII, which total $85.0 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 64 swap transactions are designated as cash flow hedges of the changes in LIBOR, the benchmark interest rate being hedged, associated with the interest payments made on $105.0$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 2019, the interest rate swap transactions associated with Morrill Statutory Trust I and II, totaling $20.0 million, matured and the fixed rate debt has been converted to variable rate subordinated debentures. During the first quarter of 2020, the interest rate swap transaction associated with Heartland Financial Statutory Trust VI, totaling $20.0 million, matured and the fixed rate debt has been converted to a variable rate subordinated debenture.
On May 18, 2018, Heartland acquired cash flow hedges related to OCGI Statutory Trust III and OCGI Capital Trust IV with notional amounts of $3.0 million and $6.0 million, respectively, in the First Bank Lubbock Bancshares, Inc. transaction. The cash flow hedges effectively convert OCGI Statutory Trust III and OGCI Capital Trust IV from variable rate subordinated debentures to fixed rate debt. These swaps are designated as cash flow hedges of the changes in LIBOR, the benchmark interest rate being hedged, associated with the interest payments made on $9.0 million of Heartland's subordinated debentures that reset quarterly on a specified reset date.
The table below identifies the balance sheet category and fair values of Heartland's derivative instruments designated as cash flow hedges at March 31,September 30, 2020, and December 31, 2019, in thousands:
| | | | Notional
Amount | | Fair
Value | | Balance
Sheet
Category | | Receive
Rate | | Weighted
Average
Pay Rate | | Maturity | | Notional
Amount | | Fair
Value | | Balance
Sheet
Category | | Receive
Rate | | Weighted
Average
Pay Rate | | Maturity |
| March 31, 2020 | | | | | | | | | | | | |
| September 30, 2020 | | September 30, 2020 | | | | | | | | | | | |
| | Interest rate swap | Interest rate swap | $ | 25,000 | | | $ | (435) | | | Other liabilities | | 0.843 | % | | 2.255 | % | | 03/17/2021 | Interest rate swap | $ | 25,000 | | | $ | (253) | | | Other liabilities | | 0.246 | % | | 2.255 | % | | 03/17/2021 |
| | Interest rate swap | Interest rate swap | 24,667 | | | (216) | | | Other liabilities | | 3.363 | | | 3.674 | | | 05/10/2021 | Interest rate swap | 22,667 | | | (147) | | | Other liabilities | | 2.656 | | | 3.674 | | | 05/10/2021 |
| Interest rate swap | Interest rate swap | 25,000 | | | (2,587) | | | Other liabilities | | 3.429 | | | 5.425 | | | 07/24/2028 | Interest rate swap | 23,500 | | | (2,449) | | | Other liabilities | | 2.651 | | | 5.425 | | | 07/24/2028 |
| Interest rate swap | Interest rate swap | 20,000 | | | (1,648) | | | Other liabilities | | 0.741 | | | 2.390 | | | 06/15/2024 | Interest rate swap | 20,000 | | | (1,592) | | | Other liabilities | | 0.250 | | | 2.390 | | | 06/15/2024 |
| Interest rate swap | Interest rate swap | 20,000 | | | (1,502) | | | Other liabilities | | 1.580 | | | 2.352 | | | 03/01/2024 | Interest rate swap | 20,000 | | | (1,488) | | | Other liabilities | | 0.246 | | | 2.352 | | | 03/01/2024 |
| Interest rate swap | Interest rate swap | 6,000 | | | (106) | | | Other liabilities | | 0.741 | | | 1.866 | | | 06/15/2021 | Interest rate swap | 6,000 | | | (74) | | | Other liabilities | | 0.250 | | | 1.866 | | | 06/15/2021 |
| Interest rate swap | Interest rate swap | 3,000 | | | (51) | | | Other liabilities | | 1.219 | | | 1.878 | | | 06/30/2021 | Interest rate swap | 3,000 | | | (38) | | | Other liabilities | | 0.275 | | | 1.878 | | | 06/30/2021 |
| December 31, 2019 | December 31, 2019 | | December 31, 2019 | |
| Interest rate swap | Interest rate swap | $ | 25,000 | | | $ | (167) | | | Other liabilities | | 1.900 | % | | 2.255 | % | | 03/17/2021 | Interest rate swap | $ | 25,000 | | | $ | (167) | | | Other liabilities | | 1.900 | % | | 2.255 | % | | 03/17/2021 |
| Interest rate swap | Interest rate swap | 20,000 | | | (67) | | | Other liabilities | | 2.043 | | | 3.355 | | | 01/07/2020 | Interest rate swap | 20,000 | | | (67) | | | Other liabilities | | 2.043 | | | 3.355 | | | 01/07/2020 |
| Interest rate swap | Interest rate swap | 25,667 | | | 135 | | | Other assets | | 4.215 | | | 3.674 | | | 05/10/2021 | Interest rate swap | 25,667 | | | 135 | | | Other assets | | 4.215 | | | 3.674 | | | 05/10/2021 |
| Interest rate swap | Interest rate swap | 25,750 | | | (1,384) | | | Other liabilities | | 4.280 | | | 5.425 | | | 07/24/2028 | Interest rate swap | 25,750 | | | (1,384) | | | Other liabilities | | 4.280 | | | 5.425 | | | 07/24/2028 |
| Interest rate swap | Interest rate swap | 20,000 | | | (614) | | | Other liabilities | | 1.894 | | | 2.390 | | | 06/15/2024 | Interest rate swap | 20,000 | | | (614) | | | Other liabilities | | 1.894 | | | 2.390 | | | 06/15/2024 |
| Interest rate swap | Interest rate swap | 20,000 | | | (561) | | | Other liabilities | | 1.907 | | | 2.352 | | | 03/01/2024 | Interest rate swap | 20,000 | | | (561) | | | Other liabilities | | 1.907 | | | 2.352 | | | 03/01/2024 |
| Interest rate swap | Interest rate swap | 6,000 | | | (15) | | | Other liabilities | | 1.894 | | | 1.866 | | | 06/15/2021 | Interest rate swap | 6,000 | | | (15) | | | Other liabilities | | 1.894 | | | 1.866 | | | 06/15/2021 |
| Interest rate swap | Interest rate swap | 3,000 | | | (9) | | | Other liabilities | | 1.831 | | | 1.878 | | | 06/30/2021 | Interest rate swap | 3,000 | | | (9) | | | Other liabilities | | 1.831 | | | 1.878 | | | 06/30/2021 |
|
The table below identifies the gains and losses recognized on Heartland's derivative instruments designated as cash flow hedges for the three-monththree- and nine-month periods ended March 31,September 30, 2020, and March 31,September 30, 2019, in thousands:
| | | Effective Portion | | | Ineffective Portion | | | Effective Portion | | Ineffective Portion |
| | | Recognized in OCI | | Reclassified from AOCI into Income | | | Recognized in Income on Derivatives | | | Recognized in OCI | | Reclassified from AOCI into Income | | Recognized in Income on Derivatives |
| | Amount of
Gain (Loss) | | Category | | Amount of
Gain (Loss) | | Category | | Amount of
Gain (Loss) | | Amount of
Gain (Loss) | | Category | | Amount of
Gain (Loss) | | Category | | Amount of
Gain (Loss) |
| | Three Months Ended March 31, 2020 | | |
| Three Months Ended September 30, 2020 | | Three Months Ended September 30, 2020 | | | | | | | | | |
| | Interest rate swaps | Interest rate swaps | $ | (3,863) | | | Interest expense | | $ | 183 | | | Other income | | $ | — | | Interest rate swaps | $ | (604) | | | Interest expense | | $ | 595 | | | Other income | | $ | 0 | |
| Nine Months Ended September 30, 2020 | | Nine Months Ended September 30, 2020 | |
| | Three Months Ended March 31, 2019 | | |
| Interest rate swaps | | Interest rate swaps | $ | (3,359) | | | Interest expense | | $ | 1,195 | | | Other income | | $ | 0 | |
| Three Months Ended September 30, 2019 | | Three Months Ended September 30, 2019 | |
| | Interest rate swaps | Interest rate swaps | $ | (1,340) | | | Interest expense | | $ | (165) | | | Other income | | $ | — | | Interest rate swaps | $ | (766) | | | Interest expense | | $ | (31) | | | Other income | | $ | 0 | |
| Nine Months Ended September 30, 2019 | | Nine Months Ended September 30, 2019 | |
| | Interest rate swaps | | Interest rate swaps | $ | (4,269) | | | Interest expense | | $ | (296) | | | Other income | | $ | 0 | |
Fair Value Hedges
Heartland uses interest rate swaps to convert certain long term fixed rate loans to floating rates to hedge interest rate risk exposure. Heartland uses hedge accounting in accordance with ASC 815, with the unrealized gains and losses, representing the change in fair value of the derivative and the change in fair value of the risk being hedged on the related loan, being recorded in the consolidated statements of income. The ineffective portions of the unrealized gains or losses, if any, are recorded in interest income and interest expense in the consolidated statements of income. Heartland uses statistical regression to assess hedge effectiveness, both at the inception of the hedge as well as on a continual basis. The regression analysis involves regressing the periodic change in the fair value of the hedging instrument against the periodic changes in the fair value of the asset being hedged due to changes in the hedge risk.
Heartland was required to pledge $3.9$4.2 million and $3.4 million of cash as collateral for these fair value hedges at March 31,September 30, 2020, and December 31, 2019, respectively.
The table below identifies the notional amount, fair value and balance sheet category of Heartland's fair value hedges at March 31,September 30, 2020, and December 31, 2019, in thousands:
| | | Notional Amount | | Fair Value | | Balance Sheet Category | | Notional Amount | | Fair Value | | Balance Sheet Category |
| March 31, 2020 | | | | | | |
| September 30, 2020 | | September 30, 2020 | | | | | |
| | Fair value hedges | Fair value hedges | 21,149 | | | (2,930) | | | Other liabilities | Fair value hedges | $ | 20,946 | | | $ | (2,900) | | | Other liabilities |
| December 31, 2019 | December 31, 2019 | | December 31, 2019 | |
| | Fair value hedges | Fair value hedges | 21,250 | | | $ | (1,253) | | | Other liabilities | Fair value hedges | $ | 21,250 | | | $ | (1,253) | | | Other liabilities |
The table below identifies the gains and losses recognized on Heartland's fair value hedges for the threethree- and nine- month periods ended March 31,September 30, 2020, and March 31,September 30, 2019, in thousands:
| | | | | | | | | | | | | | |
| | Amount of Gain (Loss) | | Income Statement Category |
| | | | |
| | | | |
Three Months Ended March 31,September 30, 2020 | | | | |
| Fair value hedges | | $ | (1,677)26 | | | Interest income |
| | | | |
| Nine Months Ended September 30, 2020 | | | | |
| Fair value hedges | | $ | (1,647) | | | Interest income |
Three Months Ended March 31,September 30, 2019 | | | | |
| Fair value hedges | | $ | 894 (263) | | | Interest income |
| Nine Months Ended September 30, 2019 | | | | |
| Fair value hedges | | $ | (1,553) | | | Interest income |
Embedded Derivatives
Heartland has fixed rate loans with embedded derivatives. The loans contain terms that affect the cash flows or value of the loan similar to a derivative instrument, and therefore are considered to contain an embedded derivative. The embedded derivatives are bifurcated from the loans because the terms of the derivative instrument are not clearly and closely related to the loans. The embedded derivatives are recorded at fair value on the consolidated balance sheets as a part of other assets, and changes in the fair value are a component of noninterest income. The table below identifies the notional amount, fair value and balance sheet category of Heartland's embedded derivatives at March 31,September 30, 2020, and December 31, 2019, in thousands:
| | | Notional Amount | | Fair Value | | Balance Sheet Category | | | Notional Amount | | Fair Value | | Balance Sheet Category | |
| March 31, 2020 | | | | | | | |
| September 30, 2020 | | September 30, 2020 | | | | | | |
| Embedded derivatives | Embedded derivatives | $ | 9,522 | | | $ | 826 | | | Other assets | | Embedded derivatives | $ | 9,308 | | | $ | 758 | | | Other assets | |
| | December 31, 2019 | December 31, 2019 | | | December 31, 2019 | | |
| Embedded derivatives | Embedded derivatives | $ | 9,627 | | | $ | 465 | | | Other assets | | Embedded derivatives | $ | 9,627 | | | $ | 465 | | | Other assets | |
|
The table below identifies the gains and losses recognized on Heartland's embedded derivatives for the three-monththree- and nine--month periods ended March 31,September 30, 2020, and March 31,September 30, 2019, in thousands:
| | | | | | | | | | | | | | |
| | Amount of Gain (Loss) | | Income Statement Category |
| | | | |
| | | | |
Three Months Ended March 31,September 30, 2020 | | | | |
| Embedded derivatives | | $ | 361 (69) | | | Other noninterest income |
| | | | |
| Nine Months Ended September 30, 2020 | | | | |
| Embedded derivatives | | $ | 293 | | | Other noninterest income |
Three Months Ended March 31,September 30, 2019 | | | | |
| Embedded derivatives | | $ | 8891,389 | | | Other noninterest income |
| Nine Months Ended September 30, 2019 | | | | |
| Embedded derivatives | | $ | 318 | | | Other noninterest income |
Back-to-Back Loan Swaps
Heartland has interest rate swap loan relationships with customers to meet their financing needs. Upon entering into these loan swaps, Heartland enters into offsetting positions with counterparties in order to minimize interest rate risk. These back-to-back loan swaps qualify as free standing financial derivatives with the fair values reported in other assets and other liabilities on the consolidated balance sheets. Heartland was required to post $48.9$53.2 million and $20.2 million as of March 31,September 30, 2020, and December 31, 2019, respectively, as collateral related to these back-to-back swaps. Heartland's counterparties were required to pledge $0 at March 31,September 30, 2020, and $0 at December 31, 2019. Any gains and losses on these back-to-back swaps are recorded in noninterest income on the consolidated statements of income, and for the threethree- and nine months ended March 31,September 30, 2020 and March 31,September 30, 2019, 0 gain or loss was recognized. The table below identifies the balance sheet category and fair values of Heartland's derivative instruments designated as loan swaps at March 31,September 30, 2020, and December 31, 2019, in thousands:
| | | Notional
Amount | | Fair
Value | | Balance Sheet
Category | | Weighted
Average
Receive
Rate | | Weighted
Average
Pay
Rate | | Notional
Amount | | Fair
Value | | Balance Sheet
Category | | Weighted
Average
Receive Rate | | Weighted
Average
Pay Rate |
| March 31, 2020 | | | | | | | | | | | |
| September 30, 2020 | | September 30, 2020 | | | | | | | | | |
| Customer interest rate swaps | Customer interest rate swaps | | $ | 415,024 | | | $ | 47,476 | | | Other assets | | 4.58 | % | | 3.71 | % | Customer interest rate swaps | $ | 443,856 | | | $ | 49,629 | | | Other assets | | 4.46 | % | | 2.45 | % |
| Customer interest rate swaps | Customer interest rate swaps | | 415,024 | | (47,476) | | | Other liabilities | | 3.71 | | | 4.58 | | Customer interest rate swaps | 443,856 | | | (49,629) | | | Other liabilities | | 2.45 | | | 4.46 | |
| December 31, 2019 | December 31, 2019 | | December 31, 2019 | |
| Customer interest rate swaps | Customer interest rate swaps | | $ | 374,191 | | | $ | 16,927 | | | Other assets | | 4.68 | % | | 4.05 | % | Customer interest rate swaps | $ | 374,191 | | | $ | 16,927 | | | Other assets | | 4.68 | % | | 4.05 | % |
| Customer interest rate swaps | Customer interest rate swaps | | 374,191 | | | (16,927) | | | Other liabilities | | 4.05 | | | 4.68 | | Customer interest rate swaps | 374,191 | | | (16,927) | | | Other liabilities | | 4.05 | | | 4.68 | |
|
Other Free Standing Derivatives
Heartland has entered into interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans and mortgage backed securities that are considered derivative instruments. Heartland enters into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of future changes in interest rates on the commitments to fund the loans as well as on residential mortgage loans available for sale. The fair value of these commitments is recorded on the consolidated balance sheets, with the changes in fair value recorded in the consolidated statements of income as a component of gains on sale of loans held for sale. These derivative contracts are designated as free standing derivative contracts and are not designated against specific assets and liabilities on the consolidated balance sheets or forecasted transactions and therefore do not qualify for hedge accounting treatment. Heartland was required to pledge 0 collateral at both March 31,September 30, 2020, and December 31, 2019. Heartland's counterparties were required to pledge 0 collateral at both March 31,September 30, 2020 and December 31, 2019, as collateral for these forward commitments.
Heartland 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 sheet or forecasted transactions and therefore do not qualify for hedge accounting in accordance with ASC 815. These swaps are carried at fair value on the consolidated balance sheets as a component of other liabilities, with changes in the fair value recorded as a component of other noninterest income.
The table below identifies the balance sheet category and fair values of Heartland's other free standing derivative instruments not designated as hedging instruments at March 31,September 30, 2020, and December 31, 2019, in thousands:
| | | | Balance Sheet Category | | Notional Amount | | Fair Value | | Balance Sheet Category | | Notional Amount | | Fair Value |
| March 31, 2020 | | | | | | |
| September 30, 2020 | | September 30, 2020 | | | | | |
| Interest rate lock commitments (mortgage) | Interest rate lock commitments (mortgage) | Other assets | | $ | 70,051 | | | $ | 2,457 | | Interest rate lock commitments (mortgage) | Other assets | | $ | 51,579 | | | $ | 2,255 | |
| | Forward commitments | Forward commitments | Other assets | | 5,000 | | | 30 | | Forward commitments | Other assets | | 24,500 | | | 27 | |
| Forward commitments | Forward commitments | Other liabilities | | 64,500 | | | (1,273) | | Forward commitments | Other liabilities | | 72,500 | | | (352) | |
| Undesignated interest rate swaps | Undesignated interest rate swaps | Other liabilities | | 9,522 | | | (826) | | Undesignated interest rate swaps | Other liabilities | | 9,308 | | | (758) | |
| | December 31, 2019 | December 31, 2019 | | | | | | | December 31, 2019 | |
| Interest rate lock commitments (mortgage) | Interest rate lock commitments (mortgage) | Other assets | | $ | 20,356 | | | $ | 681 | | Interest rate lock commitments (mortgage) | Other assets | | $ | 20,356 | | | $ | 681 | |
| | Forward commitments | Forward commitments | Other assets | | 16,000 | | | 15 | | Forward commitments | Other assets | | 16,000 | | | 15 | |
| Forward commitments | Forward commitments | Other liabilities | | 36,500 | | | (113) | | Forward commitments | Other liabilities | | 36,500 | | | (113) | |
| Undesignated interest rate swaps | Undesignated interest rate swaps | Other liabilities | | 9,627 | | | (465) | | Undesignated interest rate swaps | Other liabilities | | 9,627 | | | (465) | |
|
The table below identifies the income statement category of the gains and losses recognized in income on Heartland's other free standing derivative instruments not designated as hedging instruments for the three-monththree- and nine-month periods ended March 31,September 30, 2020, and March 31,September 30, 2019, in thousands:
| | | | | | | | | | | |
| | Income Statement Category | | Gain (Loss) Recognized |
| | | |
| | | |
| | | |
| | | |
Three Months Ended March 31,September 30, 2020 | | | |
| Interest rate lock commitments (mortgage) | Net gains on sale of loans held for sale | | $ | 1,698249 | |
| Forward commitments | Net gains on sale of loans held for sale | | (1,146)(44) | |
| Undesignated interest rate swaps | Other noninterest income | | (361)69 | |
| Nine Months Ended September 30, 2020 | | | |
| Interest rate lock commitments (mortgage) | Net gains on sale of loans held for sale | | $ | 3,243 | |
| Forward commitments | Net gains on sale of loans held for sale | | (228) | |
| Undesignated interest rate swaps | Other noninterest income | | (293) | |
Three Months Ended March 31,September 30, 2019 | | | |
| Interest rate lock commitments (mortgage) | Net gains on sale of loans held for sale | | $ | 264 (255) | |
| Forward commitments | Net gains on sale of loans held for sale | | 283 | |
| Undesignated interest rate swaps | Other noninterest income | | (1,389) | |
| Nine Months Ended September 30, 2019 | | | |
| Interest rate lock commitments (mortgage) | Net gains on sale of loans held for sale | | $ | 561 | |
| | | |
| Forward commitments | Net gains on sale of loans held for sale | | 117255 | |
| Undesignated interest rate swaps | Other noninterest income | | 889 (318) | |
NOTE 8: FAIR VALUE
Heartland utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities 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, Heartland may be required to record at fair value other assets on a nonrecurring basis such as loans held for sale, loans held to maturity and certain other assets including, but not limited to, mortgage servicing rights, commercial servicing rights and other real estate owned. These nonrecurring fair value adjustments typically involve application of the lower of cost or fair value accounting or write-downs of individual assets.
Fair Value Hierarchy
Under ASC 820, assets and liabilities are grouped at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1 — Valuation is based upon quoted prices for identical instruments in active markets.
Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, or similar instruments in markets that are not active, and model-based valuation techniques for all significant assumptions are observable in the market.
Level 3 — Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the
asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
The following is a description of valuation methodologies used for assets and liabilities recorded at fair value on a recurring or non-recurring basis.
Assets
Securities Available for Sale and Held to Maturity
Securities available for sale are recorded at fair value on a recurring basis. Securities held to maturity are generally recorded at
cost and are recorded at fair value only to the extent a decline in fair value is determined to be other-than-temporary. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security's credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, as well as U.S. Treasury securities. Level 2 securities include U.S. government and agency securities, mortgage and asset-backed securities and private collateralized mortgage obligations, municipal bonds 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'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, Heartland classifies loans held for sale subjected to nonrecurring fair value adjustments as Level 2.
Loans Held to Maturity
Heartland does not record loans held to maturity at fair value on a recurring basis. However, from time to time, certain loans are considered collateral dependent and an allowance for credit losses is established. The fair value of individually assessed loans is measured using the fair value of the collateral. In accordance with ASC 820, individually 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-party appraisals less estimated disposal costs. Heartland considers third party appraisals, 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. Accordingly, the valuation of premises, furniture and equipment held for sale is subject to significant external and internal judgment. Heartland periodically reviews premises, furniture and equipment held for sale to determine if the fair value of the property, less disposal costs, has declined below its recorded book value and records any adjustments accordingly. Premises, furniture and equipment held for sale are classified as nonrecurring Level 3 in the fair value hierarchy.
Mortgage Servicing Rights
Mortgage servicing rights assets represent the value associated with servicing residential real estate loans that have been sold to outside investors with servicing retained. 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. Heartland classifies mortgage servicing rights as nonrecurring with Level 3 measurement inputs.
Commercial Servicing Rights
Commercial servicing rights assets represent the value associated with servicing commercial loans guaranteed by the Small Business Administration and the United States Department of Agriculture that have been sold with servicing retained by Heartland. Heartland uses the amortization method (i.e., the lower of amortized cost or estimated fair value measured on a nonrecurring basis), not fair value measurement accounting, to determine the carrying value of its commercial servicing rights.
The fair value for servicing assets is determined through market prices for comparable servicing contracts, when available, or through a valuation model that calculates the present value of estimated future net servicing income. Inputs utilized include discount rates, prepayment speeds and delinquency rate assumptions as inputs. All of these assumptions require a significant degree of management estimation and judgment. Commercial servicing rights are subject to impairment testing, and the carrying values of these rights are reviewed quarterly for impairment based upon the calculation of fair value as performed by an outside third party. If the valuation model reflects a fair value less than the carrying value, commercial servicing rights are adjusted to fair value through a valuation allowance. Heartland classifies commercial servicing rights as nonrecurring with Level 3 measurement inputs.
Derivative Financial Instruments
Heartland's current interest rate risk strategy includes interest rate swaps. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. To comply with the provisions of ASC 820, Heartland incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty's nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, Heartland has considered the impact of netting any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Although Heartland has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of March 31,September 30, 2020, and December 31, 2019, Heartland has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, Heartland has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
Interest rate lock commitments
Heartland uses an internal valuation model that relies on internally developed inputs to estimate the fair value of its interest rate lock commitments which is based on unobservable inputs that reflect management's assumptions and specific information about each borrower. Interest rate lock commitments are classified in Level 3 of the fair value hierarchy.
Forward commitments
The fair value of forward commitments are estimated using an internal valuation model, which includes current trade pricing for similar financial instruments in active markets that Heartland has the ability to access and are classified in Level 2 of the fair value hierarchy.
Other Real Estate Owned
Other real estate owned ("OREO") represents property acquired through foreclosures and settlements of loans. Property acquired is carried at the fair value of the property at the time of acquisition (representing the property's cost basis), plus any acquisition costs, or the estimated fair value of the property, less disposal costs. Heartland considers third party appraisals, as well as independent fair value assessments from realtors or persons involved in selling OREO, in determining the fair value of particular properties. Accordingly, the valuation of OREO is subject to significant external and internal judgment. Heartland periodically reviews OREO to determine if the fair value of the property, less disposal costs, has declined below its recorded book value and records any adjustments accordingly. OREO is classified as nonrecurring Level 3 of the fair value hierarchy.
The table below presents Heartland's assets and liabilities that are measured at fair value on a recurring basis as of March 31,September 30, 2020, and December 31, 2019, in thousands, aggregated by the level in the fair value hierarchy within which those measurements fall:
| | | Total Fair Value | | Level 1 | | Level 2 | | Level 3 | | Total Fair Value | | Level 1 | | Level 2 | | Level 3 |
| March 31, 2020 | | | | | | | | |
| September 30, 2020 | | September 30, 2020 | | | | | | | |
| Assets | Assets | | Assets | |
| | Securities available for sale | Securities available for sale | | Securities available for sale | |
| U.S. government corporations and agencies | U.S. government corporations and agencies | $ | 9,916 | | | $ | 8,569 | | | $ | 1,347 | | | $ | — | | U.S. government corporations and agencies | $ | 3,272 | | | $ | 2,035 | | | $ | 1,237 | | | $ | 0 | |
| Mortgage and asset-backed securities | Mortgage and asset-backed securities | 2,520,004 | | | — | | | 2,520,004 | | | — | | Mortgage and asset-backed securities | 3,742,508 | | | 0 | | | 3,742,508 | | | 0 | |
| Obligations of states and political subdivisions | Obligations of states and political subdivisions | 940,441 | | | — | | | 940,441 | | | — | | Obligations of states and political subdivisions | 1,185,349 | | | 0 | | | 1,185,349 | | | 0 | |
| | Equity securities with a readily determinable fair value | Equity securities with a readily determinable fair value | 18,260 | | | — | | | 18,260 | | | — | | Equity securities with a readily determinable fair value | 19,569 | | | 0 | | | 19,569 | | | 0 | |
Derivative financial instruments(1) | Derivative financial instruments(1) | 48,302 | | | — | | | 48,302 | | | — | | Derivative financial instruments(1) | 50,387 | | | 0 | | | 50,387 | | | 0 | |
| Interest rate lock commitments | Interest rate lock commitments | 2,457 | | | — | | | — | | | 2,457 | | Interest rate lock commitments | 2,255 | | | 0 | | | 0 | | | 2,255 | |
| Forward commitments | Forward commitments | 30 | | | — | | | 30 | | | — | | Forward commitments | 27 | | | 0 | | | 27 | | | 0 | |
| Total assets at fair value | Total assets at fair value | $ | 3,539,410 | | | $ | 8,569 | | | $ | 3,528,384 | | | $ | 2,457 | | Total assets at fair value | $ | 5,003,367 | | | $ | 2,035 | | | $ | 4,999,077 | | | $ | 2,255 | |
| Liabilities | Liabilities | | | | | | | | Liabilities | | | | | | | |
Derivative financial instruments(2) | Derivative financial instruments(2) | $ | 57,777 | | | $ | — | | | $ | 57,777 | | | $ | — | | Derivative financial instruments(2) | $ | 59,328 | | | $ | 0 | | | $ | 59,328 | | | $ | 0 | |
| Forward commitments | Forward commitments | 1,273 | | | — | | | 1,273 | | | — | | Forward commitments | 352 | | | 0 | | | 352 | | | 0 | |
| | Total liabilities at fair value | Total liabilities at fair value | $ | 59,050 | | | $ | — | | | $ | 59,050 | | | $ | — | | Total liabilities at fair value | $ | 59,680 | | | $ | 0 | | | $ | 59,680 | | | $ | 0 | |
| December 31, 2019 | December 31, 2019 | | December 31, 2019 |
| Assets | Assets | | Assets | |
| | Securities available for sale | Securities available for sale | | Securities available for sale | |
| U.S. government corporations and agencies | U.S. government corporations and agencies | $ | 9,893 | | | $ | 8,503 | | | $ | 1,390 | | | $ | — | | U.S. government corporations and agencies | $ | 9,893 | | | $ | 8,503 | | | $ | 1,390 | | | $ | 0 | |
| Mortgage and asset-backed securities | Mortgage and asset-backed securities | 2,577,278 | | | — | | | 2,577,278 | | | — | | Mortgage and asset-backed securities | 2,577,278 | | | 0 | | | 2,577,278 | | | 0 | |
| Obligations of states and political subdivisions | Obligations of states and political subdivisions | 707,190 | | | — | | | 707,190 | | | — | | Obligations of states and political subdivisions | 707,190 | | | 0 | | | 707,190 | | | 0 | |
| | Equity securities | Equity securities | 18,435 | | | — | | | 18,435 | | | — | | Equity securities | 18,435 | | | 0 | | | 18,435 | | | 0 | |
Derivative financial instruments(1) | Derivative financial instruments(1) | 17,527 | | | — | | | 17,527 | | | — | | Derivative financial instruments(1) | 17,527 | | | 0 | | | 17,527 | | | 0 | |
| Interest rate lock commitments | Interest rate lock commitments | 681 | | | — | | | — | | | 681 | | Interest rate lock commitments | 681 | | | 0 | | | 0 | | | 681 | |
| | Total assets at fair value | Total assets at fair value | $ | 3,331,019 | | | $ | 8,503 | | | $ | 3,321,835 | | | $ | 681 | | Total assets at fair value | $ | 3,331,019 | | | $ | 8,503 | | | $ | 3,321,835 | | | $ | 681 | |
| Liabilities | Liabilities | | | | | | | | Liabilities | | | | | | | |
Derivative financial instruments(2) | Derivative financial instruments(2) | $ | 21,462 | | | $ | — | | | $ | 21,462 | | | $ | — | | Derivative financial instruments(2) | $ | 21,462 | | | $ | 0 | | | $ | 21,462 | | | $ | 0 | |
| Forward commitments | Forward commitments | 113 | | | — | | | 113 | | | — | | Forward commitments | 113 | | | 0 | | | 113 | | | 0 | |
| | Total liabilities at fair value | Total liabilities at fair value | $ | 21,575 | | | $ | — | | | $ | 21,575 | | | $ | — | | Total liabilities at fair value | $ | 21,575 | | | $ | 0 | | | $ | 21,575 | | | $ | 0 | |
| | (1) Includes embedded derivatives, back-to-back loan swaps, fair value hedges, free standing derivative instruments and cash flow hedges. | (1) Includes embedded derivatives, back-to-back loan swaps, fair value hedges, free standing derivative instruments and cash flow hedges. | | (1) Includes embedded derivatives, back-to-back loan swaps, fair value hedges, free standing derivative instruments and cash flow hedges. |
| (2) Includes cash flow hedges, fair value hedges, back-to-back loan swaps, embedded derivatives and free standing derivative instruments. | (2) Includes cash flow hedges, fair value hedges, back-to-back loan swaps, embedded derivatives and free standing derivative instruments. | | (2) Includes cash flow hedges, fair value hedges, back-to-back loan swaps, embedded derivatives and free standing derivative instruments. |
The tables below present Heartland's assets that are measured at fair value on a nonrecurring basis, in thousands:
| | | Fair Value Measurements at
March 31, 2020 | | | Fair Value Measurements at September 30, 2020 |
| | 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 | | 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 loans: | | | | | | | | | | |
| Collateral dependent individually assessed loans: | | Collateral dependent individually assessed loans: | | | | | | | | | |
| Commercial and industrial | Commercial and industrial | $ | 5,494 | | | $ | — | | | $ | — | | | $ | 5,494 | | | $ | 153 | | Commercial and industrial | $ | 9,602 | | | $ | 0 | | | $ | 0 | | | $ | 9,602 | | | $ | 445 | |
| Owner occupied commercial real estate | Owner occupied commercial real estate | 2,129 | | | — | | | — | | | 2,129 | | | — | | Owner occupied commercial real estate | 5,949 | | | 0 | | | 0 | | | 5,949 | | | 9,456 | |
| Non-owner occupied commercial real estate | Non-owner occupied commercial real estate | 109 | | | — | | | — | | | 109 | | | — | | Non-owner occupied commercial real estate | 1,035 | | | 0 | | | 0 | | | 1,035 | | | 0 | |
| Real estate construction | Real estate construction | 132 | | | — | | | — | | | 132 | | | — | | Real estate construction | 449 | | | 0 | | | 0 | | | 449 | | | 0 | |
| Agricultural and agricultural real estate | Agricultural and agricultural real estate | 1,980 | | | — | | | — | | | 1,980 | | | — | | Agricultural and agricultural real estate | 13,923 | | | 0 | | | 0 | | | 13,923 | | | 781 | |
| Residential real estate | Residential real estate | 543 | | | — | | | — | | | 543 | | | 52 | | Residential real estate | 376 | | | 0 | | | 0 | | | 376 | | | 36 | |
| Consumer | Consumer | 153 | | | — | | | — | | | 153 | | | — | | Consumer | 250 | | | 0 | | | 0 | | | 250 | | | 0 | |
| Total collateral dependent loans | $ | 10,540 | | | $ | — | | | $ | — | | | $ | 10,540 | | | $ | 205 | | |
| Total collateral dependent individually assessed loans | | Total collateral dependent individually assessed loans | $ | 31,584 | | | $ | 0 | | | $ | 0 | | | $ | 31,584 | | | $ | 10,718 | |
| Loans held for sale | Loans held for sale | $ | 22,957 | | | $ | — | | | $ | 22,957 | | | $ | — | | | $ | (1,734) | | Loans held for sale | $ | 65,969 | | | $ | 0 | | | $ | 65,969 | | | $ | 0 | | | $ | (2,648) | |
| Other real estate owned | Other real estate owned | $ | 6,074 | | | $ | — | | | $ | — | | | $ | 6,074 | | | $ | 66 | | Other real estate owned | 5,050 | | | 0 | | | 0 | | | 5,050 | | | 1,047 | |
| Premises, furniture and equipment held for sale | Premises, furniture and equipment held for sale | $ | 2,967 | | | $ | — | | | $ | — | | | $ | 2,967 | | | $ | — | | Premises, furniture and equipment held for sale | 567 | | | 0 | | | 0 | | | 567 | | | 0 | |
| Servicing rights | Servicing rights | $ | 4,125 | | | $ | — | | | $ | — | | | $ | 4,125 | | | $ | 1,579 | | Servicing rights | 4,823 | | | 0 | | | 0 | | | 4,823 | | | 1,676 | |
|
| | | Fair Value Measurements at
December 31, 2019 | | | Fair Value Measurements at
December 31, 2019 |
| | 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 | | 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: | Collateral dependent impaired loans: | | | | | | | | | | Collateral dependent impaired loans: | | | | | | | | | |
| Commercial and industrial | Commercial and industrial | $ | 15,173 | | | $ | — | | | $ | — | | | $ | 15,173 | | | $ | 1,114 | | Commercial and industrial | $ | 15,173 | | | $ | 0 | | | $ | 0 | | | $ | 15,173 | | | $ | 1,114 | |
| Owner occupied commercial real estate | Owner occupied commercial real estate | 1,352 | | | — | | | — | | | 1,352 | | | — | | Owner occupied commercial real estate | 1,352 | | | 0 | | | 0 | | | 1,352 | | | 0 | |
| Non-owner occupied commercial real estate | Non-owner occupied commercial real estate | 1,305 | | | — | | | — | | | 1,305 | | | — | | Non-owner occupied commercial real estate | 1,305 | | | 0 | | | 0 | | | 1,305 | | | 0 | |
| Real estate construction | Real estate construction | — | | | — | | | — | | | — | | | — | | Real estate construction | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Agricultural and agricultural real estate | Agricultural and agricultural real estate | 12,623 | | | — | | | — | | | 12,623 | | | 1,254 | | Agricultural and agricultural real estate | 12,623 | | | 0 | | | 0 | | | 12,623 | | | 1,254 | |
| Residential real estate | Residential real estate | 4,978 | | | — | | | — | | | 4,978 | | | 82 | | Residential real estate | 4,978 | | | 0 | | | 0 | | | 4,978 | | | 82 | |
| Consumer | Consumer | 1,033 | | | — | | | — | | | 1,033 | | | — | | Consumer | 1,033 | | | 0 | | | 0 | | | 1,033 | | | 0 | |
| Total collateral dependent impaired loans | Total collateral dependent impaired loans | $ | 36,464 | | | $ | — | | | $ | — | | | $ | 36,464 | | | $ | 2,450 | | Total collateral dependent impaired loans | $ | 36,464 | | | $ | 0 | | | $ | 0 | | | $ | 36,464 | | | $ | 2,450 | |
| Loans held for sale | Loans held for sale | $ | 26,748 | | | $ | — | | | $ | 26,748 | | | $ | — | | | $ | (980) | | Loans held for sale | $ | 26,748 | | | $ | 0 | | | $ | 26,748 | | | $ | 0 | | | $ | (980) | |
| | Other real estate owned | Other real estate owned | $ | 6,914 | | | $ | — | | | $ | — | | | $ | 6,914 | | | $ | 947 | | Other real estate owned | 6,914 | | | 0 | | | 0 | | | 6,914 | | | 947 | |
| Premises, furniture and equipment held for sale | Premises, furniture and equipment held for sale | $ | 2,967 | | | $ | — | | | $ | — | | | $ | 2,967 | | | $ | 735 | | Premises, furniture and equipment held for sale | 2,967 | | | 0 | | | 0 | | | 2,967 | | | 735 | |
| Servicing rights | Servicing rights | $ | 5,621 | | | $ | — | | | $ | — | | | $ | 5,621 | | | $ | 911 | | Servicing rights | 5,621 | | | 0 | | | 0 | | | 5,621 | | | 911 | |
The following tables present additional quantitative information about assets measured at fair value on a recurring and nonrecurring basis and for which Heartland has utilized Level 3 inputs to determine fair value, in thousands:
| | | Fair Value at
3/31/2020 | | Valuation
Technique | | Unobservable
Input | | Range
(Weighted Average) | | Fair Value at
9/30/2020 | | Valuation
Technique | | Unobservable
Input | | Range
(Weighted Average) |
| Interest rate lock commitments | Interest rate lock commitments | $ | 2,457 | | | Discounted cash flows | | Closing ratio | | 0-99% (88%)(1) | Interest rate lock commitments | $ | 2,255 | | | Discounted cash flows | | Closing ratio | | 0-99% (86%)(1) |
| Other real estate owned | Other real estate owned | 6,074 | | | Modified appraised value | | Third party appraisal | | (2) | Other real estate owned | 5,050 | | | Modified appraised value | | Third party appraisal | | (2) |
| | Appraisal discount | | 0-10%(3) | Other real estate owned | | Appraisal discount | | 0-10%(3) |
| Servicing rights | Servicing rights | 4,125 | | | Discounted cash flows | | Third party valuation | | (4) | Servicing rights | 4,823 | | Discounted cash flows | | Third party valuation | | (4) |
| Premises, furniture and equipment held for sale | Premises, furniture and equipment held for sale | 2,967 | | | Modified appraised value | | Third party appraisal | | (2) | Premises, furniture and equipment held for sale | 567 | | | Modified appraised value | | Third party appraisal | | (2) |
| | Appraisal discount | | 0-10%(3) | Premises, furniture and equipment held for sale | | Appraisal discount | | 0-10%(3) |
| Collateral dependent impaired loans: | | |
| Collateral dependent individually assessed loans: | | Collateral dependent individually assessed loans: | |
| Commercial | Commercial | 5,494 | | | Modified appraised value | | Third party appraisal | | (2) | Commercial | 9,602 | | | Modified appraised value | | Third party appraisal | | (2) |
| | Appraisal discount | | 0-15%(3) | Commercial | | Appraisal discount | | 0-15%(3) |
| Owner occupied commercial real estate | Owner occupied commercial real estate | 2,129 | | | Modified appraised value | | Third party appraisal | | (2) | Owner occupied commercial real estate | 5,949 | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-6%(3) | | Appraisal discount | | 0-8%(3) |
| Non-owner occupied commercial real estate | Non-owner occupied commercial real estate | 109 | | | Modified appraised value | | Third party appraisal | | (2) | Non-owner occupied commercial real estate | 1,035 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-8%(3) | | Appraisal discount | | 0-7%(3) |
| Real estate construction | Real estate construction | 132 | | | Modified appraised value | | Third party appraisal | | (2) | Real estate construction | 449 | | | Modified appraised value | | Third party appraisal | | (2) |
| | Appraisal discount | | 0-8%(3) | Real estate construction | | Appraisal discount | | 0-8%(3) |
| Agricultural and agricultural real estate | Agricultural and agricultural real estate | 1,980 | | | Modified appraised value | | Third party appraisal | | (2) | Agricultural and agricultural real estate | 13,923 | | Modified appraised value | | Third party appraisal | | (2) |
| | Appraisal discount | | 0-6%(3) | Agricultural and agricultural real estate | | Appraisal discount | | 0-15%(3) |
| Residential real estate | Residential real estate | 543 | | | Modified appraised value | | Third party appraisal | | (2) | Residential real estate | 376 | | Modified appraised value | | Third party appraisal | | (2) |
| | Appraisal discount | | 0-11%(3) | Residential real estate | | Appraisal discount | | 0-8%(3) |
| Consumer | Consumer | 153 | | | Modified appraised value | | Third party valuation | | (2) | Consumer | 250 | | Modified appraised value | | Third party valuation | | (2) |
| | Valuation discount | | 0-7%(3) | Consumer | | Valuation 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. The weighted average closing ratio for PrimeWest Mortgage Corporation is 88%. | | |
| (1) The significant unobservable input used in the fair value measurement is the closing ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. The closing ratio calculation takes into consideration historical data and loan-level data. | | (1) The significant unobservable input used in the fair value measurement is the closing ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. The closing ratio calculation takes into consideration historical data and loan-level data. |
| (2) Third party appraisals are obtained and updated at least annually to establish the value of the underlying asset, but the disclosure of the unobservable inputs used by the appraisers would not be meaningful because the range will vary widely from appraisal to appraisal. | (2) Third party appraisals are obtained and updated at least annually to establish the value of the underlying asset, but the disclosure of the unobservable inputs used by the appraisers would not be meaningful because the range will vary widely from appraisal to appraisal. | | (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. | (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. | | (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 fair value measurement are the value indices, which are weighted-average spreads to LIBOR based on maturity groups. | (4) The significant unobservable input used in the fair value measurement are the value indices, which are weighted-average spreads to LIBOR based on maturity groups. | | (4) The significant unobservable input used in the fair value measurement are the value indices, which are weighted-average spreads to LIBOR based on maturity groups. |
| | | Fair Value at
12/31/2019 | | Valuation
Technique | | Unobservable
Input | | Range
(Weighted Average) | | Fair Value at
12/31/2019 | | Valuation
Technique | | Unobservable
Input | | Range
(Weighted Average) |
| | Interest rate lock commitments | Interest rate lock commitments | $ | 681 | | | Discounted cash flows | | Closing ratio | | 0-99% (90%)(1) | Interest rate lock commitments | $ | 681 | | | Discounted cash flows | | Closing ratio | | 0-99% (90%)(1) |
| Other real estate owned | Other real estate owned | 6,914 | | | Modified appraised value | | Third party appraisal | | (2) | Other real estate owned | 6,914 | | | Modified appraised value | | Third party appraisal | | (2) |
| | Appraisal discount | | 0-10%(3) | Other real estate owned | | Appraisal discount | | 0-10%(3) |
| | Servicing rights | Servicing rights | 5,621 | | | Discounted cash flows | | Third party valuation | | (4) | Servicing rights | 5,621 | | | Discounted cash flows | | Third party valuation | | (4) |
| Premises, furniture and equipment held for sale | Premises, furniture and equipment held for sale | 2,967 | | | Modified appraised value | | Third party appraisal | | (2) | Premises, furniture and equipment held for sale | 2,967 | | | Modified appraised value | | Third party appraisal | | (2) |
| | Appraisal discount | | 0-10%(3) | Premises, furniture and equipment held for sale | | Appraisal discount | | 0-10%(3) |
| | | | Collateral dependent impaired loans: | Collateral dependent impaired loans: | | Collateral dependent impaired loans: | |
| Commercial | Commercial | 15,173 | | | Modified appraised value | | Third party appraisal | | (2) | Commercial | 15,173 | | | Modified appraised value | | Third party appraisal | | (2) |
| | Appraisal discount | | 0-25%(3) | | Appraisal discount | | 0-25%(3) |
| Owner occupied commercial real estate | Owner occupied commercial real estate | 1,352 | | | Modified appraised value | | Third party appraisal | | (2) | Owner occupied commercial real estate | 1,352 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-14%(3) | | Appraisal discount | | 0-14%(3) |
| Non-owner occupied commercial real estate | Non-owner occupied commercial real estate | 1,305 | | | Modified appraised value | | Third party appraisal | | (2) | Non-owner occupied commercial real estate | 1,305 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-14%(3) | | Appraisal discount | | 0-14%(3) |
| Real estate construction | Real estate construction | — | | | Modified appraised value | | Third party appraisal | | (2) | Real estate construction | 0 | | | Modified appraised value | | Third party appraisal | | (2) |
| | Appraisal discount | | 0-14%(3) | | Appraisal discount | | 0-14%(3) |
| Agricultural and agricultural real estate | Agricultural and agricultural real estate | 12,623 | | | Modified appraised value | | Third party appraisal | | (2) | Agricultural and agricultural real estate | 12,623 | | | Modified appraised value | | Third party appraisal | | (2) |
| | Appraisal discount | | 0-15%(3) | Agricultural and agricultural real estate | | Appraisal discount | | 0-15%(3) |
| Residential real estate | Residential real estate | 3,088 | | | Modified appraised value | | Third party appraisal | | (2) | Residential real estate | 3,088 | | Modified appraised value | | Third party appraisal | | (2) |
| | Appraisal discount | | 0-25%(3) | Residential real estate | | Appraisal discount | | 0-25%(3) |
| Consumer | Consumer | 988 | | | Modified appraised value | | Third party valuation | | (2) | Consumer | 988 | | Modified appraised value | | Third party valuation | | (2) |
| | Valuation discount | | 0-10%(3) | Consumer | | Valuation 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. | (1) The significant unobservable input used in the fair value measurement is the closing ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. The closing ratio calculation takes into consideration historical data and loan-level data. | | (1) The significant unobservable input used in the fair value measurement is the closing ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. The closing ratio calculation takes into consideration historical data and loan-level data. |
| (2) Third party appraisals are obtained and updated at least annually to establish the value of the underlying asset, but the disclosure of the unobservable inputs used by the appraisers would not be meaningful because the range will vary widely from appraisal to appraisal. | (2) Third party appraisals are obtained and updated at least annually to establish the value of the underlying asset, but the disclosure of the unobservable inputs used by the appraisers would not be meaningful because the range will vary widely from appraisal to appraisal. | | (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. | (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. | | (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 fair value measurement are the value indices, which are weighted-average spreads to LIBOR based on maturity groups. | (4) The significant unobservable input used in the fair value measurement are the value indices, which are weighted-average spreads to LIBOR based on maturity groups. | | (4) The significant unobservable input used in the fair value measurement are the value indices, which are weighted-average spreads to LIBOR based on maturity groups. |
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 Three Months Ended
March 31, 2020 | | For the Year Ended
December 31, 2019 | | For the Nine Months Ended
September 30, 2020 | | For the Year Ended
December 31, 2019 |
| Balance at January 1, | Balance at January 1, | $ | 681 | | | $ | 725 | | Balance at January 1, | $ | 681 | | | $ | 725 | |
| | Total gains (losses) included in earnings | 1,698 | | | 18 | | |
| Total net gains included in earnings | | Total net gains included in earnings | 3,243 | | | 18 | |
| Issuances | Issuances | 2,478 | | | 10,702 | | Issuances | 11,387 | | | 10,702 | |
| Settlements | Settlements | (2,400) | | | (10,764) | | Settlements | (13,056) | | | (10,764) | |
| Balance at period end | Balance at period end | $ | 2,457 | | | $ | 681 | | Balance at period end | $ | 2,255 | | | $ | 681 | |
Gains included in gains (losses) on sale of loans held for sale attributable to interest rate lock commitments held at March 31,September 30, 2020, and December 31, 2019, were $2.5$2.3 million and $681,000, respectively.
The table below is a summary of the estimated fair value of Heartland's financial instruments (as defined by ASC 825) as of March 31,September 30, 2020, and December 31, 2019, 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, including the value of the commercial and mortgage servicing rights,
premises, furniture and equipment, premises, furniture and equipment held for sale, OREO, goodwill, and other intangibles and other liabilities.
Heartland does not believe that the estimated information presented herein is representative of the earnings power or value of Heartland. The following analysis, which is inherently limited in depicting fair value, also does not consider any value associated with either existing customer relationships or the ability of Heartland to create value through loan origination, deposit gathering or fee generating activities. Many of the estimates presented herein are based upon the use of highly subjective information and assumptions and, accordingly, the results may not be precise. Management believes that fair value estimates may not be comparable between financial institutions due to the wide range of permitted valuation techniques and numerous estimates which must be made. Furthermore, because the disclosed fair value amounts were estimated as of the balance sheet date, the amounts actually realized or paid upon maturity or settlement of the various financial instruments could be significantly different.
| | | Fair Value Measurements at
March 31, 2020 | | | Fair Value Measurements at September 30, 2020 |
| | 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: | | | | | | | | | | Financial assets: | | | | | | | | | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 239,743 | | | $ | 239,743 | | | $ | 239,743 | | | $ | — | | | $ | — | | Cash and cash equivalents | $ | 331,655 | | | $ | 331,665 | | | $ | 331,665 | | | $ | 0 | | | $ | 0 | |
| Time deposits in other financial institutions | Time deposits in other financial institutions | 3,568 | | | 3,568 | | | 3,568 | | | — | | | — | | Time deposits in other financial institutions | 3,129 | | | 3,129 | | | 3,129 | | | 0 | | | 0 | |
| Securities: | Securities: | | Securities: | |
| | Carried at fair value | Carried at fair value | 3,488,621 | | | 3,488,621 | | | 8,569 | | | 3,480,052 | | | — | | Carried at fair value | 4,950,698 | | | 4,950,698 | | | 2,035 | | | 4,948,663 | | | 0 | |
| Held to maturity | Held to maturity | 91,875 | | | 101,375 | | | — | | | 101,375 | | | — | | Held to maturity | 88,700 | | | 99,619 | | | 0 | | | 99,619 | | | 0 | |
| Other investments | Other investments | 35,370 | | | 35,370 | | | — | | | 35,370 | | | — | | Other investments | 35,940 | | | 35,940 | | | 0 | | | 35,940 | | | 0 | |
| Loans held for sale | Loans held for sale | 22,957 | | | 22,957 | | | — | | | 22,957 | | | — | | Loans held for sale | 65,969 | | | 65,969 | | | 0 | | | 65,969 | | | 0 | |
| Loans, net: | Loans, net: | | Loans, net: | |
| Commercial and industrial | Commercial and industrial | 2,518,034 | | | 2,507,060 | | | — | | | 2,501,566 | | | 5,494 | | Commercial and industrial | 2,269,048 | | | 2,229,482 | | | 0 | | | 2,219,880 | | | 9,602 | |
| PPP | | PPP | 1,128,035 | | | 1,128,035 | | | 0 | | | 1,128,035 | | | 0 | |
| Owner occupied commercial real estate | Owner occupied commercial real estate | 1,420,702 | | | 1,456,304 | | | — | | | 1,454,175 | | | 2,129 | | Owner occupied commercial real estate | 1,483,673 | | | 1,470,592 | | | 0 | | | 1,464,643 | | | 5,949 | |
| Non-owner occupied commercial real estate | Non-owner occupied commercial real estate | 1,543,466 | | | 1,567,555 | | | — | | | 1,567,446 | | | 109 | | Non-owner occupied commercial real estate | 1,647,556 | | | 1,634,341 | | | 0 | | | 1,633,306 | | | 1,035 | |
| Real estate construction | Real estate construction | 1,046,749 | | | 1,076,645 | | | — | | | 1,076,513 | | | 132 | | Real estate construction | 896,978 | | | 907,919 | | | 0 | | | 907,470 | | | 449 | |
| Agricultural and agricultural real estate | Agricultural and agricultural real estate | 545,310 | | | 552,823 | | | — | | | 550,843 | | | 1,980 | | Agricultural and agricultural real estate | 502,717 | | | 484,657 | | | 0 | | | 470,734 | | | 13,923 | |
| Residential real estate | Residential real estate | 783,815 | | | 798,549 | | | — | | | 798,006 | | | 543 | | Residential real estate | 692,228 | | | 690,745 | | | 0 | | | 690,369 | | | 376 | |
| Consumer | Consumer | 418,817 | | | 431,583 | | | — | | | 431,430 | | | 153 | | Consumer | 376,034 | | | 374,832 | | | 0 | | | 374,582 | | | 250 | |
| Total Loans, net | Total Loans, net | 8,276,893 | | | 8,390,519 | | | — | | | 8,379,979 | | | 10,540 | | Total Loans, net | 8,996,269 | | | 8,920,603 | | | 0 | | | 8,889,019 | | | 31,584 | |
| Cash surrender value on life insurance | Cash surrender value on life insurance | 172,140 | | | 172,140 | | | — | | | 172,140 | | | — | | Cash surrender value on life insurance | 173,111 | | | 173,111 | | | 0 | | | 173,111 | | | 0 | |
Derivative financial instruments(1) | Derivative financial instruments(1) | 48,302 | | | 48,302 | | | — | | | 48,302 | | | — | | Derivative financial instruments(1) | 50,387 | | | 50,387 | | | 0 | | | 50,387 | | | 0 | |
| Interest rate lock commitments | Interest rate lock commitments | 2,457 | | | 2,457 | | | — | | | — | | | 2,457 | | Interest rate lock commitments | 2,255 | | | 2,255 | | | 0 | | | 0 | | | 2,255 | |
| Forward commitments | Forward commitments | 30 | | | 30 | | | — | | | 30 | | | — | | Forward commitments | 27 | | | 27 | | | 0 | | | 27 | | | 0 | |
| Financial liabilities: | Financial liabilities: | | Financial liabilities: | |
| Deposits | Deposits | | Deposits | |
| Demand deposits | Demand deposits | 3,696,974 | | | 3,696,974 | | | — | | | 3,696,974 | | | — | | Demand deposits | 5,022,567 | | | 5,022,567 | | | 0 | | | 5,022,567 | | | 0 | |
| Savings deposits | Savings deposits | 6,366,610 | | | 6,366,610 | | | — | | | 6,366,610 | | | — | | Savings deposits | 6,742,151 | | | 6,742,151 | | | 0 | | | 6,742,151 | | | 0 | |
| Time deposits | Time deposits | 1,110,441 | | | 1,110,441 | | | — | | | 1,110,441 | | | — | | Time deposits | 1,002,392 | | | 1,002,392 | | | 0 | | | 1,002,392 | | | 0 | |
| Deposits held for sale | — | | | — | | | — | | | — | | | — | | |
| | Short term borrowings | Short term borrowings | 121,442 | | | 121,442 | | | — | | | 121,442 | | | — | | Short term borrowings | 306,706 | | | 306,706 | | | 0 | | | 306,706 | | | 0 | |
| Other borrowings | Other borrowings | 276,150 | | | 280,447 | | | — | | | 280,447 | | | — | | Other borrowings | 524,045 | | | 525,388 | | | 0 | | | 525,388 | | | 0 | |
Derivative financial instruments(2) | Derivative financial instruments(2) | 57,777 | | | 57,777 | | | — | | | 57,777 | | | — | | Derivative financial instruments(2) | 59,328 | | | 59,328 | | | 0 | | | 59,328 | | | 0 | |
| Forward commitments | Forward commitments | 1,273 | | | 1,273 | | | — | | | 1,273 | | | — | | Forward commitments | 352 | | | 352 | | | 0 | | | 352 | | | 0 | |
| | (1) Includes embedded derivatives and back-to-back loan swaps. | (1) Includes embedded derivatives and back-to-back loan swaps. | | (1) Includes embedded derivatives and back-to-back loan swaps. |
| (2) Includes embedded derivatives, back-to-back loan swaps, fair value hedges, free standing derivative instruments and cash flow hedges. | (2) Includes embedded derivatives, back-to-back loan swaps, fair value hedges, free standing derivative instruments and cash flow hedges. | | (2) Includes embedded derivatives, back-to-back loan swaps, fair value hedges, free standing derivative instruments and cash flow hedges. |
| | | Fair Value Measurements at
December 31, 2019 | | | Fair Value Measurements at
December 31, 2019 |
| | 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: | | | | | | | | | | Financial assets: | | | | | | | | | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 378,734 | | | $ | 378,734 | | | $ | 378,734 | | | $ | — | | | $ | — | | Cash and cash equivalents | $ | 378,734 | | | $ | 378,734 | | | $ | 378,734 | | | $ | 0 | | | $ | 0 | |
| Time deposits in other financial institutions | Time deposits in other financial institutions | 3,564 | | | 3,564 | | | 3,564 | | | — | | | — | | Time deposits in other financial institutions | 3,564 | | | 3,564 | | | 3,564 | | | 0 | | | 0 | |
| Securities: | Securities: | | Securities: | |
| | Carried at fair value | Carried at fair value | 3,312,796 | | | 3,312,796 | | | 8,503 | | | 3,304,293 | | | — | | Carried at fair value | 3,312,796 | | | 3,312,796 | | | 8,503 | | | 3,304,293 | | | 0 | |
| Held to maturity | Held to maturity | 91,324 | | | 100,484 | | | — | | | 100,484 | | | — | | Held to maturity | 91,324 | | | 100,484 | | | 0 | | | 100,484 | | | 0 | |
| Other investments | Other investments | 31,321 | | | 31,321 | | | — | | | 31,321 | | | — | | Other investments | 31,321 | | | 31,321 | | | 0 | | | 31,321 | | | 0 | |
| Loans held for sale | Loans held for sale | 26,748 | | | 26,748 | | | — | | | 26,748 | | | — | | Loans held for sale | 26,748 | | | 26,748 | | | 0 | | | 26,748 | | | 0 | |
| Loans, net: | Loans, net: | | Loans, net: | |
| Commercial and industrial | Commercial and industrial | 2,530,809 | | | 2,621,253 | | | — | | | 2,606,080 | | | 15,173 | | Commercial and industrial | 2,530,809 | | | 2,621,253 | | | 0 | | | 2,606,080 | | | 15,173 | |
| Owner occupied commercial real estate | Owner occupied commercial real estate | 1,472,704 | | | 1,409,388 | | | — | | | 1,408,036 | | | 1,352 | | Owner occupied commercial real estate | 1,472,704 | | | 1,409,388 | | | 0 | | | 1,408,036 | | | 1,352 | |
| Non-owner occupied commercial real estate | Non-owner occupied commercial real estate | 1,495,877 | | | 1,397,527 | | | — | | | 1,396,222 | | | 1,305 | | Non-owner occupied commercial real estate | 1,495,877 | | | 1,397,527 | | | 0 | | | 1,396,222 | | | 1,305 | |
| Real estate construction | Real estate construction | 1,027,081 | | | 924,041 | | | — | | | 924,041 | | | — | | Real estate construction | 1,027,081 | | | 924,041 | | | 0 | | | 924,041 | | | 0 | |
| Agricultural and agricultural real estate | Agricultural and agricultural real estate | 565,837 | | | 576,821 | | | — | | | 564,198 | | | 12,623 | | Agricultural and agricultural real estate | 565,837 | | | 576,821 | | | 0 | | | 564,198 | | | 12,623 | |
| Residential real estate | Residential real estate | 832,277 | | | 841,453 | | | — | | | 838,365 | | | 3,088 | | Residential real estate | 832,277 | | | 841,453 | | | 0 | | | 838,365 | | | 3,088 | |
| Consumer | Consumer | 443,332 | | | 470,927 | | | — | | | 469,939 | | | 988 | | Consumer | 443,332 | | | 470,927 | | | 0 | | | 469,939 | | | 988 | |
| Total Loans, net | Total Loans, net | 8,297,522 | | | 8,243,343 | | | — | | | 8,206,879 | | | 36,464 | | Total Loans, net | 8,297,522 | | | 8,243,343 | | | 0 | | | 8,206,879 | | | 36,464 | |
| Cash surrender value on life insurance | Cash surrender value on life insurance | 171,625 | | | 171,625 | | | — | | | 171,625 | | | — | | Cash surrender value on life insurance | 171,625 | | | 171,625 | | | 0 | | | 171,625 | | | 0 | |
Derivative financial instruments(1) | Derivative financial instruments(1) | 17,527 | | | 17,527 | | | — | | | 17,527 | | | — | | Derivative financial instruments(1) | 17,527 | | | 17,527 | | | 0 | | | 17,527 | | | 0 | |
| Interest rate lock commitments | Interest rate lock commitments | 681 | | | 681 | | | — | | | — | | | 681 | | Interest rate lock commitments | 681 | | | 681 | | | 0 | | | 0 | | | 681 | |
| | Financial liabilities: | Financial liabilities: | | Financial liabilities: | |
| Deposits | Deposits | | Deposits | |
| Demand deposits | Demand deposits | 3,543,863 | | | 3,543,863 | | | — | | | 3,543,863 | | | — | | Demand deposits | 3,543,863 | | | 3,543,863 | | | 0 | | | 3,543,863 | | | 0 | |
| Savings deposits | Savings deposits | 6,307,425 | | | 6,307,425 | | | — | | | 6,307,425 | | | — | | Savings deposits | 6,307,425 | | | 6,307,425 | | | 0 | | | 6,307,425 | | | 0 | |
| Time deposits | Time deposits | 1,193,043 | | | 1,193,043 | | | — | | | 1,193,043 | | | — | | Time deposits | 1,193,043 | | | 1,193,043 | | | 0 | | | 1,193,043 | | | 0 | |
| | Short term borrowings | Short term borrowings | 182,626 | | | 182,626 | | | — | | | 182,626 | | | — | | Short term borrowings | 182,626 | | | 182,626 | | | 0 | | | 182,626 | | | 0 | |
| Other borrowings | Other borrowings | 275,773 | | | 278,169 | | | — | | | 278,169 | | | — | | Other borrowings | 275,773 | | | 278,169 | | | 0 | | | 278,169 | | | 0 | |
Derivative financial instruments(1) | Derivative financial instruments(1) | 21,462 | | | 21,462 | | | — | | | 21,462 | | | — | | Derivative financial instruments(1) | 21,462 | | | 21,462 | | | 0 | | | 21,462 | | | 0 | |
| Forward commitments | Forward commitments | 113 | | | 113 | | | — | | | 113 | | | — | | Forward commitments | 113 | | | 113 | | | 0 | | | 113 | | | 0 | |
| | (1) Includes embedded derivatives, back-to-back loan swaps, fair value hedges, free standing derivative instruments and cash flow hedges. | (1) Includes embedded derivatives, back-to-back loan swaps, fair value hedges, free standing derivative instruments and cash flow hedges. | | (1) Includes embedded derivatives, back-to-back loan swaps, fair value hedges, free standing derivative instruments and cash flow hedges. |
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, Heartland utilizes independent pricing provided by third party vendors or brokers.
Other Investments — Fair value measurement of other investments, which consists primarily of FHLB stock, are based on their redeemable value, which is at cost due to the restrictions placed on their transferability. The market for these securities is restricted to the issuer of the stock and subject to impairment evaluation.
Loans — The fair value of loans is determined using an exit price methodology. The exit price estimation of fair value is based on the present value of the expected cash flows. The projected cash flows are based on the contractual terms of the loans, adjusted 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 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, Heartland 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 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.
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.
Deposits — The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. If the fair value of the fixed maturity certificates of deposit is calculated at less than the carrying amount, the carrying value of these deposits is reported as the fair value.
Short-term and Other Borrowings — Rates currently available to Heartland for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.
Commitments to Extend Credit, Unused Lines of Credit and Standby Letters of Credit — Based upon management's analysis of the off balance sheet financial instruments, there are no significant unrealized gains or losses associated with these financial instruments based upon review of the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties.
NOTE 9: REVENUE
On January 1, 2018, Heartland adopted ASU 2014-09, "RevenueAccounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers" (Topic 606), andCustomers, requires revenue to be recognized at an amount that reflects the consideration to which Heartland expects to be entitled in exchange for transferring goods or services to a customer. ASC 606 applies to all subsequent ASUscontracts with customers to provide goods or services in the ordinary course of business, except for contracts that modified Topic 606.
Topic 606 does not apply toare specifically excluded from its scope. The majority of Heartland's revenue associated with financial instruments,streams including revenue from loans and securities. In addition, certain noninterestinterest income, streams such as fees associated with loan servicing income, net securities gain, net unrealized gains and losses on equity securities, net gains on sale of loans held for sale, valuation adjustment on servicing rights, income from bank owned life insurance derivatives and certain credit card feesother noninterest income are also not inoutside the scope of the new guidance. Topic 606 is applicable to noninterest revenueASC 606. Revenue streams such asincluding service charges and fees, interchange fees on credit and debit cards, trust fees and brokerage and insurance commissions. However,commissions are within the recognitionscope of these revenue streams did not change significantly upon adoption of TopicASC 606. Substantially all of Heartland's revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.
Service Charges and Fees
Service charges and fees consist of revenue generated from deposit account related service charges and fees, overdraft fees, customer service fees and other service charges, credit card fee income, debit card income and other service charges and fees.
Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders and other deposit account related fees. Heartland's performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees, including overdraft fees, are largely transactionaltransaction based, and therefore, the performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.
Customer service fees and other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. Heartland's performance obligation for fees, exchange, and other service charges are largely
satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.
Credit card fee income and debit card income are comprised of interchange fees, ATM fees, and merchant services income. Credit card fee income and debit card income are earned whenever the banks' debit and credit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a bank cardholder uses an ATM that is not owned by one of Heartland's banks or a non-bank cardholder uses a Heartland-owned ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees.
Trust Fees
Trust fees are primarily comprised of fees earned from the management and administration of trusts and other customer assets. Heartland's performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the average daily market value or month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days before or after month end through a direct charge to customers’ accounts. Heartland does not earn performance-based incentives. Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. Heartland's performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered.
Brokerage and Insurance Commissions
Brokerage commission primarily consist of commissions related to broker-dealer contracts. The contracts are between the customer and the broker-dealer, and Heartland satisfies its performance obligation and earns commission when the transactions are completed. The recognition of revenue is based on a defined fee schedule and does not require significant judgment. Payment is received shortly after services are rendered. Insurance commissions are related to commissions received directly from the insurance carrier. Heartland acts as an insurance agent between the customer and the insurance carrier. Heartland's performance obligations and associated fee and commission income are defined with each insurance product with the insurance company. When insurance payments are received from customers, a portion of the payment is recognized as commission revenue.
The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three-monthsthree and nine months ended March 31,September 30, 2020, and 2019, in thousands:
| | | | Three Months Ended
March 31, | | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| In-scope of Topic 606 | In-scope of Topic 606 | | | | | In-scope of Topic 606 | | | | | | | |
| Service charges and fees | Service charges and fees | | | Service charges and fees | |
| Service charges and fees on deposit accounts | Service charges and fees on deposit accounts | | $ | 3,438 | | | $ | 2,977 | | Service charges and fees on deposit accounts | $ | 3,710 | | | $ | 3,221 | | | $ | 10,623 | | | $ | 9,383 | |
| Overdraft fees | Overdraft fees | | 2,809 | | | 2,744 | | Overdraft fees | 2,184 | | | 2,917 | | | 6,627 | | | 8,537 | |
| Customer service and other service fees | Customer service and other service fees | | 59 | | | 82 | | Customer service and other service fees | 39 | | | 104 | | | 133 | | | 270 | |
| Credit card fee income | Credit card fee income | | 3,900 | | | 3,349 | | Credit card fee income | 3,894 | | | 3,936 | | | 11,861 | | | 11,555 | |
| Debit card income | Debit card income | | 1,815 | | | 3,642 | | Debit card income | 1,922 | | | 2,188 | | | 5,498 | | | 10,044 | |
| | Total service charges and fees | Total service charges and fees | | $ | 12,021 | | | $ | 12,794 | | Total service charges and fees | 11,749 | | | 12,366 | | | 34,742 | | | 39,789 | |
| Trust fees | Trust fees | | 5,022 | | | 4,474 | | Trust fees | 5,357 | | | 4,959 | | | 15,356 | | | 14,258 | |
| Brokerage and insurance commissions | Brokerage and insurance commissions | | 733 | | | 734 | | Brokerage and insurance commissions | 649 | | | 962 | | | 1,977 | | | 2,724 | |
| Total noninterest income in-scope of Topic 606 | Total noninterest income in-scope of Topic 606 | | $ | 17,776 | | | $ | 18,002 | | Total noninterest income in-scope of Topic 606 | 17,755 | | | 18,287 | | | 52,075 | | | 56,771 | |
| | Out-of-scope of Topic 606 | Out-of-scope of Topic 606 | | | Out-of-scope of Topic 606 | |
| Loan servicing income | Loan servicing income | | $ | 963 | | | $ | 1,729 | | Loan servicing income | $ | 638 | | | $ | 821 | | | $ | 1,980 | | | $ | 3,888 | |
| Securities gains/(losses), net | | 1,658 | | | 1,575 | | |
| Unrealized gain/(loss) on equity securities, net | | (231) | | | 258 | | |
| Securities gains, net | | Securities gains, net | 1,300 | | | 2,013 | | | 4,964 | | | 7,168 | |
| Unrealized gain on equity securities, net | | Unrealized gain on equity securities, net | 155 | | | 144 | | | 604 | | | 514 | |
| Net gains on sale of loans held for sale | Net gains on sale of loans held for sale | | 4,660 | | | 3,176 | | Net gains on sale of loans held for sale | 8,894 | | | 4,673 | | | 21,411 | | | 12,192 | |
| Valuation adjustment on servicing rights | Valuation adjustment on servicing rights | | (1,565) | | | (589) | | Valuation adjustment on servicing rights | (120) | | | (626) | | | (1,676) | | | (1,579) | |
| Income on bank owned life insurance | Income on bank owned life insurance | | 498 | | | 899 | | Income on bank owned life insurance | 868 | | | 881 | | | 2,533 | | | 2,668 | |
| Other noninterest income | Other noninterest income | | 2,058 | | | 1,667 | | Other noninterest income | 1,726 | | | 3,207 | | | 5,779 | | | 6,556 | |
| Total noninterest income out-of-scope of Topic 606 | Total noninterest income out-of-scope of Topic 606 | | 8,041 | | | 8,715 | | Total noninterest income out-of-scope of Topic 606 | 13,461 | | | 11,113 | | | 35,595 | | | 31,407 | |
| Total noninterest income | Total noninterest income | | $ | 25,817 | | | $ | 26,717 | | Total noninterest income | $ | 31,216 | | | $ | 29,400 | | | $ | 87,670 | | | $ | 88,178 | |
Contract Balances
A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. Heartland's noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after Heartland satisfies its performance obligation and revenue is recognized. Heartland does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of March 31,September 30, 2020, and December 31, 2019, Heartland did not have any significant contract balances.
Contract Acquisition Costs
In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). Heartland utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, Heartland did not capitalize any contract acquisition costs.
NOTE 10: STOCK COMPENSATION
Heartland may grant, through its Nominating, Compensation and CompensationCorporate Governance Committee (the "Compensation Committee"), non-qualified and incentive stock options, stock appreciation rights, stock awards, restricted stock, restricted stock units and cash incentive
stock units and cash incentive awards, under its 20122020 Long-Term Incentive Plan (the "Plan"). The Plan was originally approved by stockholders in May 2020 and replaces the 2012 and was amended effective March 8, 2016, to increaseLong-Term Incentive Plan. The Plan increases the number of shares of common stock authorized for issuance to 1,460,000 and makemakes certain other changes to the Plan. As of March 31,September 30, 2020, 213,8631,421,218 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.
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. Forfeitures are accounted for as they occur.
Heartland's income tax expense included $25,000$93,000 of tax expense during the threenine months ended March 31,September 30, 2020 and a tax benefit of $336,000$270,000 during the threenine months ended March 31,September 30, 2019, 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"). In the first quarter of 2020, the Compensation Committee granted time-based RSUs with respect to 114,944 shares of common stock, and in the first quarter of 2019, the Compensation Committee granted time-based RSUs with respect to 90,073 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 date in the future. The time-based RSUs granted in 2020 and 2019 vest over three years in equal installments on March 6 of each of the three years following the year of the grant. 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.
The Compensation Committee also granted three-year performance-based RSUs with respect to 50,787 shares and 34,848 shares of common stock in the first quarter of 2020 and 2019 respectively. These performance-based RSUs will be earned based on satisfaction of performance targets for the three-year performance period ended December 31, 2022, and December 31, 2021, respectively. These performance-based RSUs or a portion thereof may vest in 2022 and 2021, respectively, after measurement of performance in relation to the performance targets.
The three-year performance-based RSUs vest to the extent that they are earned upon death or disability or upon a "qualified retirement." Upon a change in control, performance-based RSUs shall become vested at 100% of target if the RSU obligations are not assumed by the successor company. If the successor company does assume the RSU obligations, the 2019 and 2018 performance-based RSUs will vest at 100% of target upon a "Termination of Service" within the period beginning six months prior to a change in control and ending twenty-four months after a change in control.
All of Heartland's RSUs will be settled in common stock upon vesting and are not entitled to dividends until vested.
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 threenine months ended March 31,September 30, 2020, and March 31,September 30, 2019, 054,957 and 1,04532,662 time-based RSUs, respectively, were granted to directors and new employees.
A summary of the RSUs outstanding as of March 31,September 30, 2020, and 2019, and changes during the threenine months ended March 31,September 30, 2020 and 2019, follows:
| | | 2020 | | | 2019 | | | 2020 | | 2019 |
| | Shares | | Weighted-Average Grant Date
Fair Value | | Shares | | Weighted-Average Grant Date
Fair Value | | Shares | | Weighted-Average Grant Date
Fair Value | | Shares | | Weighted-Average Grant Date
Fair Value |
| Outstanding at January 1, | Outstanding at January 1, | 254,383 | | | $ | 46.76 | | | 266,995 | | | $ | 43.89 | | Outstanding at January 1, | 254,383 | | | $ | 46.76 | | | 266,995 | | | $ | 43.89 | |
| Granted | Granted | 165,731 | | | 32.57 | | | 125,966 | | | 45.77 | | Granted | 220,688 | | | 31.95 | | | 157,583 | | | 45.00 | |
| Vested | Vested | (86,441) | | | 45.48 | | | (117,122) | | | 35.84 | | Vested | (119,325) | | | 44.49 | | | (142,023) | | | 38.93 | |
| Forfeited | Forfeited | (11,929) | | | 48.38 | | | (13,364) | | | 49.89 | | Forfeited | (15,674) | | | 47.13 | | | (26,136) | | | 48.95 | |
| Outstanding at March 31, | 321,744 | | | $ | 40.14 | | | 262,475 | | | $ | 48.07 | | |
| Outstanding at September 30, | | Outstanding at September 30, | 340,072 | | | $ | 38.37 | | | 256,419 | | | $ | 46.96 | |
Total compensation costs recorded for RSUs were $2.2$5.4 million and $2.4$4.8 million for the three-monthnine-month periods ended March 31,September 30, 2020 and 2019. As of March 31,September 30, 2020, there were $8.1$6.8 million of total unrecognized compensation costs related to the Plan for RSUs that are expected to be recognized through 2022.
NOTE 11: LEASES
A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration.
Lessee Accounting
Substantially all of the leases in which Heartland is the lessee are comprised of real estate property for branches, ATM locations, and office space with terms extending through 2031. All of Heartland's leases are classified as operating leases, and therefore, were previously not recognized on the consolidated balance sheet. With the adoption of ASU 2016-02 "Leases" (Topic 842), operating lease agreements are required to be recognized on the consolidated balance sheet as a right-of-use ("ROU") asset and a corresponding lease liability.
Heartland elected not to include short-term leases (i.e., leases with initial terms of twelve months or less), or equipment leases (deemed immaterial) on the consolidated balance sheet. The table below presents Heartland's ROU assets and lease liabilities as of March 31,September 30, 2020 and December 31, 2019, in thousands:
| | | | Classification | | March 31, 2020 | | December 31, 2019 | | Classification | | September 30, 2020 | | December 31, 2019 |
| Operating lease right-of-use assets | Operating lease right-of-use assets | | Other assets | | $ | 21,868 | | | $ | 23,200 | | Operating lease right-of-use assets | | Other assets | | $ | 19,963 | | | $ | 23,200 | |
| Operating lease liabilities | Operating lease liabilities | | Accrued expenses and other liabilities | | $ | 23,182 | | | $ | 24,617 | | Operating lease liabilities | | Accrued expenses and other liabilities | | $ | 21,949 | | | $ | 24,617 | |
The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. Heartland’s lease agreements often include one or more options to renew at Heartland’s discretion. If at lease inception, Heartland considers the exercising of a renewal option to be reasonably certain, Heartland will include the extended term in the calculation of the ROU asset and lease liability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, Heartland utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. The variable lease cost primarily represents variable payments such as common area maintenance and utilities. The table below presents the lease costs and supplemental information as of March 31,September 30, 2020 and 2019, in thousands:
| | | | Three Months Ended
March 31, | | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | Income Statement Category | | 2020 | | 2019 | | Income Statement Category | 2020 | | 2019 | | 2020 | | 2019 |
| Lease Cost | Lease Cost | | | | | | Lease Cost | | | | | | | | |
| Operating lease cost | Operating lease cost | | Occupancy expense | | $ | 1,382 | | | $ | 1,405 | | Operating lease cost | Occupancy expense | $ | 1,359 | | | $ | 1,681 | | | $ | 3,998 | | | $ | 4,548 | |
| Variable lease cost | Variable lease cost | | Occupancy expense | | 16 | | | 35 | | Variable lease cost | Occupancy expense | 14 | | | 42 | | | 46 | | | 109 | |
| | Total lease cost | Total lease cost | | | $ | 1,398 | | | $ | 1,440 | | Total lease cost | | $ | 1,373 | | | $ | 1,723 | | | $ | 4,044 | | | $ | 4,657 | |
| Supplemental Information | Supplemental Information | | | | | | Supplemental Information | | | | | | | | |
| Noncash reduction of ROU assets arising from lease modifications and terminations | Noncash reduction of ROU assets arising from lease modifications and terminations | | Occupancy expense | | $ | 358 | | | $ | 1,209 | | Noncash reduction of ROU assets arising from lease modifications and terminations | Occupancy expense | $ | 692 | | | $ | 495 | | | $ | 1,067 | | | $ | 2,959 | |
| Noncash reduction of lease liabilities arising from lease modifications and terminations | Noncash reduction of lease liabilities arising from lease modifications and terminations | | Occupancy expense | | 386 | | | — | | Noncash reduction of lease liabilities arising from lease modifications and terminations | Occupancy expense | 3 | | | 284 | | | 389 | | | 2,771 | |
| | | | |
| Supplemental balance sheet information | Supplemental balance sheet information | | | As of March 31, 2020 | | Supplemental balance sheet information | | As of September 30, 2020 |
| Weighted-average remaining operating lease term (in years) | Weighted-average remaining operating lease term (in years) | | | 6.5 | | Weighted-average remaining operating lease term (in years) | | 6.50 |
| | Weighted-average discount rate for operating leases | Weighted-average discount rate for operating leases | | | 3.00 | % | | Weighted-average discount rate for operating leases | | 2.97 | % |
A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities as of March 31,September 30, 2020 are as follows, in thousands:
| | Nine months ending December 31, 2020 | $ | 4,167 | | |
| Three months ending December 31, 2020 | | Three months ending December 31, 2020 | $ | 1,422 | |
| Year ending December 31, | Year ending December 31, | | Year ending December 31, | |
| 2021 | 2021 | 5,289 | | 2021 | 5,406 | |
| 2022 | 2022 | 4,065 | | 2022 | 4,183 | |
| 2023 | 2023 | 2,728 | | 2023 | 2,850 | |
| 2024 | 2024 | 2,015 | | 2024 | 2,140 | |
| Thereafter | Thereafter | 7,300 | | Thereafter | 8,160 | |
| Total lease payments | Total lease payments | $ | 25,564 | | Total lease payments | 24,161 | |
| Less interest | Less interest | (2,382) | | Less interest | (2,212) | |
| Present value of lease liabilities | Present value of lease liabilities | $ | 23,182 | | Present value of lease liabilities | $ | 21,949 | |
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT
This Quarterly Report on Form 10-Q (including any information incorporated herein by reference) contains, and future oral and written statements of Heartland Financial USA, Inc. ("Heartland") and its management may contain, forward-looking statements within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the business, financial condition, results of operations, plans, objectives and future performance of Heartland. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of Heartland's management and on information currently available to management, are generally identifiable by the use of words such as "believe," "expect," "anticipate," "plan," "intend," "estimate," "may," "will," "would," "could," "should" or other similar expressions. Although Heartland has made these statements based on management's experience and best estimate of future events, there may be events or factors that management has not anticipated, and the accuracy and achievement of such forward-looking statements and estimates are subject to a number of risks, including those identified in our Annual Report on Form 10-K for the year ended December 31, 2019, as updated and supplemented in this Quarterly Report on Form 10-Q. Additionally, all statements in this document, includingTherefore, the accuracy and achievement of such forward-looking statements speak only asand 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 are detailed below and in the risk factors in Heartland's reports filed with the Securities and Exchange Commission ("SEC"), include, among others:
•The impact of the date they are made,COVID-19 pandemic on Heartland and U.S. and global financial markets;
•Measures enacted by the U.S. federal and state governments and adopted by private businesses in response to the COVID-19 pandemic;
•The deterioration of the U.S. economy in general and in the local economies in which Heartland undertakes no obligationconducts its operations;
•Increasing credit losses due to updatedeterioration in the financial condition of its borrowers, based on declining oil prices and asset and collateral values, which may continue to increase the provision for credit losses and net charge-offs of Heartland;
•Civil unrest in the communities that Heartland serves;
•Levels of unemployment in the geographic areas in which Heartland operates;
•Real estate market values in these geographic areas;
•Future natural disasters and increases to flood insurance premiums;
•The effects of past and any statementfuture terrorist threats and attacks, acts of war or threats thereof;
•The level of prepayments on loans and mortgage-backed securities;
•Legislative and regulatory changes affecting banking, tax, securities, insurance and monetary and financial matters;
•Monetary and fiscal policies of the U.S. Government including policies of the U.S. Department of Treasury and the Federal Reserve Board;
•The quality or composition of the loan and investment portfolios of Heartland;
•Demand for loan products and financial services, deposit flows and competition in lightHeartland’s market areas;
•Changes in accounting principles and guidelines;
•The timely development and acceptance of new information or future events.products and services, including products and services offered through alternative delivery channels such as the Internet;
•The ability of Heartland to implement technological changes as planned and to develop and maintain secure and reliable electronic delivery systems;
•Heartland’s ability to retain key executives and employees; and
•The ability of Heartland to successfully consummate acquisitions and integrate acquired operations.
The COVID-19 pandemic is adversely affecting Heartland and its customers, counterparties, employees and third-party service providers. The COVID-19 pandemic’s severity, its duration and the extent of its impact on Heartland’s business, financial
condition, results of operations, liquidity and prospects remain uncertain. The deterioration in general business and economic conditions and turbulence in domestic orand global financial markets caused by the COVID-19 pandemic have negatively affected Heartland’s net income, total equity and book value per common share, and continued economic deterioration could adversely affect the value of its assets and liabilities, reduce the availability of funding to Heartland, lead to a tightening of credit and increase stock price volatility. Some economists and investment banks believe that a recession or depression may result from the continued spread of COVID-19 and the economic consequences.
These risks and uncertainties should be considered in evaluating forward-looking statements made by Heartland 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 Heartland will not materially and adversely affect Heartland’s business, financial condition and results of operations. In addition, many of these risks and uncertainties are currently amplified by and may continue to be amplified by the COVID-19 pandemic and the impact of varying governmental responses that affect Heartland’s customers and the economies where they operate. Additionally, all statements in this Quarterly Report on Form 10-Q, including forward-looking statements, speak only as of the date they are made, and Heartland undertakes no obligation to update any statement in light of new information or future events. Further information concerning Heartland and its business, including additional factors that could materially affect Heartland’s financial results, is included in Heartland’s filings with the SEC.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, income and expenses. These estimates are based upon historical experience and on various other assumptions that management believes are reasonable under the circumstances. Among other things, the estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The estimates and judgments that management believes have the most effect on Heartland's reported financial position and results of operations are described as critical accounting policies in Heartland's Annual Report on Form 10-K for the year ended December 31, 2019. There have been no significant changes in the critical accounting policies or the assumptions and judgments utilized in applying these policies since December 31, 2019 other than those in Note 1, "Basis of Presentation," of the consolidated financial statements included in this Quarterly Report on Form 10-Q related to Heartland's adoption of CECL.
OVERVIEW
Heartland is a multi-bank holding company providing banking, mortgage, wealth management, investments and insurance services to individuals and businesses. As of the date of this Quarterly Report on Form 10-Q, Heartland has eleven banking subsidiaries with 114113 locations in Iowa, Illinois, Wisconsin, New Mexico, Arizona, Montana, Colorado, Minnesota, Kansas, Missouri, Texas and California. Heartland's primary objectives are to increase profitability and diversify its market area and asset base by expanding through acquisitions and to grow organically by increasing its customer base in the markets it serves.
Heartland's results of operations depend primarily on net interest income, which is the difference between interest income from interest earning assets and interest expense on interest bearing liabilities. Noninterest income, which includes service charges and fees, loan servicing income, trust income, brokerage and insurance commissions, securities gains, net gains on sale of loans held for sale, and income on bank owned life insurance also affects Heartland's results of operations. Heartland's principal operating expenses, aside from interest expense, consist of the provision for credit losses, salaries and employee benefits, occupancy and equipment costs, professional fees, advertising, core deposit and customer relationship intangibles amortization and other real estate and loan collection expenses.
NetHeartland reported the following results for the three months ended September 30, 2020:
•net income available to common stockholders for the quarter ended March 31, 2020, was $20.0of $45.5 million, or $0.54 per diluted common share, compared to $31.5 million, or $0.91$1.23 per diluted common share, for the quarter ended March 31,September 30, 2020, compared to $34.6 million, or $0.94 per diluted common share, for the third quarter of 2019.
Excludingexcluding tax-effected provision for credit losses of $1.3 million and tax-effected acquisition, integration and restructuring costs (tax-effected),of $905,000, adjusted net income available to common stockholders (non-GAAP) was $38.1$47.8 million, or $1.03$1.29 of adjusted earnings per diluted common share (non-GAAP) for the firstthird quarter of 2020, compared to $35.6$39.9 million (non-GAAP), or $1.03 per$1.08 of adjusted earnings per diluted common share (non-GAAP), for the firstthird quarter of 2019. Return2019, which excluded tax-effected provision for credit losses of $4.1 million and tax-effected acquisition, integration and restructuring costs of $1.2 million.
•return on average common equity was 4.98%10.90% and return on average assets was 0.61%1.19% for the firstthird quarter of 2020, compared to 9.56%8.91% and 1.13%1.12%, respectively, for the same quarter in 2019. Return
•return on average tangible common equity (non-GAAP) was 8.00%of 16.11% and adjusted return on average tangible common equity (non-GAAP) was 14.46%of 16.86% for the firstthird quarter of 2020 compared to 15.24%13.78% and 17.11%15.76%, respectively, for the firstthird quarter of 2019.
Heartland reported the following results for the nine months ended September 30, 2020:
•net income available to common stockholders of $95.7 million or $2.59 per diluted common share, for the nine months ended September 30, 2020, compared to $111.3 million or $3.11 per diluted common share for the nine months ended September 30, 2019.
•excluding tax-effected provision for credit losses of $39.5 million and tax-effected acquisition, integration and restructuring costs of $2.5 million, adjusted net income available to common stockholders (non-GAAP) was $137.7 million, or $3.73 of adjusted earnings per diluted common share (non-GAAP), for the nine months ended September 30, 2020, compared to $125.3 million (non-GAAP), or $3.50 of adjusted earnings per diluted common share (non-GAAP), for the nine months ended September 30, 2019, which excluded tax-effected provision for credit losses of $9.3 million and tax-effected acquisition, integration and restructuring costs of $4.8 million.
•return on average common equity was 7.90% and return on average assets was 0.90% for the first nine months of 2020, compared to 10.33% and 1.27%, respectively, for the same period in 2019.
•return on average tangible common equity (non-GAAP) of 12.10% and adjusted return on average tangible common equity (non-GAAP) of 17.08% for the nine months ended September 30, 2020, compared to 16.13% and 18.05%, respectively, for the nine months ended September 30, 2019.
For the firstthird quarter of 2020, Heartland's net interest margin was 3.81% (3.84%3.51% (3.55% on a fully tax-equivalent basis) comparedbasis, non-GAAP), which compares to 4.12% (4.18%3.81% (3.85% on a fully tax-equivalent basis)basis, non-GAAP) and 3.98% (4.02% on a fully-tax equivalent basis, non-GAAP) for the second quarter of 2020 and third quarter of 2019, respectively.
Heartland's net interest margin for the first nine months of 2020 was 3.70% (3.74% on a fully-tax equivalent basis, non-GAAP) which compares to 4.05% (4.10% on a fully-tax equivalent basis, non-GAAP) for the same period of 2019.
The efficiency ratio on a fully tax-equivalent basis (non-GAAP) was 54.67% for the third quarter of 2020 compared to 60.85% for the same quarter in 2019, and theof 2019. The efficiency ratio on a fully tax-equivalent basis (non-GAAP) was 61.82% and 64.93%57.28% for the first quarternine months of 2020 and 2019, respectively.compared to 63.26% for the first nine months of 2019.
Total assets of Heartland were $13.29$15.61 billion at March 31,September 30, 2020, an increase of $84.9 million$2.40 billion or 1%18% since year-end 2019. Securities represented 27%33% of total assets at March 31,September 30, 2020, and 26% of total assets at December 31, 2019. Total loans held to maturity were $9.10 billion at September 30, 2020 compared to $8.37 billion at both March 31, 2020, and December 31, 2019.2019, which was an increase of $731.7 million or 9%.
Total deposits were $11.17$12.77 billion as of March 31,September 30, 2020, compared to $11.04 billion at year-end 2019, an increase of $129.7 million$1.72 billion or 1%16%.
Total equity was $1.55$1.81 billion at March 31,September 30, 2020, compared to $1.58 billion at year-end 2019. Book value per common share was $42.21$46.11 at March 31,September 30, 2020, compared to $43.00 at year-end 2019. Heartland's unrealized lossgain on securities available for sale, net of applicable taxes, was $21.2$60.0 million at March 31,September 30, 2020, compared to an unrealized gain of $969,000, net of applicable taxes, at December 31, 2019.
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.
COVID-19
In March 2020, the outbreak of the novel Coronavirus Disease 2019 ("COVID-19") was recognized as a pandemic by the World Health Organization. The spread of COVID-19 has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States, as well as globally. Governmental responses to the pandemic have included orders closing businesses not deemed essential and directing individuals to restrict their movements, observe social distancing and shelter in
place. These actions, together with responses to the pandemic by businesses and individuals, have resulted in rapid decreases in commercial and consumer activity, temporary closures of many businesses, which have led to a loss of revenues and a rapid increase in unemployment, material decreases in commodity prices and business valuations, disruptions in global supply chains, market downturns and volatility, changes in consumer behavior related to pandemic fears, emergency response legislation and an expectation that the Federal Reserve will maintain a low interest rate environment for the foreseeable future.
In the first quarter of 2020, Heartland implemented and continues to operate under its pandemic management plan to protect employeesassure workplace and enableemployee safety and business continuity while providing reliefresiliency. Relief and support provided to customers and communities facing challenges from the impacts of COVID-19 which included the following:following measures:
•enabled approximately 2/3rds of employees towho can work from home continue to do so, and canceled those employees who are working in bank offices have been placed on rotating teams to limit potential exposure to COVID-19;
•all in-person events and large meetings are canceled and have transitioned to virtual meetings;
•expanded paidemployees receive an increase in time off program and enhanced health care coverage for COVID-19 related to testing and treatments;treatments for COVID-19;
•Heartland has installed and requires the use of personal protective equipment in bank offices;
•Heartland has implemented and extended a 20% wage premium for certain customer-facing and call center employees;employees,
•closed most bank lobbies and implemented drive-through only for in-person transactions;
•established alternating weekly staffing schedule for in-branch employees to limit potential cross-infection;
•announced a series of relief programs for consumers and small business customers, which include waiving account maintenance fees, ATM fees and early redemption penalties on CDs, and deferrals on loan payments;
•Heartland has provided direct guaranteed loans from the U.S. Small Business Administration ("SBA"(the "SBA") guaranteed loans to customers via itsthrough Heartland’s participation in the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") and originated $1.2 billion of loans under the Paycheck Protection Program ("PPP");
•Heartland has participated in the CARES Act SBA loan payment and deferral program for existing SBA loans; and
•Heartland has contributed $1.2$1.5 million to support non-profit organizations in communities served by Heartland and its subsidiary banks.banks, including recent donations of $260,000 to local schools.
While the measures described above remain in effect, Heartland's pandemic management plan continues to evolve in response to the recent developments relating to the COVID-19 pandemic.
The continued economic disruption resulting from the COVID-19 pandemic will make it difficult for some customers to repay the principal and interest on their loans, and Heartland's subsidiary banks have startedbeen working with customers to modify the terms of certain existing loans. The following table shows the total exposure, which includes loans outstanding and unfunded loan commitmentsexposure as of September 30, 2020, June 30, 2020, and March 31, 2020, to customer segment profiles that Heartland believes will be more heavily impactedimpact by COVID-19, dollars in thousands:
| | | | | | | | | | | | | | |
| Industry | | Total Exposure(1) | | % of Gross Exposure(1) |
| Lodging | | $ | 498,596 | | | 4.47 | % |
| Multi-family properties | | 436,931 | | | 3.92 | |
| Retail real estate | | 408,506 | | | 3.66 | |
| Retail trade | | 367,764 | | | 3.30 | |
| Restaurants and bars | | 247,239 | | | 2.22 | |
| Nursing homes/assisted living | | 126,267 | | | 1.13 | |
| Oil and gas | | 56,302 | | | 0.50 | |
| Childcare facilities | | 48,455 | | | 0.43 | |
| Gaming | | 34,790 | | | 0.31 | |
| | | | |
| (1) Total loans outstanding and unfunded commitments | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2020 | | As of June 30, 2020 | | As of March 31, 2020 |
| Industry | Total Exposure(1) | | % of Gross Exposure(1) | | Total Exposure(1) | | % of Gross Exposure(1) | | Total Exposure(1) | | % of Gross Exposure(1) |
| Lodging | $ | 495,187 | | | 4.52 | % | | $ | 490,475 | | | 4.38 | % | | $ | 498,596 | | | 4.47 | % |
| Retail trade | 405,118 | | | 3.70 | | | 407,030 | | | 3.64 | | | 367,727 | | | 3.30 | |
| Retail properties | 363,457 | | | 3.32 | | | 369,782 | | | 3.31 | | | 408,506 | | | 3.66 | |
| Restaurants and bars | 248,053 | | | 2.26 | | | 255,701 | | | 2.29 | | | 247,239 | | | 2.22 | |
| Oil and gas | 52,766 | | | 0.48 | | | 63,973 | | | 0.57 | | | 56,302 | | | 0.50 | |
| Total | $ | 1,564,581 | | | 14.28 | % | | $ | 1,586,961 | | | 14.19 | % | | $ | 1,578,370 | | | 14.15 | % |
|
| (1) Total loans outstanding and unfunded commitments excluding PPP loans |
As of May 1,September 30, 2020, of the approximately $1.11 billion of loans modified under COVID-19 relief programs, $860.0 million of loans have returned to full payment status, $133.0 million of loans remain in the original deferral status, and second loan modifications have been made on approximately $696.2$122.0 million of loans in Heartland's portfolio. Approximately 67%69% of thesethe second loan modifications are principal and interest onlydeferments for 90 days, and the remainder are primarily principal and interest defermentsinterest-only payments for 90 days. Heartland expects modifications to increase in the near term. In accordance with interagency guidance issued in March 2020, these modifications are not considered troubled debt restructurings.
Through early MayAt September 30, 2020, Heartland's subsidiary banks received SBA approval for approximately 4,600Heartland had $1.13 billion of PPP loans totaling $1.18 billion,outstanding, which was net of which approximately 4,400 or $1.16 billion have been closed and funded.$27.7 million of unamortized deferred fees. Under the CARES Act, PPP loans are 100% SBA guaranteed and borrowers may be eligible to have an amount up to the entire principal balance forgiven and paid by the SBA. PPP loans also carry a zero risk rating for regulatory capital purposes and the Federal Reserve has made available a liquidity facility to facilitate funding of PPP loans held by banks. Under current program rules, Heartland’s subsidiary banks are eligible to receive an estimated $35.1 million of fees based on PPP loans processed through early May 2020.
As of early May 2020, approximately $213.7 million in principal amount of existing SBA loans were eligible to participate in the SBA loan payment and deferral program, pursuant to which the SBA will pay the borrower’s principal, interest and fees for a period of six months.
COVID-19 Risks and Uncertainties
The spread of the pandemic has caused significant disruptions in the U.S. economy, including disruption of banking and other financial activity in the areas in which Heartland operates. While there has been no material impact to Heartland to date, COVID-19 could also potentially create widespread business continuity issues.
Government authorities, including the United States Congress, the President, and the Federal Reserve, have taken several actions designed to cushion the economic fallout from COVID-19. Most notably,
•In early March 2020, the Coronavirus Aid, ReliefFederal Reserve reduced the target range of its overnight funds rate to near zero, and Economic Security (the "CARES Act")in September 2020, stated its intention to maintain such target range until (i) labor market conditions have reached levels consistent with the Federal Open Market Committee’s assessments of maximum employment and (ii) inflation has risen to 2 percent and is expected to moderately exceed 2 percent for some time, which will continue to negatively impact Heartland's net interest margin.
•The CARES Act was signed into law at the end of March 2020. The CARES Act provides $2 trillion in funding to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. sectors through the PPP and other programs.
•In addition toApril 2020, the general impact of COVID-19, certain provisions of the CARES Act,Federal Reserve provided additional funding sources for small and mid-sized businesses as well as other recent legislativefor state and regulatory relief efforts, could have a material impact on Heartland's results of operations.local governments as they work through cash flow stresses caused by the COVID-19 pandemic.
Heartland's business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. If the global response to contain COVID-19 escalates further or is unsuccessful, Heartland could experience a material adverse effect on its business, financial condition, results of operations and cash flows. The full extent of the impact of the COVID-19 pandemic, and resulting measures to curtail its spread, will depend on future developments which are highly uncertain, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or
mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among other future developments. Potentially material effects on Heartland’s business are discussed below.
Interest Income, Net Interest Margin and Fee Income
Heartland's interest income may be reduced due to lower interest rates, more loan modifications, delinquent interest payments, and related credit losses, resulting from the economic impact of COVID-19. During the threenine months ended March 31,September 30, 2020, Heartland significantly increased its allowance for credit losses. The allowance for credit losses is increased through provisions for credit losses which are deducted from net interest income on Heartland’s consolidated statements of income. In keeping with guidance from regulators, Heartland is actively working with COVID-19 affected borrowers to defer their payments, interest, and fees. While interest and fees will still accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments occur, interest income and fees accrued would need to be reversed. In such a scenario, interest income and net interest margin could be negatively impacted in future periods.
However, any reduction in interest income could be offset by additional interest and fee income earned on PPP loans. The interest rate on the PPP loans is 1%, and under current program rules, Heartland’s subsidiary banks are eligible to receive an estimated $35.1 million of fees based on PPP loans processed as of May 5, 2020. At this time, Heartland is unable to project the impact of interest deferrals and interest earned on PPP loans on Heartland's net interest margin in future periods.
Heartland's fee income could be reduced due to COVID-19. In keeping with guidance from regulators, Heartland is actively working with COVID-19 affected customers to waive fees from a variety of sources, as previously described. At this time, Heartland believes that these reductions in fees are temporary in nature. However, Heartland is unable to project the materiality of the impact to fee income in future periods.
Capital and Liquidity
While Heartland believes that it has sufficient capital to withstand an extended economic recession brought about by COVID-19, its regulatory capital ratios could be adversely impacted by further credit losses. Heartland relies on cash on hand as well as dividends from its subsidiary banks to service its debt. If Heartland's capital deteriorates such that its subsidiary banks are unable to pay dividends to Heartland for an extended period of time, it may not be able to service its debt.debt or pay dividends on its preferred or common stock.
Heartland maintains access to multiple sources of liquidity and futureexpanded its borrowing capacity at the Federal Reserve Discount Window from two subsidiary banks to all subsidiary banks. Future access to these sources may be adversely impacted by the economic disruption of the COVID-19 pandemic. Wholesale funding markets have remained open, but rates for short term funding have recently been volatile. If funding costs are elevated for an extended period of time, it could have an adverse effect on Heartland's net interest margin. If an extended recession causes large numbers of deposit customers to withdraw their funds, Heartland might become more reliant on volatile or more expensive sources of funding.
Asset Valuation
Currently, Heartland does not expect COVID-19 to affect its ability to account for the assets on its balance sheet on a timely basis; however, this ability could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, Heartland does not anticipate significant changes in the methodology used to determine the fair value of assets measured in accordance with GAAP.
The COVID-19 pandemic and its lingering effects could cause a further and sustained decline in Heartland's stock price, or the occurrence of whatwhich management would deemdeemed to be a triggering event, that could, under certain circumstances, causecaused management to perform impairment testing on its goodwill or core deposit and customer relationships intangiblesin the second quarter of 2020. Management concluded that could result in an impairment charge being recorded for that period. Innone of the event that Heartland concludes that all or a portiongoodwill at any of its goodwill or core deposit and customer relationship intangibles is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. However, such a charge would have no impact on tangible capital or regulatory capital.Heartland's reporting units was impaired.
Processes, Controls and Business Continuity Plan
As previously discussed, Heartland has invoked and continues to operate under its pandemic management plan that includes a remote working strategy. Heartland does not anticipate incurring additional material costs related to its continued deployment of the remote working strategy. No material unmitigated operational or internal control challenges or risks have been identified to date. Heartland does not anticipate significant challenges in maintaining systems and controls due to its continued business resiliency and measures taken to manage employee and workplace safety. Heartland monitors the resiliency of its critical servicesservice providers and does not anticipate significant business disruptions at this time. Heartland does not currently face any material resource constraints through the implementation of its business continuity plans.
Credit
As a result of the current economic environment caused by the COVID-19 pandemic, Heartland is engaging in more frequent communication with borrowers to better understand their creditworthiness and the challenges faced. These communications should allow Heartland to respond proactively as borrower needs and issues arise. The fiscal stimulus and relief programs have been an effective mitigant to credit losses in the near term; however, once these programs have run their course, Heartland may experience changes in the value of collateral securing outstanding loans, deterioration in the credit quality of borrowers, and the inability of borrowers to repay loans in accordance with their loan terms causing credit losses. Should economic conditions worsen, Heartland could be required to further increase its allowance for credit losses and record additional credit loss expense. It is likely that Heartland's asset quality measures could worsen during future measurement periods if the effects of the COVID-19 pandemic are prolonged.
Stock Price Volatility
Capital market disruptions from the COVID-19 pandemic could cause a further and sustained decline in the price of Heartland’s common stock.
RECENT DEVELOPMENTS
Adoption of ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)"
On January 1, 2020, Heartland adopted ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)," commonly referred to as "CECL." The impact of Heartland's adoption of CECL on January 1, 2020 ("Day 1") resulted in the following:
•an increase of $12.1 million to the allowance for credit losses related to loans, which included a reclassification of $6.0 million of purchased credit impaired loan discount on previously acquired loans, and a cumulative-effect adjustment to retained earnings totaling $4.6 million, net of taxes of $1.5 million;
•an increase of $13.6 million to the allowance for unfunded commitments and a cumulative-effect adjustment to retained earnings totaling $10.2 million, net of taxes of $3.4 million, and
•established an allowance for credit losses for Heartland's held to maturity debt securities of $158,000 and a cumulative-effect adjustment to retained earnings totaling $118,000, net of taxes of $40,000.
The allowance calculation under CECL is an expected loss model, which encompasses expected losses over the life of the loan and held to maturity securities portfolios, including expected losses due to changes in economic conditions and forecasts, such as those caused by the COVID-19 pandemic. Heartland recorded $21.5$50.0 million of provision for credit losses in the first quarternine
months of 2020, primarily due to a deteriorating economic outlook resulting in an increase in expected credit losses. For more information, see "Provision for Credit Losses" and "Allowance for Credit Losses" below.
Entered into a DefinitivePurchase and Assumption Agreement with Johnson Financial Group, Inc.
On June 9, 2020, Arizona Bank & Trust ("AB&T"), a wholly-owned subsidiary of Heartland headquartered in Phoenix, Arizona, entered into a purchase and assumption agreement, pursuant to which AB&T will acquire certain assets and will assume substantially all of the deposits and certain other liabilities of Johnson Bank’s Arizona operations, which includes four banking centers. Johnson Bank is a wholly-owned subsidiary of Johnson Financial Group, Inc. headquartered in Racine, Wisconsin. Johnson Insurance Services is not a part of this transaction.
Under the terms of the purchase and assumption agreement, AB&T will acquire Johnson Bank's Arizona banking centers, which had deposits of approximately $392.2 million and loans of approximately $183.8 million as of September 30, 2020. Heartland has received all regulatory approvals for this transaction. The actual amount of deposits assumed and loans acquired will be determined at closing, which is expected to be in the fourth quarter of 2020 and is subject to certain potential adjustments as set forth in the purchase and assumption agreement.
Entered into an Amended and Restated Agreement and Plan of Merger Agreement with AIM Bancshares, Inc.
On February 11,October 19, 2020, Heartland entered into a definitivean Amended and Restated Agreement and Plan of Merger (the "amended and restated merger agreementagreement") relating to acquirethe acquisition of AIM Bancshares, Inc. ("AIM") and its wholly-owned subsidiary, AimBank, headquartered in Levelland, Texas. The amended and restated merger agreement amends and restates the Agreement and Plan of Merger dated February 11, 2020 between Heartland and AIM (the "original merger agreement"). The original merger agreement was amended and restated to address certain regulatory concerns raised by the Federal Reserve Board during its review of the transaction contemplated by the original merger agreement. In response to discussions with the Federal Reserve Board, AIM and Heartland agreed that they could better serve the goals of the transaction and more easily address regulatory concerns if they effected the transaction by completing the two sequential mergers described in the next paragraph. AIM and Heartland also agreed to adjust the cash component of the merger consideration based on increases in AIM’s adjusted tangible common equity as a result of gains in AIM’s "available-for-sale" securities portfolio, an increase in AIM’s retained earnings and gains in AIM’s "held-to-maturity" securities portfolio since the date of the original merger agreement. A holdback provision was added to the amended and restated merger agreement as a result of certain litigation proceedings against AimBank. Certain other provisions of the original merger agreement were revised to reflect other changes in economic terms and the significantly delayed closing date of the transaction.
In the first merger, AIM will merge with and into AimBank, and holders of shares of AIM common stock will receive one share of AimBank common stock for each share of AIM common stock owned by such holders. In the second merger, which will occur immediately following the consummation of the AIM/AimBank merger, AimBank will merge with and into Heartland’s wholly owned subsidiary, First Bank & Trust. In the second merger transaction, all issued and outstanding shares of AIM BancsharesAimBank common stock will be exchanged for shares of Heartland common stock and cash. ShareholdersAs a result, each share of AimBank common stock received by shareholders of AIM Bancsharesin the first merger will receivebe exchanged for 207.0 shares of Heartland common stock and $685.00 of cash for each share of AIM Bancshares.cash. The transaction value will change due to fluctuations in the price of Heartland common stock and is subject to certain potential adjustments as set forth in the amended and restated merger agreement. SimultaneousThe transaction is structured as a tax-free reorganization with respect to the closingstock consideration received by shareholders of AIM.
The combined entity, resulting from the transaction,merger of AimBank will merge with and into Heartland's Lubbock, Texas-based subsidiary, First Bank & Trust, will operate as First Bank & Trust. As of September 30, 2020, AimBank had total assets of $1.85 billion, $1.14 billion of gross loans outstanding, and Trust. The$1.60 billion of deposits. Because the amended and restated merger agreement was signed on October 19, 2020 and the transaction is expected to close in the fourth quarter of 2020, the transaction had no impact on Heartland's consolidated financial statements for the nine months ended September 30, 2020.
Issued $115.0 Million of Preferred Equity
On June 26, 2020, Heartland 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 symbol "HTLFP." The net proceeds of $110.7 million will be used for general corporate purposes, which may include organic and acquired growth, financing investments, capital expenditures, investments in wholly-owned subsidiaries as regulatory capital and repayment of debt.
Branch Optimization
In the third quarter of 2020, with a systems conversion planned for the fourth quarter of 2020. As of March 31, 2020, AimBank had total assets of approximately $1.82 billion,Heartland's member banks approved plans to consolidate six branch locations, which included $1.16 billionone branch in the Midwest region, four branches in the Western region and one in the Southwestern region, and resulted in $1.2 million of gross loans outstanding,fixed asset write-downs. The branch consolidations are expected to be completed in early 2021. Heartland continues
to review its branch network for optimization and approximately $1.58 billionconsolidation opportunities, which may result in additional write-downs of deposits.fixed assets in future periods.
| | | | | | | | | | | | | | | | | | | | | | | |
| FINANCIAL HIGHLIGHTS |
| (Dollars in thousands, except per share data) | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| STATEMENT OF INCOME DATA | | | | | | | |
| Interest income | $ | 130,967 | | | $ | 133,403 | | | $ | 395,781 | | | $ | 381,127 | |
| Interest expense | 8,470 | | | 22,082 | | | 36,627 | | | 60,143 | |
| Net interest income | 122,497 | | | 111,321 | | | 359,154 | | | 320,984 | |
| Provision for credit losses | 1,678 | | | 5,201 | | | 49,994 | | | 11,754 | |
| Net interest income after provision for credit losses | 120,819 | | | 106,120 | | | 309,160 | | | 309,230 | |
| Noninterest income | 31,216 | | | 29,400 | | | 87,670 | | | 88,178 | |
| Noninterest expenses | 90,396 | | | 92,967 | | | 271,694 | | | 256,295 | |
| Income taxes | 13,681 | | | 7,941 | | | 27,007 | | | 29,835 | |
| Net income | 47,958 | | | 34,612 | | | 98,129 | | | 111,278 | |
| Preferred dividends | (2,437) | | | — | | | (2,437) | | | — | |
| | | | | | | |
| Net income available to common stockholders | $ | 45,521 | | | $ | 34,612 | | | $ | 95,692 | | | $ | 111,278 | |
| | | | | | | |
| Key Performance Ratios | | | | | | | |
| Annualized return on average assets | 1.19 | % | | 1.12 | % | | 0.90 | % | | 1.27 | % |
| Annualized return on average common equity (GAAP) | 10.90 | | | 8.91 | | | 7.90 | | | 10.33 | |
Annualized return on average tangible common equity (non-GAAP)(1) | 16.11 | | | 13.78 | | | 12.10 | | | 16.13 | |
Annualized adjusted return on average tangible common equity (non-GAAP)(1) | 16.86 | | | 15.76 | | | 17.08 | | | 18.05 | |
| Annualized ratio of net charge-offs to average loans | 0.92 | | | 0.14 | | | 0.43 | | | 0.13 | |
| Annualized net interest margin (GAAP) | 3.51 | | | 3.98 | | | 3.70 | | | 4.05 | |
Annualized net interest margin, fully tax-equivalent (non-GAAP)(1) | 3.55 | | | 4.02 | | | 3.74 | | | 4.10 | |
Efficiency ratio, fully tax-equivalent (non-GAAP)(1) | 54.67 | | | 60.85 | | | 57.28 | | | 63.26 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Dollars in thousands, expect per share data | As Of and For the Quarter Ended |
| 9/30/2020 | | 6/30/2020 | | 3/31/2020 | | 12/31/2019 | | 9/30/2019 |
| BALANCE SHEET DATA | | | | | | | | | |
| Investments | $ | 5,075,338 | | | $ | 4,252,832 | | | $ | 3,615,866 | | | $ | 3,435,441 | | | $ | 3,137,575 | |
| Loans held for sale | 65,969 | | | 54,382 | | | 22,957 | | | 26,748 | | | 35,427 | |
| Loans receivable held to maturity | 9,099,646 | | | 9,246,830 | | | 8,374,236 | | | 8,367,917 | | | 7,971,608 | |
| Allowance for credit losses | 103,377 | | | 119,937 | | | 97,350 | | | 70,395 | | | 66,222 | |
| Total assets | 15,612,664 | | | 15,026,153 | | | 13,294,509 | | | 13,209,597 | | | 12,569,262 | |
| Total deposits | 12,767,110 | | | 12,708,699 | | | 11,174,025 | | | 11,044,331 | | | 10,469,856 | |
| Long-term obligations | 524,045 | | | 306,459 | | | 276,150 | | | 275,773 | | | 278,417 | |
| | | | | | | | | |
| Common equity | 1,700,899 | | | 1,636,672 | | | 1,553,714 | | | 1,578,137 | | | 1,563,843 | |
| | | | | | | | | |
| Common Share Data | | | | | | | | | |
| Book value per common share (GAAP) | $ | 46.11 | | | $ | 44.42 | | | $ | 42.21 | | | $ | 43.00 | | | $ | 42.62 | |
Tangible book value per common share (non-GAAP)(1) | $ | 32.91 | | | $ | 31.14 | | | $ | 28.84 | | | $ | 29.51 | | | $ | 29.62 | |
| | | | | | | | | |
| Common shares outstanding, net of treasury stock | 36,885,390 | | | 36,844,744 | | | 36,807,217 | | | 36,704,278 | | | 36,696,190 | |
Tangible common equity ratio (non-GAAP)(1) | 8.03 | % | | 7.89 | % | | 8.29 | % | | 8.52 | % | | 8.99 | % |
|
| (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 | | | | | | | |
| (Dollars in thousands, except per share data) | | | | | Three Months Ended
March 31, | | |
| | | | | 2020 | | 2019 |
| STATEMENT OF INCOME DATA | | | | | | | |
| Interest income | | | | | $ | 131,049 | | | $ | 120,721 | |
| Interest expense | | | | | 18,538 | | | 17,766 | |
| Net interest income | | | | | 112,511 | | | 102,955 | |
| Provision for credit losses | | | | | 21,520 | | | 1,635 | |
| Net interest income after provision for credit losses | | | | | 90,991 | | | 101,320 | |
| Noninterest income | | | | | 25,817 | | | 26,717 | |
| Noninterest expenses | | | | | 90,859 | | | 88,230 | |
| Income taxes | | | | | 5,909 | | | 8,310 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Net income available to common stockholders | | | | | $ | 20,040 | | | $ | 31,497 | |
| | | | | | | |
| Key Performance Ratios | | | | | | | |
| Annualized return on average assets | | | | | 0.61 | % | | 1.13 | % |
| Annualized return on average common equity (GAAP) | | | | | 4.98 | % | | 9.56 | % |
Annualized return on average tangible common equity (non-GAAP)(1) | | | | | 8.00 | % | | 15.24 | % |
Annualized adjusted return on average tangible common equity (non-GAAP)(1) | | | | | 14.46 | % | | 17.11 | % |
| Annualized ratio of net charge-offs to average loans | | | | | 0.24 | % | | 0.05 | % |
| Annualized net interest margin (GAAP) | | | | | 3.81 | % | | 4.12 | % |
Annualized net interest margin, fully tax-equivalent (non-GAAP)(1) | | | | | 3.84 | % | | 4.18 | % |
Efficiency ratio, fully tax-equivalent (non-GAAP)(1) | | | | | 61.82 | % | | 64.93 | % |
| | | | | | | |
| (1) Refer to "Non-GAAP Measures" in this Quarterly Report on Form 10-Q 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. | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| NON-GAAP Reconciliations | | | | | | | | | |
| (Dollars in thousands, except per share data) | | | | | | | | | |
| As Of and For the Quarter Ended |
| 9/30/2020 | | 6/30/2020 | | 3/31/2020 | | 12/31/2019 | | 9/30/2019 |
| Reconciliation of Annualized Return on Average Tangible Common Equity (non-GAAP) | | | | | | | | | |
| Net income available to common stockholders (GAAP) | $ | 45,521 | | | $ | 30,131 | | | $ | 20,040 | | | $ | 37,851 | | | $ | 34,612 | |
Plus core deposit and customer relationship intangibles amortization, net of tax(1) | 1,969 | | | 2,130 | | | 2,355 | | | 2,305 | | | 2,291 | |
| Net income excluding intangible amortization (non-GAAP) | $ | 47,490 | | | $ | 32,261 | | | $ | 22,395 | | | $ | 40,156 | | | $ | 36,903 | |
| | | | | | | | | |
| Average common equity (GAAP) | $ | 1,661,381 | | | $ | 1,574,902 | | | $ | 1,619,682 | | | $ | 1,570,258 | | | $ | 1,541,369 | |
| Less average goodwill | 446,345 | | | 446,345 | | | 446,345 | | | 433,374 | | | 427,097 | |
| Less average core deposit and customer relationship intangibles, net | 42,145 | | | 44,723 | | | 47,632 | | | 49,389 | | | 51,704 | |
| Average tangible common equity (non-GAAP) | $ | 1,172,891 | | | $ | 1,083,834 | | | $ | 1,125,705 | | | $ | 1,087,495 | | | $ | 1,062,568 | |
| Annualized return on average common equity (GAAP) | 10.90 | % | | 7.69 | % | | 4.98 | % | | 9.56 | % | | 8.91 | % |
| Annualized return on average tangible common equity (non-GAAP) | 16.11 | % | | 11.97 | % | | 8.00 | % | | 14.65 | % | | 13.78 | % |
| | | | | | | | | |
| Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP) | | | | | | | | | |
| Net Interest Income (GAAP) | $ | 122,497 | | | $ | 124,146 | | | $ | 112,511 | | | $ | 112,745 | | | $ | 111,321 | |
Plus tax-equivalent adjustment(1) | 1,390 | | | 1,416 | | | 1,131 | | | 1,109 | | | 1,140 | |
| Net interest income, fully tax-equivalent (non-GAAP) | $ | 123,887 | | | $ | 125,562 | | | $ | 113,642 | | | $ | 113,854 | | | $ | 112,461 | |
| | | | | | | | | |
| Average earning assets | $ | 13,868,360 | | | $ | 13,103,159 | | | $ | 11,891,455 | | | $ | 11,580,295 | | | $ | 11,102,581 | |
| | | | | | | | | |
| Annualized net interest margin (GAAP) | 3.51 | % | | 3.81 | % | | 3.81 | % | | 3.86 | % | | 3.98 | % |
| Annualized net interest margin, fully tax-equivalent (non-GAAP) | 3.55 | | | 3.85 | | | 3.84 | | | 3.90 | | | 4.02 | |
| Purchase accounting discount accretion on loans included in annualized net interest margin | 0.10 | | | 0.16 | | | 0.09 | | | 0.17 | | | 0.23 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As Of and For the Quarter Ended |
| 9/30/2020 | | 6/30/2020 | | 3/31/2020 | | 12/31/2019 | | 9/30/2019 |
| Reconciliation of Tangible Book Value Per Common Share (non-GAAP) | | | | | | | | | |
| Common equity (GAAP) | $ | 1,700,899 | | | $ | 1,636,672 | | | $ | 1,553,714 | | | $ | 1,578,137 | | | $ | 1,563,843 | |
| Less goodwill | 446,345 | | | 446,345 | | | 446,345 | | | 446,345 | | | 427,097 | |
| Less core deposit and customer relationship intangibles, net | 40,520 | | | 43,011 | | | 45,707 | | | 48,688 | | | 49,819 | |
| Tangible common equity (non-GAAP) | $ | 1,214,034 | | | $ | 1,147,316 | | | $ | 1,061,662 | | | $ | 1,083,104 | | | $ | 1,086,927 | |
| | | | | | | | | |
| Common shares outstanding, net of treasury stock | 36,885,390 | | | 36,844,744 | | | 36,807,217 | | | 36,704,278 | | | 36,696,190 | |
| Common equity (book value) per share (GAAP) | $ | 46.11 | | | $ | 44.42 | | | $ | 42.21 | | | $ | 43.00 | | | $ | 42.62 | |
| Tangible book value per common share (non-GAAP) | $ | 32.91 | | | $ | 31.14 | | | $ | 28.84 | | | $ | 29.51 | | | $ | 29.62 | |
| | | | | | | | | |
| Reconciliation of Tangible Common Equity Ratio (non-GAAP) | | | | | | | | | |
| Tangible common equity (non-GAAP) | $ | 1,214,034 | | | $ | 1,147,316 | | | $ | 1,061,662 | | | $ | 1,083,104 | | | $ | 1,086,927 | |
| | | | | | | | | |
| Total assets (GAAP) | $ | 15,612,664 | | | $ | 15,026,153 | | | $ | 13,294,509 | | | $ | 13,209,597 | | | $ | 12,569,262 | |
| Less goodwill | 446,345 | | | 446,345 | | | 446,345 | | | 446,345 | | | 427,097 | |
| Less core deposit and customer relationship intangibles, net | 40,520 | | | 43,011 | | | 45,707 | | | 48,688 | | | 49,819 | |
| Total tangible assets (non-GAAP) | $ | 15,125,799 | | | $ | 14,536,797 | | | $ | 12,802,457 | | | $ | 12,714,564 | | | $ | 12,092,346 | |
| Tangible common equity ratio (non-GAAP) | 8.03 | % | | 7.89 | % | | 8.29 | % | | 8.52 | % | | 8.99 | % |
| | | | | | | | | |
| (1) Computed on a tax-equivalent basis using an effective tax rate of 21%. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Dollars in thousands, expect per share data | As Of and For the Quarter Ended | | | | | | | | |
| 3/31/2020 | | 12/31/2019 | | 9/30/2019 | | 6/30/2019 | | 3/31/2019 |
| BALANCE SHEET DATA | | | | | | | | | |
| Investments | $ | 3,615,866 | | | $ | 3,435,441 | | | $ | 3,137,575 | | | $ | 2,681,419 | | | $ | 2,516,055 | |
| Loans held for sale | 22,957 | | | 26,748 | | | 35,427 | | | 34,575 | | | 69,716 | |
| Total net loans receivable held to maturity | 8,374,236 | | | 8,367,917 | | | 7,971,608 | | | 7,853,051 | | | 7,331,544 | |
| Allowance for credit losses | 97,350 | | | 70,395 | | | 66,222 | | | 63,850 | | | 62,639 | |
| Total assets | 13,294,509 | | | 13,209,597 | | | 12,569,262 | | | 12,160,290 | | | 11,312,495 | |
Total deposits(1) | 11,174,025 | | | 11,044,331 | | | 10,469,856 | | | 10,108,557 | | | 9,352,942 | |
| Long-term obligations | 276,150 | | | 275,773 | | | 278,417 | | | 282,863 | | | 268,312 | |
| | | | | | | | | |
| Common equity | 1,553,714 | | | 1,578,137 | | | 1,563,843 | | | 1,521,787 | | | 1,372,102 | |
| | | | | | | | | |
| Common Share Data | | | | | | | | | |
| Book value per common share (GAAP) | $ | 42.21 | | | $ | 43.00 | | | $ | 42.62 | | | $ | 41.48 | | | $ | 39.65 | |
Tangible book value per common share (non-GAAP)(2) | $ | 28.84 | | | $ | 29.51 | | | $ | 29.62 | | | $ | 28.40 | | | $ | 27.04 | |
| | | | | | | | | |
| Common shares outstanding, net of treasury stock | 36,807,217 | | | 36,704,278 | | | 36,696,190 | | | 36,690,061 | | | 34,603,611 | |
Tangible common equity ratio (non-GAAP)(2) | 8.29 | % | | 8.52 | % | | 8.99 | % | | 8.92 | % | | 8.60 | % |
| | | | | | | | | |
| (1) Excludes deposits held for sale. | | | | | | | | | |
| (2) Refer to "Non-GAAP 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. | | | | | | | | | |
(Dollars in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As Of and For the Quarter Ended | | | | | | | | |
| 3/31/2020 | | 12/31/2019 | | 9/30/2019 | | 6/30/2019 | | 3/31/2019 |
| Reconciliation of Annualized Return on Average Tangible Common Equity (non-GAAP) | | | | | | | | | |
| Net income available to common stockholders (GAAP) | $ | 20,040 | | | $ | 37,851 | | | $ | 34,612 | | | $ | 45,169 | | | $ | 31,497 | |
Plus core deposit and customer relationship intangibles amortization, net of tax(1) | 2,355 | | | | 2,305 | | | | 2,291 | | | | 2,617 | | | | 2,245 | |
| Net income excluding intangible amortization (non-GAAP) | $ | 22,395 | | | $ | 40,156 | | | $ | 36,903 | | | $ | 47,786 | | | $ | 33,742 | |
| | | | | | | | | |
| Average common equity (GAAP) | $ | 1,619,682 | | | $ | 1,570,258 | | | $ | 1,541,369 | | | $ | 1,442,388 | | | $ | 1,336,250 | |
| Less average goodwill | 446,345 | | | 433,374 | | | 427,097 | | | 410,642 | | | 391,668 | |
| Less average core deposit and customer relationship intangibles, net | 47,632 | | | 49,389 | | | 51,704 | | | 49,868 | | | 46,490 | |
| Average tangible common equity (non-GAAP) | $ | 1,125,705 | | | $ | 1,087,495 | | | $ | 1,062,568 | | | $ | 981,878 | | | $ | 898,092 | |
| Annualized return on average common equity (GAAP) | 4.98 | % | | | 9.56 | % | | | 8.91 | % | | | 12.56 | % | | | 9.56 | % |
| Annualized return on average tangible common equity (non-GAAP) | 8.00 | % | | | 14.65 | % | | | 13.78 | % | | | 19.52 | % | | | 15.24 | % |
| | | | | | | | | |
| Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP) | | | | | | | | | |
| Net Interest Income (GAAP) | $ | 112,511 | | | $ | 112,745 | | | $ | 111,321 | | | $ | 106,708 | | | $ | 102,955 | |
Plus tax-equivalent adjustment(1) | 1,131 | | | 1,109 | | | 1,140 | | | 1,268 | | | 1,412 | |
| Net interest income, fully tax-equivalent (non-GAAP) | $ | 113,642 | | | $ | 113,854 | | | $ | 112,461 | | | $ | 107,976 | | | $ | 104,367 | |
| | | | | | | | | |
| Average earning assets | $ | 11,891,455 | | | $ | 11,580,295 | | | $ | 11,102,581 | | | $ | 10,552,166 | | | $ | 10,129,957 | |
| | | | | | | | | |
| Annualized net interest margin (GAAP) | 3.81 | % | | | 3.86 | % | | | 3.98 | % | | | 4.06 | % | | | 4.12 | % |
| Annualized net interest margin, fully tax-equivalent (non-GAAP) | 3.84 | % | | | 3.90 | % | | | 4.02 | % | | | 4.10 | % | | | 4.18 | % |
| Purchase accounting discount | 0.09 | % | | | 0.17 | % | | | 0.23 | % | | | 0.18 | % | | | 0.16 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As Of and For the Quarter Ended | | | | | | | | |
| 3/31/2020 | | 12/31/2019 | | 9/30/2019 | | 6/30/2019 | | 3/31/2019 |
| Reconciliation of Tangible Book Value Per Common Share (non-GAAP) | | | | | | | | | |
| Common equity (GAAP) | $ | 1,553,714 | | | | $ | 1,578,137 | | | | $ | 1,563,843 | | | | $ | 1,521,787 | | | | $ | 1,372,102 | |
| Less goodwill | 446,345 | | | | 446,345 | | | | 427,097 | | | | 427,097 | | | | 391,668 | |
| Less core deposit and customer relationship intangibles, net | 45,707 | | | | 48,688 | | | | 49,819 | | | | 52,718 | | | | 44,637 | |
| Tangible common equity (non-GAAP) | $ | 1,061,662 | | | | $ | 1,083,104 | | | | $ | 1,086,927 | | | | $ | 1,041,972 | | | | $ | 935,797 | |
| | | | | | | | | | | | | | | | | | |
| Common shares outstanding, net of treasury stock | 36,807,217 | | | | 36,704,278 | | | | 36,696,190 | | | | 36,690,061 | | | | 34,603,611 | |
| Common equity (book value) per share (GAAP) | $ | 42.21 | | | | $ | 43.00 | | | | $ | 42.62 | | | | $ | 41.48 | | | | $ | 39.65 | |
| Tangible book value per common share (non-GAAP) | $ | 28.84 | | | | $ | 29.51 | | | | $ | 29.62 | | | | $ | 28.40 | | | | $ | 27.04 | |
| | | | | | | | | | | | | | | | | | |
| Reconciliation of Tangible Common Equity Ratio (non-GAAP) | | | | | | | | | | | | | | | | | | |
| Tangible common equity (non-GAAP) | $ | 1,061,662 | | | | $ | 1,083,104 | | | | $ | 1,086,927 | | | | $ | 1,041,972 | | | | $ | 935,797 | |
| | | | | | | | | | | | | | | | | | |
| Total assets (GAAP) | $ | 13,294,509 | | | | $ | 13,209,597 | | | | $ | 12,569,262 | | | | $ | 12,160,290 | | | | $ | 11,312,495 | |
| Less goodwill | 446,345 | | | | 446,345 | | | | 427,097 | | | | 427,097 | | | | 391,668 | |
| Less core deposit and customer relationship intangibles, net | 45,707 | | | | 48,688 | | | | 49,819 | | | | 52,718 | | | | 44,637 | |
| Total tangible assets (non-GAAP) | $ | 12,802,457 | | | | $ | 12,714,564 | | | | $ | 12,092,346 | | | | $ | 11,680,475 | | | | $ | 10,876,190 | |
| Tangible common equity ratio (non-GAAP) | 8.29 | % | | | 8.52 | % | | | 8.99 | % | | | 8.92 | % | | | 8.60 | % |
| | | | | | | | | |
| (1) Computed on a tax-equivalent basis using an effective tax rate of 21%. | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Reconciliation of Efficiency Ratio (non-GAAP) | For the Quarter Ended | | | | | | | | |
| 3/31/2020 | | 12/31/2019 | | 9/30/2019 | | 6/30/2019 | | 3/31/2019 |
| Net interest income (GAAP) | $ | 112,511 | | | $ | 112,745 | | | $ | 111,321 | | | $ | 106,708 | | | $ | 102,955 | |
Tax-equivalent adjustment(1) | 1,131 | | | 1,109 | | | 1,140 | | | 1,268 | | | 1,412 | |
| Fully tax-equivalent net interest income | 113,642 | | | 113,854 | | | 112,461 | | | 107,976 | | | 104,367 | |
| Noninterest income | 25,817 | | | 28,030 | | | 29,400 | | | 32,061 | | | 26,717 | |
| Securities gains, net | (1,658) | | | (491) | | | (2,013) | | | (3,580) | | | (1,575) | |
| Unrealized (gain)/loss on equity securities, net | 231 | | | (11) | | | (144) | | | (112) | | | (258) | |
| Gain on extinguishment of debt | — | | | — | | | (375) | | | — | | | — | |
| Valuation adjustment on servicing rights | 1,565 | | | (668) | | | 626 | | | 364 | | | 589 | |
| Adjusted revenue (non-GAAP) | $ | 139,597 | | | $ | 140,714 | | | $ | 139,955 | | | $ | 136,709 | | | $ | 129,840 | |
| | | | | | | | | |
| Total noninterest expenses (GAAP) | $ | 90,859 | | | $ | 92,866 | | | $ | 92,967 | | | $ | 75,098 | | | $ | 88,230 | |
| Less: | | | | | | | | | |
| Core deposit and customer relationship intangibles amortization | 2,981 | | | 2,918 | | | 2,899 | | | 3,313 | | | 2,842 | |
| Partnership investment in tax credit projects | 184 | | | 3,038 | | | 3,052 | | | 1,465 | | | 475 | |
| (Gain)/loss on sales/valuation of assets, net | 16 | | | 1,512 | | | 356 | | | (18,286) | | | (3,004) | |
| Acquisition, integration and restructuring costs | 1,376 | | | 537 | | | 1,500 | | | 929 | | | 3,614 | |
| Adjusted noninterest expenses (non-GAAP) | $ | 86,302 | | | $ | 84,861 | | | $ | 85,160 | | | $ | 87,677 | | | $ | 84,303 | |
| Efficiency ratio, fully tax-equivalent (non-GAAP) | 61.82 | % | | 60.31 | % | | 60.85 | % | | 64.13 | % | | 64.93 | % |
| | | | | | | | | | | | | | |
| Acquisition, integration and restructuring costs | | | | | | | | | |
| Salaries and employee benefits | $ | 44 | | | | $ | — | | | | $ | 100 | | | | $ | 100 | | | | $ | 616 | |
| Occupancy | — | | | | 11 | | | | — | | | | 10 | | | | 1,194 | |
| Furniture and equipment | 24 | | | | 7 | | | | (4) | | | | 84 | | | | — | |
| Professional fees | 996 | | | | 462 | | | | 855 | | | | 624 | | | | 424 | |
| Advertising | 89 | | | | 31 | | | | 115 | | | | 52 | | | | 5 | |
| (Gain)/loss on sales/valuations of assets, net | — | | | | — | | | | — | | | | — | | | | 1,003 | |
| Other noninterest expenses | 223 | | | | 26 | | | | 434 | | | | 59 | | | | 372 | |
| Total acquisition, integration and restructuring costs | $ | 1,376 | | | | $ | 537 | | | | $ | 1,500 | | | | $ | 929 | | | | $ | 3,614 | |
After tax impact on diluted earnings per share(1) | $ | 0.03 | | | | $ | 0.01 | | | | $ | 0.03 | | | | $ | 0.02 | | | | $ | 0.08 | |
| | | | | | | | | |
| Reconciliation of Adjusted Net Income and Adjusted Diluted EPS (non-GAAP) | | | | | | | | | |
| Net income (GAAP) | $ | 20,040 | | | | $ | 37,851 | | | | $ | 34,612 | | | | $ | 45,169 | | | | $ | 31,497 | |
Provision for credit losses(1) | 17,001 | | | | 3,873 | | | | 4,109 | | | | 3,885 | | | | 1,292 | |
Acquisition, integration and restructuring costs(1) | 1,087 | | | | 424 | | | | 1,185 | | | | 734 | | | | 2,855 | |
| Adjusted net income (non-GAAP) | $ | 38,128 | | | | $ | 42,148 | | | | $ | 39,906 | | | | $ | 49,788 | | | | $ | 35,644 | |
| Diluted earnings per share (GAAP) | $ | 0.54 | | | | $ | 1.03 | | | | $ | 0.94 | | | | $ | 1.26 | | | | $ | 0.91 | |
| Adjusted diluted earnings per share (non-GAAP) | $ | 1.03 | | | | $ | 1.14 | | | | $ | 1.08 | | | | $ | 1.39 | | | | $ | 1.03 | |
| | | | | | | | | | | | | | | | | | |
| Reconciliation of Annualized Adjusted Return on Average Tangible Common Equity (non-GAAP) | | | | | | | | | | | | | | | | | | |
| Adjusted net income (non-GAAP) | $ | 38,128 | | | | $ | 42,148 | | | | $ | 39,906 | | | | $ | 49,788 | | | | $ | 35,644 | |
Plus core deposit and customer relationship intangibles amortization, net of tax(1) | 2,355 | | | | 2,305 | | | | 2,291 | | | | 2,617 | | | | 2,245 | |
| Adjusted net income excluding intangible amortization (non-GAAP) | $ | 40,483 | | | | $ | 44,453 | | | | $ | 42,197 | | | | $ | 52,405 | | | | $ | 37,889 | |
| Average tangible common equity (non-GAAP) | $ | 1,125,705 | | | | $ | 1,087,495 | | | | $ | 1,062,568 | | | | $ | 981,878 | | | | $ | 898,092 | |
| Annualized adjusted return on average tangible common equity (non-GAAP) | 14.46 | % | | | 16.22 | % | | | 15.76 | % | | | 21.41 | % | | | 17.11 | % |
| | | | | | | | | |
| (1) Computed on a tax-equivalent basis using an effective tax rate of 21%. | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Reconciliation of Efficiency Ratio (non-GAAP) | For the Quarter Ended |
| 9/30/2020 | | 6/30/2020 | | 3/31/2020 | | 12/31/2019 | | 9/30/2019 |
| Net interest income (GAAP) | $ | 122,497 | | | $ | 124,146 | | | $ | 112,511 | | | $ | 112,745 | | | $ | 111,321 | |
Tax-equivalent adjustment(1) | 1,390 | | | 1,416 | | | 1,131 | | | 1,109 | | | 1,140 | |
| Fully tax-equivalent net interest income | 123,887 | | | 125,562 | | | 113,642 | | | 113,854 | | | 112,461 | |
| Noninterest income | 31,216 | | | 30,637 | | | 25,817 | | | 28,030 | | | 29,400 | |
| Securities gains, net | (1,300) | | | (2,006) | | | (1,658) | | | (491) | | | (2,013) | |
| Unrealized (gain)/loss on equity securities, net | (155) | | | (680) | | | 231 | | | (11) | | | (144) | |
| Gain on extinguishment of debt | — | | | — | | | — | | | — | | | (375) | |
| Valuation adjustment on servicing rights | 120 | | | (9) | | | 1,565 | | | (668) | | | 626 | |
| Adjusted revenue (non-GAAP) | $ | 153,768 | | | $ | 153,504 | | | $ | 139,597 | | | $ | 140,714 | | | $ | 139,955 | |
| | | | | | | | | |
| Total noninterest expenses (GAAP) | $ | 90,396 | | | $ | 90,439 | | | $ | 90,859 | | | $ | 92,866 | | | $ | 92,967 | |
| Less: | | | | | | | | | |
| Core deposit and customer relationship intangibles amortization | 2,492 | | | 2,696 | | | 2,981 | | | 2,918 | | | 2,899 | |
| Partnership investment in tax credit projects | 927 | | | 791 | | | 184 | | | 3,038 | | | 3,052 | |
| (Gain)/loss on sales/valuation of assets, net | 1,763 | | | 701 | | | 16 | | | 1,512 | | | 356 | |
| Acquisition, integration and restructuring costs | 1,146 | | | 673 | | | 1,376 | | | 537 | | | 1,500 | |
| Adjusted noninterest expenses (non-GAAP) | $ | 84,068 | | | $ | 85,578 | | | $ | 86,302 | | | $ | 84,861 | | | $ | 85,160 | |
| Efficiency ratio, fully tax-equivalent (non-GAAP) | 54.67 | % | | 55.75 | % | | 61.82 | % | | 60.31 | % | | 60.85 | % |
| | | | | | | | | |
| Acquisition, integration and restructuring costs | | | | | | | | | |
| Salaries and employee benefits | $ | — | | | $ | 122 | | | $ | 44 | | | $ | — | | | $ | 100 | |
| Occupancy | — | | | — | | | — | | | 11 | | | — | |
| Furniture and equipment | 496 | | | 15 | | | 24 | | | 7 | | | (4) | |
| Professional fees | 476 | | | 505 | | | 996 | | | 462 | | | 855 | |
| Advertising | 8 | | | 4 | | | 89 | | | 31 | | | 115 | |
| (Gain)/loss on sales/valuations of assets, net | — | | | — | | | — | | | — | | | — | |
| Other noninterest expenses | 166 | | | 27 | | | 223 | | | 26 | | | 434 | |
| Total acquisition, integration and restructuring costs | $ | 1,146 | | | $ | 673 | | | $ | 1,376 | | | $ | 537 | | | $ | 1,500 | |
After tax impact on diluted earnings per share(1) | $ | 0.02 | | | $ | 0.01 | | | $ | 0.03 | | | $ | 0.01 | | | $ | 0.03 | |
| | | | | | | | | |
| Reconciliation of Adjusted Net Income Available to Common Stockholders and Adjusted Diluted EPS (non-GAAP) | | | | | | | | | |
| Net income available to common stockholders (GAAP) | $ | 45,521 | | | $ | 30,131 | | | $ | 20,040 | | | $ | 37,851 | | | $ | 34,612 | |
Provision for credit losses(1) | 1,325 | | | 21,169 | | | 17,001 | | | 3,873 | | | 4,109 | |
Acquisition, integration and restructuring costs(1) | 905 | | | 532 | | | 1,087 | | | 424 | | | 1,185 | |
| Adjusted net income available to common stockholders (non-GAAP) | $ | 47,751 | | | $ | 51,832 | | | $ | 38,128 | | | $ | 42,148 | | | $ | 39,906 | |
| Diluted earnings per common share (GAAP) | $ | 1.23 | | | $ | 0.82 | | | $ | 0.54 | | | $ | 1.03 | | | $ | 0.94 | |
| Adjusted diluted earnings per common share (non-GAAP) | $ | 1.29 | | | $ | 1.40 | | | $ | 1.03 | | | $ | 1.14 | | | $ | 1.08 | |
| | | | | | | | | |
| Reconciliation of Annualized Adjusted Return on Average Tangible Common Equity (non-GAAP) | | | | | | | | | |
| Adjusted net income available to common stockholders (non-GAAP) | $ | 47,751 | | | $ | 51,832 | | | $ | 38,128 | | | $ | 42,148 | | | $ | 39,906 | |
Plus core deposit and customer relationship intangibles amortization, net of tax(1) | 1,969 | | | 2,130 | | | 2,355 | | | 2,305 | | | 2,291 | |
| Adjusted net income available to common stockholders excluding intangible amortization (non-GAAP) | $ | 49,720 | | | $ | 53,962 | | | $ | 40,483 | | | $ | 44,453 | | | $ | 42,197 | |
| Average tangible common equity (non-GAAP) | $ | 1,172,891 | | | $ | 1,083,834 | | | $ | 1,125,705 | | | $ | 1,087,495 | | | $ | 1,062,568 | |
| Annualized adjusted return on average tangible common equity (non-GAAP) | 16.86 | % | | 20.02 | % | | 14.46 | % | | 16.22 | % | | 15.76 | % |
| | | | | | | | | |
| (1) Computed on a tax-equivalent basis using an effective tax rate of 21%. |
| | | | | | | | | | | | | | | | | | | | | | | |
|
|
|
| For the Quarter Ended
September 30, | | For the Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| Reconciliation of Annualized Return on Average Tangible Common Equity (non-GAAP) | | | | | | | |
| Net income available to common stockholders (GAAP) | $ | 45,521 | | | $ | 34,612 | | | $ | 95,692 | | | $ | 111,278 | |
Plus core deposit and customer relationship intangibles amortization, net of tax(1) | 1,969 | | | 2,291 | | | 6,454 | | | 7,153 | |
| Net income available to common stockholders excluding intangible amortization (non-GAAP) | $ | 47,490 | | | $ | 36,903 | | | $ | 102,146 | | | $ | 118,431 | |
| | | | | | | |
| Average common equity (GAAP) | $ | 1,661,381 | | | $ | 1,541,369 | | | $ | 1,618,811 | | | $ | 1,440,754 | |
| Less average goodwill | 446,345 | | | 427,097 | | | 446,345 | | | 409,932 | |
| Less average core deposit and customer relationship intangibles, net | 42,145 | | | 51,704 | | | 44,824 | | | 49,373 | |
| Average tangible common equity (non-GAAP) | $ | 1,172,891 | | | $ | 1,062,568 | | | $ | 1,127,642 | | | $ | 981,449 | |
| Annualized return on average common equity (GAAP) | 10.90 | % | | 8.91 | % | | 7.90 | % | | 10.33 | % |
| Annualized return on average tangible common equity (non-GAAP) | 16.11 | % | | 13.78 | % | | 12.10 | % | | 16.13 | % |
| | | | | | | |
| Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP) | | | | | | | |
| Net Interest Income (GAAP) | $ | 122,497 | | | $ | 111,321 | | | $ | 359,154 | | | $ | 320,984 | |
Plus tax-equivalent adjustment(1) | 1,390 | | | 1,140 | | | 3,937 | | | 3,820 | |
| Net interest income, fully tax-equivalent (non-GAAP) | $ | 123,887 | | | $ | 112,461 | | | $ | 363,091 | | | $ | 324,804 | |
| | | | | | | |
| Average earning assets | $ | 13,868,360 | | | $ | 11,102,581 | | | $ | 12,957,661 | | | $ | 10,598,465 | |
| | | | | | | |
| Annualized net interest margin (GAAP) | 3.51 | % | | 3.98 | % | | 3.70 | % | | 4.05 | % |
| Annualized net interest margin, fully tax-equivalent (non-GAAP) | 3.55 | | | 4.02 | | | 3.74 | | | 4.10 | |
| Purchase accounting discount accretion on loans included in annualized net interest margin | 0.10 | | | 0.23 | | | 0.12 | | | 0.19 | |
| | | | | | | |
| (1) Computed on a tax-equivalent basis using an effective tax rate of 21%. |
| | | | | | | | | | | | | | | | | | | | | | | |
|
|
|
| Reconciliation of Efficiency Ratio (non-GAAP) | For the Quarter Ended September 30, | | For the Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| Net interest income (GAAP) | $ | 122,497 | | | $ | 111,321 | | | $ | 359,154 | | | $ | 320,984 | |
Tax-equivalent adjustment(1) | 1,390 | | | 1,140 | | | 3,937 | | | 3,820 | |
| Fully tax-equivalent net interest income | 123,887 | | | 112,461 | | | 363,091 | | | 324,804 | |
| Noninterest income | 31,216 | | | 29,400 | | | 87,670 | | | 88,178 | |
| Securities gains, net | (1,300) | | | (2,013) | | | (4,964) | | | (7,168) | |
| Unrealized (gain)/loss on equity securities, net | (155) | | | (144) | | | (604) | | | (514) | |
| Gain on extinguishment of debt | — | | | (375) | | | — | | | (375) | |
| Valuation adjustment on servicing rights | 120 | | | 626 | | | 1,676 | | | 1,579 | |
| Adjusted revenue (non-GAAP) | $ | 153,768 | | | $ | 139,955 | | | $ | 446,869 | | | $ | 406,504 | |
| | | | | | | |
| Total noninterest expenses (GAAP) | $ | 90,396 | | | $ | 92,967 | | | $ | 271,694 | | | $ | 256,295 | |
| Less: | | | | | | | |
| Core deposit and customer relationship intangibles amortization | 2,492 | | | 2,899 | | | 8,169 | | | 9,054 | |
| Partnership investment in tax credit projects | 927 | | | 3,052 | | | 1,902 | | | 4,992 | |
| (Gain)/loss on sales/valuation of assets, net | 1,763 | | | 356 | | | 2,480 | | | (20,934) | |
| Acquisition, integration and restructuring costs | 1,146 | | | 1,500 | | | 3,195 | | | 6,043 | |
| Adjusted noninterest expenses (non-GAAP) | $ | 84,068 | | | $ | 85,160 | | | $ | 255,948 | | | $ | 257,140 | |
| Efficiency ratio, fully tax-equivalent (non-GAAP) | 54.67 | % | | 60.85 | % | | 57.28 | % | | 63.26 | % |
| | | | | | | |
| Acquisition, integration and restructuring costs | | | | | | | |
| Salaries and employee benefits | $ | — | | | $ | 100 | | | $ | 166 | | | $ | 816 | |
| Occupancy | — | | | — | | | — | | | 1,204 | |
| Furniture and equipment | 496 | | | (4) | | | 535 | | | 80 | |
| Professional fees | 476 | | | 855 | | | 1,977 | | | 1,903 | |
| Advertising | 8 | | | 115 | | | 101 | | | 172 | |
| (Gain)/loss on sales/valuations of assets, net | — | | | — | | | — | | | 1,003 | |
| Other noninterest expenses | 166 | | | 434 | | | 416 | | | 865 | |
| Total acquisition, integration and restructuring costs | $ | 1,146 | | | $ | 1,500 | | | $ | 3,195 | | | $ | 6,043 | |
After tax impact on diluted earnings per share(1) | $ | 0.02 | | | $ | 0.03 | | | $ | 0.07 | | | $ | 0.13 | |
| | | | | | | |
| Reconciliation of Adjusted Net Income Available to Common Stockholders and Adjusted Diluted EPS (non-GAAP) | | | | | | | |
| Net income available to common stockholders (GAAP) | $ | 45,521 | | | $ | 34,612 | | | $ | 95,692 | | | $ | 111,278 | |
Provision for credit losses(1) | 1,325 | | | 4,109 | | | 39,495 | | | 9,286 | |
Acquisition, integration and restructuring costs(1) | 905 | | | 1,185 | | | 2,524 | | | 4,774 | |
| Adjusted net income available common stockholders (non-GAAP) | $ | 47,751 | | | $ | 39,906 | | | $ | 137,711 | | | $ | 125,338 | |
| Diluted earnings per common share (GAAP) | $ | 1.23 | | | $ | 0.94 | | | $ | 2.59 | | | $ | 3.11 | |
| Adjusted diluted earnings per common share (non-GAAP) | $ | 1.29 | | | $ | 1.08 | | | $ | 3.73 | | | $ | 3.50 | |
| | | | | | | |
| Reconciliation of Annualized Adjusted Return on Average Tangible Common Equity (non-GAAP) | | | | | | | |
| Adjusted net income available to common stockholders (non-GAAP) | $ | 47,751 | | | $ | 39,906 | | | $ | 137,711 | | | $ | 125,338 | |
Plus core deposit and customer relationship intangibles amortization, net of tax(1) | 1,969 | | | 2,291 | | | 6,454 | | | 7,153 | |
| Adjusted net income available to common stockholders excluding intangible amortization (non-GAAP) | $ | 49,720 | | | $ | 42,197 | | | $ | 144,165 | | | $ | 132,491 | |
| Average tangible common equity (non-GAAP) | $ | 1,172,891 | | | $ | 1,062,568 | | | $ | 1,127,642 | | | $ | 981,449 | |
| Annualized adjusted return on average tangible common equity (non-GAAP) | 16.86 | % | | 15.76 | % | | 17.08 | % | | 18.05 | % |
|
| (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 Heartland'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 return on average tangible common equity is net income available to common stockholders plus core deposit and customer relationship intangibles amortization, net of tax, divided by 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 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.
•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 as it enhances the comparability of income and expenses arising from taxable and nontaxable sources and excludes specific items as noted in the reconciliation.
•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.
•Adjusted net income and adjusted diluted earnings per share exclude tax-effected provision for credit losses and acquisition, integration and restructuring costs. Management believes the presentation of these non-GAAP measures are useful to compare net income and earnings per share results excluding the variability of credit loss provisions and acquisition, integration and restructuring costs.
•Annualized adjusted return on average tangible common equity is adjusted net income excluding intangible amortization calculated as (1) net income excluding (A) tax-effected provision for credit losses, (B) tax-effected acquisition, integration and restructuring costs and (C) 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.
RESULTS OF OPERATIONS
Net Interest Margin and Net Interest Income
Heartland's success in maintaining competitive net interest margin has been the result of an increase in average earning assets and a favorable deposit mix for the quarters ended March 31,September 30, 2020 and 2019 and the nine-month periods ended September 30, 2020 and 2019. Also contributing to Heartland's ability to maintain its net interest margin has been the amortization of purchase accounting discounts associated with acquisitions completed by Heartland. Growth in interest income on a tax-equivalent basis was largely due to the increase in average earning assets primarily from recent acquisitions. Increasesacquisitions and loan growth, including PPP loans. Decreases in total interest expense were aprimarily the result of increases in average interest bearing liabilities from acquired and organic growth, which were partially offset by declining interest rates. See "Analysis of Average Balances, Tax-Equivalent Yields and Rates" for information relating to Heartland's net interest income on a fully tax-equivalent basis, which is not defined by GAAP. Refer to the financial highlights"Financial Highlights" above for a reconciliation of annualized net interest margin on a fully tax-equivalent basis to GAAP.
For the Quarters ended September 30, 2020 and 2019
Net interest margin, expressed as a percentage of average earning assets, was 3.81% (3.84%3.51% (3.55% on a fully tax-equivalent basis)basis, non-GAAP) during the firstthird quarter of 2020, compared to 4.12% (4.18%3.98% (4.02% on a fully tax-equivalent basis)basis, non-GAAP) during the firstthird quarter of 2019. Excluding the impact of the PPP loans, Heartland's net interest margin on a fully tax-equivalent basis (non-GAAP) for the third quarter of 2020 was 3.64%. For the firstthird quarter of 2020, Heartland's net interest margin included 910 basis points of purchase accounting discount amortizationaccretion on loans compared to 1623 basis points in the same quarter of 2019.
Total interest income and average earning asset changes for the firstthird quarter of 2020 wascompared to the third quarter of 2019 were:
•Heartland recorded $131.0 million of total interest income, which was a decrease of $2.4 million or 2% from $133.4 million, based on a decrease in the average rate on earning assets, which was partially offset by an increase of $10.3 million or 9%, compared to $120.7 million recorded in the first quarter of 2019. The tax-equivalent adjustments for income taxes saved on the interest earned on nontaxable securities and loans were $1.1 million for the first quarter of 2020 and $1.4 million for the first quarter of 2019. With these adjustments, totalaverage earning assets.
•Total interest income on a tax-equivalent basis (non-GAAP) was $132.2$132.4 million, for the first quarterwhich was a decrease of 2020, an increase of $10.0$2.2 million or 8%, compared to $122.1 million for the first quarter of 2019.2% from $134.5 million.
Average earning assets increased $1.76$2.77 billion or 17%25% to $11.89$13.87 billion from $10.13compared to $11.10 billion infor the firstthird quarter of 2019, which was primarily attributable to recent acquisitions. acquisitions, increases in securities and loan growth, including PPP loans.
•The average interest rate on earning assets decreased 42101 basis points to 4.47% for the first quarter of 20203.80% compared to 4.89% for the same quarter in 2019,4.81%, which was primarily due to recent decreases in market interest rates.rates and the lower yield on PPP loans, which was 2.63% for the third quarter of 2020.
Total interest expense and average interest bearing liability changes for the firstthird quarter of 2020 was $18.5 million, an increase of $772,000 or 4% from $17.8 million incompared to the firstthird quarter of 2019 were:
•Total interest expense was $8.5 million, a decrease of $13.6 million or 62% from $22.1 million, based on a decrease in the average interest rate paid, which was the result ofpartially offset by an increase in average interest bearing liabilities.
•The average interest rate paid on Heartland's interest bearing liabilities partially offset by decliningdecreased to 0.40% compared to 1.22%, which was primarily due to recent decreases in market interest rates.
•Average interest bearing deposits increased $966.9 million or 14% to $7.76 billion from $6.79 billion which was primarily attributable to recent acquisitions and deposit growth, including deposits from government stimulus payments and other COVID-19 relief programs.
•The average interest rate paid on Heartland's interest bearing deposits decreased by 880 basis points to 0.79% for the first quarter of 20200.25% compared to 0.87% for the first quarter of 2019. The average interest rate paid on savings deposits was 0.65% during the first quarter of 2020 compared1.05%.
•Average borrowings increased $178.3 million or 47% to 0.80% for the first quarter of 2019, and the average interest rate paid on time deposits was 1.58% for the first quarter of 2020 compared to 1.23% for the first quarter of 2019.$560.4 million from $382.2 million. The average interest rate paid on Heartland's borrowings was 3.81% for the first quarter of 20202.49% compared to 3.96% in the first quarter of 2019.
For the quarter ended March 31, 2020, average interest bearing liabilities were $7.84 billion, an increase of $1.22 billion or 18%, from $6.62 billion for the quarter ended March 31, 2019. Average interest bearing deposits increased $1.27 billion or 21% to $7.42 billion for the quarter ended March 31, 2020, from $6.16 billion in the same quarter in 2019, as a result of acquired and organic growth. Average borrowings decreased $48.4 million or 10% to $417.8 million during the first quarter of 2020 from $466.2 million during the same quarter in 2019.
Net interest income increased $9.6 million or 9% to $112.5 million infor the firstthird quarter of 2020 from $103.0 million incompared to the firstthird quarter of 2019. After the tax-equivalent adjustment discussed above, net2019:
•Net interest income totaled $122.5 million compared to $111.3 million, which was an increase of $11.2 million or 10%.
•Net interest income on a tax-equivalent basis (non-GAAP) totaled $113.6$123.9 million compared to $112.5 million, which was an increase of $11.4 million or 10%.
For the Nine Months ended September 30, 2020 and 2019
Net interest margin, expressed as a percentage of average earning assets, was 3.70% (3.74% on a fully tax-equivalent basis, non-GAAP) during the first quarternine months of 2020, compared to 4.05% (4.10% on a fully tax-equivalent basis, non-GAAP) during the first nine months of 2019. Excluding the impact of the PPP loans, Heartland's net interest margin on a fully tax-equivalent basis (non-GAAP) for the first nine months of 2020 was 3.80%. For the nine months ended September 30, 2020, Heartland's net interest margin included 12 basis points of purchase accounting discount accretion on loans compared to 19 basis points in the same period of 2019.
Total interest income and average earning asset changes for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 were:
•Heartland recorded $395.8 million of total interest income, which was an increase of $9.3$14.7 million or 9%4% from $104.4$381.1 million, duringbased on a decrease in the average rate on earning assets, which was partially offset by an increase in average earning assets.
•Total interest income on a tax-equivalent basis (non-GAAP) was $399.7 million, which was an increase of $14.8 million or 4% from $384.9 million.
•Average earning assets increased $2.36 billion or 22% to $12.96 billion compared to $10.60 billion for the first quarternine months of 2019.2019, which was primarily attributable to recent acquisitions, increases in securities, and loan growth, including PPP loans.
•The average rate on earning assets decreased 74 basis points to 4.12% compared to 4.86%, which was primarily due to recent decreases in market interest rates and the lower yield on PPP loans, which was 2.64% for the nine months ended September 30, 2020.
Total interest expense and average interest bearing liability changes for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 were:
•Total interest expense was $36.6 million, a decrease of $23.5 million or 39% from $60.1 million, based on a decrease in the average interest rate paid, which was partially offset by an increase in average interest bearing liabilities.
•The average interest rate paid on Heartland's interest bearing liabilities decreased to 0.60% compared to 1.17%, which was primarily due to recent decreases in market interest rates.
•Average interest bearing deposits increased $1.17 billion or 18% to $7.66 billion from $6.49 billion which was primarily attributable to recent acquisitions and deposit growth, including deposits from government stimulus payments and other COVID-19 relief programs.
•The average interest rate paid on Heartland's interest bearing deposits decreased 53 basis points to 0.45% compared to 0.98%.
•Average borrowings increased $43.9 million or 11% to $449.4 million from $405.6 million. The average interest rate paid on Heartland's borrowings was 3.25% compared to 4.22%.
Net interest income increased for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019:
•Net interest income totaled $359.2 million compared to $321.0 million, which was an increase of $38.2 million or 12%.
•Net interest income on a tax-equivalent basis (non-GAAP) totaled $363.1 million compared to $324.8 million, which was an increase of $38.3 million or 12%.
Heartland attempts to manage its balance sheet to minimize the effect that a change in interest rates has on its net interest margin. Heartland plans to continue to work toward improving both its earning assets and funding mix through targeted organic growth strategies, which management believes will result in additional net interest income. Heartland produces and reviews simulations of various interest rate scenarios to assist in monitoring its exposure to interest rate risk. Based on these simulations, it is management's opinion that Heartland maintains a well-balanced and manageable interest rate posture. Item 3 of Part I of this Quarterly Report on Form 10-Q contains additional information about the results of Heartland's most recent net interest income simulations. Note 7 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 tables set forth certain information relating to Heartland's average consolidated balance sheets and reflect 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 treatment are evaluated on a tax-equivalent basis assuming a federal income tax rate of 21%. Tax-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 favored 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) | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| For the Quarter Ended | | | | | | | | | | | | | | | | |
| March 31, 2020 | | | | | | December 31, 2019 | | | | | | March 31, 2019 | | | | |
| Average
Balance | | Interest | | Rate | | Average
Balance | | Interest | | Rate | | Average
Balance | | Interest | | Rate |
| Earning Assets | | | | | | | | | | | | | | | | | |
| Securities: | | | | | | | | | | | | | | | | | |
| Taxable | $ | 3,132,103 | | | $ | 21,731 | | | 2.79 | % | | $ | 3,033,480 | | | $ | 22,581 | | | 2.95 | % | | $ | 2,169,016 | | | $ | 15,876 | | | 2.97 | % |
Nontaxable(1) | 288,535 | | | 2,763 | | | 3.85 | | | 271,792 | | | 2,661 | | | 3.88 | | | 391,724 | | | 3,915 | | | 4.05 | |
| Total securities | 3,420,638 | | | | 24,494 | | | 2.88 | | | 3,305,272 | | | | 25,242 | | | 3.03 | | | 2,560,740 | | | | 19,791 | | | 3.13 | |
| Interest on deposits with other banks and short-term investments | 181,320 | | | | 721 | | | | 1.60 | | | 251,599 | | | | 953 | | | | 1.50 | | | 218,445 | | | | 1,292 | | | | 2.40 | |
| Federal funds sold | — | | | — | | | — | | | — | | | — | | | — | | | 560 | | | 4 | | | 2.90 | |
Loans:(2)(3) | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial(1) | 2,607,513 | | | 32,454 | | | 5.01 | | | 2,444,961 | | | 32,006 | | | 5.19 | | | 2,137,168 | | | 30,389 | | | 5.77 | |
| Owner occupied commercial real estate | 1,433,160 | | | 18,581 | | | 5.21 | | | 1,416,338 | | | 19,241 | | | 5.39 | | | 1,262,567 | | | 17,531 | | | 5.63 | |
| Non-owner occupied commercial real estate | 1,472,268 | | | 19,530 | | | 5.34 | | | 1,388,677 | | | 18,952 | | | 5.41 | | | 1,326,014 | | | 17,423 | | | 5.33 | |
| Real estate construction | 1,045,836 | | | 12,845 | | | 4.94 | | | 1,003,797 | | | 13,645 | | | 5.39 | | | 825,634 | | | 11,871 | | | 5.83 | |
| Agricultural and agricultural real estate | 552,968 | | | 7,039 | | | 5.12 | | | 566,419 | | | 7,314 | | | 5.12 | | | 566,878 | | | 7,203 | | | 5.15 | |
| Residential mortgage | 819,730 | | | 10,421 | | | 5.11 | | | 830,277 | | | 10,454 | | | 5.00 | | | 880,825 | | | 10,286 | | | 4.74 | |
| Consumer | 432,745 | | | 6,095 | | | 5.66 | | | 440,007 | | | 6,504 | | | 5.86 | | | 413,769 | | | 6,343 | | | 6.22 | |
| Less: allowance for loan losses | (74,723) | | | — | | | — | | | (67,052) | | | — | | | — | | | (62,643) | | | — | | | — | |
| Net loans | 8,289,497 | | | 106,965 | | | 5.19 | | | 8,023,424 | | | 108,116 | | | 5.35 | | | 7,350,212 | | | 101,046 | | | 5.58 | |
| Total earning assets | 11,891,455 | | | 132,180 | | | 4.47 | % | | 11,580,295 | | | 134,311 | | | 4.60 | % | | 10,129,957 | | | 122,133 | | | 4.89 | % |
| Nonearning Assets | 1,256,718 | | | | | | | | 1,218,475 | | | | | | | | 1,137,257 | | | | | | |
| Total Assets | $ | 13,148,173 | | | | | | | | | $ | 12,798,770 | | | | | | | | | $ | 11,267,214 | | | | | | | |
Interest Bearing Liabilities(4) | | | | | | | | | | | | | | | | | | | | |
| Savings | $ | 6,277,528 | | | | $ | 10,082 | | | 0.65 | % | | $ | 5,986,007 | | | | $ | 11,790 | | | 0.78 | % | | $ | 5,121,179 | | | | $ | 10,083 | | | 0.80 | % |
| Time deposits | 1,146,619 | | | 4,500 | | | 1.58 | | | 1,135,025 | | | 4,611 | | | 1.61 | | | 1,034,744 | | | 3,130 | | | 1.23 | |
| Short-term borrowings | 141,807 | | | 296 | | | 0.84 | | | 115,680 | | | 271 | | | 0.93 | | | 195,390 | | | 889 | | | 1.85 | |
| Other borrowings | 275,987 | | | 3,660 | | | 5.33 | | | 276,989 | | | 3,785 | | | 5.42 | | | 270,836 | | | 3,664 | | | 5.49 | |
| Total interest bearing liabilities | 7,841,941 | | | 18,538 | | | 0.95 | % | | 7,513,701 | | | 20,457 | | | 1.08 | % | | 6,622,149 | | | 17,766 | | | 1.09 | |
Noninterest Bearing Liabilities(3) | | | | | | | | | | | | | | | | | | | | |
| Noninterest bearing deposits | 3,547,046 | | | | | | | | 3,583,611 | | | | | | | | 3,200,281 | | | | | | |
| Accrued interest and other liabilities | 139,504 | | | | | | | | 131,200 | | | | | | | | 108,534 | | | | | | |
| Total noninterest bearing liabilities | 3,686,550 | | | | | | | | 3,714,811 | | | | | | | | 3,308,815 | | | | | | |
| Common Equity | 1,619,682 | | | | | | | | 1,570,258 | | | | | | | | 1,336,250 | | | | | | |
| Total Liabilities and Common Equity | $ | 13,148,173 | | | | | | | | $ | 12,798,770 | | | | | | | | $ | 11,267,214 | | | | | | |
Net interest income, fully tax-equivalent (non-GAAP)(1) | | | $ | 113,642 | | | | | | | | $ | 113,854 | | | | | | | | $ | 104,367 | | | | |
Net interest spread(1) | | | | | 3.52 | % | | | | | | 3.52 | % | | | | | | 3.80 | % |
| Net interest income, fully tax-equivalent (non-GAAP) to total earning assets | | | | | 3.84 | % | | | | | | 3.90 | % | | | | | | 4.18 | % |
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| (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) In conjunction with the adoption of ASU 2016-13, Heartland reclassified loan balances to align more closely with FDIC codes. All prior period balances have been adjusted. | | | | | | | | | | | | | | | | | |
| (4) Includes deposits held for sale. | | | | | | | | | | | | | | | | | |
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ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES (1) |
| (DOLLARS IN THOUSANDS) |
| For the Quarter Ended |
| September 30, 2020 | | June 30, 2020 | | September 30, 2019 |
| Average
Balance | | Interest | | Rate | | Average
Balance | | Interest | | Rate | | Average
Balance | | Interest | | Rate |
| Earning Assets | | | | | | | | | | | | | | | | | |
| Securities: | | | | | | | | | | | | | | | | | |
| Taxable | $ | 4,125,700 | | | $ | 25,016 | | | 2.41 | % | | $ | 3,375,245 | | | $ | 23,362 | | | 2.78 | % | | $ | 2,658,107 | | | $ | 18,567 | | | 2.77 | % |
Nontaxable(1) | 429,710 | | | 4,078 | | | 3.78 | | | 433,329 | | | 4,233 | | | 3.93 | | | 266,933 | | | 2,682 | | | 3.99 | |
| Total securities | 4,555,410 | | | 29,094 | | | 2.54 | | | 3,808,574 | | | 27,595 | | | 2.91 | | | 2,925,040 | | | 21,249 | | | 2.88 | |
| Interest on deposits with other banks and short-term investments | 215,361 | | | 72 | | | 0.13 | | | 210,347 | | | 54 | | | 0.10 | | | 358,327 | | | 2,151 | | | 2.38 | |
| Federal funds sold | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Loans:(2)(3) | | | | | | | | | | | | | | | | | |
Commercial and industrial(1) | 2,331,467 | | | 27,777 | | | 4.74 | | | 2,453,066 | | | 30,759 | | | 5.04 | | | 2,469,770 | | | 33,410 | | | 5.37 | |
| PPP loans | 1,128,488 | | | 7,462 | | | 2.63 | | | 916,405 | | | 6,017 | | | 2.64 | | | — | | | — | | | — | |
| Owner occupied commercial real estate | 1,463,538 | | | 17,359 | | | 4.72 | | | 1,426,019 | | | 17,670 | | | 4.98 | | | 1,364,901 | | | 19,422 | | | 5.65 | |
| Non-owner occupied commercial real estate | 1,589,073 | | | 18,860 | | | 4.72 | | | 1,540,958 | | | 19,055 | | | 4.97 | | | 1,217,879 | | | 19,009 | | | 6.19 | |
| Real estate construction | 1,023,490 | | | 11,628 | | | 4.52 | | | 1,100,514 | | | 12,589 | | | 4.60 | | | 969,292 | | | 13,957 | | | 5.71 | |
| Agricultural and agricultural real estate | 514,442 | | | 5,968 | | | 4.62 | | | 532,668 | | | 6,171 | | | 4.66 | | | 564,729 | | | 7,643 | | | 5.37 | |
| Residential mortgage | 774,850 | | | 8,915 | | | 4.58 | | | 795,149 | | | 9,586 | | | 4.85 | | | 859,904 | | | 11,007 | | | 5.08 | |
| Consumer | 395,318 | | | 5,222 | | | 5.26 | | | 422,134 | | | 5,685 | | | 5.42 | | | 437,203 | | | 6,695 | | | 6.08 | |
| Less: allowance for loan losses | (123,077) | | | — | | | — | | | (102,675) | | | — | | | — | | | (64,464) | | | — | | | — | |
| Net loans | 9,097,589 | | | 103,191 | | | 4.51 | | | 9,084,238 | | | 107,532 | | | 4.76 | | | 7,819,214 | | | 111,143 | | | 5.64 | |
| Total earning assets | 13,868,360 | | | 132,357 | | | 3.80 | % | | 13,103,159 | | | 135,181 | | | 4.15 | % | | 11,102,581 | | | 134,543 | | | 4.81 | % |
| Nonearning Assets | 1,298,865 | | | | | | | 1,288,697 | | | | | | | 1,190,751 | | | | | |
| Total Assets | $ | 15,167,225 | | | | | | | $ | 14,391,856 | | | | | | | $ | 12,293,332 | | | | | |
| Interest Bearing Liabilities | | | | | | | | | | | | | | | | | |
| Savings | $ | 6,723,962 | | | $ | 1,940 | | | 0.11 | % | | $ | 6,690,504 | | | $ | 2,372 | | | 0.14 | % | | $ | 5,643,722 | | | $ | 13,301 | | | 0.94 | % |
| Time deposits | 1,035,715 | | | 3,022 | | | 1.16 | | | 1,096,386 | | | 3,762 | | | 1.38 | | | 1,149,064 | | | 4,681 | | | 1.62 | |
| Short-term borrowings | 128,451 | | | 78 | | | 0.24 | | | 82,200 | | | 61 | | | 0.30 | | | 102,440 | | | 250 | | | 0.97 | |
| Other borrowings | 431,995 | | | 3,430 | | | 3.16 | | | 286,663 | | | 3,424 | | | 4.80 | | | 279,718 | | | 3,850 | | | 5.46 | |
| Total interest bearing liabilities | 8,320,123 | | | 8,470 | | | 0.40 | % | | 8,155,753 | | | 9,619 | | | 0.47 | % | | 7,174,944 | | | 22,082 | | | 1.22 | |
| Noninterest Bearing Liabilities | | | | | | | | | | | | | | | | | |
| Noninterest bearing deposits | 4,891,145 | | | | | | | 4,501,488 | | | | | | | 3,460,857 | | | | | |
| Accrued interest and other liabilities | 183,871 | | | | | | | 153,618 | | | | | | | 116,162 | | | | | |
| Total noninterest bearing liabilities | 5,075,016 | | | | | | | 4,655,106 | | | | | | | 3,577,019 | | | | | |
| Equity | 1,772,086 | | | | | | | 1,580,997 | | | | | | | 1,541,369 | | | | | |
| Total Liabilities and Equity | $ | 15,167,225 | | | | | | | $ | 14,391,856 | | | | | | | $ | 12,293,332 | | | | | |
Net interest income, fully tax-equivalent (non-GAAP)(4) | | | $ | 123,887 | | | | | | | $ | 125,562 | | | | | | | $ | 112,461 | | | |
Net interest spread(1) | | | | | 3.40 | % | | | | | | 3.68 | % | | | | | | 3.59 | % |
Net interest income, fully tax-equivalent to total earning assets (non-GAAP)(4) | | | | | 3.55 | % | | | | | | 3.85 | % | | | | | | 4.02 | % |
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| (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) In conjunction with the adoption of ASU 2016-13, Heartland reclassified loan balances to align more closely with FDIC codes. All prior period balances have been adjusted. |
| (4) 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. |
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ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES (1) |
| (DOLLARS IN THOUSANDS) |
| |
| For the Nine Months Ended |
| September 30, 2020 | | September 30, 2019 |
| Average
Balance | | Interest | | Rate | | Average
Balance | | Interest | | Rate |
| Earning Assets | | | | | | | | | | | |
| Securities: | | | | | | | | | | | |
| Taxable | $ | 3,546,471 | | | $ | 70,109 | | | 2.64 | % | | $ | 2,350,120 | | | $ | 50,566 | | | 2.88 | % |
Nontaxable(1) | 384,026 | | | 11,074 | | | 3.85 | | | 327,150 | | | 9,830 | | | 4.02 | |
| Total securities | 3,930,497 | | | 81,183 | | | 2.76 | | | 2,677,270 | | | 60,396 | | | 3.02 | |
| Interest bearing deposits with other banks and other short-term investments | 202,390 | | | 847 | | | 0.56 | | | 334,191 | | | 5,742 | | | 2.30 | |
| Federal funds sold | — | | | — | | | — | | | 185 | | | 4 | | | 2.89 | |
Loans:(2)(3) | | | | | | | | | | | |
Commercial and industrial(1) | 2,463,546 | | | 90,990 | | | 4.93 | | | 2,394,412 | | | 95,790 | | | 5.35 | |
| PPP loans | 683,262 | | | 13,479 | | | 2.64 | | | — | | | — | | | — | |
| Owner occupied commercial real estate | 1,440,981 | | | 53,610 | | | 4.97 | | | 1,309,573 | | | 55,612 | | | 5.68 | |
| Non-owner occupied commercial real estate | 1,534,293 | | | 57,445 | | | 5.00 | | | 1,169,295 | | | 54,115 | | | 6.19 | |
| Real estate construction | 1,056,493 | | | 37,062 | | | 4.69 | | | 914,911 | | | 39,023 | | | 5.70 | |
| Agricultural and agricultural real estate | 533,290 | | | 19,178 | | | 4.80 | | | 562,407 | | | 22,311 | | | 5.30 | |
| Residential mortgage | 796,497 | | | 28,922 | | | 4.85 | | | 873,088 | | | 32,422 | | | 4.96 | |
| Consumer | 416,654 | | | 17,002 | | | 5.45 | | | 426,404 | | | 19,532 | | | 6.12 | |
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| Less: allowance for loan losses | (100,242) | | | — | | | — | | | (63,271) | | | — | | | — | |
| Net loans | 8,824,774 | | | 317,688 | | | 4.81 | | | 7,586,819 | | | 318,805 | | | 5.62 | |
| Total earning assets | 12,957,661 | | | 399,718 | | | 4.12 | % | | 10,598,465 | | | 384,947 | | | 4.86 | % |
| Nonearning Assets | 1,281,490 | | | | | | | 1,161,655 | | | | | |
| Total Assets | $ | 14,239,151 | | | | | | | $ | 11,760,120 | | | | | |
| Interest Bearing Liabilities | | | | | | | | | | | |
| Savings | $ | 6,564,582 | | | $ | 14,394 | | | 0.29 | % | | $ | 5,376,999 | | | $ | 35,279 | | | 0.88 | % |
| Time deposits | 1,092,698 | | | 11,284 | | | 1.38 | | | 1,109,302 | | | 12,054 | | | 1.45 | |
| Short-term borrowings | 117,526 | | | 435 | | | 0.49 | | | 129,928 | | | 1,477 | | | 1.52 | |
| Other borrowings | 331,915 | | | 10,514 | | | 4.23 | | | 275,642 | | | 11,333 | | | 5.50 | |
| Total interest bearing liabilities | 8,106,721 | | | 36,627 | | | 0.60 | % | | 6,891,871 | | | 60,143 | | | 1.17 | % |
| Noninterest Bearing Liabilities | | | | | | | | | | | |
| Noninterest bearing deposits | 4,315,335 | | | | | | | 3,317,187 | | | | | |
| Accrued interest and other liabilities | 159,089 | | | | | | | 110,308 | | | | | |
| Total noninterest bearing liabilities | 4,474,424 | | | | | | | 3,427,495 | | | | | |
| Stockholders' Equity | 1,658,006 | | | | | | | 1,440,754 | | | | | |
| Total Liabilities and Stockholders' Equity | $ | 14,239,151 | | | | | | | $ | 11,760,120 | | | | | |
Net interest income, fully tax-equivalent (non-GAAP)(4) | | | $ | 363,091 | | | | | | | $ | 324,804 | | | |
Net interest spread(1) | | | | | 3.52 | % | | | | | | 3.69 | % |
Net interest income, fully tax-equivalent (non-GAAP) to total earning assets(4) | | | | | 3.74 | % | | | | | | 4.10 | % |
| Interest bearing liabilities to earning assets | 62.56 | % | | | | | | 65.03 | % | | | | |
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| (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) In conjunction with the adoption of ASU 2016-13, Heartland reclassified loan balances to more closely align with FDIC codes. All prior period balances have been adjusted. |
| (4) 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. |
Provision For Credit Losses
The allowance for credit losses is established through provision expense to provide, in Heartland management's opinion, an appropriate allowance for credit losses. The following table shows the components of Heartland's provision for credit losses for the three and nine months ended March 31,September 30, 2020 and 2019, in thousands:
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| | | | | | Three Months Ended March 31, | | |
| | | | | | 2020 | | 2019 |
| Provision for credit losses-loans | | | | | | $ | 19,865 | | | $ | 1,635 | |
Provision for credit losses-unfunded commitments(1) | | | | | | 1,616 | | | — | |
Provision for credit losses-held to maturity securities(2) | | | | | | 39 | | | — | |
| Total provision expense | | | | | | $ | 21,520 | | | $ | 1,635 | |
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| (1) Prior to the adoption of ASU 2016-13, the provision for unfunded commitments was immaterial, and therefore prior periods are not presented. | | | | | | | | |
| (2) Prior to the adoption of ASU 2016-13, there was no requirement to record provision for credit losses for held to maturity securities. | | | | | | | | |
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| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| Provision for credit losses-loans | $ | 4,741 | | | $ | 5,201 | | | $ | 49,613 | | | $ | 11,754 | |
Provision for credit losses-unfunded commitments(1) | (3,062) | | | — | | | 478 | | | — | |
Provision for credit losses-held to maturity securities(2) | (1) | | | — | | | (97) | | | — | |
| Total provision expense | $ | 1,678 | | | $ | 5,201 | | | $ | 49,994 | | | $ | 11,754 | |
|
| (1) Prior to the adoption of ASU 2016-13, the provision for unfunded commitments was immaterial, and therefore prior periods are not presented. |
| (2) Prior to the adoption of ASU 2016-13, there was no requirement to record provision for credit losses for held to maturity securities. |
Provision for credit losses on loans totaled $4.7 million for the third quarter of 2020, which was a decrease of $20.3 million from $25.0 million recorded for the second quarter of 2020 and a decrease of $460,000 from $5.2 million recorded in the third quarter of 2019. The provision expense for the third quarter of 2020 was impacted by several factors, including:
•decreases in balances of loans held to maturity of $147.2 million from the prior quarter;
•modest changes in credit quality marked by delinquencies of 0.17% of total loans and nonpass loans of 8.7% of total loans for the third quarter compared to delinquencies of 0.22% of total loans and nonpass loans of 8.1% of total loans for the second quarter;
•consistent macroeconomic outlook compared to the second quarter of 2020, and
•the charge off of one $5.9 million commercial and industrial loan originated in California for which no specific reserve was previously established.
For the first nine months of 2020, the provision for credit losses on loans was $19.9increased $37.9 million to $49.6 million compared to $11.8 million for the first nine months of 2019 and included $11.6 of provision expense for one owner-occupied commercial real estate fracking sand company that was individually assessed for allowance for credit losses in the second quarter of 2020 compared to $1.6and $5.9 million for the first quarter of 2019.commercial and industrial loan previously described. The increase in the first quarter of 2020 was primarily due to a deterioratingprolonged negative economic outlook resulting in an increase in expectednegatively impacted the provision for credit losses.losses for loans for the third quarter and nine months ended September 30, 2020.
Given the size of Heartland's loan portfolio, the level of organic loan growth, changes in credit quality and the variability that can occur in the factors, such as economic conditions, considered when determining the appropriateness of the allowance for credit losses, Heartland's provision for credit losses will vary from quarter to quarter. For additional details on the specific factors considered in establishing the allowance for credit losses, refer to the discussion of critical accounting policies set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Heartland's Annual Report on Form 10-K for the year ended December 31, 2019, the information in Note 1, "Basis of Presentation," to the consolidated financial statements included herein, "Allowance For Credit Losses" and "Provision for Credit Losses" in Item 2 of this Quarterly Report on Form 10-Q and Note 5, "Allowance for Credit Losses," to the consolidated financial statements included herein.
Heartland believes the allowance for credit losses as of March 31,September 30, 2020, was at a level commensurate with the overall risk exposure of the loan portfolio. However, if current economic conditions resulting from COVID-19 continue or further deteriorate, certain borrowers may experience difficulty and the level of nonperforming loans, charge-offs and delinquencies could rise and require further increases in the provision for credit losses. Due to the deterioratinguncertainty of future economic conditions resulting from the COVID-19 pandemic, Heartland expectsthe provision for credit losses tocould remain elevated.
Noninterest Income
The tables below show Heartland's noninterest income for the three-monththree- and nine-month periods ended March 31,September 30, 2020, and 2019, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | |
| | 2020 | | 2019 | | Change | | % Change |
| Service charges and fees | $ | 11,749 | | | $ | 12,366 | | | $ | (617) | | | (5) | % |
| Loan servicing income | 638 | | | 821 | | | (183) | | | (22) | |
| Trust fees | 5,357 | | | 4,959 | | | 398 | | | 8 | |
| Brokerage and insurance commissions | 649 | | | 962 | | | (313) | | | (33) | |
| Securities gains, net | 1,300 | | | 2,013 | | | (713) | | | (35) | |
| Unrealized gain on equity securities, net | 155 | | | 144 | | | 11 | | | 8 | |
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| Net gains on sale of loans held for sale | 8,894 | | | 4,673 | | | 4,221 | | | 90 | |
| Valuation adjustment on servicing rights | (120) | | | (626) | | | 506 | | | 81 | |
| Income on bank owned life insurance | 868 | | | 881 | | | (13) | | | (1) | |
| Other noninterest income | 1,726 | | | 3,207 | | | (1,481) | | | (46) | |
| Total noninterest income | $ | 31,216 | | | $ | 29,400 | | | $ | 1,816 | | | 6 | % |
| | | Three Months Ended
March 31, | | | | | | Nine Months Ended
September 30, | | |
| | 2020 | | 2019 | | Change | | % Change | | 2020 | | 2019 | | Change | | % Change |
| Service charges and fees | Service charges and fees | $ | 12,021 | | | $ | 12,794 | | | $ | (773) | | | (6) | % | Service charges and fees | $ | 34,742 | | | $ | 39,789 | | | $ | (5,047) | | | (13) | % |
| Loan servicing income | Loan servicing income | 963 | | | 1,729 | | | (766) | | | (44) | | Loan servicing income | 1,980 | | | 3,888 | | | (1,908) | | | (49) | |
| Trust fees | Trust fees | 5,022 | | | 4,474 | | | 548 | | | 12 | | Trust fees | 15,356 | | | 14,258 | | | 1,098 | | | 8 | |
| Brokerage and insurance commissions | Brokerage and insurance commissions | 733 | | | 734 | | | (1) | | | — | | Brokerage and insurance commissions | 1,977 | | | 2,724 | | | (747) | | | (27) | |
| Securities gains, net | Securities gains, net | 1,658 | | | 1,575 | | | 83 | | | 5 | | Securities gains, net | 4,964 | | | 7,168 | | | (2,204) | | | (31) | |
| Unrealized gain/(loss) on equity securities, net | (231) | | | 258 | | | (489) | | | (190) | | |
| Unrealized gain on equity securities, net | | Unrealized gain on equity securities, net | 604 | | | 514 | | | 90 | | | 18 | |
| | Net gains on sale of loans held for sale | Net gains on sale of loans held for sale | 4,660 | | | 3,176 | | | 1,484 | | | 47 | | Net gains on sale of loans held for sale | 21,411 | | | 12,192 | | | 9,219 | | | 76 | |
| Valuation adjustment on servicing rights | Valuation adjustment on servicing rights | (1,565) | | | (589) | | | (976) | | | 166 | | Valuation adjustment on servicing rights | (1,676) | | | (1,579) | | | (97) | | | (6) | |
| Income on bank owned life insurance | Income on bank owned life insurance | 498 | | | 899 | | | (401) | | | (45) | | Income on bank owned life insurance | 2,533 | | | 2,668 | | | (135) | | | (5) | |
| Other noninterest income | Other noninterest income | 2,058 | | | 1,667 | | | 391 | | | 23 | | Other noninterest income | 5,779 | | | 6,556 | | | (777) | | | (12) | |
| Total noninterest income | Total noninterest income | $ | 25,817 | | | $ | 26,717 | | | $ | (900) | | | (3) | % | Total noninterest income | $ | 87,670 | | | $ | 88,178 | | | $ | (508) | | | (1) | % |
Total noninterest income totaled $25.8$31.2 million during the firstthird quarter of 2020 compared to $26.7$29.4 million during the firstthird quarter of 2019, an increase of $1.8 million or 6%. Total noninterest income totaled $87.7 million for the first nine months of 2020 compared to $88.2 million for the first nine months of 2019, which was a decrease of $900,000$508,000 or 3%1%. The
Notable changes in noninterest income categories for the quarter were primarily the result of higher net gains on sale of loans held for sale, which was offset by lower service chargesthree- and fees, loan servicing income,nine-months ended September 30, 2020 and valuation adjustment on servicing rights.2019 are as follows:
Service Charges and Fees
The following tables summarize the changes in service charges and fees for the three-monththree- and nine-month periods ended March 31,September 30, 2020, and 2019, in thousands:
| | | | Three Months Ended
March 31, | | | | Three Months Ended
September 30, | |
| | 2020 | | 2019 | | Change | | % Change | | 2020 | | 2019 | | Change | | % Change |
| Service charges and fees on deposit accounts | Service charges and fees on deposit accounts | $ | 3,438 | | | $ | 2,977 | | | $ | 461 | | | 15 | % | Service charges and fees on deposit accounts | $ | 3,710 | | | $ | 3,221 | | | $ | 489 | | | 15 | % |
| Overdraft fees | Overdraft fees | 2,809 | | | 2,744 | | | 65 | | | 2 | | Overdraft fees | 2,184 | | | 2,917 | | | (733) | | | (25) | |
| Customer service and other service fees | Customer service and other service fees | 59 | | | 82 | | | (23) | | | (28) | | Customer service and other service fees | 39 | | | 104 | | | (65) | | | (63) | |
| Credit card fee income | Credit card fee income | 3,900 | | | 3,349 | | | 551 | | | 16 | | Credit card fee income | 3,894 | | | 3,936 | | | (42) | | | (1) | |
| Debit card income | Debit card income | 1,815 | | | 3,642 | | | (1,827) | | | (50) | | Debit card income | 1,922 | | | 2,188 | | | (266) | | | (12) | |
| | Total service charges and fees | Total service charges and fees | $ | 12,021 | | | $ | 12,794 | | | $ | (773) | | | (6) | % | Total service charges and fees | $ | 11,749 | | | $ | 12,366 | | | $ | (617) | | | (5) | % |
| | | | Nine Months Ended
September 30, | |
| | | 2020 | | 2019 | | Change | | % Change |
| Service charges and fees on deposit accounts | | Service charges and fees on deposit accounts | $ | 10,623 | | | $ | 9,383 | | | $ | 1,240 | | | 13 | % |
| Overdraft fees | | Overdraft fees | 6,627 | | | 8,537 | | | (1,910) | | | (22) | |
| Customer service and other service fees | | Customer service and other service fees | 133 | | | 270 | | | (137) | | | (51) | |
| Credit card fee income | | Credit card fee income | 11,861 | | | 11,555 | | | 306 | | | 3 | |
| Debit card income | | Debit card income | 5,498 | | | 10,044 | | | (4,546) | | | (45) | |
| | Total service charges and fees | | Total service charges and fees | $ | 34,742 | | | $ | 39,789 | | | $ | (5,047) | | | (13) | % |
Total service charges and fees decreased $773,000$617,000 or 6%5% to $12.0$11.7 million during the firstthird quarter of 2020 compared to $12.8$12.4 million during the firstthird quarter of 2019, as2019. Total service charges and fees decreased $5.0 million or 13% to $34.7 million for the nine months ended September 30, 2020, compared to $39.8 million for the nine months ended September 30, 2019. The decreases for the three- and nine-month results were primarily attributable to decreases in overdraft fees and debit card income, which were partially offset by increases in credit card fee income and service charges and fees on deposit accounts were offset by a decrease in debit card income.accounts.
Service charges and fees on deposit accounts increased $461,000$489,000 or 15% to $3.4$3.7 million for the firstthird quarter of 2020 compared to $3.0from $3.2 million for the firstsame quarter of 2019. Overdraft fees increased $65,000 or 2% to $2.8 million forFor the first quarter ofnine months ended September 30, 2020, compared to $2.7 million for the first quarter of 2019. The increases in service charges and fees on deposit accounts increased $1.2 million or 13% to $10.6 million from $9.4 million recorded in the nine months ended September 30, 2019. The increase for both the quarterly and overdraft fees were primarilynine month periods ended September 30, 2020 was attributable to a larger demandhigher deposit customer base, a portion of which is attributable to the acquisitions completed in 2019.account balances.
Fees associated with credit card services were $3.9Overdraft fees totaled $2.2 million duringfor the firstthird quarter of 2020 compared to $3.3$2.9 million duringfor the firstthird quarter of 2019, an increasewhich was a decrease of $551,000$733,000 or 16%25%. These increases resultedFor the nine months ended September 30, 2020 and 2019, overdraft fees totaled $6.6 million and $8.5 million, respectively, which was a decrease of $1.9 million or 22%. The decreases for both the three- and nine-month periods was primarily from effortsattributable to increasereduced customer activity due to the level of commercial credit card services provided at Heartland's subsidiary banks, including at recently acquired banks. Heartland has
focused on expanding its card payment solutions for businesses. In particular, Heartland has introduced an expense management service that provides business customers the ability to more efficiently manage their card-based spending.COVID-19 pandemic.
Debit card income decreased $1.8 million$266,000 or 50%12% to $1.8$1.9 million for the firstthird quarter of 2020 compared to $3.6$2.2 million for the firstthird quarter of 2019. For the nine months ended September 30, 2020 and 2019, debit card income totaled $5.5 million and $10.0 million, respectively, which was a decrease of $4.5 million or 45%. The decrease was primarily attributable to reduced volume due to the COVID-19 pandemic, and for the nine-month results, the impact of the Durbin Amendment, which restricts interchange fees to those which are "reasonable and proportionate" for certain debit card issuers and limits the ability of networks and issuers to restrict debit card transaction routing. The Durbin Amendment was effective for Heartland on July 1, 2019.
Loan Servicing Income
The following tables show the changes in loan servicing income for the three-monththree- and nine-month periods ended March 31,September 30, 2020, and 2019, in thousands:
| | | | Three Months Ended
September 30, | |
| | | 2020 | | 2019 | | Change | | % Change |
| Commercial and agricultural loan servicing fees(1) | | Commercial and agricultural loan servicing fees(1) | $ | 820 | | | $ | 774 | | | $ | 46 | | | 6 | % |
| Residential mortgage servicing fees | | Residential mortgage servicing fees | 443 | | | 519 | | | (76) | | | (15) | |
| Mortgage servicing rights amortization | | Mortgage servicing rights amortization | (625) | | | (472) | | | (153) | | | (32) | |
| Total loan servicing income | | Total loan servicing income | $ | 638 | | | $ | 821 | | | $ | (183) | | | (22) | % |
| | | Three Months Ended
March 31, | | | | Nine Months Ended
September 30, | |
| | 2020 | | 2019 | | Change | | % Change | | 2020 | | 2019 | | Change | | % Change |
Commercial and agricultural loan servicing fees(1) | Commercial and agricultural loan servicing fees(1) | $ | 861 | | | $ | 683 | | | $ | 178 | | | 26 | % | Commercial and agricultural loan servicing fees(1) | $ | 2,411 | | | $ | 2,270 | | | $ | 141 | | | 6 | % |
| Residential mortgage servicing fees | Residential mortgage servicing fees | 409 | | | 2,546 | | | (2,137) | | | (84) | | Residential mortgage servicing fees | 1,262 | | | 4,484 | | | (3,222) | | | (72) | |
| Mortgage servicing rights amortization | Mortgage servicing rights amortization | (307) | | | (1,500) | | | 1,193 | | | 80 | | Mortgage servicing rights amortization | (1,693) | | | (2,866) | | | 1,173 | | | 41 | |
| Total loan servicing income | Total loan servicing income | $ | 963 | | | $ | 1,729 | | | $ | (766) | | | (44) | % | Total loan servicing income | $ | 1,980 | | | $ | 3,888 | | | $ | (1,908) | | | (49) | % |
| | (1) Includes servicing fees for commercial, commercial real estate, agricultural and agricultural real estate loans. | (1) Includes servicing fees for commercial, commercial real estate, agricultural and agricultural real estate loans. | | (1) Includes servicing fees for commercial, commercial real estate, agricultural and agricultural real estate loans. |
Loan servicing income includes the fees collected for the servicing of commercial, agricultural, and mortgage loans, which are dependent upon the aggregate outstanding balances of these loans, rather than quarterly production and sale of these loans. Loan servicing income totaled $963,000$638,000 during the firstthird quarter of 2020 compared to $1.7 million$821,000 during the firstthird quarter of 2019, a decrease of $766,000$183,000 or 44%22%, which was primarily attributable to increased mortgage servicing rights amortization due to increased mortgage loan refinancing activity in response to recent declines in mortgage interest rates.
For the nine months ended September 30, 2020, loan servicing income totaled $2.0 million compared to $3.9 million for the nine months ended September 30, 2019, which was a decrease of $1.9 million or 49%. The decrease was due to the sale of the mortgage servicing rights portfolio of Dubuque Bank and Trust Company which occurred on April 30, 2019. This transaction2019, which resulted in reduced residential mortgage servicing fees and mortgage servicing rights amortization for the nine months ended September 30, 2020. The sale of the mortgage servicing rights portfolio of Dubuque Bank and Trust Company did not impact the residential mortgage servicing portfolio of Heartland's PrimeWest Mortgage CorporationFirst Bank & Trust subsidiary.
Net Gains on Sale of Loans Held for Sale
During the firstthird quarter of 2020, net gains on sale of loans held for sale totaled $4.7$8.9 million compared to $3.2$4.7 million during the same period in 2019, an increase of $1.5$4.2 million or 47%90%. During the first nine months of 2020, net gains on sale of loans held for sale totaled $21.4 million compared to $12.2 million during the first nine months of 2019, which was an increase of $9.2 million or 76%. The increase for both the three- and nine-month comparisons was primarily due to an increase in residential mortgage loan refinancing activity in response to the recent declines in mortgage interest rates.
Valuation Adjustment on Servicing Rights
The valuation adjustment on servicing rights increased $976,000 to $1.6 million in the first quarter of 2020 from $589,000 in the first quarter of 2019, primarily due to recent declines in mortgage interest rates.
Noninterest Expense
The tables below show Heartland's noninterest expenses for the three-monththree- and nine-month periods ended March 31,September 30, 2020, and 2019, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | |
| | 2020 | | 2019 | | Change | | % Change |
| Salaries and employee benefits | $ | 50,978 | | | $ | 49,927 | | | $ | 1,051 | | | 2 | % |
| Occupancy | 6,732 | | | 6,594 | | | 138 | | | 2 | |
| Furniture and equipment | 2,500 | | | 2,862 | | | (362) | | | (13) | |
| Professional fees | 12,802 | | | 11,276 | | | 1,526 | | | 14 | |
| | | | | | | |
| Advertising | 928 | | | 2,622 | | | (1,694) | | | (65) | |
| Core deposit and customer relationship intangibles amortization | 2,492 | | | 2,899 | | | (407) | | | (14) | |
| Other real estate and loan collection expenses, net | 335 | | | (89) | | | 424 | | | 476 | |
| (Gain)/loss on sales/valuations of assets, net | 1,763 | | | 356 | | | 1,407 | | | 395 | |
| Acquisition, integration and restructuring costs | 1,146 | | | 1,500 | | | (354) | | | (24) | |
| Partnership investment in tax credit projects | 927 | | | 3,052 | | | (2,125) | | | (70) | |
| Other noninterest expenses | 9,793 | | | 11,968 | | | (2,175) | | | (18) | |
| Total noninterest expenses | $ | 90,396 | | | $ | 92,967 | | | $ | (2,571) | | | (3) | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | Three Months Ended
March 31, | | | | | | Nine Months Ended
September 30, | | |
| | | 2020 | | 2019 | | Change | | % Change | | 2020 | | 2019 | | Change | | % Change |
| Salaries and employee benefits | Salaries and employee benefits | $ | 49,957 | | | $ | 50,285 | | | $ | (328) | | | (1) | % | Salaries and employee benefits | $ | 151,053 | | | $ | 150,107 | | | $ | 946 | | | 1 | % |
| Occupancy | Occupancy | 6,471 | | | 6,607 | | | (136) | | | (2) | | Occupancy | 19,705 | | | 19,627 | | | 78 | | | — | |
| Furniture and equipment | Furniture and equipment | 3,108 | | | 2,692 | | | 416 | | | 15 | | Furniture and equipment | 8,601 | | | 8,690 | | | (89) | | | (1) | |
| Professional fees | Professional fees | 12,473 | | | 10,995 | | | 1,478 | | | 13 | | Professional fees | 38,951 | | | 36,642 | | | 2,309 | | | 6 | |
| | Advertising | Advertising | 2,205 | | | 2,320 | | | (115) | | | (5) | | Advertising | 4,128 | | | 7,551 | | | (3,423) | | | (45) | |
| Core deposit and customer relationship intangibles amortization | Core deposit and customer relationship intangibles amortization | 2,981 | | | 2,869 | | | 112 | | | 4 | | Core deposit and customer relationship intangibles amortization | 8,169 | | | 9,054 | | | (885) | | | (10) | |
| Other real estate and loan collection expenses, net | Other real estate and loan collection expenses, net | 334 | | | 701 | | | (367) | | | (52) | | Other real estate and loan collection expenses, net | 872 | | | 774 | | | 98 | | | 13 | |
| (Gain)/loss on sales/valuations of assets, net | (Gain)/loss on sales/valuations of assets, net | 16 | | | (3,004) | | | 3,020 | | | (101) | | (Gain)/loss on sales/valuations of assets, net | 2,480 | | | (20,934) | | | 23,414 | | | 112 | |
| Acquisition, integration and restructuring costs | Acquisition, integration and restructuring costs | 1,376 | | | 3,614 | | | (2,238) | | | (62) | | Acquisition, integration and restructuring costs | 3,195 | | | 6,043 | | | (2,848) | | | (47) | |
| Partnership investment in tax credit projects | Partnership investment in tax credit projects | 184 | | | 475 | | | (291) | | | (61) | | Partnership investment in tax credit projects | 1,902 | | | 4,992 | | | (3,090) | | | (62) | |
| Other noninterest expenses | Other noninterest expenses | 11,754 | | | 10,676 | | | 1,078 | | | 10 | | Other noninterest expenses | 32,638 | | | 33,749 | | | (1,111) | | | (3) | |
| Total noninterest expenses | Total noninterest expenses | $ | 90,859 | | | $ | 88,230 | | | $ | 2,629 | | | 3 | % | Total noninterest expenses | $ | 271,694 | | | $ | 256,295 | | | $ | 15,399 | | | 6 | % |
|
For the firstthird quarter of 2020, noninterest expenses totaled $90.8$90.4 million compared to $88.2$93.0 million during the firstthird quarter of 2019, an increasea decrease of $2.6 million or 3%. For the nine months ended September 30, 2020, total noninterest expense was $271.7 million, an increase of $15.4 million or 6% from $256.3 million for the nine months ended September 30, 2019.
Notable changes in noninterest expense categories for the threethree- and nine months ended March 31,September 30, 2020 and 2019 are as follows:
Furniture and equipment
Furniture and equipment expenses totaled $3.1 million in first quarter of 2020, which was an increase of $416,000 or 15% from $2.7 million recorded in the first quarter of 2019. Equipment expenses of $321,000 in the first quarter of 2020 were related to purchases to allow employees to work from home due to the COVID-19 pandemic.
Professional Fees
Professional fees increased $1.5 million or 14% to $12.8 million for the firstthird quarter of 2020 totaled $12.5 million compared to $11.0$11.3 million for the same period of 2019. For the nine months ended September 30, 2020, professional fees totaled $39.0 million, which was an increase of $2.3 million or 6% from $36.6 million for the nine months ended September 30, 2019. Included in professional fees for the third quarter of 2020 was $1.6 million of expense for FDIC insurance assessments compared to a benefit of $911,000 in the third quarter of 2019.
Advertising
Advertising expense totaled $928,000 for the quarter ended September 30, 2020 compared to $2.6 million for the same quarter ofin 2019, which was an increasea decrease of $1.5$1.7 million or 13%65%. The increase is primarily attributableFor the nine months ended September 30, 2020 and 2019, advertising expense totaled $4.1 million and $7.6 million, respectively, which was a decrease of $3.4 million or 45%. Heartland has adjusted its advertising strategy in response to changes in business practices due to the amortizationCOVID-19 pandemic, including the reduction of expenses related to the Salesforce and nCino implementation.in-person customer events.
Gain/Loss on Sales/Valuations of Assets, Net
Net losslosses on sales/valuations of assets increased $3.0totaled $1.8 million as losses totaled $16,000 infor the firstthird quarter of 2020 compared to gains of $3.0 million in$356,000 for the firstthird quarter of 2019.2019, which was an increase of $1.4 million. The gains recorded in 2019 wereincrease was primarily attributable to losses and writedowns on fixed assets associated with branch optimization activities.
For the nine months ended September 30, 2020, net losses on sales/valuations of assets totaled $2.5 million compared to net gains on sales/valuation of assets of $20.9 million for the nine months ended September 30, 2019. During the first nine months of 2019, Heartland completed several strategic initiatives that resulted in net gains, which included the sale of the mortgage servicing rights portfolio of Dubuque Bank and Trust Company and several branch sales at Wisconsin Bank & Trust.locations across Heartland's footprint.
Acquisition, integration and restructuring costs
Acquisition, integration and restructuring costs totaled $1.4$1.1 million inand $1.5 million for the firstthird quarter of 2020 and 2019, respectively, which was a decrease of $2.2$354,000 or 24%. For the nine months ended September 30, 2020, acquisition, integration and restructuring costs totaled $3.2 million compared to $6.0 million for the same period of 2019, which was a decrease of $2.8 million or 62% from $3.6 million in the same quarter of 2019.47%. In the first quarter of 2019, Heartland recorded $2.2 million of anticipated lease buyout expense, fixed asset disposals and software discontinuation fees related to the discontinuation of Heartland's legacy mortgage operations and consumer finance business.
Other noninterest expenses
OtherFor the third quarter of 2020, other noninterest expenses totaled $11.8$9.8 million, which was a decrease of $2.2 million or 18% from $12.0 million for the firstsame quarter of 2019. For the nine months ended September 30, 2020, compared to $10.7other noninterest expenses were $32.6 million, for the first quarter of 2019, which was an increasea decrease of $1.1 million or 10%.3% from $33.7 million for the same period of 2019. The increase wasreduction for the three- and nine-month comparisons is primarily attributable to recent acquisitions.reduced travel expenses and customer entertainment activities because meetings have transitioned to virtual formats.
Efficiency Ratio
One of Heartland's top priorities has been to improve its efficiency ratio, on a fully tax-equivalent basis (non-GAAP), with the goal of reducing and maintaining it to below 60%.in the 55-60% range. During the firstthird quarter of 2020, Heartland's efficiency ratio on a fully tax-equivalent basis (non-GAAP) decreased by 311618 basis points to 61.82%54.67% in comparison with 64.93%60.85% for the quarter ended March 31,September 30, 2019. The improvement of the efficiency ratio was primarily attributable to higher fully tax-equivalent net interest income (non-GAAP), which increased $9.3$11.4 million or 9%10% to $113.6$123.9 million for the third quarter of 2020 from $112.5 million for the third quarter of 2019.
For the first nine months of 2020, Heartland's efficiency ratio on a fully-tax equivalent basis (non-GAAP) was 57.28%, which was a decrease of 598 basis points from 63.26% for the first nine months of 2019. The improvement of the efficiency ratio was primarily attributable to higher fully-tax equivalent net interest income (non-GAAP), which increased $38.3 million or 12% to $363.1 million for the first quarternine months of 2020 from $104.4$324.8 million for the first quartersame period of 2019.
Income Taxes
Heartland's effective tax rate was 22.77%22.20% for the firstthird quarter of 2020 compared to 20.88%18.66% for the firstthird quarter of 2019. The following items impacted Heartland's firstthird quarter 2020 and 2019 tax calculations:
•Solar energy tax credits of $76,000 and $314,000 for the first quarter of 2020 and 2019, respectively.$965,000 compared to $2.0 million.
•Federal low-income housing tax credits of $195,000 and $281,000 for the first quarter of 2020 and 2019, respectively.compared to $281,000.
•New markets tax credits of $75,000 duringcompared to $0.
•Tax-exempt interest income as a percentage of pre-tax income of 8.48% compared to 10.08%.
Heartland's effective tax rate was 21.58% for the first quarternine months of 2020 compared to $0 in21.14% for the first quarternine months of 2019. The following items impacted Heartland's tax calculation for the first nine months of 2020 and 2019:
•Solar energy tax credits of $1.8 million compared to $3.2 million.
•Federal low-income housing tax credits of $585,000 compared to $843,000.
•New markets tax credits of $225,000 compared to $0.
•Tax-exempt interest income as a percentage of pre-tax income increased to 16.40% during the first quarter of 202011.84% compared to 13.35% for the first quarter of 2019.10.19%.
•Tax expense of $25,000 in the first quarter of 2020$93,000 compared to a tax benefit of $336,000 in the first quarter of 2019$270,000 resulting from the vesting of restricted stock unit awards. The majority of Heartland's restricted stock unit awards vest in the first quarter of each year.
FINANCIAL CONDITION
Total assets of Heartland were $13.29$15.61 billion at March 31,September 30, 2020, an increase of $84.9 million$2.40 billion or 1%18% since December 31, 2019. Securities represented 27%33% and 26% of total assets at March 31,September 30, 2020, and December 31, 2019, respectively.
Lending Activities
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.
In conjunction with the adoption of ASU 2016-13, Heartland reclassified loan balances to more closely align with FDIC codes. All prior periods shown in this Quarterly Report on Form 10-Q have been adjusted.
Heartland originates commercial and industrial loans and owner occupied commercial real estate loans for a wide variety of business purposes, 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 risks in the commercial and industrial portfolio include the unpredictability of the cash flow of the borrowers and the variability in the value of the collateral securing the loans. Owner occupied commercial real estate loans are dependent upon the cash flow of the borrowers and the collateral value of the real estate.
Non-owner occupied commercial real estate loans provide financing for various non-owner occupied or income producing properties. Real estate construction loans are generally short-term or interim loans that provide financing for acquiring or developing commercial income properties, multi-family projects or single-family residential homes. The collateral that Heartland requires for most of these loans is based upon the discounted market value of the collateral. Non-owner occupied commercial real estate loans are typically dependent, in large part, on sufficient income from the properties securing the loans to cover the operating expenses and debt service. Real estate construction loans involve additional risks because funds are advanced based upon estimates of costs and the estimated value of the completed project. Additionally, real estate construction loans have a greater risk of default in a weaker economy because the source of repayment is reliant on the successful and timely sale of the project. 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.
Agricultural and agricultural real estate 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 and agricultural real estate 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 and agricultural real estate loans is dependent upon the profitable operation or management of the agricultural entity. Loans secured by farm equipment, livestock or crops may not provide an adequate source of repayment because of damage or depreciation. In underwriting agricultural and agricultural real estate 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 work closely with governmental agencies, including the U.S. Small Business Administration and U.S. Department of Agriculture's Rural Development Business and Industry Program Farm Service Agency, to help agricultural customers obtain credit enhancement products, such as loan guarantees, longer-term funding or interest assistance, to reduce risk.
Residential real estate loans are originated for the purchase or refinancing of single family residential properties. Residential real estate loans are dependent upon the borrower's ability to repay the loan and the underlying collateral value. During the
fourth quarter of 2018, Heartland entered into arrangements with third parties to offer residential mortgage loans to customers in many of its markets. In addition, the acquisition in 2018 of First Bank & Trust in Lubbock, Texas, included its wholly owned mortgage subsidiary, PrimeWest Mortgage Corporation. PrimeWest Mortgage Corporation, which was merged into First Bank & Trust in April 2020. First Bank & Trust provides mortgage loans to customers in Texas and has expanded to also serve the mortgage needs of customers in severalmany of Heartland's southwestern markets. PrimeWest Mortgage CorporationFirst Bank & Trust services the loans it sells into the secondary market.
Consumer lending includes motor vehicle, home improvement, home equity and small personal credit lines. Consumer loans typically have shorter terms, lower balances, higher yields and higher risks of default than one-to-four-family residential mortgage loans. Consumer loan collections are dependent on the borrower's continuing financial stability and are therefore more likely to be affected by adverse personal circumstances. Risk is reduced through underwriting criteria, which include credit verification, appraisals, a review of the borrower's financial condition, and personal cash flows. A security interest, with title insurance when necessary, is taken in the underlying real estate.
Total loans held to maturity were $9.10 billion at September 30, 2020, and $8.37 billion at both March 31, 2020, and December 31, 2019, an increase of $6.3$731.7 million or less than 1%9%. The following table shows the changes in loan balances by loan category since December 31, 2019, in thousands:
| | | March 31, 2020 | | December 31, 2019 | | $ Change | | % Change | | September 30, 2020 | | December 31, 2019 | | Change | | % Change |
| Commercial and industrial | Commercial and industrial | $ | 2,550,490 | | | $ | 2,530,809 | | | $ | 19,681 | | | 1 | % | Commercial and industrial | $ | 2,303,646 | | | $ | 2,530,809 | | | $ | (227,163) | | | (9) | % |
| PPP | | PPP | 1,128,035 | | — | | 1,128,035 | | | 100 | |
| Owner occupied commercial real estate | Owner occupied commercial real estate | 1,431,038 | | 1,472,704 | | (41,666) | | | (3) | | Owner occupied commercial real estate | 1,494,902 | | 1,472,704 | | 22,198 | | | 2 | |
| Non-owner occupied commercial real estate | Non-owner occupied commercial real estate | 1,551,787 | | 1,495,877 | | 55,910 | | | 4 | | Non-owner occupied commercial real estate | 1,659,683 | | 1,495,877 | | 163,806 | | | 11 | |
| Real estate construction | Real estate construction | 1,069,700 | | 1,027,081 | | 42,619 | | | 4 | | Real estate construction | 917,765 | | 1,027,081 | | (109,316) | | | (11) | |
| Agricultural and agricultural real estate | Agricultural and agricultural real estate | 550,107 | | 565,837 | | (15,730) | | | (3) | | Agricultural and agricultural real estate | 508,058 | | 565,837 | | (57,779) | | | (10) | |
| Residential mortgage | Residential mortgage | 792,540 | | 832,277 | | (39,737) | | | (5) | | Residential mortgage | 701,899 | | 832,277 | | (130,378) | | | (16) | |
| Consumer | Consumer | 428,574 | | 443,332 | | (14,758) | | | (3) | | Consumer | 385,658 | | 443,332 | | (57,674) | | | (13) | |
| $ | 8,374,236 | | | $ | 8,367,917 | | | $ | 6,319 | | | — | % | |
| Total loans held to maturity | | Total loans held to maturity | $ | 9,099,646 | | | $ | 8,367,917 | | | $ | 731,729 | | | 9 | % |
Total commercial loans, excluding PPP loans, totaled $6.38 billion at September 30, 2020, which was a decrease of $150.5 million or 2% from $6.53 billion at year-end 2019. The decrease in commercial and industrial loan balances was primarily attributable to loan payoffs and paydowns. The increases in owner occupied and non-owner occupied commercial real estate loan balances was primarily the result of real estate construction loans that moved to permanent financing.
Agricultural and agricultural real estate loan balances declined $57.8 million or 10% to $508.1 million at September 30, 2020 from $565.8 million at year-end 2019, which was primarily due to scheduled paydowns.
The decreases in the residential and consumer loan balances were primarily due to the recent declines in residential mortgage interest rates.
The table below presents the composition of the loan portfolio as of March 31,September 30, 2020, and December 31, 2019, in thousands:
| | | March 31, 2020 | | | December 31, 2019 | | | September 30, 2020 | | December 31, 2019 |
| | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
| Loans receivable held to maturity: | Loans receivable held to maturity: | | | | | | | | Loans receivable held to maturity: | | | | | | | |
| Commercial and industrial | Commercial and industrial | $ | 2,550,490 | | | 30.46 | % | | $ | 2,530,809 | | | 30.24 | % | Commercial and industrial | $ | 2,303,646 | | | 25.31 | % | | $ | 2,530,809 | | | 30.24 | % |
| PPP | | PPP | 1,128,035 | | 12.40 | | | — | | — | |
| Owner occupied commercial real estate | Owner occupied commercial real estate | 1,431,038 | | 17.09 | | | 1,472,704 | | 17.60 | | Owner occupied commercial real estate | 1,494,902 | | 16.43 | | | 1,472,704 | | 17.60 | |
| Non-owner occupied commercial real estate | Non-owner occupied commercial real estate | 1,551,787 | | 18.53 | | | 1,495,877 | | 17.88 | | Non-owner occupied commercial real estate | 1,659,683 | | 18.24 | | | 1,495,877 | | 17.88 | |
| Real estate construction | Real estate construction | 1,069,700 | | 12.77 | | | 1,027,081 | | 12.27 | | Real estate construction | 917,765 | | 10.09 | | | 1,027,081 | | 12.27 | |
| Agricultural and agricultural real estate | Agricultural and agricultural real estate | 550,107 | | | 6.57 | | | 565,837 | | | 6.76 | | Agricultural and agricultural real estate | 508,058 | | | 5.58 | | | 565,837 | | | 6.76 | |
| Residential mortgage | Residential mortgage | 792,540 | | | 9.46 | | | 832,277 | | | 9.95 | | Residential mortgage | 701,899 | | | 7.71 | | | 832,277 | | | 9.95 | |
| Consumer | Consumer | 428,574 | | | 5.12 | | | 443,332 | | | 5.30 | | Consumer | 385,658 | | | 4.24 | | | 443,332 | | | 5.30 | |
| Gross loans receivable held to maturity | Gross loans receivable held to maturity | 8,374,236 | | | 100.00 | % | | 8,367,917 | | | 100.00 | % | Gross loans receivable held to maturity | 9,099,646 | | | 100.00 | % | | 8,367,917 | | | 100.00 | % |
| | Allowance for credit losses | Allowance for credit losses | (97,350) | | | (70,395) | | | | Allowance for credit losses | (103,377) | | | | | (70,395) | | | |
| Loans receivable, net | Loans receivable, net | $ | 8,276,886 | | | | | $ | 8,297,522 | | | Loans receivable, net | $ | 8,996,269 | | | | | $ | 8,297,522 | | |
Allowance for Credit Losses
On January 1, 2020, Heartland adopted ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)," which replaces the incurred loss methodology with a current expected credit loss ("CECL") methodology. Additionally, CECL required an allowance for unfunded commitments to be calculated using a current expected credit loss methodology. Heartland's CECL methodology is comprised of three parts: a quantitative calculation, a qualitative calculation, and an economic forecasting component.
The process utilized by Heartland to determine the appropriateness of the allowance for credit losses is considered a critical accounting practice for Heartland and has been updated to be in accordance with CECL as of January 1, 2020. All prior periods are presented in accordance with prior GAAP. The allowance for credit losses represents management's estimate of lifetime losses in the existing loan portfolio. For additional details on the specific factors considered in determining the allowance for credit losses, refer to the critical accounting policies section of Heartland's Annual Report on Form 10-K for the year ended December 31, 2019 and Note 1, "Basis of Presentation," of the consolidated financial statements included in this Quarterly Report on Form 10-Q.
The table below presents the changes in the allowance for credit losses for loans during the three-monththree- and nine-month periods ended March 31,September 30, 2020 and 2019, in thousands:
| | | | | | | | | | | |
| Three Months Ended
March 31, | | |
| 2020 | | 2019 |
| Balance at beginning of period | $ | 70,395 | | | $ | 61,963 | |
| Impact of ASU 2016-13 adoption | 12,071 | | | — | |
| Provision for credit losses | 19,865 | | | 1,635 | |
| Recoveries on loans previously charged off | 1,320 | | | 991 | |
| Charge-offs on loans | (6,301) | | | (1,950) | |
| Balance at end of period | $ | 97,350 | | | $ | 62,639 | |
| | | |
| Allowance for credit losses on loans as a percent of loans | 1.16 | % | | 0.85 | % |
| Annualized ratio of net charge offs to average loans | 0.24 | % | | 0.05 | % |
Heartland's allowance for credit losses for loans totaled $82.5 million after adoption of CECL on January 1, 2020, which was an increase of $12.1 million since year-end 2019. Heartland recorded provision for credit losses for loans of $19.9 million in the first quarter of 2020 compared to $1.6 million in the first quarter of 2019. The allowance for credit losses for loans totaled $97.4 million and $70.4 million at March 31, 2020, and December 31, 2019, respectively.
| | | | | | | | | | | |
| Three Months Ended
September 30, |
| 2020 | | 2019 |
| Balance at beginning of period | $ | 119,937 | | | $ | 63,850 | |
| | | |
| Provision for credit losses | 4,741 | | | 5,201 | |
| Recoveries on loans previously charged off | 452 | | | 2,013 | |
| Charge-offs on loans | (21,753) | | | (4,842) | |
| Balance at end of period | $ | 103,377 | | | $ | 66,222 | |
| Allowance for credit losses for loans as a percent of loans | 1.14 | % | | 0.83 | % |
| Annualized ratio of net charge offs to average loans | 0.92 | % | | 0.14 | % |
| | | |
| | | | | | | | | | | |
| Nine Months Ended
September 30, |
| 2020 | | 2019 |
| Balance at beginning of period | $ | 70,395 | | | $ | 61,963 | |
| Impact of ASU 2016-13 adoption on January 1, 2020 | 12,071 | | | — | |
| Adjusted balance at January 1, 2020 | 82,466 | | | 61,963 | |
| Provision for credit losses | 49,613 | | | 11,754 | |
| Recoveries on loans previously charged off | 2,916 | | | 4,077 | |
| Charge-offs on loans | (31,618) | | | (11,572) | |
| Balance at end of period | $ | 103,377 | | | $ | 66,222 | |
| | | |
| Allowance for credit losses for loans as a percent of loans | 1.14 | % | | 0.83 | % |
| Annualized ratio of net charge offs to average loans | 0.43 | % | | 0.13 | % |
The allowance for credit losses for loans totaled $103.4 million and $70.4 million at September 30, 2020, and December 31, 2019, respectively. The allowance for credit losses for loans at March 31,September 30, 2020, was 1.16%1.14% of loans compared to 0.84% of loans at December 31, 2019. The following items have impacted Heartland's allowance for credit losses for loans for the nine months ended September 30, 2020:
•The allowance for credit losses for loans increased $12.1 million after the adoption of CECL on January 1, 2020.
•Provision expense for the nine months ended September 30, 2020, totaled $49.6 million.
•Net charge offs for the first quarternine months of 2020 totaled $5.0$28.7 million compared to $959,000$7.5 million for the first quarternine months of 2019, which was a $4.0$21.2 million increase. The increase was primarily attributable
During the third quarter of 2020, Heartland charged off $13.9 million on individually assessed loans with principal balances of $17.1 million that had been specifically reserved in the second quarter of 2020 in addition to a $3.2 millionthe charge off onof one $5.9 million loan that did not have a commercial and industrial loan for which a full reserve had been previously established.recorded specific reserve. Net charge offs could remain elevated in future periods if customers’ ability to repay loans continues to be adversely impacted by prolonged economic disruptions caused by the COVID-19 pandemic.
The following table shows, in thousands, the changes in Heartland's allowance for unfunded commitments for the three-monththree- and nine-month periods ended March 31,September 30, 2020 and 2019:
| | | Three Months Ended
March 31, | | | Three Months Ended
September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Balance at beginning of period(1) | Balance at beginning of period(1) | $ | 248 | | | $ | — | | Balance at beginning of period(1) | 17,392 | | | — | |
| Impact of ASU 2016-13 adoption | 13,604 | | | — | | |
| Provision for credit losses | | Provision for credit losses | (3,062) | | | — | |
| Balance at end of period | | Balance at end of period | $ | 14,330 | | | $ | — | |
| | | | Nine Months Ended
September 30, |
| | | 2020 | | 2019 |
Balance at beginning of period(1) | | Balance at beginning of period(1) | $ | 248 | | | $ | — | |
| Impact of ASU 2016-13 adoption on January 1, 2020 | | Impact of ASU 2016-13 adoption on January 1, 2020 | 13,604 | | | — | |
| Adjusted balance at January 1, 2020 | | Adjusted balance at January 1, 2020 | 13,852 | | | — | |
| Provision for credit losses | Provision for credit losses | 1,616 | | | — | | Provision for credit losses | 478 | | | — | |
| Balance at end of period | Balance at end of period | $ | 15,468 | | | $ | — | | Balance at end of period | $ | 14,330 | | | $ | — | |
| (1) Prior to the adoption of ASU 2016-13, the allowance for unfunded commitments was immaterial, and therefore prior periods have not been shown in this table. | (1) Prior to the adoption of ASU 2016-13, the allowance for unfunded commitments was immaterial, and therefore prior periods have not been shown in this table. | | (1) Prior to the adoption of ASU 2016-13, the allowance for unfunded commitments was immaterial, and therefore prior periods have not been shown in this table. |
Heartland's allowance for unfunded commitments totaled $13.9 million after the adoption of CECL on January 1, 2020. Prior to January 1, 2020, the allowance for unfunded commitments was immaterial. Heartland recorded $1.6 million$478,000 of provision for credit losses related to unfunded loan commitments in the first quarternine months of 2020. At March 31,September 30, 2020, the allowance for unfunded commitments was $15.5$14.3 million, and Heartland had $2.78$2.98 billion of unfunded loan commitments.
The total allowance for lending related credit losses was $112.8$117.7 million at March 31,September 30, 2020, which was 1.35%1.29% of loans as of March 31,September 30, 2020. The following table shows, in thousands, the components of Heartland's allowance for lending related credit losses as of March 31,September 30, 2020, January 1, 2020, and December 31, 2019:
| | | March 31, 2020 | | | January 1, 2020(1) | | | December 31, 2019(2) | | | September 30, 2020 | | January 1, 2020(1) | | December 31, 2019(2) |
| | Amount | | Percentage of
Allowance | | Amount | | Percentage of
Allowance | | Amount | | Percentage of
Allowance | | Amount | | Percentage of
Allowance | | Amount | | Percentage of
Allowance | | Amount | | Percentage of
Allowance |
| Quantitative | Quantitative | $ | 77,447 | | | 68.65 | % | | $ | 82,829 | | | 85.99 | % | | $ | 41,691 | | | 59.22 | % | Quantitative | $ | 78,870 | | | 67.00 | % | | $ | 82,829 | | | 85.99 | % | | $ | 41,694 | | | 59.23 | % |
| Qualitative | Qualitative | 26,027 | | | 23.07 | | | 11,468 | | | 11.91 | | | 28,704 | | | 40.78 | | Qualitative | 24,623 | | | 20.92 | | | 11,468 | | | 11.91 | | | 28,701 | | | 40.77 | |
| Economic Forecast | Economic Forecast | 9,344 | | | 8.28 | | | 2,021 | | | 2.10 | | | — | | | — | | Economic Forecast | 14,214 | | | 12.08 | | | 2,021 | | | 2.10 | | | — | | | — | |
| Total | Total | $ | 112,818 | | | 100.00 | % | | $ | 96,318 | | | 100.00 | % | | $ | 70,395 | | | 100.00 | % | Total | $ | 117,707 | | | 100.00 | % | | $ | 96,318 | | | 100.00 | % | | $ | 70,395 | | | 100.00 | % |
| | (1) January 1, 2020 is included to show the impact of the adoption of ASU 2016-13 on the components of the allowance for lending related credit losses. | (1) January 1, 2020 is included to show the impact of the adoption of ASU 2016-13 on the components of the allowance for lending related credit losses. | | (1) January 1, 2020 is included to show the impact of the adoption of ASU 2016-13 on the components of the allowance for lending related credit losses. |
| (2) The allowance for unfunded commitments was immaterial prior to the adoption of ASU 2016-13 and therefore not included in prior periods. | (2) The allowance for unfunded commitments was immaterial prior to the adoption of ASU 2016-13 and therefore not included in prior periods. | | (2) The allowance for unfunded commitments was immaterial prior to the adoption of ASU 2016-13 and therefore not included in prior periods. |
Heartland's quantitative allowance totaled $77.4 million or 69% of Heartland's total allowance for lending related credit losses at March 31, 2020 compared to $82.8 million or 86% of the total allowance for lending related credit losses on January 1, 2020, and $41.7 million or 59% of the allowance for loan losses at December 31, 2019. The increase in the quantitative component on January 1, 2020, was primarily attributable to the addition of $1.80 billion of previously acquired loans to the allowance calculation.
The quantitative allowance of Heartland's total allowance for lending related credit losses decreased $4.0 million to $77.4$78.9 million at March 31,September 30, 2020 compared to $82.8 million at January 1, 2020. The decrease in the quantitative portion was primarily due to the decrease of individually assessed loans, which declined to $48.8 million at March 31, 2020 from $67.4 million at January 1, 2020. Theallowance includes an allowance for credit losses on individually assessed loans totaled $6.3of $8.4 million at March 31,September 30, 2020 compared to $11.4 million at January 1, 2020, which was a decrease of $5.1$2.9 million or 44%26%.
Heartland's qualitative allowance totaled $26.0 million or 23% of Heartland's total allowance for lending related credit losses at March 31, 2020 compared to $11.5 million or 12% of the total allowance for lending related credit losses on January 1, 2020, and $28.7 million or 41% of the allowance for loan losses at December 31, 2019. The2019, which was the result of the change in methodology to an expected loss model from an incurred loss model resulted in the reduction of the qualitative allowance of $17.2 million or 60% to $11.5 million at January 1, 2020, compared to $28.7 million at December 31, 2019.model.
The qualitative allowance component of Heartland’s total allowance for lending related credit losses increased to $26.0$24.6 million or 23%21% of the total allowance at March 31September 30, 2020, compared to $11.5 million or 12% on January 1, 2020. As described in Note 1, "Basis of Presentation," of the consolidated financial statements included in this Quarterly Report on Form 10-Q, in determining the appropriate level of this qualitative component, management assesses several risk factors including an overall assessment of "other external factors." At the end of the first quarter of 2020, in making its assessment, management increased the level of other external factors risk from the initial day 1 (January 1, 2020) assessment of moderate to high.high, which remained high at September 30, 2020. This change reflectedlevel reflects the uncertainty of both the economic forecasting and quantitative allowance component results given the high level of market and economic volatility that have existed at the end of the quarter due to the COVID-19 pandemic. While several of the qualitative factors increased, during the quarter, the change in the other external factors was the primary driver of the overall increase in the qualitative allowance for the quarternine months ended March 31,September 30, 2020.
Economic forecasting was not required prior to January 1, 2020. Heartland has access to various third-party economic forecast scenarios provided by Moody's, which are updated quarterly in Heartland's methodology. Heartland’s initial January 1, 2020 allowance calculation utilized a two-year reasonable and supportable forecast period which resulted in an economic forecasting allowance of $2.0 million or 2% of the total allowance for lending related credit losses.
At March 31,September 30, 2020, Heartland utilized Moody's March 27,September 8, 2020, baseline forecast scenario, which was the most currently available forecast and included the potential impact of COVID-19. Because ofAt March 31, 2020, due to the economic deterioration and uncertainty associated with COVID-19, the reasonable and supportable forecast period was reduced to one year. At September 30, 2020, Heartland continued to use a one year forecast period, which resulted in an allowance of $9.3$14.2 million or 8%12% of the total allowance for lending related credit losses at March 31,September 30, 2020.
Credit Quality and Nonperforming Assets
Heartland's 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 4 of Heartland’s consolidated financial statements in this Quarterly Report on Form 10-Q.
Heartland's nonpass loans totaled 6.4%8.7% of total loans as of March 31,September 30, 2020 compared to 6.7%6.6% of total loans as of December 31, 2019. As of March 31,September 30, 2020, Heartland's nonpass loans consisted of approximately 45%53% watch loans and 55%47% substandard loans. The percent of nonpass loans on nonaccrual status as of March 31,September 30, 2020, was 15%10%. Included in Heartland's nonpass loans at September 30, 2020 were $64.9 million of nonpass PPP loans as a result of risk ratings on related credits. Heartland's risk rating methodology assigns a risk rating to the whole lending relationship. Heartland has no allowance recorded related to the PPP loans because of the 100% SBA guarantee.
As of December 31, 2019, Heartland's nonpass loans were comprised of approximately 60% watch loans and 40% substandard loans. The percent of nonpass loans on nonaccrual status as of December 31, 2019, was 14%. Loans delinquent 30-89 days as a percent of total loans was 0.38%0.17% at March 31,September 30, 2020, in comparison with 0.33% at December 31, 2019.
The table below presents the amounts of nonperforming loans and other nonperforming assets on the dates indicated, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, | | | | December 31, | | |
| | 2020 | | 2019 | | 2019 | | 2018 |
| Nonaccrual loans | $ | 79,280 | | | $ | 77,294 | | | $ | 76,548 | | | $ | 71,943 | |
| Loans contractually past due 90 days or more | — | | | 1,706 | | | 4,105 | | | 726 | |
| Total nonperforming loans | 79,280 | | | 79,000 | | | 80,653 | | | 72,669 | |
| Other real estate | 6,074 | | | 5,391 | | | 6,914 | | | 6,153 | |
| Other repossessed assets | 17 | | | 8 | | | 11 | | | 459 | |
| Total nonperforming assets | $ | 85,371 | | | $ | 84,399 | | | $ | 87,578 | | | $ | 79,281 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Performing troubled debt restructured loans(1) | $ | 2,858 | | | $ | 3,460 | | | $ | 3,794 | | | $ | 4,026 | |
| Nonperforming loans to total loans | 0.95 | % | | 1.08 | % | | 0.96 | % | | 0.98 | % |
| Nonperforming assets to total loans plus repossessed property | 1.02 | % | | 1.15 | % | | 1.05 | % | | 1.07 | % |
| Nonperforming assets to total assets | 0.64 | % | | 0.75 | % | | 0.66 | % | | 0.69 | % |
| | | | | | | |
| (1) Represents accruing troubled debt restructured loans performing according to their restructured terms. | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, | | December 31, |
| | 2020 | | 2019 | | 2019 | | 2018 |
| Nonaccrual loans | $ | 79,040 | | | $ | 72,208 | | | $ | 76,548 | | | $ | 71,943 | |
| Loans contractually past due 90 days or more | 1,681 | | | 40 | | | 4,105 | | | 726 | |
| Total nonperforming loans | 80,721 | | | 72,248 | | | 80,653 | | | 72,669 | |
| Other real estate | 5,050 | | | 6,425 | | | 6,914 | | | 6,153 | |
| Other repossessed assets | 130 | | | 13 | | | 11 | | | 459 | |
| Total nonperforming assets | $ | 85,901 | | | $ | 78,686 | | | $ | 87,578 | | | $ | 79,281 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Performing troubled debt restructured loans(1) | $ | 11,818 | | | $ | 3,199 | | | $ | 3,794 | | | $ | 4,026 | |
| Nonperforming loans to total loans | 0.89 | % | | 0.91 | % | | 0.96 | % | | 0.98 | % |
| Nonperforming assets to total loans plus repossessed property | 0.94 | % | | 0.99 | % | | 1.05 | % | | 1.07 | % |
| Nonperforming assets to total assets | 0.55 | % | | 0.63 | % | | 0.66 | % | | 0.69 | % |
| | | | | | | |
| (1) Represents accruing troubled debt restructured loans performing according to their restructured terms. |
The performing troubled debt restructured loans above do not include any loan modifications initially made under COVID-19 modification programs. Refer to the "Overview" section of Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, for further information on these modifications.
The schedules below summarize the changes in Heartland's nonperforming assets during the first three months ofthree- and nine-month periods ended September 30, 2020, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| Nonperforming
Loans | | Other
Real Estate
Owned | | Other
Repossessed
Assets | | Total
Nonperforming
Assets |
| December 31, 2019 | $ | 80,653 | | | $ | 6,914 | | | $ | 11 | | | $ | 87,578 | |
| Loan foreclosures | (251) | | | 245 | | | 6 | | | — | |
| Net loan charge-offs | (4,981) | | | — | | | — | | | (4,981) | |
| Acquired nonperforming assets | — | | | — | | | — | | | — | |
| New nonperforming loans | 15,796 | | | — | | | — | | | 15,796 | |
Reduction of nonperforming loans(1) | (11,937) | | | — | | | — | | | (11,937) | |
| OREO/Repossessed assets sales proceeds | — | | | (1,019) | | | — | | | (1,019) | |
| OREO/Repossessed assets writedowns, net | — | | | (66) | | | — | | | (66) | |
| Net activity at Citizens Finance Co. | — | | | — | | | — | | | — | |
| March 31, 2020 | $ | 79,280 | | | $ | 6,074 | | | $ | 17 | | | $ | 85,371 | |
| (1) Includes principal reductions and transfers to performing status. | | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nonperforming
Loans | | Other
Real Estate
Owned | | Other
Repossessed
Assets | | Total
Nonperforming
Assets |
| June 30, 2020 | $ | 92,969 | | | $ | 5,539 | | | $ | 29 | | | $ | 98,537 | |
| Loan foreclosures | (787) | | | 651 | | | 136 | | | — | |
| Net loan charge-offs | (21,301) | | | — | | | — | | | (21,301) | |
| | | | | | | |
| New nonperforming loans | 11,834 | | | — | | | — | | | 11,834 | |
Reduction of nonperforming loans(1) | (1,994) | | | — | | | — | | | (1,994) | |
| OREO/Repossessed assets sales proceeds | — | | | (746) | | | (30) | | | (776) | |
| OREO/Repossessed assets writedowns, net | — | | | (394) | | | (5) | | | (399) | |
| | | | | | | |
| September 30, 2020 | $ | 80,721 | | | $ | 5,050 | | | $ | 130 | | | $ | 85,901 | |
| (1) Includes principal reductions and transfers to performing status. |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nonperforming
Loans | | Other
Real Estate
Owned | | Other
Repossessed
Assets | | Total
Nonperforming
Assets |
| December 31, 2019 | $ | 80,653 | | | $ | 6,914 | | | $ | 11 | | | $ | 87,578 | |
| Loan foreclosures | (1,875) | | | 1,706 | | | 169 | | | — | |
| Net loan charge-offs | (28,702) | | | — | | | — | | | (28,702) | |
| | | | | | | |
| New nonperforming loans | 54,487 | | | — | | | — | | | 54,487 | |
Reduction of nonperforming loans(1) | (23,842) | | | — | | | — | | | (23,842) | |
| OREO/Repossessed assets sales proceeds | — | | | (2,524) | | | (35) | | | (2,559) | |
| OREO/Repossessed assets writedowns, net | — | | | (1,046) | | | (15) | | | (1,061) | |
| | | | | | | |
| September 30, 2020 | $ | 80,721 | | | $ | 5,050 | | | $ | 130 | | | $ | 85,901 | |
| | | | | | | |
| (1) Includes principal reductions and transfers to performing status. |
Total nonperforming assets decreased $1.7 million or 2% to $85.9 million or 0.55% of total assets at September 30, 2020, compared to $87.6 million or 0.66% of total assets at December 31, 2019. Nonperforming loans were $79.3 million or 0.95% of total loans at March 31, 2020, compared to $80.7 million orat both September 30, 2020, and December 31, 2019, which represented 0.89% and 0.96% of total loans at September 30, 2020, and December 31, 2019.2019, respectively. At March 31,September 30, 2020, approximately $39.8$40.1 million or 50% of Heartland's nonperforming loans had individual loan balances exceeding $1.0 million and represented loans to thirteen borrowers. The portion of Heartland's nonperforming nonresidential real estate loans covered by government guarantees totaled $17.9$15.2 million at March 31,September 30, 2020, compared to $18.1 million at December 31, 2019.
Heartland expectsCOVID-19 payment deferral and loan modification programs could delay the recognition of net charge-offs, delinquencies and nonaccrual status for loans that nonperforming assets and delinquent loans will increase through 2020 as customers' ability to repay is adversely impacted by economic disruptions caused by COVID-19.would have otherwise moved into past due or nonaccrual status.
Securities
The composition of Heartland's securities portfolio is managed to maximize the return on the portfolio while considering the impact it has on Heartland's asset/liability position and liquidity needs. Securities represented 27%33% and 26% of total assets at March 31,September 30, 2020, and December 31, 2019, respectively. Total securities carried at fair value as of March 31,September 30, 2020, were $3.49$4.95 billion, an increase of $175.8 million$1.64 billion or 5%49% from $3.31 billion at December 31, 2019.
The table below presents the composition of the securities portfolio, including securities carried at fair value, held to maturity securities, net of allowance for credit losses, and other, by major category, as of March 31,September 30, 2020, and December 31, 2019, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2020 | | | | December 31, 2019 | | |
| | Amount | | Percent | | Amount | | Percent |
| U.S. government corporations and agencies | $ | 9,916 | | | 0.27 | % | | $ | 9,893 | | | 0.29 | % |
| Mortgage and asset-backed securities | 2,520,004 | | | 69.70 | | | 2,577,278 | | | 75.02 | |
| Obligation of states and political subdivisions | 1,032,316 | | | 28.55 | | | 798,514 | | | 23.24 | |
| | | | | | | |
| Equity securities | 18,260 | | | 0.50 | | | 18,435 | | | 0.54 | |
| Other securities | 35,370 | | | 0.98 | | | 31,321 | | | 0.91 | |
| Total securities | $ | 3,615,866 | | | 100.00 | % | | $ | 3,435,441 | | | 100.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| | Amount | | Percent | | Amount | | Percent |
| U.S. government corporations and agencies | $ | 3,272 | | | 0.06 | % | | $ | 9,893 | | | 0.29 | % |
| Mortgage and asset-backed securities | 3,742,508 | | | 73.74 | | | 2,577,278 | | | 75.02 | |
| Obligation of states and political subdivisions | 1,274,049 | | | 25.10 | | | 798,514 | | | 23.24 | |
| | | | | | | |
| Equity securities | 19,569 | | | 0.39 | | | 18,435 | | | 0.54 | |
| Other securities | 35,940 | | | 0.71 | | | 31,321 | | | 0.91 | |
| Total securities | $ | 5,075,338 | | | 100.00 | % | | $ | 3,435,441 | | | 100.00 | % |
The percentage of Heartland's securities portfolio comprised of mortgage and asset-backed securities was 70%74% at March 31,September 30, 2020, compared to 75% at December 31, 2019. Heartland's securities portfolio had an expected modified duration of 5.845.64 years as of March 31,September 30, 2020, compared to 6.17 years as of year-end 2019.
At March 31,September 30, 2020, Heartland had $35.4$35.9 million of other securities, including capital stock in each Federal Home Loan Bank ("FHLB") of which each of its bank subsidiaries is a member. All of these securities were classified as other securities held at cost.
Deposits
Total deposits were $11.17$12.77 billion as of March 31,September 30, 2020, compared to $11.04 billion at December 31, 2019, an increase of $129.7 million$1.72 billion or 1%16%. Growth in non-time deposits during the first nine months of 2020 was positively impacted by federal government stimulus payments and other COVID-19 relief programs.
The following table shows the changes in deposit balances by deposit type since year-end 2019, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 | | $ Change | | % Change |
| Demand deposits | $ | 3,696,974 | | | $ | 3,543,863 | | | $ | 153,111 | | | 4 | % |
| Savings deposits | 6,366,610 | | | 6,307,425 | | | 59,185 | | | 1 | |
| Time deposits | 1,110,441 | | | 1,193,043 | | | (82,602) | | | (7) | |
| $ | 11,174,025 | | | $ | 11,044,331 | | | $ | 129,694 | | | 1 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 | | Change | | % Change |
| Demand deposits | $ | 5,022,567 | | | $ | 3,543,863 | | | $ | 1,478,704 | | | 42 | % |
| Savings deposits | 6,742,151 | | | 6,307,425 | | | 434,726 | | | 7 | |
| Time deposits | 1,002,392 | | | 1,193,043 | | | (190,651) | | | (16) | |
| $ | 12,767,110 | | | $ | 11,044,331 | | | $ | 1,722,779 | | | 16 | % |
The table below presents the composition of Heartland's deposits by category as of March 31,September 30, 2020, and December 31, 2019, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2020 | | | | December 31, 2019 | | |
| Amount | | Percent | | Amount | | Percent |
| Demand | $ | 3,696,974 | | | 33.09 | % | | $ | 3,543,863 | | | 32.09 | % |
| Savings | 6,366,610 | | | 56.97 | | | 6,307,425 | | | 57.11 | |
| Time | 1,110,441 | | | 9.94 | | | 1,193,043 | | | 10.80 | |
| Total | $ | 11,174,025 | | | 100.00 | % | | $ | 11,044,331 | | | 100.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| Amount | | Percent | | Amount | | Percent |
| Demand | $ | 5,022,567 | | | 39.34 | % | | $ | 3,543,863 | | | 32.09 | % |
| Savings | 6,742,151 | | | 52.81 | | | 6,307,425 | | | 57.11 | |
| Time | 1,002,392 | | | 7.85 | | | 1,193,043 | | | 10.80 | |
| Total | $ | 12,767,110 | | | 100.00 | % | | $ | 11,044,331 | | | 100.00 | % |
Short-Term Borrowings
Short-term borrowings, which Heartland defines as borrowings with an original maturity of one year or less, were as follows as of March 31,September 30, 2020, and December 31, 2019, in thousands:
| | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
| Securities sold under agreement to repurchase | $ | 51,910 | | | $ | 84,486 | |
| Federal funds purchased | 2,250 | | | 2,450 | |
| Advances from the FHLB | 55,000 | | | 81,198 | |
| | | |
| Other short-term borrowings | 12,282 | | | 14,492 | |
| Total | $ | 121,442 | | | $ | 182,626 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 | | Change | | % Change |
| Securities sold under agreement to repurchase | $ | 88,685 | | | $ | 84,486 | | | $ | 4,199 | | | 5 | % |
| Federal funds purchased | 1,500 | | | 2,450 | | | (950) | | | (39) | |
| Advances from the FHLB | — | | | 81,198 | | | (81,198) | | | (100) | |
| Advances from the federal discount window | 200,000 | | | — | | | 200,000 | | | 100 | |
| Other short-term borrowings | 16,521 | | | 14,492 | | | 2,029 | | | 14 | |
| Total | $ | 306,706 | | | $ | 182,626 | | | $ | 124,080 | | | 68 | % |
Short-term borrowings generally include federal funds purchased, securities sold under agreements to repurchase, short-term FHLB advances and discount window borrowings from the Federal Reserve Bank. These funding alternatives are utilized in varying degrees depending on their pricing and availability. All of Heartland's bank subsidiaries own FHLB stock in one of the Chicago, Dallas, Des Moines, San Francisco or Topeka FHLBs, enabling them to borrow funds from their respective FHLB for short-term or long-term purposes under a variety of programs. The amount of short-term borrowings of Heartland was $121.4$306.7 million at March 31,September 30, 2020, compared to $182.6 million at year-end 2019, a decreasean increase of $61.2$124.1 million or 34%68%.
All of the Heartland bank subsidiaries provide retail repurchase agreements to their customers as a cash management tool, which sweep excess funds from demand deposit accounts into these agreements. 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 $51.9$88.7 million at March 31,September 30, 2020, compared to $84.5 million at December 31, 2019, a decreasean increase of $32.6$4.2 million or 39%5%.
At September 30, 2020, Heartland had $200.0 million of short-term borrowings outstanding at the federal discount window compared to $0 at December 31, 2019. Heartland used short-term borrowings in the third quarter of 2020 to purchase securities in anticipation of expected cash flow from PPP loan forgiveness, which is expected to occur over the next several quarters.
Heartland renewed its $30.0 million revolving credit line agreement with an unaffiliated bank on June 14, 2019.2020. This revolving credit line agreement, which has $45.0 million of borrowing capacity, is included in short-term borrowings, and the primary purpose of this credit line agreement is to provide liquidity to Heartland. Heartland had no advances on this line during the first threenine months of 2020, and the outstanding balance was $0 at both March 31,September 30, 2020, and December 31, 2019.
Other Borrowings
The outstanding balances of other borrowings, which Heartland defines as borrowings with an original maturity date of more than one year, are shown in the table below, net of discount and issuance costs amortization as of March 31,September 30, 2020, and December 31, 2019, in thousands:
| | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
| Advances from the FHLB | $ | 2,806 | | | $ | 2,835 | |
| | | |
| Trust preferred securities | 145,588 | | | 145,343 | |
| | | |
| Note payable to unaffiliated bank | 49,667 | | | 51,417 | |
| Contracts payable for purchase of real estate and other assets | 3,768 | | | 1,892 | |
| Subordinated notes | 74,321 | | | 74,286 | |
| | | |
| Total | $ | 276,150 | | | $ | 275,773 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 | | Change | | % Change |
| Advances from the FHLB | $ | 1,047 | | | $ | 2,835 | | | $ | (1,788) | | | (63) | % |
| | | | | | | |
| Trust preferred securities | 146,078 | | | 145,343 | | | 735 | | | 1 | |
| | | | | | | |
| Note payable to unaffiliated bank | 46,167 | | | 51,417 | | | (5,250) | | | (10) | |
| Contracts payable for purchase of real estate and other assets | 3,750 | | | 1,892 | | | 1,858 | | | 98 | |
| Subordinated notes | 74,393 | | | 74,286 | | | 107 | | | — | |
| Paycheck Protection Program Liquidity Fund | 252,610 | | | — | | | 252,610 | | | 100 | |
| Total | $ | 524,045 | | | $ | 275,773 | | | $ | 248,272 | | | 90 | % |
As of March 31,September 30, 2020, the amount of other borrowings was $276.2$524.0 million, an increase of $377,000$248.3 million or less than 1%90% since year-end 2019.
Each of Heartland's subsidiary banks has been approved by their respective Federal Reserve Bank for the Paycheck Protection Program Liquidity Fund ("PPPLF"), and as of September 30, 2020, $252.6 million was outstanding. Heartland anticipates limited additional utilization of the PPPLF through the end of 2020.
Heartland has a non-revolving credit facility with an unaffiliated bank, which provides a borrowing capacity of up to $70.0$55.0 million. At March 31,September 30, 2020, $49.7$46.2 million was outstanding on this non-revolving credit line compared to $51.4 million outstanding at December 31, 2019. At March 31,September 30, 2020, Heartland had $14.8$6.5 million available on this non-revolving credit facility, of which no balance was drawn.
A schedule of Heartland's trust preferred securities outstanding excluding deferred issuance costs as of March 31,September 30, 2020, is as follows, in thousands:
| | | Amount
Issued | | Issuance
Date | | Interest
Rate | | Interest Rate as of 3/31/20(1) | | Maturity
Date | | Callable
Date | | Amount
Issued | | Issuance
Date | | Interest
Rate | | Interest Rate as of 9/30/2020(1) | | | Maturity
Date | | Callable
Date |
| Heartland Financial Statutory Trust IV | Heartland Financial Statutory Trust IV | | $ | 10,310 | | | 03/17/2004 | | 2.75% over LIBOR | | 3.59% | (2) | | 03/17/2034 | | 06/17/2020 | Heartland Financial Statutory Trust IV | $ | 10,310 | | | 03/17/2004 | | 2.75% over LIBOR | | 3.00% | (2) | | 03/17/2034 | | 12/17/2020 |
| Heartland Financial Statutory Trust V | Heartland Financial Statutory Trust V | | 20,619 | | | 01/27/2006 | | 1.33% over LIBOR | | 3.16% | | | 04/07/2036 | | 07/07/2020 | Heartland Financial Statutory Trust V | 20,619 | | | 01/27/2006 | | 1.33% over LIBOR | | 1.61% | | 04/07/2036 | | 01/07/2021 |
| Heartland Financial Statutory Trust VI | Heartland Financial Statutory Trust VI | 20,619 | | | 06/21/2007 | | 1.48% over LIBOR | | 2.22% | (3) | | 09/15/2037 | | 06/15/2020 | Heartland Financial Statutory Trust VI | 20,619 | | | 06/21/2007 | | 1.48% over LIBOR | | 1.73% | (3) | | 09/15/2037 | | 12/15/2020 |
| Heartland Financial Statutory Trust VII | Heartland Financial Statutory Trust VII | | 18,042 | | | 06/26/2007 | | 1.48% over LIBOR | | 3.06% | (4) | | 09/01/2037 | | 06/01/2020 | Heartland Financial Statutory Trust VII | 18,042 | | | 06/26/2007 | | 1.48% over LIBOR | | 1.72% | (4) | | 09/01/2037 | | 12/01/2020 |
| Morrill Statutory Trust I | Morrill Statutory Trust I | | 9,111 | | | 12/19/2002 | | 3.25% over LIBOR | | 4.48% | | 12/26/2032 | | 06/26/2020 | Morrill Statutory Trust I | 9,158 | | | 12/19/2002 | | 3.25% over LIBOR | | 3.48% | | 12/26/2032 | | 12/26/2020 |
| Morrill Statutory Trust II | Morrill Statutory Trust II | | 8,781 | | | 12/17/2003 | | 2.85% over LIBOR | | 3.69% | | 12/17/2033 | | 06/17/2020 | Morrill Statutory Trust II | 8,837 | | | 12/17/2003 | | 2.85% over LIBOR | | 3.10% | | 12/17/2033 | | 12/17/2020 |
| Sheboygan Statutory Trust I | Sheboygan Statutory Trust I | | 6,550 | | | 09/17/2003 | | 2.95% over LIBOR | | 3.79% | | 09/17/2033 | | 06/17/2020 | Sheboygan Statutory Trust I | 6,593 | | | 09/17/2003 | | 2.95% over LIBOR | | 3.20% | | 09/17/2033 | | 12/17/2020 |
| CBNM Capital Trust I | CBNM Capital Trust I | | 4,421 | | | 09/10/2004 | | 3.25% over LIBOR | | 3.99% | | 12/15/2034 | | 06/15/2020 | CBNM Capital Trust I | 4,446 | | | 09/10/2004 | | 3.25% over LIBOR | | 3.50% | | 12/15/2034 | | 12/15/2020 |
| Citywide Capital Trust III | Citywide Capital Trust III | | 6,452 | | | 12/19/2003 | | 2.80% over LIBOR | | 4.57% | | 12/19/2033 | | 07/23/2020 | Citywide Capital Trust III | 6,480 | | | 12/19/2003 | | 2.80% over LIBOR | | 3.07% | | 12/19/2033 | | 01/23/2021 |
| Citywide Capital Trust IV | Citywide Capital Trust IV | | 4,310 | | | 09/30/2004 | | 2.20% over LIBOR | | 3.88% | | 09/30/2034 | | 05/23/2020 | Citywide Capital Trust IV | 4,339 | | | 09/30/2004 | | 2.20% over LIBOR | | 2.46% | | 09/30/2034 | | 11/23/2020 |
| Citywide Capital Trust V | Citywide Capital Trust V | | 11,804 | | | 05/31/2006 | | 1.54% over LIBOR | | 2.28% | | 07/25/2036 | | 06/15/2020 | Citywide Capital Trust V | 11,917 | | | 05/31/2006 | | 1.54% over LIBOR | | 1.79% | | 07/25/2036 | | 12/15/2020 |
| OCGI Statutory Trust III | OCGI Statutory Trust III | | 2,999 | | | 06/27/2002 | | 3.65% over LIBOR | | 4.87% | (5) | | 09/30/2032 | | 06/30/2020 | OCGI Statutory Trust III | 3,002 | | | 06/27/2002 | | 3.65% over LIBOR | | 3.93% | (5) | | 09/30/2032 | | 12/30/2020 |
| OCGI Capital Trust IV | OCGI Capital Trust IV | | 5,356 | | | 09/23/2004 | | 2.50% over LIBOR | | 3.24% | (6) | | 12/15/2034 | | 06/15/2020 | OCGI Capital Trust IV | 5,385 | | | 09/23/2004 | | 2.50% over LIBOR | | 2.75% | (6) | | 12/15/2034 | | 12/15/2020 |
| BVBC Capital Trust II | BVBC Capital Trust II | | 7,208 | | | 04/10/2003 | | 3.25% over LIBOR | | 5.01% | | 04/24/2033 | | 07/24/2020 | BVBC Capital Trust II | 7,228 | | | 04/10/2003 | | 3.25% over LIBOR | | 3.50% | | 04/24/2033 | | 01/24/2021 |
| BVBC Capital Trust III | BVBC Capital Trust III | | 9,092 | | | 07/29/2005 | | 1.60% over LIBOR | | 3.05% | | 09/30/2035 | | 06/30/2020 | BVBC Capital Trust III | 9,181 | | | 07/29/2005 | | 1.60% over LIBOR | | 1.82% | | 09/30/2035 | | 12/30/2020 |
| Total trust preferred costs | Total trust preferred costs | 145,674 | | | | | | | | | | | | Total trust preferred costs | 146,156 | | | | | | | | | | | |
| Less: deferred issuance costs | Less: deferred issuance costs | (86) | | | Less: deferred issuance costs | (78) | | |
| | $ | 145,588 | | | | $ | 146,078 | | |
| | (1) Effective weighted average interest rate as of March 31, 2020, was 4.17% 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 March 31, 2020, 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 March 31, 2020, was 3.87% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein. | | |
| (4) Effective interest rate as of March 31, 2020, was 3.83% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein. | | |
| (5) Effective interest rate as of March 31, 2020, was 5.53% 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 March 31, 2020, was 4.37% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein. | | |
| (1) Effective weighted average interest rate as of September 30, 2020, was 3.42% due to interest rate swap transactions on the variable rate securities as discussed in Note 7 to Heartland's consolidated financial statements included herein. | | (1) Effective weighted average interest rate as of September 30, 2020, was 3.42% 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, 2020, was 5.01% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein. | | (2) Effective interest rate as of September 30, 2020, 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, 2020, was 3.87% 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, 2020, was 3.87% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein. |
| (4) Effective interest rate as of September 30, 2020, was 3.83% 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, 2020, was 3.83% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein. |
| (5) Effective interest rate as of September 30, 2020, was 5.53% 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, 2020, was 5.53% 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, 2020, was 4.37% 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, 2020, was 4.37% 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 of a bank holding company. Under Basel III, Heartland must hold a conservation buffer above the adequately capitalized risk-based capital ratios; however, the transition provisions related to the conservation buffer have been extended indefinitely.
The most recent notification from the FDIC categorized Heartland and each of its bank subsidiaries as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the categorization of any of these entities.
Heartland's capital ratios are calculated in accordance with Federal Reserve Board instructions and are required regulatory financial measures. The following table illustrates Heartland's capital ratios and the Federal Reserve Board's current capital adequacy guidelines for the dates indicated, in thousands. The table also indicates the fully-phased in capital conservation buffer, but the requirements to comply have been extended indefinitely.
| | | 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) | | 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) |
| March 31, 2020 | 13.91 | % | | 12.22 | % | | 10.79 | % | | 9.85 | % | |
| September 30, 2020 | | September 30, 2020 | 15.47 | % | | 13.76 | % | | 11.29 | % | | 9.82 | % |
| Minimum capital requirement | Minimum capital requirement | 8.00 | % | | 6.00 | % | | 4.50 | % | | 4.00 | % | Minimum capital requirement | 8.00 | % | | 6.00 | % | | 4.50 | % | | 4.00 | % |
| Well capitalized requirement | Well capitalized requirement | 10.00 | % | | 8.00 | % | | 6.50 | % | | 5.00 | % | Well capitalized requirement | 10.00 | % | | 8.00 | % | | 6.50 | % | | 5.00 | % |
| Minimum capital requirement, including fully-phased in capital conservation buffer | Minimum capital requirement, including fully-phased in capital conservation buffer | 10.50 | % | | 8.50 | % | | 7.00 | % | | N/A | Minimum capital requirement, including fully-phased in capital conservation buffer | 10.50 | % | | 8.50 | % | | 7.00 | % | | N/A |
| Risk-weighted assets | Risk-weighted assets | $ | 10,212,321 | | | $ | 10,212,321 | | | $ | 10,212,321 | | | N/A | | Risk-weighted assets | $ | 10,372,253 | | | $ | 10,372,253 | | | $ | 10,372,253 | | | N/A |
| Average Assets | Average Assets | N/A | | | N/A | | | N/A | | | $ | 12,670,412 | | Average Assets | N/A | | N/A | | N/A | | $ | 14,534,308 | |
| | December 31, 2019 | December 31, 2019 | 13.75 | % | | 12.31 | % | | 10.88 | % | | 10.10 | % | December 31, 2019 | 13.75 | % | | 12.31 | % | | 10.88 | % | | 10.10 | % |
| Minimum capital requirement | Minimum capital requirement | 8.00 | % | | 6.00 | % | | 4.50 | % | | 4.00 | % | Minimum capital requirement | 8.00 | % | | 6.00 | % | | 4.50 | % | | 4.00 | % |
| Well capitalized requirement | Well capitalized requirement | 10.00 | % | | 8.00 | % | | 6.50 | % | | 5.00 | % | Well capitalized requirement | 10.00 | % | | 8.00 | % | | 6.50 | % | | 5.00 | % |
| Minimum capital requirement, including fully-phased in capital conservation buffer | Minimum capital requirement, including fully-phased in capital conservation buffer | 10.50 | % | | 8.50 | % | | 7.00 | % | | N/A | | Minimum capital requirement, including fully-phased in capital conservation buffer | 10.50 | % | | 8.50 | % | | 7.00 | % | | N/A |
| Risk-weighted assets | Risk-weighted assets | $ | 10,098,515 | | | $ | 10,098,515 | | | $ | 10,098,515 | | | N/A | | Risk-weighted assets | $ | 10,098,515 | | | $ | 10,098,515 | | | $ | 10,098,515 | | | N/A |
| Average Assets | Average Assets | N/A | | | N/A | | | N/A | | | $ | 12,318,135 | | Average Assets | N/A | | N/A | | N/A | | $ | 12,318,135 | |
Heartland elected not to utilize the regulatory transition relief issued by federal regulatory authorities in the first quarter of 2020, which allowed banking institutions to delay the impact of CECL on regulatory capital because the impact on the capital ratios of Heartland and its subsidiary banks was not significant.
At March 31,September 30, 2020, and December 31, 2019, retained earnings that could be available for the payment of dividends to meet the minimum capital requirements totaled $544.1$606.2 million and $533.9 million, respectively. Retained earnings that could be available for the payment of dividends to Heartland from its banks totaled approximately $340.3$399.7 million and $331.5 million at March 31,September 30, 2020, and December 31, 2019, respectively, under the capital requirements to remain well capitalized. These dividends are the principal source of funds to pay dividends on Heartland's common and preferred stock and to pay interest and principal on its debt.
On February 11,June 26, 2020, Heartland announcedissued 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 plannedsymbol "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 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. The net proceeds of $110.7 million will be used for general corporate purposes, which may include organic and acquired growth, financing investments, capital expenditures, investments in wholly-owned subsidiaries as regulatory capital and repayment of debt.
On October 19, 2020, Heartland entered into an amended and restated agreement relating to the acquisition of AIM Bancshares, Inc. AimBank, theand its wholly-owned subsidiary, of AIM Bancshares, Inc.AimBank, which had $1.82$1.85 billion in assets as of March 31,September 30, 2020. WithThe issuance of preferred equity in the completionsecond quarter of this pending acquisition, Heartland is expected2020 will ensure that regulatory capital ratios remain strong after the closing of the AIM Bancshares, Inc. transaction, which will trigger the Collins Amendment to exceed $15.0 billionthe Sarbanes-Oxley legislation resulting in assets, and Heartland will no longer be able to include its$146.1 million of trust preferred securities aslosing Tier 1 Capital. However, Heartland expects to remain well-capitalized under all regulatory capital ratio requirements after its assets exceed $15.0 billion.Capital treatment.
On August 8, 2019, Heartland filed a universal shelf registration statement with the SEC to register debt or equity securities. This shelf registration statement, which was effective immediately, provided Heartland with the ability to raise capital, subject to market conditions and SEC rules and limitations, if Heartland's board of directors decided to do so. This registration statement permitted Heartland, from time to time, in one or more public offerings, to offer debt securities, subordinated notes, common stock, preferred stock, rights or any combination of these securities. The amount of securities that may have been offered was not specified in the registration statement, and the terms of any future offerings were to be established at the time of the offering.
COMMITMENTS AND CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
Commitments and Contractual Obligations
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Heartland's bank subsidiaries evaluate the creditworthiness of customers to which they extend a credit commitment on a case-by-case basis and may require collateral to secure any credit extended. The amount of collateral obtained is based upon management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties. Standby letters of credit and financial guarantees are conditional commitments issued by Heartland's bank subsidiaries to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. At March 31,September 30, 2020, and December 31, 2019, commitments to extend credit aggregated $2.78$2.98 billion and $2.97 billion, respectively. Standby letters of credit aggregated $74.3$63.1 million at March 31,September 30, 2020, and $79.5 million at December 31, 2019.
Contractual obligations and other commitments were disclosed in Heartland's Annual Report on Form 10-K for the year ended December 31, 2019. There have been no material changes to Heartland's contractual obligations and other commitments since that report was filed.
Heartland continues to explore opportunities to expand the size of its independent community banks. In the current banking industry environment, Heartland seeks these opportunities for growth through acquisitions. Heartland is primarily focused on possible acquisitions in the markets it currently serves, in which there would be an opportunity to increase market share, achieve efficiencies and provide greater convenience for current customers. However, Heartland may also pursue acquisitions in areas outside of its current geographic footprint. Future expenditures relating to expansion efforts, in addition to those identified above, cannot be estimated at this time.
Derivative Financial Instruments
Through PrimeWest Mortgage Corporation, Heartland enters into mortgage banking derivatives, which are classified as free standing derivatives. These derivatives include interest rate lock commitments provided to customers to fund certain mortgage loans to be sold into the secondary market and forward commitments for the future delivery of these loans. Heartland enters into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of future interest rate changes on the commitments to fund these loans and on the residential mortgage loans held as available for sale. See Note 7 to the consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information on Heartland's derivative financial instruments.
LIQUIDITY
Liquidity refers to Heartland's 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’ credit needs. The liquidity of Heartland principally depends on cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings and its ability to borrow funds in the money or capital markets. For COVID-19 trends and uncertainties impacting Heartland’s liquidity, see the discussion of "Capital and Liquidity" under Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
At March 31,September 30, 2020, Heartland had $239.7$331.7 million of cash and cash equivalents, time deposits in other financial institutions of $3.6$3.1 million and securities carried at fair value of $3.49$4.95 billion.
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 growth in net interest cash flows.
Heartland's short-term borrowing balances are dependent on commercial cash management and smaller correspondent bank relationships and, as a result, will normally fluctuate. Management believes these balances, on average, to be stable sources of funds; however, Heartland intends to rely on deposit growth and additional FHLB and discount window borrowings as needed in the future.
Additional funding is provided by long-term debt and short-term borrowings. In the event of short-term liquidity needs, Heartland's banks may purchase federal funds from each other or from correspondent banks and may also borrow from the Federal Reserve Bank. As of March 31,September 30, 2020, Heartland had $121.4$306.7 million of short-term borrowings outstanding.
As of March 31,September 30, 2020, Heartland had $276.2$524.0 million of long-term debt outstanding, and it is an important funding source because of its multi-year borrowing structure. Additionally, the subsidiary banks' FHLB memberships give them the ability to borrow funds for short-term and long-term purposes under a variety of programs. At March 31,September 30, 2020, Heartland had $1.67$1.56 billion of borrowing capacity under these programs. Under the PPPLF, Heartland had $903.1 million of borrowing capacity as of September 30, 2020. Additionally, at March 31,September 30, 2020, Heartland had $490.2 million$1.18 billion of borrowing capacity at the Federal Reserve Bank'sBanks' discount window.
Each of Heartland's subsidiary banks has been approved by their respective Federal Reserve bank for the Paycheck Protection Program Liquidity Fund ("PPPLF") and access to the PPPLF has been tested. Heartland anticipates increased utilization of the PPPLF through the third quarter of 2020 as customers utilize their loan proceeds for payroll and payroll related purposes. Through early May 2020, Heartland's subsidiary banks received SBA approval for approximately 4,600 PPP loans totaling $1.18 billion, of which approximately 4,400 or $1.16 billion have been closed and funded.
On a consolidated basis, Heartland maintains a large balance of short-term securities that, when combined with cash from operations, Heartland believes are adequate to meet its funding obligations.
At the parent company level, routine funding requirements consist primarily of dividends paid to stockholders, debt service on revolving credit arrangements and trust preferred securities issuances, repayment requirements under other debt obligations and payments for acquisitions. The parent company obtains the funding to meet these obligations from dividends paid by its bank subsidiaries and the issuance of debt and equity securities. Heartland has a revolving credit agreement and non-revolving credit line with an unaffiliated bank, which wasis renewed annually, most recently on June 14, 2019.2020. Heartland's revolving credit agreement has $30.0$45.0 million of maximum borrowing capacity, of which none was outstanding at March 31,September 30, 2020. At March 31,September 30, 2020, $14.8$6.5 million was available on the non-revolving credit line. These credit agreements contain specific financial covenants, all of which Heartland complied with as of March 31,September 30, 2020.
The ability of Heartland to pay dividends to its stockholders is dependent upon dividends paid to Heartland 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 at Heartland's bank subsidiaries, certain portions of their retained earnings are not available for the payment of dividends.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market prices and rates. Heartland's market risk is comprised primarily of interest rate risk resulting from its core banking activities of lending and accepting deposits. Interest rate risk measures the impact on earnings from changes in interest rates and the effect on the current fair market values of Heartland's assets, liabilities and off-balance sheet contracts. Heartland's objective is to measure this risk and manage 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 committees of Heartland's bank subsidiaries and, on a consolidated basis, by Heartland's executive management and board of directors. At least quarterly, a detailed review of the balance sheet risk profile is performed for Heartland and each of its bank subsidiaries. Included in these reviews are interest rate sensitivity analyses, which simulate changes in net interest income in response to various interest rate scenarios. These analyses consider current portfolio rates, existing maturities, repricing opportunities and market interest rates, in addition to prepayments and growth under different interest rate assumptions. Selected strategies are modeled prior to implementation to determine their effect on Heartland's interest rate risk profile and net interest income. Heartland believes its primary market risk exposures did not change significantly in the first three months of 2020.
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 one) and a rate shock (year two and beyond) could have on Heartland's net interest income. Starting balances in the model reflect actual balances on the "as of" date, adjusted for material 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 March 31,September 30, 2020, and March 31,September 30, 2019, provided the following results, in thousands:
| | | | 2020 | | | 2019 | | | 2020 | | 2019 |
| | | Net Interest
Margin | | % Change
From Base | | Net Interest
Margin | | % Change
From Base | | Net Interest
Margin | | % Change
From Base | | Net Interest
Margin | | % Change
From Base |
| Year 1 | Year 1 | | | | | | | | Year 1 | | | | | | | |
| Down 100 Basis Points | Down 100 Basis Points | $ | 426,450 | | | (2.20) | % | | $ | 400,843 | | | (3.30) | % | Down 100 Basis Points | $ | 441,039 | | | (0.87) | % | | $ | 425,662 | | | (3.37) | % |
| Base | Base | $ | 436,047 | | | — | % | | $ | 414,540 | | | — | % | Base | 444,918 | | | — | | | 440,498 | | | — | |
| Up 200 Basis Points | Up 200 Basis Points | $ | 455,706 | | | 4.51 | % | | $ | 437,779 | | | 5.61 | % | Up 200 Basis Points | 467,620 | | | 5.10 | | | 468,374 | | | 6.33 | |
| Year 2 | Year 2 | | | | | | | | | Year 2 | | | | | | | |
| Down 100 Basis Points | Down 100 Basis Points | $ | 394,839 | | | (9.45) | % | | $ | 382,215 | | | (7.80) | % | Down 100 Basis Points | 420,920 | | | (5.39) | | | 388,722 | | | (11.75) | |
| Base | Base | $ | 417,950 | | | (4.15) | % | | $ | 416,785 | | | 0.54 | % | Base | 435,536 | | | (2.11) | | | 426,489 | | | (3.18) | |
| Up 200 Basis Points | Up 200 Basis Points | $ | 466,853 | | | 7.06 | % | | $ | 464,301 | | | 12.00 | % | Up 200 Basis Points | 495,843 | | | 11.45 | | | 485,463 | | | 10.21 | |
Heartland uses derivative financial instruments to manage the impact of changes in interest rates on its future interest income or interest expense. Heartland is exposed to credit-related losses in the event of nonperformance by the counterparties to these derivative instruments but believes it has minimized the risk of these losses by entering into the contracts with large, stable financial institutions. The estimated fair market values of these derivative instruments are presented in Note 7 to the consolidated financial statements included in this Quarterly Report on Form 10-Q.
Heartland enters into financial instruments with off balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. Commitments to extend credit are agreements to lend funds to a customer as long as there is no violation of any condition established in the contract relating to the commitment. Commitments generally have fixed expiration dates and may require collateral from the borrower. Standby letters of credit are conditional commitments issued by Heartland to guarantee the performance of a customer to a third party up to a stated amount and subject to specified terms and conditions. These commitments to extend credit and standby letters of credit are not recorded on the consolidated balance sheet until the loan is made or the letter or credit is issued.
ITEM 4. CONTROLS AND PROCEDURES
Based on an evaluation, as of the end of the period covered by this Quarterly Report on Form 10-Q, under the supervision and with the participation of Heartland's management, including its Chief Executive Officer and Chief Financial Officer, the Chief Executive Officer and Chief Financial Officer have concluded that:
•Heartland's disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) were effective.
•During the quarterthree months ended March 31,September 30, 2020, there have been no changes in Heartland's internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) that have materially affected, or are reasonably likely to materially affect, Heartland's internal control over financial reporting other than the adoption of internal controls over financial reporting due to the implementation of FASB ASU-2016-13, "Financial Instruments: Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," as amended and commonly referred to as CECL.reporting.
PART II
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which Heartland or its subsidiaries are a party other than ordinary routine litigation incidental to their respective businesses. While the ultimate outcome of current legal proceedings cannot be predicted with certainty, it is the opinion of management that the resolution of these legal actions should not have a material effect on Heartland's consolidated financial position or results of operations.
ITEM 1A. RISK FACTORS
There have been no material changes in the risk factors applicable to Heartland from those disclosed in Part I, Item 1A. “Risk Factors”"Risk Factors" in Heartland's 2019 Annual Report on Form 10-K, with the exception of the addition of the following risk factors:except as described below:
The ongoingcontinuation of the COVID-19 pandemic and measures intended to prevent itsthe spread of COVID-19 could have a material adverse effect on Heartland'sadversely affect Heartland’s business results of operation andactivities, financial condition, and results of operations, and such effects will depend on future developments, which are highly uncertain and difficult to predict.
Global health concerns relatedrelating to the COVID-19 pandemic and related government actions taken to reduce the spread of the virusCOVID-19 have negatively impacted the macroeconomic environment, and the COVID-19 pandemic has significantly increased economic uncertainty and abruptly reduced economic activity. The COVID-19 pandemic has resulted in government authorities implementing numerous measures to try to contain COVID-19, including the virus,declaration of a federal National Emergency; multiple cities’ and states’ declarations of states of emergency; school and business closings; limitations on social or public gatherings and other social distancing measures, such as working remotely; travel bans and restrictions, quarantines and shelter-in-place orders and business limitations and shutdowns.orders. Such measures have significantly contributed to rising unemployment and negatively impacted consumer and business spending. Thespending, borrowing needs and saving habits. Governmental authorities worldwide have taken unprecedented measures to stabilize markets and support economic growth. U.S. federal and state governments have taken measures to address the economic and social consequences of the COVID-19 pandemic, has adversely impacted and could potentially further adversely impact Heartland's workforce and operations,including the passage of the CARES Act and the operationsMain Street Lending Program. The CARES Act, among other things, provides certain measures to support individuals and businesses in maintaining solvency through monetary relief, including in the form of its customersfinancing, loan forgiveness and business partners. automatic forbearance. There can be no assurance, however, that the steps taken by the worldwide community or the U.S. government will be sufficient to address the negative economic effects of COVID-19 or avert severe and prolonged reductions in economic activity.
In particular, Heartland may experience adverse financial consequences due to a number of factors, including, but not limited to:
•increased credit losses due to financial strain on its customers as a result of the COVID-19 pandemic and governmental actions, specifically on loans to borrowers in theor that have a substantial relationship to lodging, retail trade, restaurant and bar, nursing home/assisted living, oil and gas, childcare, facilities, and gaming industries, and loans to borrowers that are secured by multi-family properties or retail real estate; increased credit losses would require Heartland to increase its provision for credit losses and net charge-offs;
•declines in collateral values;
•further and sustained decline in Heartland’s stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause management to perform impairment testing on its goodwill or core deposit and customer relationships intangibles that could result in an impairment charge being recorded for that period, which would adversely impact Heartland’s results of operations and the ability of certain of its bank subsidiaries to pay dividends;
•disruptions if a significant portion of Heartland’s workforce is unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the COVID-19 pandemic; Heartland has modified its business practices, including restricting employee travel, and implementing work-from-home arrangements, and installing and requiring utilization of personal protection equipment and it may be necessary for Heartland to take further actions as may be required by government authorities or as Heartlandit determines areis in the best interests of its employees, customers and business partners; there is no certainty that such measures will be sufficient to mitigate the risks posed by COVID-19 or will otherwise be satisfactory to government authorities.authorities;
•the negative effect on earnings resulting from Heartland’s subsidiary banks modifying loans and agreeing to loan payment deferrals due to the COVID-19 pandemic;
•increased demand on Heartland’s liquidity as it meets borrowers’ needs and coverscover expenses related to the COVID-19 pandemic management plan;
•reduced liquidity may negatively affect Heartland’s capital and leverage ratios, and although not currently contemplated, reduce or force suspension of dividends;
•third-party disruptions, including negative effects on network providers and other suppliers, which have been, and may further be, affected by, stay-at-home orders, market volatility and other factors that increase their risks of business disruption or that may otherwise affect their ability to perform under the terms of any agreements with Heartland or provide essential services;
•increased cyber and payment fraud risk due to increased online and remote activity; and
•other operational failures due to changes in Heartland'sHeartland’s normal business practices because of the COVID-19 pandemic and governmental actions to contain it.
These factors may remain prevalent for a significant period of time and may continue to adversely affect Heartland's business, results of operations, financial conditions, liquidity and financial conditionprospects even after the COVID-19 pandemic has subsided.
Governmental authorities worldwide have taken unprecedented measures to stabilize economicIn addition, the COVID-19 pandemic has significantly affected the financial markets and support economic growth.The successhas resulted in a number of these measuresFederal Reserve actions. Market interest rates have declined significantly. In March 2020, the Federal Reserve reduced the target federal funds rate, and in September 2020, it announced that the low rate would be maintained until (i) labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and (ii) inflation has risen to 2 percent and is unknown, and they may not be sufficientexpected to address the negative economic effects of COVID-19 or avert severe and prolongedmoderately exceed 2 percent for some time. Heartland expects that these reductions in interest rates, especially if prolonged, could adversely affect Heartland’s net interest income and margins and profitability. The Federal Reserve also (i) announced a $700 billion quantitative easing program in response to the expected economic activity.downturn caused by COVID-19 and (ii) launched the Main Street Lending Program, which will offer deferred interest on four-year loans to small and mid-sized businesses. The full impact of the COVID-19 pandemic on Heartland’s business activities as a result of new government and regulatory policies, programs and guidelines, as well as market reactions to such activities, remains uncertain.
Heartland's subsidiary banks ("the Banks") are participating lenders in the PPP, a loan program administered through the SBA, that was created to help eligible businesses, organizations and self-employed persons fund their operational costs during the
COVID-19 pandemic. Under this program, the SBA guarantees 100% of the amounts loaned under the PPP. The PPP opened on April 3, 2020; however, because of the short windowamount of time between the passingpassage of the CARES Act and the opening of the PPP, there iswas some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposeshas exposed Heartland and the Banks to risks relating to noncompliance with the PPP. For instance, other financial institutions have experienced litigation related to their process and procedures used in processing applications for the PPP. Under the PPP, lending banks are generally entitled to rely on borrower representations and certifications of eligibility to participate in the program,PPP, and lending banks may also be held harmless by the SBA in certain circumstances for actions taken in reliance on borrower representations and certifications. The PPP was modified on June 5, 2020, with the adoption of the Paycheck Protection Program Flexibility Act (the "PPFA"). The PPFA increased the amount of time that borrowers have to use PPP loan proceeds and apply for loan forgiveness and made other changes to make the program more favorable to borrowers. Notwithstanding the foregoing, the BanksHeartland's subsidiary banks have been, and may continue to be, exposed to credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded or serviced. If a deficiency is identified, the SBA may deny its liability under theits guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Banks.Heartland's subsidiary banks.
Heartland and the Banks'Heartland's subsidiary banks participation in and execution of these and other measures taken by governments and regulatory authorities in response to the COVID-19 pandemic could result in reputational harm and has resulted in, and may continuealso lead to result in, litigation, including class actions, or regulatory and government actions and proceedings. Such actions and proceedings may result in judgments, settlements, penalties and fines levied against Heartland and the Banks.Heartland's subsidiary banks.
Heartland's current period results of operations are not necessarily indicative of results that may be expected for any other interim period or for the year as a whole. WhileIn addition, while the COVID-19 outbreakpandemic had a material impact on the provision for credit losses, Heartland is unable to fully predict the impact that the COVID-19 pandemic will have on itsthe credit quality of the loan portfolios of Heartland’s subsidiary banks, and any acquired banks, Heartland financial position andor results of operations due to numerous uncertainties. Heartland will continue to assess the potential impacts on the credit quality of the loan portfolios of Heartland’s subsidiary banks and any acquired banks, its financial positionpositions and results of operations.
The extent to which the COVID-19 pandemic impacts Heartland's business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the pandemic,COVID-19, its severity, the actions to contain the virusCOVID-19 or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, Heartland may continue to experience materially adverse impacts to its businessbusinesses as a result of the virus’sCOVID-19’s global
economic impact, including the availability of credit, adverse impacts on liquidity and any recession or depression that has occurred or may occur in the future.
There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the pandemicCOVID-19 is highly uncertain and subject to change. Heartland does not yet know the full extent of the impacts of COVID-19 on its business, operations or the economy as a whole. However, the effects could have a material impact on Heartland's results of operations and heighten many of the known risks described in the "Risk Factors" sectionsections of theits Annual Report on Form 10-K for the year ended December 31, 2019.
Heartland relies on dividends from its subsidiaries for most of its revenue and is subject to restrictions on payment of dividends.
The primary source of funds for Heartland is dividends from its subsidiary banks. In general, the subsidiary banks may only pay dividends either out of their historical net income after any required transfers to surplus or reserves have been made or out of their retained earnings. The payment of dividends by any financial institution is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited frompaying any dividends if, following payment thereof, the institution would be undercapitalized. These dividends are the principal source of funds to pay dividends on Heartland's common and preferred stock and to pay interest and principal on its debt. Dividends payable on common shares are also subject to quarterly dividends payable on outstanding preferred shares at the applicable dividend rate.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On March 17, 2020, Heartland's board of directors authorized management to acquire and hold up to 5% of capital or $77.7$85.0 million as of March 31,September 30, 2020, as treasury shares at any one time. Heartland and its affiliated purchasers made no purchases of its common stock during the quarter ended March 31,September 30, 2020.
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 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. |
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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) Filed 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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| /s/ Bruce K. Lee |
| By: Bruce K. Lee |
| President 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) |
|
Dated: May 8,November 5, 2020 |