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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, 2023 | | | | | |
☐ | 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)
1800 Larimer Street, Suite 1800, Denver, Colorado 80202
(Address of principal executive offices)(Zip Code)
(303) 285-9200
(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 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 ☒
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 4, 2023, the Registrant had outstanding 42,558,995 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
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HEARTLAND FINANCIAL USA, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data) | | | |
| March 31, 2023 (Unaudited) | | December 31, 2022 |
ASSETS | | | |
Cash and due from banks | $ | 274,354 | | | $ | 309,045 | |
Interest bearing deposits with other banks and other short-term investments | 87,757 | | | 54,042 | |
Cash and cash equivalents | 362,111 | | | 363,087 | |
Time deposits in other financial institutions | 1,740 | | | 1,740 | |
Securities: | | | |
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Carried at fair value (cost of $6,670,971 at March 31, 2023, and $6,788,729 at December 31, 2022) | 6,096,657 | | | 6,147,144 | |
Held to maturity, net of allowance for credit losses of $0 at both March 31, 2023, and December 31, 2022 (fair value of $815,672 at March 31, 2023, and $776,557 at December 31, 2022) | 832,098 | | | 829,403 | |
Other investments, at cost | 72,364 | | | 74,567 | |
Loans held for sale | 10,425 | | | 5,277 | |
Loans receivable: | | | |
Held to maturity | 11,495,353 | | | 11,428,352 | |
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Allowance for credit losses | (112,707) | | | (109,483) | |
Loans receivable, net | 11,382,646 | | | 11,318,869 | |
Premises, furniture and equipment, net | 186,868 | | | 190,479 | |
Premises, furniture and equipment held for sale | 4,399 | | | 6,851 | |
Other real estate, net | 7,438 | | | 8,401 | |
Goodwill | 576,005 | | | 576,005 | |
Core deposit intangibles and customer relationship intangibles, net | 23,366 | | | 25,154 | |
Servicing rights, net | — | | | 7,840 | |
Cash surrender value on life insurance | 194,419 | | | 193,403 | |
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Other assets | 432,008 | | | 496,008 | |
TOTAL ASSETS | $ | 20,182,544 | | | $ | 20,244,228 | |
LIABILITIES AND EQUITY | | | |
LIABILITIES: | | | |
Deposits: | | | |
Demand | $ | 5,119,554 | | | $ | 5,701,340 | |
Savings | 9,256,609 | | | 9,994,391 | |
Time | 3,305,183 | | | 1,817,278 | |
Total deposits | 17,681,346 | | | 17,513,009 | |
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Short-term borrowings | 92,337 | | | 376,117 | |
Other borrowings | 372,097 | | | 371,753 | |
Accrued expenses and other liabilities | 207,359 | | | 248,294 | |
TOTAL LIABILITIES | 18,353,139 | | | 18,509,173 | |
STOCKHOLDERS' EQUITY: | | | |
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Preferred stock (par value $1 per share; authorized 6,104 shares at both March 31, 2023, and December 31, 2022; none issued or outstanding at both March 31, 2023, and December 31, 2022) | — | | | — | |
Series A Junior Participating preferred stock (par value $1 per share; authorized 16,000 shares; none issued or outstanding at both March 31, 2023, and December 31, 2022) | — | | | — | |
Series B Fixed Rate Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares authorized at both March 31, 2023, and December 31, 2022; none issued or outstanding at both March 31, 2023, and December 31, 2022) | — | | | — | |
Series C Senior Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares authorized at both March 31, 2023, and December 31, 2022; none issued or outstanding at both March 31, 2023, and December 31, 2022) | — | | | — | |
Series D Senior Non-Cumulative Perpetual Convertible Preferred Stock (par value $1 per share; 3,000 shares authorized at both March 31, 2023, and December 31, 2022; none issued or outstanding at both March 31, 2023, and December 31, 2022) | — | | | — | |
Series E Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 11,500 shares authorized at both March 31, 2023, and December 31, 2022; 11,500 shares issued and outstanding at both March 31, 2023 and December 31, 2022) | 110,705 | | | 110,705 | |
Common stock (par value $1 per share; 60,000,000 shares authorized at both March 31, 2023, and December 31, 2022; issued 42,558,726 shares at March 31, 2023, and 42,467,394 shares at December 31, 2022) | 42,559 | | | 42,467 | |
Capital surplus | 1,084,112 | | | 1,080,964 | |
Retained earnings | 1,158,948 | | | 1,120,925 | |
Accumulated other comprehensive loss | (566,919) | | | (620,006) | |
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TOTAL STOCKHOLDERS' EQUITY | 1,829,405 | | | 1,735,055 | |
TOTAL LIABILITIES AND EQUITY | $ | 20,182,544 | | | $ | 20,244,228 | |
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See accompanying notes to consolidated financial statements. | | | |
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HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands, except per share data) | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
INTEREST INCOME: | | | | | | | |
Interest and fees on loans | | | | | $ | 153,843 | | | $ | 102,369 | |
Interest on securities: | | | | | | | |
Taxable | | | | | 55,976 | | | 32,620 | |
Nontaxable | | | | | 6,028 | | | 6,202 | |
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Interest on interest bearing deposits in other financial institutions | | | | | 1,131 | | | 71 | |
TOTAL INTEREST INCOME | | | | | 216,978 | | | 141,262 | |
INTEREST EXPENSE: | | | | | | | |
Interest on deposits | | | | | 56,898 | | | 2,977 | |
Interest on short-term borrowings | | | | | 2,422 | | | 46 | |
Interest on other borrowings (includes $591 and $0 of interest expense related to derivatives reclassified from accumulated other comprehensive income (loss) for the three months ended March 31, 2023 and 2022, respectively) | | | | | 5,446 | | | 3,560 | |
TOTAL INTEREST EXPENSE | | | | | 64,766 | | | 6,583 | |
NET INTEREST INCOME | | | | | 152,212 | | | 134,679 | |
Provision for credit losses | | | | | 3,074 | | | 3,245 | |
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES | | | | | 149,138 | | | 131,434 | |
NONINTEREST INCOME: | | | | | | | |
Service charges and fees | | | | | 17,136 | | | 15,251 | |
Loan servicing income | | | | | 714 | | | 286 | |
Trust fees | | | | | 5,657 | | | 6,079 | |
Brokerage and insurance commissions | | | | | 696 | | | 869 | |
Capital markets fees | | | | | 2,449 | | | 3,039 | |
Securities (losses) gains, net (includes $(1,104) and $1,991 of net security (losses) gains reclassified from accumulated other comprehensive income (loss) for the three months ended March 31, 2023 and 2022, respectively) | | | | | (1,104) | | | 2,872 | |
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Unrealized gain (loss) on equity securities, net | | | | | 193 | | | (283) | |
Net gains on sale of loans held for sale | | | | | 1,831 | | | 3,411 | |
Valuation adjustment on servicing rights | | | | | — | | | 1,658 | |
Income on bank owned life insurance | | | | | 964 | | | 524 | |
Other noninterest income | | | | | 1,463 | | | 863 | |
TOTAL NONINTEREST INCOME | | | | | 29,999 | | | 34,569 | |
NONINTEREST EXPENSES: | | | | | | | |
Salaries and employee benefits | | | | | 62,149 | | | 66,174 | |
Occupancy | | | | | 7,209 | | | 7,362 | |
Furniture and equipment | | | | | 2,915 | | | 3,519 | |
Professional fees | | | | | 16,076 | | | 15,156 | |
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Advertising | | | | | 1,985 | | | 1,555 | |
Core deposit and customer relationship intangibles amortization | | | | | 1,788 | | | 2,054 | |
Other real estate and loan collection expenses | | | | | 155 | | | 195 | |
Loss on sales/valuations of assets, net | | | | | 1,115 | | | 46 | |
Acquisition, integration and restructuring costs | | | | | 1,673 | | | 576 | |
Partnership investment in tax credit projects | | | | | 538 | | | 77 | |
Other noninterest expenses | | | | | 15,440 | | | 14,083 | |
TOTAL NONINTEREST EXPENSES | | | | | 111,043 | | | 110,797 | |
INCOME BEFORE INCOME TAXES | | | | | 68,094 | | | 55,206 | |
Income taxes (includes $426 and $503 of income tax benefit reclassified from accumulated other comprehensive income (loss) for the three months ended March 31, 2023 and 2022, respectively) | | | | | 15,318 | | | 12,117 | |
NET INCOME | | | | | 52,776 | | | 43,089 | |
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Preferred dividends | | | | | (2,013) | | | (2,013) | |
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NET INCOME AVAILABLE TO COMMON STOCKHOLDERS | | | | | $ | 50,763 | | | $ | 41,076 | |
EARNINGS PER COMMON SHARE - BASIC | | | | | $ | 1.19 | | | $ | 0.97 | |
EARNINGS PER COMMON SHARE - DILUTED | | | | | $ | 1.19 | | | $ | 0.97 | |
CASH DIVIDENDS DECLARED PER COMMON SHARE | | | | | $ | 0.30 | | | $ | 0.27 | |
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See accompanying notes to consolidated financial statements. | | | | | | | |
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HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Dollars in thousands) |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
NET INCOME | | | | | $ | 52,776 | | | $ | 43,089 | |
OTHER COMPREHENSIVE INCOME (LOSS) | | | | | | | |
Changes in available for sale securities: | | | | | | | |
Net change in unrealized gain (loss) on securities | | | | | 66,167 | | | (378,690) | |
Reclassification adjustment for net (gains) losses realized in net income | | | | | 1,104 | | | (1,991) | |
Income tax (expense) benefit | | | | | (17,921) | | | 99,370 | |
Other comprehensive income (loss) on available for sale securities | | | | | 49,350 | | | (281,311) | |
Changes in securities held to maturity: | | | | | | | |
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Net amortization of unrealized losses on securities transferred from AFS | | | | | 2,740 | | | — | |
Income tax expense | | | | | (1,060) | | | — | |
Other comprehensive income on held to maturity securities | | | | | 1,680 | | | — | |
Change in cash flow hedges: | | | | | | | |
Net change in unrealized gain on derivatives | | | | | 1,952 | | | — | |
Reclassification adjustment for net losses on derivatives realized in net income | | | | | 764 | | | 181 | |
Income taxes | | | | | (659) | | | (39) | |
Other comprehensive income on cash flow hedges | | | | | 2,057 | | | 142 | |
Other comprehensive income (loss) | | | | | 53,087 | | | (281,169) | |
TOTAL COMPREHENSIVE INCOME (LOSS) | | | | | $ | 105,863 | | | $ | (238,080) | |
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See accompanying notes to consolidated financial statements. | | | | | | | |
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HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net income | $ | 52,776 | | | $ | 43,089 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 5,484 | | | 6,831 | |
Provision for credit losses | 3,074 | | | 3,245 | |
Net amortization of premium on securities | 7,159 | | | 19,352 | |
Securities losses (gains), net | 1,104 | | | (2,872) | |
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Unrealized (gain) loss on equity securities, net | (193) | | | 283 | |
Stock based compensation | 4,719 | | | 2,704 | |
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Loans originated for sale | (43,257) | | | (99,331) | |
Proceeds on sales of loans held for sale | 39,916 | | | 101,260 | |
Net gains on sale of loans held for sale | (1,807) | | | (2,974) | |
(Increase) decrease in accrued interest receivable | (130) | | | 6,282 | |
Decrease (increase) in prepaid expenses | 806 | | | (4,765) | |
Increase (decrease) in accrued interest payable | 13,462 | | | (100) | |
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Capitalization of servicing rights | (24) | | | (437) | |
Valuation adjustment on servicing rights | — | | | (1,658) | |
Loss on sales/valuations of assets, net | 1,115 | | | 46 | |
Net excess tax benefit from stock based compensation | 46 | | | 172 | |
Other, net | (9,818) | | | 12,652 | |
NET CASH PROVIDED BY OPERATING ACTIVITIES | 74,432 | | | 83,779 | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
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Proceeds from the sale of securities available for sale | 146,448 | | | 824,071 | |
Proceeds from the sale of securities held to maturity | — | | | 2,337 | |
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Proceeds from the maturity of and principal paydowns on securities available for sale | 150,941 | | | 290,347 | |
Proceeds from the maturity of and principal paydowns on securities held to maturity | 69 | | | 1,067 | |
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Proceeds from the sale, maturity of, redemption of and principal paydowns on other investments | 3,644 | | | 1,982 | |
Purchase of securities available for sale | (187,726) | | | (1,007,992) | |
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Purchase of other investments | (1,441) | | | (1,385) | |
Net increase in loans | (66,180) | | | (235,696) | |
Purchase of bank owned life insurance policies | (51) | | | (5) | |
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Proceeds from sale of mortgage servicing rights | 6,714 | | | — | |
Capital expenditures | (248) | | | (2,544) | |
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Proceeds from the sale of equipment | 1,270 | | | 214 | |
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Proceeds on sale of OREO and other repossessed assets | 1,136 | | | 1,157 | |
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES | $ | 54,576 | | | $ | (126,447) | |
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HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (Unaudited) (Dollars in thousands) | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Net decrease in demand deposits | $ | (581,786) | | | $ | (119,077) | |
Net (decrease) increase in savings deposits | (737,782) | | | 338,518 | |
Net increase in time deposit accounts | 1,487,905 | | | 29,988 | |
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Net decrease in short-term borrowings | (234,780) | | | (24,225) | |
Proceeds from short term advances | 1,000 | | | — | |
Repayments of short term advances | (50,000) | | | — | |
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Repayments of other borrowings | (30) | | | (79) | |
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Proceeds from issuance of common stock | 242 | | | 274 | |
Dividends paid | (14,753) | | | (13,428) | |
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES | (129,984) | | | 211,971 | |
Net (decrease) increase in cash and cash equivalents | (976) | | | 169,303 | |
Cash and cash equivalents at beginning of year | 363,087 | | | 435,599 | |
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 362,111 | | | $ | 604,902 | |
Supplemental disclosures: | | | |
Cash paid for income/franchise taxes | $ | 1,264 | | | $ | 32 | |
Cash paid for interest | 51,304 | | | 6,683 | |
Loans transferred to OREO | 211 | | | 653 | |
Transfer of premises from premises, furniture and equipment, net, to premises, furniture and equipment held for sale | 3,741 | | | 3,250 | |
Transfer of premises from premises, furniture and equipment held for sale to premises, furniture and equipment, net | 5,167 | | | — | |
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Dividends declared, not paid | 2,013 | | | 2,013 | |
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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 |
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Balance at January 1, 2022 | $ | 110,705 | | | $ | 42,275 | | | $ | 1,071,956 | | | $ | 962,994 | | | $ | (5,752) | | | | | | | $ | 2,182,178 | |
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Comprehensive income (loss) | | | | | | | 43,089 | | | (281,169) | | | | | | | (238,080) | |
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Cash dividends declared: | | | | | | | | | | | | | | | |
Preferred, $175.00 per share | | | | | | | (2,013) | | | | | | | | | (2,013) | |
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Common, $0.27 per share | | | | | | | (11,415) | | | | | | | | | (11,415) | |
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Issuance of 94,644 shares of common stock | | | 95 | | | (1,612) | | | | | | | | | | | (1,517) | |
Stock based compensation | | | | | 2,704 | | | | | | | | | | | 2,704 | |
Balance at March 31, 2022 | $ | 110,705 | | | $ | 42,370 | | | $ | 1,073,048 | | | $ | 992,655 | | | $ | (286,921) | | | | | | | $ | 1,931,857 | |
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Balance at January 1, 2023 | $ | 110,705 | | | $ | 42,467 | | | $ | 1,080,964 | | | $ | 1,120,925 | | | $ | (620,006) | | | | | | | $ | 1,735,055 | |
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Comprehensive income (loss) | | | | | | | 52,776 | | | 53,087 | | | | | | | 105,863 | |
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Cash dividends declared: | | | | | | | | | | | | | | | |
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Preferred, $175.00 per share | | | | | | | (2,013) | | | | | | | | | (2,013) | |
Common, $0.30 per share | | | | | | | (12,740) | | | | | | | | | (12,740) | |
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Issuance of 91,332 shares of common stock | | | 92 | | | (1,571) | | | | | | | | | | | (1,479) | |
Stock based compensation | | | | | 4,719 | | | | | | | | | | | 4,719 | |
Balance at March 31, 2023 | $ | 110,705 | | | $ | 42,559 | | | $ | 1,084,112 | | | $ | 1,158,948 | | | $ | (566,919) | | | | | | | $ | 1,829,405 | |
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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, 2022, included in the Annual Report on Form 10-K of Heartland Financial USA, Inc. ("HTLF") filed with the Securities and Exchange Commission ("SEC") on February 23, 2023. Footnote disclosures to the interim unaudited consolidated financial statements which would substantially duplicate the disclosure contained in the footnotes to the audited consolidated financial statements have been omitted.
The financial information 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, 2023, are not necessarily indicative of the results expected for the year ending December 31, 2023.
During the first quarter of 2023, HTLF reclassified swap and loan syndication income (collectively, "capital markets fees") to capital markets fees from other noninterest income on the consolidated statements of income, and all prior periods have been adjusted.
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 months ended March 31, 2023 and 2022, are shown in the table below, dollars and number of shares in thousands, except per share data:
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| Three Months Ended March 31, |
| 2023 | | 2022 |
Net income | $ | 52,776 | | | $ | 43,089 | |
Preferred dividends | (2,013) | | | (2,013) | |
| | | |
Net income available to stockholders | $ | 50,763 | | | $ | 41,076 | |
| | | |
Weighted average common shares outstanding for basic earnings per share | 42,615 | | | 42,360 | |
Assumed incremental common shares issued upon vesting of outstanding restricted stock units | 128 | | | 181 | |
Weighted average common shares for diluted earnings per share | 42,743 | | | 42,541 | |
Earnings per common share — basic | $ | 1.19 | | | $ | 0.97 | |
Earnings per common share — diluted | $ | 1.19 | | | $ | 0.97 | |
Number of antidilutive common stock equivalents excluded from diluted earnings per share computation | 50 | | | — | |
Number of antidilutive stock options excluded from diluted earnings per share computation | 61 | | | — | |
Subsequent Events - HTLF 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.
Following the end of the first quarter, one of the Banks had deposit items returned to it resulting in an overdraft with respect to a single long-term customer totaling $5.3 million. Following the overdraft, HTLF's initial assessment indicates a potential credit exposure range of $5.3-$7.0 million. HTLF continues to assess the situation and plans to actively pursue potential remedies and strategies with respect to the customer to address the overdraft and mitigate any potential loss arising from it.
Effect of New Financial Accounting Standards
ASU 2022-02
In March 2022, the Financial Accounting Standards Board ("FASB") issued ASU 2022-02, "Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures." These amendments eliminate the troubled debt restructurings ("TDR") recognition and measurement guidance and, instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, these amendments require that an entity disclose current-period gross charge-offs by year of origination for loans receivable within the scope of Subtopic 326-20. The guidance was effective for entities that have adopted ASU 2016-13 for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. HTLF adopted this ASU on January 1, 2023, as required, and these amendments were applied prospectively.
In March 2023, the FASB issued ASU 2023-02 "Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of the Emerging Issues Task Force)." ASU 2023-02 expands the permitted use of the proportional amortization method, which is currently only available to low-income housing tax credit investments, to other tax equity investments if certain conditions are met. Under the proportional amortization method, the initial cost of an investment is amortized in proportion to the income tax benefits received and both the amortization of the investment and the income tax benefits received are recognized as a component of income tax expense. This ASU is effective on January 1, 2024 and may be applied on either a modified retrospective or retrospective basis or, for certain changes, on a prospective basis, and early adoption is permitted. The amendments in this ASU are not expected to have a material impact on the results of operations or financial position.
NOTE 2: SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair values of debt securities available for sale and equity securities with a readily determinable fair value that are carried at fair value as of March 31, 2023, and December 31, 2022, are summarized in the table below, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
March 31, 2023 | | | | | | | |
U.S. treasuries | $ | 32,391 | | | $ | 33 | | | $ | (492) | | | $ | 31,932 | |
U.S. agencies | 49,062 | | | — | | | (5,478) | | | 43,584 | |
Obligations of states and political subdivisions | 1,023,650 | | | 47 | | | (135,775) | | | 887,922 | |
Mortgage-backed securities - agency | 2,002,260 | | | 85 | | | (244,876) | | | 1,757,469 | |
Mortgage-backed securities - non-agency | 2,260,462 | | | 3,739 | | | (146,319) | | | 2,117,882 | |
Commercial mortgage-backed securities - agency | 99,914 | | | — | | | (13,892) | | | 86,022 | |
Commercial mortgage-backed securities - non-agency | 675,425 | | | — | | | (17,551) | | | 657,874 | |
Asset-backed securities | 448,001 | | | — | | | (12,478) | | | 435,523 | |
Corporate bonds | 59,202 | | | — | | | (1,357) | | | 57,845 | |
Total debt securities | 6,650,367 | | | 3,904 | | | (578,218) | | | 6,076,053 | |
Equity securities with a readily determinable fair value | 20,604 | | | — | | | — | | | 20,604 | |
Total | $ | 6,670,971 | | | $ | 3,904 | | | $ | (578,218) | | | $ | 6,096,657 | |
December 31, 2022 | | | | | | | |
U.S. treasuries | $ | 32,369 | | | $ | 8 | | | $ | (678) | | | $ | 31,699 | |
U.S. agencies | 49,437 | | | — | | | (6,302) | | | 43,135 | |
Obligations of states and political subdivisions | 1,049,578 | | | 14 | | | (170,155) | | | 879,437 | |
Mortgage-backed securities - agency | 2,042,092 | | | 56 | | | (270,043) | | | 1,772,105 | |
Mortgage-backed securities - non-agency | 2,327,308 | | | 1,417 | | | (146,849) | | | 2,181,876 | |
Commercial mortgage-backed securities - agency | 100,518 | | | — | | | (15,395) | | | 85,123 | |
Commercial mortgage-backed securities - non-agency | 679,511 | | | — | | | (20,052) | | | 659,459 | |
Asset-backed securities | 428,397 | | | — | | | (12,343) | | | 416,054 | |
Corporate bonds | 59,205 | | | — | | | (1,263) | | | 57,942 | |
Total debt securities | 6,768,415 | | | 1,495 | | | (643,080) | | | 6,126,830 | |
Equity securities with a readily determinable fair value | 20,314 | | | — | | | — | | | 20,314 | |
Total | $ | 6,788,729 | | | $ | 1,495 | | | $ | (643,080) | | | $ | 6,147,144 | |
The amortized cost, gross unrealized gains and losses and estimated fair values of held to maturity securities as of March 31, 2023, and December 31, 2022, are summarized in the table below, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | | |
March 31, 2023 | | | | | | | | | |
| | | | | | | | | |
Obligations of states and political subdivisions | $ | 832,098 | | | $ | 3,882 | | | $ | (20,308) | | | $ | 815,672 | | | |
Total | $ | 832,098 | | | $ | 3,882 | | | $ | (20,308) | | | $ | 815,672 | | | |
December 31, 2022 | | | | | | | | | |
| | | | | | | | | |
Obligations of states and political subdivisions | $ | 829,403 | | | $ | 3,096 | | | $ | (55,942) | | | $ | 776,557 | | | |
Total | $ | 829,403 | | | $ | 3,096 | | | $ | (55,942) | | | $ | 776,557 | | | |
As of March 31, 2023, and December 31, 2022, HTLF had $30.6 million and $33.0 million, respectively, of accrued interest receivable, which is included in other assets on the consolidated balance sheets. HTLF does not consider accrued interest receivable in the carrying amount of financial assets held at amortized cost basis or in the allowance for credit losses calculation.
The amortized cost and estimated fair value of investment securities carried at fair value at March 31, 2023, by contractual maturity, are as follows, in thousands. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.
| | | | | | | | | | | |
| March 31, 2023 |
| Amortized Cost | | Estimated Fair Value |
Due in 1 year or less | $ | 875 | | | $ | 867 | |
Due in 1 to 5 years | 86,596 | | | 85,549 | |
Due in 5 to 10 years | 55,440 | | | 48,402 | |
Due after 10 years | 1,021,394 | | | 886,465 | |
Total debt securities | 1,164,305 | | | 1,021,283 | |
Mortgage and asset-backed securities | 5,486,062 | | | 5,054,770 | |
Equity securities with a readily determinable fair value | 20,604 | | | 20,604 | |
Total investment securities | $ | 6,670,971 | | | $ | 6,096,657 | |
The amortized cost and estimated fair value of debt securities held to maturity at March 31, 2023, by contractual maturity, are as follows, in thousands. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.
| | | | | | | | | | | |
| March 31, 2023 |
| Amortized Cost | | Estimated Fair Value |
Due in 1 year or less | $ | 1,243 | | | $ | 1,246 | |
Due in 1 to 5 years | 71,115 | | | 70,976 | |
Due in 5 to 10 years | 143,654 | | | 143,498 | |
Due after 10 years | 616,086 | | | 599,952 | |
Total debt securities | $ | 832,098 | | | $ | 815,672 | |
| | | |
| | | |
As of March 31, 2023, and December 31, 2022, securities with a carrying value of $2.96 billion and $1.49 billion, respectively, were pledged to secure public and trust deposits, short-term borrowings and for other purposes as required or permitted by law.
Gross gains and losses realized related to the sales of securities carried at fair value for the three months ended March 31, 2023 and 2022, are summarized as follows, in thousands:
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
Proceeds from sales | | | | | $ | 146,448 | | | $ | 824,071 | |
Gross security gains | | | | | — | | | 6,941 | |
Gross security losses | | | | | 1,104 | | | 4,950 | |
The following 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 the securities portfolio as of March 31, 2023, and December 31, 2022. The investments were segregated into two categories: those that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 months or more. The reference point for determining how long an investment was in an unrealized loss position was March 31, 2022, and December 31, 2021, respectively.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 |
March 31, 2023 | | | | | | | | | | | | | | | | | |
U.S. treasuries | $ | 25,913 | | | $ | (492) | | | 3 | | | $ | — | | | $ | — | | | — | | | $ | 25,913 | | | $ | (492) | | | 3 | |
U.S. agencies | 133 | | | (2) | | | 2 | | | 43,451 | | | (5,476) | | | 4 | | | 43,584 | | | (5,478) | | | 6 | |
Obligations of states and political subdivisions | 88,910 | | | (3,541) | | | 20 | | | 794,010 | | | (132,234) | | | 155 | | | 882,920 | | | (135,775) | | | 175 | |
Mortgage-backed securities - agency | 52,854 | | | (4,839) | | | 30 | | | 1,701,881 | | | (240,037) | | | 187 | | | 1,754,735 | | | (244,876) | | | 217 | |
Mortgage-backed securities - non-agency | 362,023 | | | (26,315) | | | 12 | | | 1,165,995 | | | (120,004) | | | 41 | | | 1,528,018 | | | (146,319) | | | 53 | |
Commercial mortgage-backed securities - agency | 3,607 | | | (146) | | | 2 | | | 82,415 | | | (13,746) | | | 18 | | | 86,022 | | | (13,892) | | | 20 | |
Commercial mortgage-backed securities - non-agency | 119,454 | | | (5,360) | | | 8 | | | 498,815 | | | (12,191) | | | 12 | | | 618,269 | | | (17,551) | | | 20 | |
Asset-backed securities | 137,105 | | | (3,582) | | | 3 | | | 94,100 | | | (8,896) | | | 10 | | | 231,205 | | | (12,478) | | | 13 | |
Corporate bonds | 51,892 | | | (601) | | | 3 | | | 5,953 | | | (756) | | | 5 | | | 57,845 | | | (1,357) | | | 8 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total temporarily impaired securities | $ | 841,891 | | | $ | (44,878) | | | 83 | | | $ | 4,386,620 | | | $ | (533,340) | | | 432 | | | $ | 5,228,511 | | | $ | (578,218) | | | 515 | |
December 31, 2022 | | |
U.S. treasuries | $ | 28,699 | | | $ | (678) | | | 4 | | | $ | — | | | $ | — | | | — | | | $ | 28,699 | | | $ | (678) | | | 4 | |
U.S. agencies | 16,487 | | | (222) | | | 5 | | | 26,648 | | | (6,080) | | | 2 | | | 43,135 | | | (6,302) | | | 7 | |
Obligations of states and political subdivisions | 288,457 | | | (28,378) | | | 69 | | | 589,641 | | | (141,777) | | | 113 | | | 878,098 | | | (170,155) | | | 182 | |
Mortgage-backed securities - agency | 241,288 | | | (21,420) | | | 99 | | | 1,528,951 | | | (248,623) | | | 126 | | | 1,770,239 | | | (270,043) | | | 225 | |
Mortgage-backed securities - non-agency | 950,054 | | | (70,213) | | | 25 | | | 693,531 | | | (76,636) | | | 25 | | | 1,643,585 | | | (146,849) | | | 50 | |
Commercial mortgage-backed securities - agency | 27,732 | | | (2,291) | | | 12 | | | 57,392 | | | (13,104) | | | 7 | | | 85,124 | | | (15,395) | | | 19 | |
Commercial mortgage-backed securities - non-agency | 530,541 | | | (16,830) | | | 15 | | | 84,619 | | | (3,222) | | | 4 | | | 615,160 | | | (20,052) | | | 19 | |
Asset-backed securities | 118,613 | | | (6,107) | | | 7 | | | 56,621 | | | (6,236) | | | 6 | | | 175,234 | | | (12,343) | | | 13 | |
Corporate bonds | 57,544 | | | (1,257) | | | 7 | | | 398 | | | (6) | | | 1 | | | 57,942 | | | (1,263) | | | 8 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total temporarily impaired securities | $ | 2,259,415 | | | $ | (147,396) | | | 243 | | | $ | 3,037,801 | | | $ | (495,684) | | | 284 | | | $ | 5,297,216 | | | $ | (643,080) | | | 527 | |
HTLF 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 HTLF 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, HTLF 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, HTLF 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 unrealized losses on HTLF's commercial mortgage, mortgage and asset-backed securities are the result of changes in market interest rates or widening of market spreads subsequent to the 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 HTLF has the intent and ability to hold these investments until a market price recovery or to maturity and does not believe it will be required to sell the securities before maturity, no credit losses were recognized on these securities during the three months ended March 31, 2023 and 2022.
The unrealized losses on HTLF's obligations of states and political subdivisions available for sale are the result of changes in market interest rates or widening of market spreads subsequent to the initial purchase of the securities. Management monitors the published credit ratings of these securities and the stability of the underlying municipalities. Because the 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 HTLF has the intent and ability to hold these investments until a market price recovery or to maturity and does not believe it will be required to sell the securities before maturity, no credit losses were recognized on these securities during the three months ended March 31, 2023 and 2022.
Based on HTLF's credit loss methodology applicable to held to maturity debt securities, no allowance for credit losses was required at both March 31, 2023, and December 31, 2022.
The following table summarizes, in thousands, the carrying amount of HTLF's held to maturity debt securities by investment rating as of March 31, 2023, and December 31, 2022, which are updated quarterly and used to monitor the credit quality of the securities:
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Rating | | | |
AAA | $ | 79,848 | | | $ | 79,598 | |
AA, AA+, AA- | 590,034 | | | 588,354 | |
A+, A, A- | 137,368 | | | 136,624 | |
BBB | 20,599 | | | 20,623 | |
Not Rated | 4,249 | | | 4,204 | |
Total | $ | 832,098 | | | $ | 829,403 | |
Included in other securities were shares of stock in each Federal Home Loan Bank (the "FHLB") of Des Moines, Chicago, Dallas and Topeka at an amortized cost of $8.9 million at March 31, 2023, and $12.3 million at December 31, 2022.
The HTLF 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. HTLF considers its FHLB stock as a long-term investment that provides access to competitive products and liquidity. HTLF evaluates impairment in these investments based on the ultimate recoverability of the par value and, at March 31, 2023, and December 31, 2022, did not consider the investments to be impaired.
NOTE 3: LOANS
Loans as of March 31, 2023, and December 31, 2022, were as follows, in thousands:
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Loans receivable held to maturity: | | | |
Commercial and industrial | $ | 3,498,345 | | | $ | 3,464,414 | |
Paycheck Protection Program ("PPP") | 8,258 | | | 11,025 | |
Owner occupied commercial real estate | 2,312,538 | | | 2,265,307 | |
Non-owner occupied commercial real estate | 2,421,341 | | | 2,330,940 | |
Real estate construction | 1,102,186 | | | 1,076,082 | |
Agricultural and agricultural real estate | 810,183 | | | 920,510 | |
Residential real estate | 841,084 | | | 853,361 | |
Consumer | 501,418 | | | 506,713 | |
Total loans receivable held to maturity | 11,495,353 | | | 11,428,352 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Allowance for credit losses | (112,707) | | | (109,483) | |
Loans receivable, net | $ | 11,382,646 | | | $ | 11,318,869 | |
As of March 31, 2023, and December 31, 2022, HTLF had $51.7 million and $49.1 million, respectively, of accrued interest receivable, which is included in other assets on the consolidated balance sheets. HTLF 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, 2023, and December 31, 2022, and the
related loan balances, disaggregated on the basis of measurement methodology, in thousands. If a loan no longer shares similar risk characteristics with other loans in the pool, it is evaluated on an individual basis and is not included in the collective evaluation. Lending relationships with $500,000 or more of total exposure and are on nonaccrual are individually assessed using a collateral dependency calculation. All other loans are collectively evaluated for losses.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
March 31, 2023 | | | | | | | | | | | |
Commercial and industrial | $ | 9,144 | | | $ | 22,679 | | | $ | 31,823 | | | $ | 19,953 | | | $ | 3,478,392 | | | $ | 3,498,345 | |
PPP | — | | | — | | | — | | | — | | | 8,258 | | | 8,258 | |
Owner occupied commercial real estate | 376 | | | 13,775 | | | 14,151 | | | 7,784 | | | 2,304,754 | | | 2,312,538 | |
Non-owner occupied commercial real estate | — | | | 17,062 | | | 17,062 | | | 10,983 | | | 2,410,358 | | | 2,421,341 | |
Real estate construction | — | | | 30,138 | | | 30,138 | | | 1,498 | | | 1,100,688 | | | 1,102,186 | |
Agricultural and agricultural real estate | 62 | | | 2,484 | | | 2,546 | | | 5,116 | | | 805,067 | | | 810,183 | |
Residential real estate | — | | | 7,564 | | | 7,564 | | | 788 | | | 840,296 | | | 841,084 | |
Consumer | — | | | 9,423 | | | 9,423 | | | — | | | 501,418 | | | 501,418 | |
| | | | | | | | | | | |
Total | $ | 9,582 | | | $ | 103,125 | | | $ | 112,707 | | | $ | 46,122 | | | $ | 11,449,231 | | | $ | 11,495,353 | |
| | | | | | | | | | | |
December 31, 2022 | | | | | | | | | | | |
Commercial and industrial | $ | 6,670 | | | $ | 22,401 | | | $ | 29,071 | | | $ | 18,712 | | | $ | 3,445,702 | | | $ | 3,464,414 | |
PPP | — | | | — | | | — | | | — | | | 11,025 | | | 11,025 | |
Owner occupied commercial real estate | 376 | | | 13,572 | | | 13,948 | | | 7,932 | | | 2,257,375 | | | 2,265,307 | |
Non-owner occupied commercial real estate | — | | | 16,539 | | | 16,539 | | | 11,371 | | | 2,319,569 | | | 2,330,940 | |
Real estate construction | — | | | 29,998 | | | 29,998 | | | 1,518 | | | 1,074,564 | | | 1,076,082 | |
Agricultural and agricultural real estate | 63 | | | 2,571 | | | 2,634 | | | 3,851 | | | 916,659 | | | 920,510 | |
Residential real estate | — | | | 7,711 | | | 7,711 | | | 1,607 | | | 851,754 | | | 853,361 | |
Consumer | — | | | 9,582 | | | 9,582 | | | — | | | 506,713 | | | 506,713 | |
| | | | | | | | | | | |
Total | $ | 7,109 | | | $ | 102,374 | | | $ | 109,483 | | | $ | 44,991 | | | $ | 11,383,361 | | | $ | 11,428,352 | |
The following table shows the amortized cost basis as of March 31, 2023, of the loans modified to borrowers experiencing financial difficulty by loan category and type of concession granted, dollars in thousands.
| | | | | | | | | | | | | | | | | | | | | | | |
| Loan Modifications Made to Borrowers Experiencing Financial Difficulty |
| Term Extension | | Term Extension and Interest Only Payments |
| Amortized Cost Basis | | % of Loan Category | | Amortized Cost Basis | | % of Loan Category |
March 31, 2023 | | | | | | | |
Commercial | $ | 3,682 | | | 0.11 | % | | $ | — | | | — | % |
| | | | | | | |
Owner occupied commercial real estate | — | | | — | | | 5,043 | | | 0.22 | |
| | | | | | | |
Real estate construction | 1,498 | | | 0.06 | | | — | | | — | |
| | | | | | | |
Residential real estate | 762 | | | 0.01 | | | — | | | — | |
| | | | | | | |
Total | $ | 5,942 | | | 0.05 | % | | $ | 5,043 | | | 0.22 | % |
The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulty in the three months ending March 31, 2023.
| | | | | | | | | | | | | | |
Loan Type | | Weighted Average Term Extension (months) | | Weighted Average Term Extension and Interest Only Payments (months) |
Commercial and industrial | | 10 | | 0 |
| | | | |
Owner occupied commercial real estate | | 0 | | 12 |
| | | | |
Real estate construction | | 6 | | 0 |
| | | | |
Residential real estate | | 12 | | 0 |
| | | | |
At March 31, 2023, there were no commitments to extend credit to any of the borrowers experiencing financial difficulty.
HTLF had no loans to borrowers experiencing financial difficulty that had a payment default during the three months ended March 31, 2023, that had been modified in the twelve-month period prior to the default.
HTLF closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table shows the performance of loans that have been modified in the three months ended March 31, 2023, dollars in thousands.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Accruing Loans | | | | |
| 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or More Past Due | | | | Total Past Due | | Current | | Nonaccrual | | |
March 31, 2023 | | | | | | | | | | | | | | | |
Commercial and industrial | $ | — | | | $ | — | | | $ | — | | | | | $ | — | | | $ | 3,682 | | | $ | — | | | |
| | | | | | | | | | | | | | | |
Owner occupied commercial real estate | — | | | — | | | — | | | | | — | | | 5,043 | | | — | | | |
| | | | | | | | | | | | | | | |
Real estate construction | — | | | — | | | — | | | | | — | | | — | | | 1,498 | | | |
| | | | | | | | | | | | | | | |
Residential real estate | — | | | — | | | — | | | | | — | | | — | | | 762 | | | |
| | | | | | | | | | | | | | | |
Total | $ | — | | | $ | — | | | $ | — | | | | | $ | — | | | $ | 8,725 | | | $ | 2,260 | | | |
HTLF's internal rating system is a series of grades reflecting management's credit risk assessment, based on its analysis of the borrower's financial condition. The "pass" category consists of all loans that are not in the "nonpass" category 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 and risk rating migration analysis.
The "nonpass" category consists of watch, substandard, doubtful and loss rated 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 HTLF 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. HTLF had no loans classified as "loss" or "doubtful" as of March 31, 2023, and December 31, 2022.
The following tables show the risk category of loans by loan category, year of origination and charge-offs as of March 31, 2023, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of March 31, 2023 | Amortized Cost Basis of Term Loans by Year of Origination | | | | |
| 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 and Prior | | Revolving | | Total |
Commercial and industrial | | | | | | | | | | | | | | | |
Pass | $ | 171,784 | | | $ | 945,388 | | | $ | 401,138 | | | $ | 236,351 | | | $ | 94,489 | | | $ | 355,412 | | | $ | 1,129,728 | | | $ | 3,334,290 | |
Watch | 372 | | | 14,254 | | | 3,822 | | | 3,023 | | | 6,093 | | | 4,914 | | | 25,162 | | | 57,640 | |
Substandard | 2,116 | | | 10,883 | | | 14,284 | | | 9,093 | | | 21,814 | | | 11,594 | | | 36,631 | | | 106,415 | |
Commercial and industrial total | $ | 174,272 | | | $ | 970,525 | | | $ | 419,244 | | | $ | 248,467 | | | $ | 122,396 | | | $ | 371,920 | | | $ | 1,191,521 | | | $ | 3,498,345 | |
Commercial and industrial charge-offs | $ | — | | | $ | 219 | | | $ | 95 | | | $ | 8 | | | $ | — | | | $ | 788 | | | $ | 341 | | | $ | 1,451 | |
| | | | | | | | | | | | | | | |
PPP | | | | | | | | | | | | | | | |
Pass | $ | — | | | $ | — | | | $ | 6,731 | | | $ | 102 | | | $ | — | | | $ | — | | | $ | — | | | $ | 6,833 | |
Watch | — | | | — | | | 6 | | | — | | | — | | | — | | | — | | | 6 | |
Substandard | — | | | — | | | 1,419 | | | — | | | — | | | — | | | — | | | 1,419 | |
PPP total | $ | — | | | $ | — | | | $ | 8,156 | | | $ | 102 | | | $ | — | | | $ | — | | | $ | — | | | $ | 8,258 | |
PPP charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | |
Owner occupied commercial real estate | | | | | | | | | | | | | | | |
Pass | $ | 90,398 | | | $ | 524,526 | | | $ | 753,107 | | | $ | 241,589 | | | $ | 263,294 | | | $ | 261,584 | | | $ | 34,578 | | | $ | 2,169,076 | |
Watch | — | | | 21,288 | | | 13,401 | | | 13,915 | | | 7,105 | | | 12,568 | | | — | | | 68,277 | |
Substandard | 6,107 | | | 7,172 | | | 23,591 | | | 22,360 | | | 5,484 | | | 9,721 | | | 750 | | | 75,185 | |
Owner occupied commercial real estate total | $ | 96,505 | | | $ | 552,986 | | | $ | 790,099 | | | $ | 277,864 | | | $ | 275,883 | | | $ | 283,873 | | | $ | 35,328 | | | $ | 2,312,538 | |
Owner occupied commercial real estate charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 14 | | | $ | — | | | $ | 14 | |
| | | | | | | | | | | | | | | |
Non-owner occupied commercial real estate | | | | | | | | | | | | | | | |
Pass | $ | 141,649 | | | $ | 730,364 | | | $ | 543,098 | | | $ | 208,137 | | | $ | 257,733 | | | $ | 305,784 | | | $ | 73,088 | | | $ | 2,259,853 | |
Watch | — | | | 8,093 | | | 1,368 | | | 3,566 | | | 38,876 | | | 53,877 | | | — | | | 105,780 | |
Substandard | — | | | — | | | 6,690 | | | 1,624 | | | 15,477 | | | 31,917 | | | — | | | 55,708 | |
Non-owner occupied commercial real estate total | $ | 141,649 | | | $ | 738,457 | | | $ | 551,156 | | | $ | 213,327 | | | $ | 312,086 | | | $ | 391,578 | | | $ | 73,088 | | | $ | 2,421,341 | |
Non-owner occupied commercial real estate charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Real estate construction | | | | | | | | | | | | | | | |
Pass | $ | 45,771 | | | $ | 625,728 | | | $ | 303,674 | | | $ | 77,340 | | | $ | 20,886 | | | $ | 7,174 | | | $ | 8,224 | | | $ | 1,088,797 | |
Watch | — | | | 6,574 | | | 1,085 | | | 1,244 | | | — | | | 103 | | | — | | | 9,006 | |
Substandard | — | | | 3,428 | | | 356 | | | 121 | | | 434 | | | 44 | | | — | | | 4,383 | |
Real estate construction total | $ | 45,771 | | | $ | 635,730 | | | $ | 305,115 | | | $ | 78,705 | | | $ | 21,320 | | | $ | 7,321 | | | $ | 8,224 | | | $ | 1,102,186 | |
Real estate construction charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Agricultural and agricultural real estate | | | | | | | | | | | | | | | |
Pass | $ | 39,667 | | | $ | 249,164 | | | $ | 125,673 | | | $ | 73,366 | | | $ | 31,283 | | | $ | 56,019 | | | $ | 197,976 | | | $ | 773,148 | |
Watch | 241 | | | 1,225 | | | 549 | | | 3,843 | | | 496 | | | 935 | | | 1,346 | | | 8,635 | |
Substandard | — | | | 7,618 | | | 3,378 | | | 212 | | | 1,154 | | | 15,017 | | | 1,021 | | | 28,400 | |
Agricultural and agricultural real estate total | $ | 39,908 | | | $ | 258,007 | | | $ | 129,600 | | | $ | 77,421 | | | $ | 32,933 | | | $ | 71,971 | | | $ | 200,343 | | | $ | 810,183 | |
Agricultural and agricultural real estate charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | |
Residential real estate | | | | | | | | | | | | | | | |
Pass | $ | 18,663 | | | $ | 181,925 | | | $ | 260,225 | | | $ | 62,951 | | | $ | 37,551 | | | $ | 238,866 | | | $ | 21,172 | | | $ | 821,353 | |
Watch | — | | | 2,549 | | | 2,618 | | | 85 | | | 1,372 | | | 5,415 | | | 433 | | | 12,472 | |
Substandard | 811 | | | 59 | | | 1,308 | | | 838 | | | 38 | | | 4,205 | | | — | | | 7,259 | |
Residential real estate total | $ | 19,474 | | | $ | 184,533 | | | $ | 264,151 | | | $ | 63,874 | | | $ | 38,961 | | | $ | 248,486 | | | $ | 21,605 | | | $ | 841,084 | |
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Residential real estate charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
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As of March 31, 2023 | Amortized Cost Basis of Term Loans by Year of Origination | | | | |
| 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 and Prior | | Revolving | | Total |
Consumer | | | | | | | | | | | | | | | |
Pass | $ | 11,806 | | | $ | 75,894 | | | $ | 44,501 | | | $ | 10,554 | | | $ | 5,180 | | | $ | 18,586 | | | $ | 328,689 | | | $ | 495,210 | |
Watch | — | | | 51 | | | 227 | | | 59 | | | 109 | | | 1,524 | | | 1,434 | | | 3,404 | |
Substandard | 9 | | | 209 | | | 339 | | | 220 | | | 261 | | | 1,565 | | | 201 | | | 2,804 | |
Consumer total | $ | 11,815 | | | $ | 76,154 | | | $ | 45,067 | | | $ | 10,833 | | | $ | 5,550 | | | $ | 21,675 | | | $ | 330,324 | | | $ | 501,418 | |
Consumer charge-offs | $ | — | | | $ | 24 | | | $ | 26 | | | $ | 11 | | | $ | 11 | | | $ | 6 | | | $ | 608 | | | $ | 686 | |
| | | | | | | | | | | | | | | |
Total Pass | $ | 519,738 | | | $ | 3,332,989 | | | $ | 2,438,147 | | | $ | 910,390 | | | $ | 710,416 | | | $ | 1,243,425 | | | $ | 1,793,455 | | | $ | 10,948,560 | |
Total Watch | 613 | | | 54,034 | | | 23,076 | | | 25,735 | | | 54,051 | | | 79,336 | | | 28,375 | | | 265,220 | |
Total Substandard | 9,043 | | | 29,369 | | | 51,365 | | | 34,468 | | | 44,662 | | | 74,063 | | | 38,603 | | | 281,573 | |
Total Loans | $ | 529,394 | | | $ | 3,416,392 | | | $ | 2,512,588 | | | $ | 970,593 | | | $ | 809,129 | | | $ | 1,396,824 | | | $ | 1,860,433 | | | $ | 11,495,353 | |
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Total Charge-offs | $ | — | | | $ | 243 | | | $ | 121 | | | $ | 19 | | | $ | 11 | | | $ | 808 | | | $ | 949 | | | $ | 2,151 | |
The following table show the risk category of loans by loan category and year of origination as of December 31, 2022, in thousands.
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As of December 31, 2022 | Amortized Cost Basis of Term Loans by Year of Origination | | | | |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 and Prior | | Revolving | | Total |
Commercial and industrial | | | | | | | | | | | | | | | |
Pass | $ | 967,103 | | | $ | 442,001 | | | $ | 260,021 | | | $ | 101,998 | | | $ | 57,776 | | | $ | 421,312 | | | $ | 1,064,333 | | | $ | 3,314,544 | |
Watch | 12,638 | | | 1,370 | | | 685 | | | 5,487 | | | 2,882 | | | 3,315 | | | 21,984 | | | 48,361 | |
Substandard | 6,691 | | | 14,366 | | | 9,369 | | | 22,171 | | | 5,546 | | | 6,758 | | | 36,608 | | | 101,509 | |
Commercial and industrial total | $ | 986,432 | | | $ | 457,737 | | | $ | 270,075 | | | $ | 129,656 | | | $ | 66,204 | | | $ | 431,385 | | | $ | 1,122,925 | | | $ | 3,464,414 | |
PPP | | | | | | | | | | | | | | | |
Pass | $ | — | | | $ | 7,807 | | | $ | 526 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 8,333 | |
Watch | — | | | 7 | | | — | | | — | | | — | | | — | | | — | | | 7 | |
Substandard | — | | | 2,685 | | | — | | | — | | | — | | | — | | | — | | | 2,685 | |
PPP total | $ | — | | | $ | 10,499 | | | $ | 526 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 11,025 | |
Owner occupied commercial real estate | | | | | | | | | | | | | | | |
Pass | $ | 511,547 | | | $ | 781,946 | | | $ | 255,476 | | | $ | 266,228 | | | $ | 103,943 | | | $ | 179,503 | | | $ | 34,117 | | | $ | 2,132,760 | |
Watch | 22,079 | | | 3,410 | | | 12,346 | | | 8,520 | | | 3,645 | | | 11,899 | | | — | | | 61,899 | |
Substandard | 2,971 | | | 23,802 | | | 26,490 | | | 6,358 | | | 2,574 | | | 7,353 | | | 1,100 | | | 70,648 | |
Owner occupied commercial real estate total | $ | 536,597 | | | $ | 809,158 | | | $ | 294,312 | | | $ | 281,106 | | | $ | 110,162 | | | $ | 198,755 | | | $ | 35,217 | | | $ | 2,265,307 | |
Non-owner occupied commercial real estate | | | | | | | | | | | | | | | |
Pass | $ | 756,059 | | | $ | 515,075 | | | $ | 227,383 | | | $ | 261,964 | | | $ | 127,400 | | | $ | 210,289 | | | $ | 70,398 | | | $ | 2,168,568 | |
Watch | 8,131 | | | 792 | | | 2,849 | | | 38,218 | | | 38,510 | | | 16,180 | | | 547 | | | 105,227 | |
Substandard | 202 | | | 6,784 | | | 1,838 | | | 16,019 | | | 22,332 | | | 9,970 | | | — | | | 57,145 | |
Non-owner occupied commercial real estate total | $ | 764,392 | | | $ | 522,651 | | | $ | 232,070 | | | $ | 316,201 | | | $ | 188,242 | | | $ | 236,439 | | | $ | 70,945 | | | $ | 2,330,940 | |
Real estate construction | | | | | | | | | | | | | | | |
Pass | $ | 597,370 | | | $ | 328,391 | | | $ | 88,660 | | | $ | 21,221 | | | $ | 2,568 | | | $ | 6,274 | | | $ | 8,252 | | | $ | 1,052,736 | |
Watch | 665 | | | 16,218 | | | 1,257 | | | — | | | — | | | 122 | | | — | | | 18,262 | |
Substandard | 2,587 | | | 356 | | | 173 | | | 446 | | | 1,478 | | | 44 | | | — | | | 5,084 | |
Real estate construction total | $ | 600,622 | | | $ | 344,965 | | | $ | 90,090 | | | $ | 21,667 | | | $ | 4,046 | | | $ | 6,440 | | | $ | 8,252 | | | $ | 1,076,082 | |
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Agricultural and agricultural real estate | | | | | | | | | | | | | | | |
Pass | $ | 324,791 | | | $ | 140,252 | | | $ | 79,307 | | | $ | 34,447 | | | $ | 22,600 | | | $ | 38,672 | | | $ | 239,686 | | | $ | 879,755 | |
Watch | 3,795 | | | 515 | | | 3,865 | | | 641 | | | 444 | | | 672 | | | 902 | | | 10,834 | |
Substandard | 8,674 | | | 3,224 | | | 204 | | | 1,859 | | | 12,323 | | | 2,682 | | | 955 | | | 29,921 | |
Agricultural and agricultural real estate total | $ | 337,260 | | | $ | 143,991 | | | $ | 83,376 | | | $ | 36,947 | | | $ | 35,367 | | | $ | 42,026 | | | $ | 241,543 | | | $ | 920,510 | |
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As of December 31, 2022 | Amortized Cost Basis of Term Loans by Year of Origination | | | | |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 and Prior | | Revolving | | Total |
Residential real estate | | | | | | | | | | | | | | | |
Pass | $ | 189,133 | | | $ | 268,561 | | | $ | 64,627 | | | $ | 39,468 | | | $ | 34,863 | | | $ | 217,489 | | | $ | 23,331 | | | $ | 837,472 | |
Watch | 706 | | | 1,095 | | | 88 | | | 957 | | | 2,296 | | | 2,237 | | | 399 | | | 7,778 | |
Substandard | 28 | | | 1,273 | | | 1,024 | | | 99 | | | 792 | | | 4,895 | | | — | | | 8,111 | |
Residential real estate total | $ | 189,867 | | | $ | 270,929 | | | $ | 65,739 | | | $ | 40,524 | | | $ | 37,951 | | | $ | 224,621 | | | $ | 23,730 | | | $ | 853,361 | |
| | | | | | | | | | | | | | | |
Consumer | | | | | | | | | | | | | | | |
Pass | $ | 80,592 | | | $ | 47,787 | | | $ | 11,722 | | | $ | 6,022 | | | $ | 4,840 | | | $ | 24,655 | | | $ | 325,247 | | | $ | 500,865 | |
Watch | 20 | | | 191 | | | 35 | | | 119 | | | 74 | | | 1,584 | | | 953 | | | 2,976 | |
Substandard | 188 | | | 331 | | | 242 | | | 303 | | | 75 | | | 1,539 | | | 194 | | | 2,872 | |
Consumer total | $ | 80,800 | | | $ | 48,309 | | | $ | 11,999 | | | $ | 6,444 | | | $ | 4,989 | | | $ | 27,778 | | | $ | 326,394 | | | $ | 506,713 | |
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Total Pass | $ | 3,426,595 | | | $ | 2,531,820 | | | $ | 987,722 | | | $ | 731,348 | | | $ | 353,990 | | | $ | 1,098,194 | | | $ | 1,765,364 | | | $ | 10,895,033 | |
Total Watch | 48,034 | | | 23,598 | | | 21,125 | | | 53,942 | | | 47,851 | | | 36,009 | | | 24,785 | | | 255,344 | |
Total Substandard | 21,341 | | | 52,821 | | | 39,340 | | | 47,255 | | | 45,120 | | | 33,241 | | | 38,857 | | | 277,975 | |
Total Loans | $ | 3,495,970 | | | $ | 2,608,239 | | | $ | 1,048,187 | | | $ | 832,545 | | | $ | 446,961 | | | $ | 1,167,444 | | | $ | 1,829,006 | | | $ | 11,428,352 | |
Included in the nonpass loans at March 31, 2023, and December 31, 2022, were $1.4 million and $2.7 million, respectively, of nonpass PPP loans as a result of risk ratings on non-PPP related credits. HTLF's risk rating methodology assigns a risk rating to the whole lending relationship. HTLF has no allowance recorded related to the PPP loans because of the 100% government guarantee through the United States Small Business Administration ("SBA").
As of March 31, 2023, HTLF had $1.3 million of loans secured by residential real estate property that were in the process of foreclosure.
The following table sets forth information regarding accruing and nonaccrual loans at March 31, 2023, and December 31, 2022, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Accruing Loans | | | | |
| 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or More Past Due | | Total Past Due | | Current | | Nonaccrual | | Total Loans |
March 31, 2023 | | | | | | | | | | | | | |
Commercial and industrial | $ | 2,783 | | | $ | 800 | | | $ | 24 | | | $ | 3,607 | | | $ | 3,470,831 | | | $ | 23,907 | | | $ | 3,498,345 | |
PPP | — | | | — | | | — | | | — | | | 8,258 | | | — | | | 8,258 | |
Owner occupied commercial real estate | 3,365 | | | 377 | | | — | | | 3,742 | | | 2,300,588 | | | 8,208 | | | 2,312,538 | |
Non-owner occupied commercial real estate | 748 | | | — | | | — | | | 748 | | | 2,409,369 | | | 11,224 | | | 2,421,341 | |
Real estate construction | 642 | | | — | | | 5 | | | 647 | | | 1,099,267 | | | 2,272 | | | 1,102,186 | |
Agricultural and agricultural real estate | 255 | | | — | | | 17 | | | 272 | | | 802,741 | | | 7,170 | | | 810,183 | |
Residential real estate | 1,073 | | | 41 | | | 41 | | | 1,155 | | | 835,781 | | | 4,148 | | | 841,084 | |
Consumer | 1,203 | | | 397 | | | 87 | | | 1,687 | | | 498,594 | | | 1,137 | | | 501,418 | |
Total gross loans receivable held to maturity | $ | 10,069 | | | $ | 1,615 | | | $ | 174 | | | $ | 11,858 | | | $ | 11,425,429 | | | $ | 58,066 | | | $ | 11,495,353 | |
December 31, 2022 | | | | | | | | | | | | | |
Commercial and industrial | $ | 1,099 | | | $ | 356 | | | $ | 131 | | | $ | 1,586 | | | $ | 3,440,062 | | | $ | 22,766 | | | $ | 3,464,414 | |
PPP | — | | | — | | | — | | | — | | | 11,006 | | | 19 | | | 11,025 | |
Owner occupied commercial real estate | 12 | | | 127 | | | — | | | 139 | | | 2,256,365 | | | 8,803 | | | 2,265,307 | |
Non-owner occupied commercial real estate | — | | | — | | | — | | | — | | | 2,319,282 | | | 11,658 | | | 2,330,940 | |
Real estate construction | 16 | | | 28 | | | — | | | 44 | | | 1,073,687 | | | 2,351 | | | 1,076,082 | |
Agricultural and agricultural real estate | 48 | | | — | | | 142 | | | 190 | | | 914,088 | | | 6,232 | | | 920,510 | |
Residential real estate | 1,206 | | | 152 | | | — | | | 1,358 | | | 846,739 | | | 5,264 | | | 853,361 | |
Consumer | 1,526 | | | 196 | | | — | | | 1,722 | | | 503,853 | | | 1,138 | | | 506,713 | |
Total gross loans receivable held to maturity | $ | 3,907 | | | $ | 859 | | | $ | 273 | | | $ | 5,039 | | | $ | 11,365,082 | | | $ | 58,231 | | | $ | 11,428,352 | |
Loans delinquent 30 to 89 days as a percent of total loans were 0.10% at March 31, 2023, compared to 0.04% at December 31, 2022. Changes in credit risk are monitored on a continuous basis as part of relationship management, and changes in risk ratings are made when credit quality improves or deteriorates in accordance with HTLF's credit risk rating framework. All individually assessed loans are reviewed at least annually.
HTLF recognized $0 of interest income on nonaccrual loans during the three months ended March 31, 2023 and March 31, 2022. As of March 31, 2023, and December 31, 2022, HTLF had $28.8 million and $26.7 million of nonaccrual loans with no related allowance, respectively.
NOTE 4: ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses on loans for the three months ended March 31, 2023, and March 31, 2022, were as follows, in thousands:
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| Commercial and Industrial | | | | Owner Occupied Commercial Real Estate | | Non-Owner Occupied Commercial Real Estate | | Real Estate Construction | | Agricultural and Agricultural Real Estate | | Residential Real Estate | | Consumer | | | | | | Total |
Balance at December 31, 2022 | $ | 29,071 | | | | | $ | 13,948 | | | $ | 16,539 | | | $ | 29,998 | | | $ | 2,634 | | | $ | 7,711 | | | $ | 9,582 | | | | | | | $ | 109,483 | |
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Charge-offs | (1,451) | | | | | (14) | | | — | | | — | | | — | | | — | | | (686) | | | | | | | (2,151) | |
Recoveries | 1,722 | | | | | 112 | | | — | | | 17 | | | 10 | | | 19 | | | 1,311 | | | | | | | 3,191 | |
Provision (benefit) | 2,481 | | | | | 105 | | | 523 | | | 123 | | | (98) | | | (166) | | | (784) | | | | | | | 2,184 | |
Balance at March 31, 2023 | $ | 31,823 | | | | | $ | 14,151 | | | $ | 17,062 | | | $ | 30,138 | | | $ | 2,546 | | | $ | 7,564 | | | $ | 9,423 | | | | | | | $ | 112,707 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | |
| Commercial and Industrial | | | | Owner Occupied Commercial Real Estate | | Non-Owner Occupied Commercial Real Estate | | Real Estate Construction | | Agricultural and Agricultural Real Estate | | Residential Real Estate | | Consumer | | | | | | Total |
Balance at December 31, 2021 | $ | 27,738 | | | | | $ | 19,214 | | | $ | 17,908 | | | $ | 22,538 | | | $ | 5,213 | | | $ | 8,427 | | | $ | 9,050 | | | | | | | $ | 110,088 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Charge-offs | (4,500) | | | | | — | | | (129) | | | — | | | (3,104) | | | (88) | | | (5,396) | | | | | | | (13,217) | |
Recoveries | 206 | | | | | 40 | | | 33 | | | 7 | | | 453 | | | — | | | 284 | | | | | | | 1,023 | |
Provision (benefit) | 2,356 | | | | | (1,279) | | | (1,799) | | | (1,148) | | | 105 | | | (464) | | | 4,857 | | | | | | | 2,628 | |
Balance at March 31, 2022 | $ | 25,800 | | | | | $ | 17,975 | | | $ | 16,013 | | | $ | 21,397 | | | $ | 2,667 | | | $ | 7,875 | | | $ | 8,795 | | | | | | | $ | 100,522 | |
Management allocates the allowance for credit losses by pools of risk within each loan portfolio. The total allowance for credit losses is available to absorb losses from any segment of the loan portfolio.
Changes in the allowance for credit losses for unfunded commitments for the three months ended March 31, 2023, and March 31, 2022, were as follows:
| | | | | | | | | | | |
| For the Three Months Ended March 31, |
| 2023 | | 2022 |
Balance at December 31, | $ | 20,196 | | | $ | 15,462 | |
| | | |
| | | |
Provision | 890 | | | 617 | |
Balance at March 31, | $ | 21,086 | | | $ | 16,079 | |
NOTE 5: GOODWILL, CORE DEPOSIT PREMIUM AND OTHER INTANGIBLE ASSETS
HTLF had goodwill of $576.0 million at both March 31, 2023, and December 31, 2022. HTLF conducts its annual internal assessment of the goodwill both at the consolidated level and at its subsidiaries as of September 30. HTLF 's annual assessment is completed in the fourth quarter of every year as of September 30. The most recent assessment was completed in the fourth quarter of 2022 as of September 30, 2022, and there was no goodwill impairment identified.
HTLF evaluated goodwill and core deposit intangibles for impairment triggering events as of March 31, 2023, and no triggering events were identified.
The gross carrying amount of other intangible assets, which consists of core deposit intangibles and mortgage servicing rights, and the associated accumulated amortization at March 31, 2023, and December 31, 2022, are presented in the table below, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Amortizing intangible assets: | | | | | | | | | | | |
Core deposit intangibles | $ | 101,185 | | | $ | 77,819 | | | $ | 23,366 | | | $ | 101,185 | | | $ | 76,031 | | | $ | 25,154 | |
| | | | | | | | | | | |
Mortgage servicing rights | — | | | — | | | — | | | 13,700 | | | 5,860 | | | 7,840 | |
| | | | | | | | | | | |
Total | $ | 101,185 | | | $ | 77,819 | | | $ | 23,366 | | | $ | 114,885 | | | $ | 81,891 | | | $ | 32,994 | |
The following table shows the estimated future amortization expense for amortizable intangible assets, in thousands:
| | | | | | | | | | | | | |
| Core Deposit Intangibles | | | | | | | | |
Nine months ending December 31, 2023 | $ | 4,951 | | | | | | | | | |
Year ending December 31, | | | | | | | | | |
2024 | 5,591 | | | | | | | | | |
2025 | 4,700 | | | | | | | | | |
2026 | 3,533 | | | | | | | | | |
2027 | 2,601 | | | | | | | | | |
2028 | 1,287 | | | | | | | | | |
Thereafter | 703 | | | | | | | | | |
Total | $ | 23,366 | | | | | | | | | |
On March 31, 2023, First Bank & Trust closed on the sale of its mortgage servicing rights portfolio, which contained loans with an unpaid principal balance of $698.5 million, to two unrelated third-parties. The transaction qualified as a sale, and $7.7 million of mortgage servicing rights were de-recognized on the consolidated balance sheet as of March 31, 2023. Cash of approximately $6.7 million was received on March 31, 2023, and an estimated loss of $193,000 was recorded. A receivable of approximately $746,000 was recorded in other assets on the consolidated balance sheet as of March 31, 2023, due to the timing of the servicing transfer per the terms of the sale agreement. Pursuant to the agreement, which includes customary terms and conditions, First Bank & Trust provided interim servicing of the loans until the transfer date, which was May 1, 2023.
Custodial escrow balances maintained in connection with the interim servicing of the mortgage loan servicing portfolio were approximately $8.8 million at March 31, 2023.
The following table summarizes, in thousands, the changes in capitalized mortgage servicing rights for the three months ended March 31, 2023, and March 31, 2022:
| | | | | | | | | | | |
| 2023 | | 2022 |
Balance at January 1, | $ | 7,840 | | | $ | 6,412 | |
Originations | 24 | | | 437 | |
Amortization | (210) | | | (405) | |
| | | |
Sale of mortgage servicing rights | (7,654) | | | — | |
| | | |
Valuation adjustment | — | | | 1,658 | |
Balance at period end | $ | — | | | $ | 8,102 | |
| | | |
Mortgage servicing rights, net to servicing portfolio | — | % | | 1.11 | % |
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 March 31, 2023, and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Book Value 15-Year Tranche | | Fair Value 15-Year Tranche | | Valuation Allowance 15-Year Tranche | | Book Value 30-Year Tranche | | Fair Value 30-Year Tranche | | Valuation Allowance 30-Year Tranche |
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March 31, 2023 | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
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| | | | | | | | | | | |
December 31, 2022 | $ | 1,388 | | | $ | 1,388 | | | $ | — | | | $ | 6,452 | | | $ | 6,452 | | | $ | — | |
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NOTE 6: DERIVATIVE FINANCIAL INSTRUMENTS
HTLF uses derivative financial instruments as part of its interest rate risk management strategy. As part of the strategy, HTLF considers the use of interest rate swaps, risk participation agreements, caps, floors, collars, and certain interest rate lock commitments and forward sales of securities related to mortgage banking activities. HTLF's current strategy includes the use of interest rate swaps, interest rate lock commitments and forward sales of mortgage securities. In addition, HTLF is facilitating back-to-back loan swaps to assist customers in managing their interest rate risk while executing offsetting interest rate swaps with dealer counterparties. HTLF's objectives are to add stability to its net interest margin and to manage its exposure to movements in interest rates. The contract or notional amount of a derivative is used to determine, along with the other terms of the derivative, the amounts to be exchanged between the counterparties. HTLF is exposed to credit risk in the event of nonperformance by counterparties to financial instruments. HTLF minimizes this risk by entering into derivative contracts with counterparties that meet HTLF’s credit standards, and the contracts contain collateral provisions protecting the at-risk party. HTLF has not experienced any losses from nonperformance by these counterparties. HTLF monitors counterparty risk in accordance with the provisions of ASC 815.
HTLF's derivative and hedging instruments are recorded at fair value on the consolidated balance sheets. See Note 7, "Fair Value," for additional fair value information and disclosures.
Cash Flow Hedges
In 2021, two interest rate swap transactions were terminated, and the debt was converted to variable rate subordinated debentures. For the next twelve months, HTLF estimates cash payments and reclassification from accumulated other comprehensive income (loss) to interest expense related to the terminated swaps will total $704,000.
In the first quarter of 2023, HTLF terminated its interest rate swap agreement, which effectively converted $500.0 million of variable rate loans to fixed rate loans. For the next twelve months, Heartland estimates cash payments and reclassification from accumulated other comprehensive income (loss) to interest expense will total $985,000.
The table below identifies the balance sheet category and fair value of HTLF's derivative instrument designated as a cash flow hedges at March 31, 2023 and December 31, 2022, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| Notional Amount | | Fair Value | | Balance Sheet Category | | | | | | |
March 31, 2023 | | | | | | | | | | | |
Interest rate swap | $ | — | | | $ | — | | | Other Assets | | | | | | |
December 31, 2022 | | | | | | | | | | | |
Interest rate swap | $ | 500,000 | | | $ | 13 | | | Other Assets | | | | | | |
| | | | | | | | | | | |
The table below identifies the gains recognized on HTLF's derivative instrument designated as a cash flow hedge for the three months ended March 31, 2023, and March 31, 2022, in thousands:
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| | | |
| Recognized in OCI | | Reclassified from AOCI into Income | | |
| Amount of Gain (Loss) | | Category | | Amount of Gain (Loss) | | | | |
March 31, 2023 | | | | | | | | | |
Interest rate swap | $ | 1,952 | | | Interest income | | $ | 591 | | | | | |
March 31, 2022 | | | | | | | | | |
Interest rate swap | $ | — | | | Interest income | | $ | — | | | | | |
| | | | | | | | | |
Fair Value Hedges
HTLF uses interest rate swaps to convert certain long term fixed rate loans to floating rates to hedge interest rate risk exposure. HTLF 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. HTLF uses statistical regression to assess hedge effectiveness, both at the inception of the hedge as well as on a continual basis. The regression analysis involves regressing the periodic change in the fair value of the hedging instrument against the periodic changes in the fair value of the asset being hedged due to changes in the hedge risk.
HTLF was required to pledge $481,000 and $481,000 of cash as collateral for these fair value hedges at March 31, 2023, and December 31, 2022, respectively.
The table below identifies the notional amount, fair value and balance sheet category of HTLF's fair value hedges at March 31, 2023, and December 31, 2022, in thousands:
| | | | | | | | | | | | | | | | | |
| Notional Amount | | Fair Value | | Balance Sheet Category |
March 31, 2023 | | | | | |
| | | | | |
Fair value hedges | $ | 1,132 | | | $ | 39 | | | Other assets |
December 31, 2022 | | | | | |
| | | | | |
Fair value hedges | $ | 1,185 | | | $ | 54 | | | Other assets |
The table below identifies the gains and losses recognized on HTLF's fair value hedges for the three months ended March 31, 2023, and March 31, 2022, in thousands:
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
Gain (loss) recognized in interest income on fair value hedges | | | | | $ | (15) | | | $ | 1,183 | |
Embedded Derivatives
HTLF has fixed rate loans with embedded derivatives. These 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 the embedded derivatives at March 31, 2023, and December 31, 2022, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| Notional Amount | | Fair Value | | Balance Sheet Category | | | | | | |
March 31, 2023 | | | | | | | | | | | |
Embedded derivatives | $ | 5,935 | | | $ | 98 | | | Other assets | | | | | | |
| | | | | | | | | | | |
December 31, 2022 | | | | | | | | | | | |
Embedded derivatives | $ | 6,028 | | | $ | 135 | | | Other assets | | | | | | |
| | | | | | | | | | | |
The table below identifies the gains and losses recognized on HTLF's embedded derivatives for the three months ended March 31, 2023, and March 31, 2022, in thousands:
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
Gain (loss) recognized in other noninterest income on embedded derivatives | | | | | $ | (37) | | | $ | 225 | |
Back-to-Back Loan Swaps
HTLF has interest rate swap loan relationships with customers to assist them in managing their interest rate risk. Upon entering into these loan swaps, HTLF 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. HTLF was required to post $103,000 of collateral at March 31, 2023, compared to $312,000 as of December 31, 2022, related to these back-to-back swaps. HTLF's counterparties were required to pledge $33.8 million at March 31, 2023, compared to $45.1 million at December 31, 2022. Any gains and losses on these back-to-back swaps are recorded in noninterest income on the consolidated statements of income, and for the three months ended March 31, 2023, and March 31, 2022, no gain or loss was recognized. The table below identifies the balance sheet category and fair values of the derivative instruments designated as loan swaps at March 31, 2023, and December 31, 2022, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Notional Amount | | Fair Value | | Balance Sheet Category | | Weighted Average Receive Rate | | Weighted Average Pay Rate |
March 31, 2023 | | | | | | | | | |
Customer interest rate swaps | $ | 1,017,539 | | | $ | 27,805 | | | Other assets | | 4.14 | % | | 6.97 | % |
Customer interest rate swaps | 1,017,539 | | | (27,805) | | | Other liabilities | | 6.97 | | | 4.14 | |
December 31, 2022 | | | | | | | | | |
Customer interest rate swaps | $ | 819,662 | | | $ | 46,091 | | | Other assets | | 4.23 | % | | 6.76 | % |
Customer interest rate swaps | 819,662 | | | (46,091) | | | Other liabilities | | 6.76 | | | 4.23 | |
| | | | | | | | | |
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Other Free Standing Derivatives
HTLF 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. HTLF enters into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into and 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. HTLF was required to pledge no collateral at both March 31, 2023, and December 31, 2022. HTLF's counterparties were required to pledge no collateral at both March 31, 2023, and December 31, 2022, as collateral for these forward commitments.
HTLF 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 sheets 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 HTLF's other free standing derivative instruments not designated as hedging instruments at March 31, 2023, and December 31, 2022, in thousands:
| | | | | | | | | | | | | | | | | |
| Balance Sheet Category | | Notional Amount | | Fair Value |
March 31, 2023 | | | | | |
Interest rate lock commitments (mortgage) | Other assets | | $ | 15,717 | | | $ | 449 | |
| | | | | |
Forward commitments | Other assets | | 21,000 | | | 241 | |
Forward commitments | Other liabilities | | 4,150 | | | (21) | |
Undesignated interest rate swaps | Other liabilities | | 5,935 | | | (98) | |
| | | | | |
December 31, 2022 | | | | | |
Interest rate lock commitments (mortgage) | Other assets | | $ | 9,340 | | | $ | 174 | |
| | | | | |
Forward commitments | Other assets | | 6,400 | | | 47 | |
Forward commitments | Other liabilities | | 5,750 | | | (99) | |
Undesignated interest rate swaps | Other liabilities | | 6,028 | | | (135) | |
| | | | | |
HTLF recognizes gains and losses on other free standing derivatives in two separate income statement categories. Interest rate lock commitments and forward commitments are recognized in net gains on sale of loans held for sale and undesignated interest rate swaps are recognized in other noninterest income. The table below identifies the gains and losses recognized in income on HTLF's other free standing derivative instruments not designated as hedging instruments for the three months ended March 31, 2023, and March 31, 2022, in thousands:
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
Interest rate lock commitments (mortgage) | | | | | $ | 410 | | | $ | (1,195) | |
| | | | | | | |
Forward commitments | | | | | 272 | | | 1,036 | |
Undesignated interest rate swaps | | | | | 37 | | | (225) | |
NOTE 7: FAIR VALUE
HTLF 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, HTLF 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.
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. 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 HTLF'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, HTLF classifies loans held for sale subjected to nonrecurring fair value adjustments as Level 2.
Loans Held to Maturity
HTLF 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
HTLF considers third party appraisals less estimated disposal costs, as well as independent fair value assessments from realtors or persons involved in selling bank premises, furniture and equipment, in determining the fair value of particular properties held for sale. Accordingly, the valuation of premises, furniture and equipment held for sale is subject to significant external and internal judgment. HTLF 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. HTLF classifies mortgage servicing rights as nonrecurring with Level 3 measurement inputs.
On March 31, 2023, HTLF sold its mortgage servicing rights portfolio. The transaction qualified as a sale, and $7.7 million of mortgage servicing rights were de-recognized on the consolidated balance sheet as of March 31, 2023. The book value and fair value were both $0 at March 31, 2023.
Derivative Financial Instruments
HTLF'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, HTLF 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, HTLF has considered the impact of netting any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Although HTLF 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, 2023, and
December 31, 2022, HTLF has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, HTLF has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
Interest rate lock commitments
HTLF 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 HTLF 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. HTLF 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. HTLF 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 HTLF's assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2023, and December 31, 2022, in thousands, aggregated by the level in the fair value hierarchy within which those measurements fall:
| | | | | | | | | | | | | | | | | | | | | | | |
| Total Fair Value | | Level 1 | | Level 2 | | Level 3 |
March 31, 2023 | | | | | | | |
Assets | | | | | | | |
| | | | | | | |
Securities available for sale | | | | | | | |
U.S. treasuries | $ | 31,932 | | | $ | 31,932 | | | $ | — | | | $ | — | |
U.S. agencies | 43,584 | | | — | | | 43,584 | | | — | |
Obligations of states and political subdivisions | 887,922 | | | — | | | 887,922 | | | — | |
Mortgage-backed securities - agency | 1,757,469 | | | — | | | 1,757,469 | | | — | |
Mortgage-backed securities - non-agency | 2,117,882 | | | — | | | 2,117,882 | | | — | |
Commercial mortgage-backed securities - agency | 86,022 | | | — | | | 86,022 | | | — | |
Commercial mortgage-backed securities - non-agency | 657,874 | | | — | | | 657,874 | | | — | |
Asset-backed securities | 435,523 | | | — | | | 435,523 | | | — | |
Corporate bonds | 57,845 | | | — | | | 57,845 | | | — | |
Equity securities with a readily determinable fair value | 20,604 | | | — | | | 20,604 | | | — | |
Derivative financial instruments(1) | 27,942 | | | — | | | 27,942 | | | — | |
Interest rate lock commitments | 449 | | | — | | | — | | | 449 | |
Forward commitments | 241 | | | — | | | 241 | | | — | |
Total assets at fair value | $ | 6,125,289 | | | $ | 31,932 | | | $ | 6,092,908 | | | $ | 449 | |
Liabilities | | | | | | | |
Derivative financial instruments(2) | $ | 27,903 | | | $ | — | | | $ | 27,903 | | | $ | — | |
Forward commitments | 21 | | | — | | | 21 | | | — | |
| | | | | | | |
Total liabilities at fair value | $ | 27,924 | | | $ | — | | | $ | 27,924 | | | $ | — | |
December 31, 2022 |
Assets | | | | | | | |
| | | | | | | |
Securities available for sale | | | | | | | |
U.S. treasuries | $ | 31,699 | | | $ | 31,699 | | | $ | — | | | $ | — | |
U.S. agencies | 43,135 | | | — | | | 43,135 | | | — | |
Obligations of states and political subdivisions | 879,437 | | | — | | | 879,437 | | | — | |
Mortgage-backed securities - agency | 1,772,105 | | | — | | | 1,772,105 | | | — | |
Mortgage-backed securities - non-agency | 2,181,876 | | | — | | | 2,181,876 | | | — | |
Commercial mortgage-backed securities - agency | 85,123 | | | — | | | 85,123 | | | — | |
Commercial mortgage-backed securities - non-agency | 659,459 | | | — | | | 659,459 | | | — | |
Asset-backed securities | 416,054 | | | — | | | 416,054 | | | — | |
Corporate bonds | 57,942 | | | — | | | 57,942 | | | — | |
Equity securities with a readily determinable fair value | 20,314 | | | — | | | 20,314 | | | — | |
Derivative financial instruments(2) | 46,293 | | | — | | | 46,293 | | | — | |
Interest rate lock commitments | 174 | | | — | | | — | | | 174 | |
Forward commitments | 47 | | | — | | | 47 | | | — | |
Total assets at fair value | $ | 6,193,658 | | | $ | 31,699 | | | $ | 6,161,785 | | | $ | 174 | |
Liabilities | | | | | | | |
Derivative financial instruments(1) | $ | 46,226 | | | $ | — | | | $ | 46,226 | | | $ | — | |
Forward commitments | 99 | | | — | | | 99 | | | — | |
| | | | | | | |
Total liabilities at fair value | $ | 46,325 | | | $ | — | | | $ | 46,325 | | | $ | — | |
| | | | | | | |
(1) Includes fair value hedges, embedded derivatives and back-to-back loan swaps. |
(2) Includes back-to-back loan swaps and free standing derivatives. |
The tables below present HTLF's assets that are measured at fair value on a nonrecurring basis, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at March 31, 2023 |
| Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Year-to- Date (Gains) Losses |
Collateral dependent individually assessed loans: | | | | | | | | | |
Commercial and industrial | $ | 10,810 | | | $ | — | | | $ | — | | | $ | 10,810 | | | $ | — | |
Owner occupied commercial real estate | 7,408 | | | — | | | — | | | 7,408 | | | — | |
Non-owner occupied commercial real estate | 10,983 | | | — | | | — | | | 10,983 | | | — | |
Real estate construction | 1,498 | | | — | | | — | | | 1,498 | | | — | |
Agricultural and agricultural real estate | 5,053 | | | — | | | — | | | 5,053 | | | — | |
Residential real estate | 788 | | | — | | | — | | | 788 | | | — | |
| | | | | | | | | |
Total collateral dependent individually assessed loans | $ | 36,540 | | | $ | — | | | $ | — | | | $ | 36,540 | | | $ | — | |
Loans held for sale | $ | 10,425 | | | $ | — | | | $ | 10,425 | | | $ | — | | | $ | (251) | |
Other real estate owned | 7,438 | | | — | | | — | | | 7,438 | | | 36 | |
Premises, furniture and equipment held for sale | 4,399 | | | — | | | — | | | 4,399 | | | 759 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at December 31, 2022 |
| Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Year-to- Date (Gains) Losses |
Collateral dependent individually assessed loans: | | | | | | | | | |
Commercial and industrial | $ | 12,042 | | | $ | — | | | $ | — | | | $ | 12,042 | | | $ | 4,186 | |
Owner occupied commercial real estate | 7,556 | | | — | | | — | | | 7,556 | | | — | |
Non-owner occupied commercial real estate | 11,371 | | | — | | | — | | | 11,371 | | | — | |
Real estate construction | 1,518 | | | — | | | — | | | 1,518 | | | — | |
Agricultural and agricultural real estate | 3,788 | | | — | | | — | | | 3,788 | | | — | |
Residential real estate | 1,607 | | | — | | | — | | | 1,607 | | | — | |
| | | | | | | | | |
Total collateral dependent individually assessed loans | $ | 37,882 | | | $ | — | | | $ | — | | | $ | 37,882 | | | $ | 4,186 | |
Loans held for sale | $ | 5,277 | | | $ | — | | | $ | 5,277 | | | $ | — | | | $ | (116) | |
| | | | | | | | | |
Other real estate owned | 8,401 | | | — | | | — | | | 8,401 | | | 180 | |
Premises, furniture and equipment held for sale | 6,851 | | | — | | | — | | | 6,851 | | | 1,562 | |
Servicing rights | 7,840 | | | — | | | — | | | 7,840 | | | 516 | |
The following tables present additional quantitative information about assets measured at fair value on a recurring and nonrecurring basis and for which HTLF has utilized Level 3 inputs to determine fair value, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value at 3/31/2023 | | Valuation Technique | | Unobservable Input | | Range (Weighted Average) |
Interest rate lock commitments | $ | 449 | | | Discounted cash flows | | Closing ratio | | 0-99% (88%)(1) |
Other real estate owned | 7,438 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-10%(3) |
| | | | | | | |
| | | | | | | |
Premises, furniture and equipment held for sale | 4,399 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-10%(3) |
Collateral dependent individually assessed loans: | | | | | | | |
Commercial | 10,810 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-15%(3) |
Owner occupied commercial real estate | 7,408 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | | Appraisal discount | | 0-13%(3) |
Non-owner occupied commercial real estate | 10,983 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | | Appraisal discount | | 0-10%(3) |
Real estate construction | 1,498 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-10%(3) |
Agricultural and agricultural real estate | 5,053 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-15%(3) |
Residential real estate | 788 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-10%(3) |
| | | | | | | |
| | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
(1) The significant unobservable input used in the fair value measurement is the closing ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. The closing ratio calculation takes into consideration historical data and loan-level data. |
(2) Third party appraisals are obtained and updated at least annually to establish the value of the underlying asset, but the disclosure of the unobservable inputs used by the appraisers would not be meaningful because the range will vary widely from appraisal to appraisal. |
(3) Discounts applied to the appraised values primarily include estimated sales costs, but also consider the age of the appraisal, changes in local market conditions and changes in the current condition of the collateral. |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value at 12/31/2022 | | Valuation Technique | | Unobservable Input | | Range (Weighted Average) |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Interest rate lock commitments | $ | 174 | | | Discounted cash flows | | Closing ratio | | 0-99% (88%)(1) |
Other real estate owned | 8,401 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-10%(3) |
| | | | | | | |
Servicing rights | 7,840 | | | Discounted cash flows | | Discount rate | | 9.98 - 11.72% (10.02%)(4) |
| | | | | Constant prepayment rate | | 7.8 - 14.2% (7.9%)(4) |
Premises, furniture and equipment held for sale | 6,851 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-10%(3) |
| | | | | | | |
| | | | | | | |
| | | | | | |
Collateral dependent individually assessed loans: | | | | | | | |
Commercial and industrial | 12,042 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | | Appraisal discount | | 0-10%(3) |
Owner occupied commercial real estate | 7,556 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-10%(3) |
Non-owner occupied commercial real estate | 11,371 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-10%(3) |
Real estate construction | 1,518 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | | Appraisal discount | | 0-10%(3) |
Agricultural and agricultural real estate | 3,788 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-15%(3) |
Residential real estate | 1,607 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-10%(3) |
| | | | | | | |
| | | | | | |
| | | | | | | |
| | | | | | | |
(1) The significant unobservable input used in the fair value measurement is the closing ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. The closing ratio calculation takes into consideration historical data and loan-level data. |
(2) Third party appraisals are obtained and updated at least annually to establish the value of the underlying asset, but the disclosure of the unobservable inputs used by the appraisers would not be meaningful because the range will vary widely from appraisal to appraisal. |
(3) Discounts applied to the appraised values primarily include estimated sales costs, but also consider the age of the appraisal, changes in local market conditions and changes in the current condition of the collateral. |
(4) The significant unobservable input used in the discounted cash flow analysis are the discount rate and constant prepayment rate. |
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, 2023 | | For the Year Ended December 31, 2022 |
Balance at January 1, | $ | 174 | | | $ | 1,306 | |
| | | |
Total net gains included in earnings | 410 | | | (1,828) | |
Issuances | 516 | | | 3,683 | |
Settlements | (651) | | | (2,987) | |
Balance at period end | $ | 449 | | | $ | 174 | |
Gains included in gains (losses) on sale of loans held for sale attributable to interest rate lock commitments held at March 31, 2023, and December 31, 2022, were $449,000 and $174,000, respectively.
The table below is a summary of the estimated fair value of HTLF's financial instruments (as defined by ASC 825) as of March 31, 2023, and December 31, 2022, in thousands. The carrying amounts in the following tables are recorded in the consolidated balance sheets under the indicated captions. In accordance with ASC 825, the assets and liabilities that are not financial instruments are not included in the disclosure, 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.
HTLF does not believe that the estimated information presented herein is representative of the earnings power or value of HTLF. The following analysis, which is inherently limited in depicting fair value, also does not consider any value associated with either existing customer relationships or the ability of HTLF 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, 2023 |
| Carrying Amount | | Estimated Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Financial assets: | | | | | | | | | |
Cash and cash equivalents | $ | 362,111 | | | $ | 362,111 | | | $ | 362,111 | | | $ | — | | | $ | — | |
Time deposits in other financial institutions | 1,740 | | | 1,740 | | | 1,740 | | | — | | | — | |
Securities: | | | | | | | | | |
| | | | | | | | | |
Carried at fair value | 6,096,657 | | | 6,096,657 | | | 31,932 | | | 6,064,725 | | | — | |
Held to maturity | 832,098 | | | 815,672 | | | — | | | 815,672 | | | — | |
Other investments | 72,364 | | | 72,364 | | | — | | | 72,364 | | | — | |
Loans held for sale | 10,425 | | | 10,425 | | | — | | | 10,425 | | | — | |
Loans, net: | | | | | | | | | |
Commercial and industrial | 3,466,522 | | | 3,286,723 | | | — | | | 3,275,913 | | | 10,810 | |
PPP | 8,258 | | | 8,258 | | | — | | | 8,258 | | | — | |
Owner occupied commercial real estate | 2,298,387 | | | 2,112,314 | | | — | | | 2,104,906 | | | 7,408 | |
Non-owner occupied commercial real estate | 2,404,279 | | | 2,265,664 | | | — | | | 2,254,681 | | | 10,983 | |
Real estate construction | 1,072,048 | | | 1,065,497 | | | — | | | 1,063,999 | | | 1,498 | |
Agricultural and agricultural real estate | 807,637 | | | 735,491 | | | — | | | 730,438 | | | 5,053 | |
Residential real estate | 833,520 | | | 718,281 | | | — | | | 717,493 | | | 788 | |
Consumer | 491,995 | | | 474,398 | | | — | | | 474,398 | | | — | |
Total Loans, net | 11,382,646 | | | 10,666,626 | | | — | | | 10,630,086 | | | 36,540 | |
Cash surrender value on life insurance | 194,419 | | | 194,419 | | | — | | | 194,419 | | | — | |
Derivative financial instruments(1) | 27,942 | | | 27,942 | | | — | | | 27,942 | | | — | |
Interest rate lock commitments | 449 | | | 449 | | | — | | | — | | | 449 | |
Forward commitments | 241 | | | 241 | | | — | | | 241 | | | — | |
Financial liabilities: | | | | | | | | | |
Deposits | | | | | | | | | |
Demand deposits | 5,119,554 | | | 5,119,554 | | | — | | | 5,119,554 | | | — | |
Savings deposits | 9,256,609 | | | 9,256,609 | | | — | | | 9,256,609 | | | — | |
Time deposits | 3,305,183 | | | 3,305,183 | | | — | | | 3,305,183 | | | — | |
| | | | | | | | | |
Short term borrowings | 92,337 | | | 92,337 | | | — | | | 92,337 | | | — | |
Other borrowings | 372,097 | | | 373,923 | | | — | | | 373,923 | | | — | |
Derivative financial instruments(2) | 27,903 | | | 27,903 | | | — | | | 27,903 | | | — | |
Forward commitments | 21 | | | 21 | | | — | | | 21 | | | — | |
|
(1) Includes fair value hedges, embedded derivatives and back-to-back loan swaps. |
(2) Includes back-to-back loan swaps and free standing derivative instruments. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements at December 31, 2022 |
| Carrying Amount | | Estimated Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Financial assets: | | | | | | | | | |
Cash and cash equivalents | $ | 363,087 | | | $ | 363,087 | | | $ | 363,087 | | | $ | — | | | $ | — | |
Time deposits in other financial institutions | 1,740 | | | 1,740 | | | 1,740 | | | — | | | — | |
Securities: | | | | | | | | | |
| | | | | | | | | |
Carried at fair value | 6,147,144 | | | 6,147,144 | | | 31,699 | | | 6,115,445 | | | — | |
Held to maturity | 829,403 | | | 776,557 | | | — | | | 776,557 | | | — | |
Other investments | 74,567 | | | 74,567 | | | — | | | 74,567 | | | — | |
Loans held for sale | 5,277 | | | 5,277 | | | — | | | 5,277 | | | — | |
Loans, net: | | | | | | | | | |
Commercial and industrial | 3,435,343 | | | 3,270,127 | | | — | | | 3,258,085 | | | 12,042 | |
PPP | 11,025 | | | 11,025 | | | — | | | 11,025 | | | — | |
Owner occupied commercial real estate | 2,251,359 | | | 2,084,665 | | | — | | | 2,077,109 | | | 7,556 | |
Non-owner occupied commercial real estate | 2,314,401 | | | 2,184,796 | | | — | | | 2,173,425 | | | 11,371 | |
Real estate construction | 1,046,084 | | | 1,039,244 | | | — | | | 1,037,726 | | | 1,518 | |
Agricultural and agricultural real estate | 917,876 | | | 842,637 | | | — | | | 838,849 | | | 3,788 | |
Residential real estate | 845,650 | | | 741,325 | | | — | | | 739,718 | | | 1,607 | |
Consumer | 497,131 | | | 480,018 | | | — | | | 480,018 | | | — | |
Total Loans, net | 11,318,869 | | | 10,653,837 | | | — | | | 10,615,955 | | | 37,882 | |
Cash surrender value on life insurance | 193,403 | | | 193,403 | | | — | | | 193,403 | | | — | |
Derivative financial instruments(1) | 46,293 | | | 46,293 | | | — | | | 46,293 | | | — | |
Interest rate lock commitments | 174 | | | 174 | | | — | | | — | | | 174 | |
Forward commitments | 47 | | | 47 | | | — | | | 47 | | | — | |
Financial liabilities: | | | | | | | | | |
Deposits | | | | | | | | | |
Demand deposits | 5,701,340 | | | 5,701,340 | | | — | | | 5,701,340 | | | — | |
Savings deposits | 9,994,391 | | | 9,994,391 | | | — | | | 9,994,391 | | | — | |
Time deposits | 1,817,278 | | | 1,817,278 | | | — | | | 1,817,278 | | | — | |
| | | | | | | | | |
Short term borrowings | 376,117 | | | 376,117 | | | — | | | 376,117 | | | — | |
Other borrowings | 371,753 | | | 372,473 | | | — | | | 372,473 | | | — | |
Derivative financial instruments(1) | 46,226 | | | 46,226 | | | — | | | 46,226 | | | — | |
Forward commitments | 99 | | | 99 | | | — | | | 99 | | | — | |
|
(1) Includes interest rate swaps, fair value hedges, embedded derivatives and back-to-back loan swaps. |
(2) Includes back-to-back loan swaps and undesignated interest rate swaps. |
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, HTLF 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, HTLF classifies the estimated fair value of the cash surrender value on life insurance as Level 2.
Derivative Financial Instruments — The fair value of all derivatives is estimated based on the amount that HTLF would pay or would be paid to terminate the contract or agreement, using current rates and prices, and, when appropriate, the current creditworthiness of the counterparty.
Interest Rate Lock Commitments — The fair value of interest rate lock commitments is estimated using an internal valuation model, which includes grouping the interest rate lock commitments by interest rate and terms, applying an estimated closing ratio based on historical experience, and then multiplying by quoted investor prices determined to be reasonably applicable to the loan commitment groups based on interest rate, terms, and rate lock expiration dates of the loan commitment group.
Forward Commitments — The fair value of these instruments is estimated using an internal valuation model, which includes current trade pricing for similar financial instruments.
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 HTLF 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 8: STOCK COMPENSATION
HTLF may grant, through its Compensation, Nominating and Corporate Governance Committee (the "Compensation Committee"), non-qualified and incentive stock options, stock appreciation rights, stock awards, restricted stock, restricted stock units and cash incentive awards, under its 2020 Long-Term Incentive Plan (the "Plan"). The Plan has 1,460,000 shares of common stock authorized for issuance. As of March 31, 2023, 789,565 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, HTLF 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.
HTLF's income tax expense included $46,000 of tax benefit during the three months ended March 31, 2023, and a tax benefit of $172,000 during the three months ended March 31, 2022, related to the exercise, vesting and forfeiture of equity-based awards.
Restricted Stock Units
The Plan permits the Compensation Committee to grant restricted stock units ("RSUs"). The time-based RSUs are generally granted in the first quarter of each year and represent the right, without payment, to receive shares of HTLF common stock on a specified date in the future. Generally, the time-based RSUs vest over three years in equal installments in March of each of the three years following the year of the grant.
The Compensation Committee has also granted three-year performance-based RSUs, generally in the first quarter of each year. These performance-based RSUs will be earned based on satisfaction of performance targets for the three-year performance
period as defined in the RSU agreement. These performance-based RSUs or a portion thereof may vest after measurement of performance in relation to the performance targets.
The time-based RSUs may also vest upon death or disability, upon a change in control or upon a "qualified retirement" (as defined in the RSU agreement), and the three-year performance-based RSUs may also vest to the extent that they are earned upon death, disability, upon a change in control or upon a "qualified retirement" (as defined in the RSU agreement).
All of HTLF's RSUs will be settled in common stock upon vesting. RSUs granted after March 2023 accrue dividends, which are paid in cash and without interest only upon vesting. Dividend equivalents with respect to RSUs forfeited are also forfeited. All RSUs granted prior to 2023 are not entitled to dividend equivalents.
A summary of the RSUs outstanding as of March 31, 2023, and March 31, 2022, and changes during the three months ended March 31, 2023 and 2022, follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 |
| Shares | | Weighted-Average Grant Date Fair Value | | Shares | | Weighted-Average Grant Date Fair Value |
Outstanding at January 1, | 424,086 | | | $ | 46.15 | | | 389,885 | | | $ | 44.19 | |
Granted | 198,562 | | | 50.75 | | | 178,611 | | | 50.20 | |
Vested | (125,870) | | | 42.15 | | | (125,343) | | | 43.85 | |
Forfeited | (21,338) | | | 42.40 | | | (12,656) | | | 45.70 | |
Outstanding at March 31, | 475,440 | | | $ | 49.30 | | | 430,497 | | | $ | 46.74 | |
Total compensation costs recorded for RSUs were $4.7 million and $2.7 million for the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, there were $14.0 million of total unrecognized compensation costs related to the Plan for RSUs that are expected to be recognized through 2026.
Stock Options
The Plan provides the Compensation Committee the authority to grant stock options. During the year ended December 31, 2022, 64,518 options were granted, and the fair value of the options granted was determined using the Black-Scholes valuation model. The options granted generally vest over the first four years in equal installments on the anniversary date of the grant. The options may also vest upon death, disability, upon a change in control or upon a "qualified retirement" as defined in the stock option agreement.
The exercise price of the stock options was established by the Compensation Committee, but the exercise price may not be less than the fair market value of the shares on the date the options are granted.
A summary of the status of stock options as of March 31, 2023, and changes during the three months ended March 31, 2023, is shown in the table below. There were no options outstanding at March 31, 2022.
| | | | | | | | | | | |
| 2023 |
| Shares | | Weighted Average Exercise Price |
Outstanding January 1, | 64,518 | | | $ | 48.79 | |
Granted | — | | | — | |
Exercised | — | | | — | |
Forfeited | (3,226) | | | 48.79 | |
Outstanding at March 31, | 61,292 | | | 48.79 | |
Options exercisable at March 31, | — | | | $ | — | |
At March 31, 2023, the options had a weighted average remaining contractual life of 9.67 years. The intrinsic value of the vested options as of March 31, 2023 was $0. The intrinsic value of the all options exercised during the three months ended March 31, 2023, was $0. The total fair value of the shares that vested during the three months ended March 31, 2023, was $0. Total compensation costs recorded for stock options during the three months ended March 31, 2023 and 2022 were $69,000 and $0, respectively. As of March 31, 2023, there were $703,000 of total unrecognized compensation costs related to the Plan for options that are expected to be recognized through 2026.
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. ("HTLF") and its management may contain, forward-looking statements within the meaning of such term in Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") with respect to the business, financial condition, results of operations, plans, objectives and future performance of HTLF. Any statements about HTLF's expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. Forward-looking statements may include information about possible or assumed future results of HTLF's operations or performance, and may be based upon beliefs, expectations and assumptions of HTLF's management. These forward-looking statements are generally identifiable by the use of words such as "believe," "expect," "anticipate," "plan," "intend," "estimate," "project," "may," "will," "would," "could," "should," "view," "opportunity," "potential," or other similar expressions. Although HTLF has made these statements based on management's experience and best estimate of future events, the ability of HTLF to predict results or the actual effect or outcomes of plans or strategies is inherently uncertain, and there may be events or factors that management has not anticipated. Therefore, the accuracy and achievement of such forward-looking statements and estimates are subject to a number of risks, many of which are beyond the ability of management to control or predict, that could cause actual results to differ materially from those in its forward-looking statements. These factors, which HTLF currently believes could have a material adverse effect on its operations and future prospects are detailed in the "Risk Factors" section include, among others, those described below and in the risk factors in HTLF's reports filed with the Securities and Exchange Commission ("SEC"), including the "Risk Factors" section under Item 1A of Part I of the company’s Annual Report on Form 10-K for the year ended December 31, 2022:
•Economic and Market Conditions Risks, including risks related to the deterioration of the U.S. economy in general and in the local economies in which HTLF conducts its operations and future civil unrest, natural disasters, pandemics and governmental measures addressing them, climate change and climate-related regulations, persistent inflation, higher interest rates, recession, supply chain issues, labor shortages, terrorist threats or acts of war;
•Credit Risks, including risks of increasing credit losses due to deterioration in the financial condition of HTLF's borrowers, changes in asset and collateral values due to climate and other borrower industry risks, which may impact the provision for credit losses and net charge-offs;
•Liquidity and Interest Rate Risks, including the impact of capital market conditions, rising interest rates and changes in monetary policy on our borrowings and net interest income;
•Operational Risks, including processing, information systems, cybersecurity, vendor, business interruption, and fraud risks;
•Strategic and External Risks, including economic, political, and competitive forces impacting our business;
•Legal, Compliance and Reputational Risks, including regulatory and litigation risks; and
•Risks of Owning Stock in HTLF, including stock price volatility and dilution as a result of future equity offerings and acquisitions.
These risks and uncertainties should be considered in evaluating forward-looking statements made by HTLF or on its behalf, and undue reliance should not be placed on these statements. There can be no assurance that other factors not currently anticipated by HTLF will not materially and adversely affect the company's business, financial condition and results of operations. All statements in this Quarterly Report on Form 10-Q, including forward-looking statements, speak only as of the date they are made. HTLF does not undertake and specifically disclaims any obligation to publicly release the results of any revisions which may be made or to correct or update any forward-looking statement to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events or to otherwise update any statement in light of new information or future events. Further information concerning HTLF and its business, including additional factors that could materially affect HTLF’s financial results, is included in the company’s filings with the SEC.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, income and expenses. These estimates are based upon historical experience and on various other assumptions that management believes are reasonable under the circumstances. Among other things, the estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The estimates and judgments that management believes have the most effect on HTLF's reported financial position and results of operations are described as critical accounting policies in the company's Annual Report on Form 10-K for the year ended December 31, 2022. There have
been no significant changes in the critical accounting estimates or the assumptions and judgments utilized in applying these estimates since December 31, 2022.
OVERVIEW
Heartland Financial USA, Inc. is a bank holding company operating under the brand name "HTLF". HTLF's independently branded and chartered banks (referred to herein collectively as the "Banks", "Bank Markets") serve communities in Arizona, California, Colorado, Illinois, Iowa, Kansas, Minnesota, Missouri, Montana, New Mexico, Texas and Wisconsin. HTLF is committed to its core commercial business supported by a strong retail operation and provides a diversified line of financial services and products including treasury management, commercial credit cards, wealth management, investments and residential mortgages. As of March 31, 2023, HTLF had six Banks operating under 11 local bank brands through a total of 119 locations.
HTLF's results of operations depend primarily on net interest income, which is the difference between interest income from interest earning assets and interest expense on interest bearing liabilities. Noninterest income, which includes service charges and fees, loan servicing income, trust fees, brokerage and insurance commissions, capital markets fees, net securities gains/(losses), net gains on sale of loans held for sale, and income on bank owned life insurance, also affects the results of operations. HTLF's principal operating expenses, aside from interest expense, consist of the provision for credit losses, salaries and employee benefits, occupancy, furniture and equipment costs, professional fees, advertising, core deposit and customer relationship intangibles amortization, other real estate and loan collection expenses, losses on sales/valuation of assets, partnership investment in tax credit projects and acquisition, integration and restructuring costs.
HTLF Response to Recent Banking Industry Disruptions
During the first quarter of 2023, the banking industry experienced significant disruptions including bank failures and industry-wide concerns related to deposit outflows, liquidity, continued interest rate increases and unrealized losses on securities. HTLF took the following actions, primarily in response to the disruption:
•Proactively reached out to over 1,000 large depositors and helped facilitate additional FDIC insurance through Insured Cash Sweep ("ICS") products and Certificate of Deposit Registry Service ("CDARS") products,
•Increased deposit pricing to address highly competitive deposit environment,
•Strategically increased wholesale deposits to reduce short-term borrowings,
•Increased access and availability to sources of liquidity through the Federal Reserve and Federal Home Loan Bank ("FHLB") system by $1.68 billion,
•Total borrowing capacity through various programs, including the Federal Reserve's Bank Term Funding Program ("BTFP"), was $2.76 billion as of March 31, 2023, of which no balance was drawn, and
•Retail deposit campaign resulted in over 8,000 new consumer accounts opened.
The shift to work-from-home and hybrid work arrangements have caused decreased utilization of and demand for office space. During the first quarter of 2023, HTLF performed a detailed, thorough review of its exposure to office space in the non-owner occupied commercial real estate portfolio and securities portfolio. As of March 31, 2023:
•Outstanding loans totaling $424.8 million were collateralized by non-owner occupied office space, which represents 3.7% of the total loans held to maturity, and the average loan size was $1.3 million.
•There were no loans collateralized by office space on nonaccrual.
•The collateral consists primarily of multi-tenant, non-central business district properties.
•The amount of office exposure in the securities portfolio was less than 1% of the total portfolio.
As of March 31, 2023:
• 35% of HTLF's deposits were uninsured and uncollateralized.
•HTLF's capital ratios substantially exceeded the well-capitalized thresholds, and management believes regulatory capital ratio buffers would withstand any changes in regulatory rules that require the inclusion of unrealized losses in the total investment portfolio and remain well capitalized.
Subsequent to March 31, 2023, HTLF repositioned its hedges and entered into new swaps totaling approximately $1.34 billion primarily designed to provide protection for unrealized securities losses against the impact of higher mid-to-long term interest rates.
Overview of First Quarter 2023 Results
HTLF reported the following results for the quarter ended March 31, 2023, compared to the quarter ended March 31, 2022:
•net income available to common stockholders of $50.8 million compared to $41.1 million, an increase of $9.7 million or 24%,
•earnings per diluted common share of $1.19 compared to $0.97, an increase of $0.22 or 23%,
•net interest income of $152.2 million compared to $134.7 million, an increase of $17.5 million or 13%,
•return on average assets was 1.06% compared to 0.91%,
•return on average common equity was 12.43% compared to 8.32%, and
•return on average tangible common equity (non-GAAP) was 20.05% compared to 12.41%.
During the first quarter of 2023, HTLF reclassified swap and loan syndication income (collectively, "capital markets fees") to capital markets fees from other noninterest income on the consolidated statements of income, and all prior periods have been adjusted.
For the first quarter of 2023, net interest margin was 3.36% (3.40% on a fully tax-equivalent basis, non-GAAP), which compares to 3.61% (3.65% on a fully tax-equivalent basis, non-GAAP) for the fourth quarter of 2022, and 3.08% (3.12% on a fully tax-equivalent basis, non-GAAP) for the first quarter of 2022.
The efficiency ratio was 60.94% (57.16% on an adjusted fully tax-equivalent basis, non-GAAP) for the first quarter of 2023 compared to 65.46% (64.65% on an adjusted fully-tax equivalent basis, non-GAAP) for the same quarter of 2022.
Total assets were $20.18 billion at March 31, 2023, a decrease of $61.7 million or less than 1% since December 31, 2022. Securities represented 35% of total assets at both March 31, 2023 and December 31, 2022. Total loans held to maturity were $11.50 billion at March 31, 2023, compared to $11.43 billion at December 31, 2022, which was an increase of $67.0 million or 1%.
The total allowance for lending related credit losses was $133.8 million or 1.16% of total loans at March 31, 2023, compared to $129.7 million or 1.13% of total loans at December 31, 2022.
Total deposits were $17.68 billion as of March 31, 2023, compared to $17.51 billion at December 31, 2022, an increase of $168.3 million or 1%.
Total equity was $1.83 billion at March 31, 2023, compared to $1.74 billion at December 31, 2022. Book value per common share was $40.38 at March 31, 2023, compared to $38.25 at year-end 2022. The unrealized loss on securities available for sale, net of applicable taxes, was $568.2 million at March 31, 2023, compared to an unrealized loss of $619.2 million, net of applicable taxes, at December 31, 2022.
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.
2023 Developments
As of March 29, 2023, HTLF's subsidiary, Dubuque Bank & Trust, entered into an agreement to sell and transfer the recordkeeping and administration services component of HTLF’s Retirement Plan Services business to July Business Services ("July"). Through the new partnership with July, HTLF expects to augment the comprehensive retirement plan solutions offered to clients with enhanced technology and an expanded suite of product offerings that clients expect from a top retirement services provider. The transaction is expected to be completed and recordkeeping and administration services transferred in the second quarter of 2023.
On March 31, 2023, HTLF's subsidiary, First Bank & Trust, closed on the sale of its mortgage servicing rights portfolio, which consisted of approximately 4,500 loans serviced for others with an unpaid principal balance of $698.5 million. In the agreement, which includes customary terms and conditions, First Bank & Trust provided interim servicing of the loans until the transfer date of May 1, 2023.
Following the end of the first quarter, one of the Banks had deposit items returned to it resulting in an overdraft with respect to a single long-term customer totaling $5.3 million. Following the overdraft, HTLF's initial assessment indicates a potential credit exposure range of $5.3-$7.0 million. HTLF continues to assess the situation and plans to actively pursue potential remedies and strategies with respect to the customer to address the overdraft and mitigate any potential loss arising from it.
Charter Consolidation Update
During the first quarter of 2023, Wisconsin Bank & Trust was consolidated into HTLF Bank. Subsequent to March 31, 2023, Bank of Blue Valley was consolidated into HTLF Bank. Citywide Banks, Premier Valley Bank, Minnesota Bank & Trust, Arizona Bank & Trust, Illinois Bank & Trust, Wisconsin Bank & Trust and Bank of Blue Valley are now operating as divisions of HTLF Bank. The remaining four charters are expected to be consolidated by the end of 2023. Charter consolidation follows a template that retains the current brands, local leadership and local decision making.
Consolidation restructuring costs are projected to be $19-$20 million with approximately $8-$9 million of expenses remaining to be incurred in 2023. Total costs incurred since the project started in the fourth quarter of 2021 through March 31, 2023, were $11.0 million, of which $1.7 million was incurred in the first quarter of 2023. Charter consolidation is designed to eliminate redundancies and improve HTLF’s operating efficiency and capacity to support ongoing product and service enhancements, as well as current and future growth. HTLF has realized some operating efficiencies and financial benefits with the completion of seven charter consolidations. The resulting efficiencies and expansion in capacity are projected to generate benefits of approximately $20 million annually when the project is completed with core operating expenses expected to decline to 2.10% or less of average assets.
| | | | | | | | | | | | | | | | | |
FINANCIAL HIGHLIGHTS |
(Dollars in thousands, except per share data) | | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
STATEMENT OF INCOME DATA | | | | | | | |
Interest income | | | | | $ | 216,978 | | | $ | 141,262 | |
Interest expense | | | | | 64,766 | | | 6,583 | |
Net interest income | | | | | 152,212 | | | 134,679 | |
Provision for credit losses | | | | | 3,074 | | | 3,245 | |
Net interest income after provision for credit losses | | | | | 149,138 | | | 131,434 | |
Noninterest income | | | | | 29,999 | | | 34,569 | |
Noninterest expenses | | | | | 111,043 | | | 110,797 | |
Income taxes | | | | | 15,318 | | | 12,117 | |
Net income | | | | | 52,776 | | | 43,089 | |
Preferred dividends | | | | | (2,013) | | | (2,013) | |
| | | | | | | |
Net income available to common stockholders | | | | | $ | 50,763 | | | $ | 41,076 | |
| | | | | | | |
KEY PERFORMANCE RATIOS | | | | | | | |
Annualized return on average assets | | | | | 1.06 | % | | 0.91 | % |
Annualized return on average common equity (GAAP) | | | | | 12.43 | | | 8.32 | |
Annualized return on average tangible common equity (non-GAAP)(1) | | | | | 20.05 | | | 12.41 | |
| | | | | | | |
Annualized ratio of net charge-offs/(recoveries) to average loans | | | | | (0.04) | | | 0.49 | |
Annualized net interest margin (GAAP) | | | | | 3.36 | | | 3.08 | |
Annualized net interest margin, fully tax-equivalent (non-GAAP)(1) | | | | | 3.40 | | | 3.12 | |
Efficiency ratio (GAAP) | | | | | 60.94 | | | 65.46 | |
Adjusted efficiency ratio, fully tax-equivalent (non-GAAP)(1) | | | | | 57.16 | | | 64.65 | |
Total noninterest expenses to average assets | | | | | 2.24 | | | 2.34 | |
Core noninterest expenses to average assets (non-GAAP)(1) | | | | | 2.14 | | | 2.28 | |
| | | | | | | |
(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. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Dollars in thousands, expect per share data | As Of and For the Quarter Ended |
| 3/31/2023 | | 12/31/2022 | | 9/30/2022 | | 6/30/2022 | | 3/31/2022 |
BALANCE SHEET DATA | | | | | | | | | |
Investments | $ | 7,001,119 | | | $ | 7,051,114 | | | $ | 6,970,864 | | | $ | 7,274,056 | | | $ | 7,189,779 | |
Loans held for sale | 10,425 | | | 5,277 | | | 9,570 | | | 18,803 | | | 22,685 | |
Loans receivable held to maturity | 11,495,353 | | | 11,428,352 | | | 10,923,532 | | | 10,678,218 | | | 10,177,385 | |
Allowance for credit losses | 112,707 | | | 109,483 | | | 105,715 | | | 101,353 | | | 100,522 | |
Total assets | 20,182,544 | | | 20,244,228 | | | 19,682,950 | | | 19,658,399 | | | 19,230,879 | |
Total deposits | 17,681,346 | | | 17,513,009 | | | 17,267,121 | | | 17,225,550 | | | 16,666,684 | |
Long-term obligations | 372,097 | | | 371,753 | | | 371,446 | | | 372,538 | | | 372,290 | |
| | | | | | | | | |
Common equity | 1,718,700 | | | 1,624,350 | | | 1,545,253 | | | 1,663,363 | | | 1,821,152 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Dollars in thousands, expect per share data | As Of and For the Quarter Ended |
| 3/31/2023 | | 12/31/2022 | | 9/30/2022 | | 6/30/2022 | | 3/31/2022 |
COMMON SHARE DATA | | | | | | | | | |
Book value per common share (GAAP) | $ | 40.38 | | | $ | 38.25 | | | $ | 36.41 | | | $ | 39.19 | | | $ | 42.98 | |
Tangible book value per common share (non-GAAP)(1) | $ | 26.30 | | | $ | 24.09 | | | $ | 22.20 | | | $ | 24.94 | | | $ | 28.66 | |
ASC 320 effect on book value per common share | $ | (13.35) | | | $ | (14.58) | | | $ | (15.31) | | | $ | (11.43) | | | $ | (6.74) | |
Common shares outstanding, net of treasury stock | 42,558,726 | | | 42,467,394 | | | 42,444,106 | | | 42,439,439 | | | 42,369,908 | |
Tangible common equity ratio (non-GAAP)(1) | 5.72 | % | | 5.21 | % | | 4.94 | % | | 5.56 | % | | 6.52 | % |
Adjusted tangible common equity ratio (non-GAAP)(1) | 8.61 | % | | 8.37 | % | | 8.35 | % | | 8.11 | % | | 8.06 | % |
|
(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. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Non-GAAP Reconciliations (Dollars in thousands, except per share data) |
| As Of and For the Quarter Ended |
| 3/31/2023 | | 12/31/2022 | | 9/30/2022 | | 6/30/2022 | | 3/31/2022 |
Reconciliation of Tangible Book Value Per Common Share (non-GAAP) | | | | | | | | | |
Common equity (GAAP) | $ | 1,718,700 | | | $ | 1,624,350 | | | $ | 1,545,253 | | | $ | 1,663,363 | | | $ | 1,821,152 | |
Less goodwill | 576,005 | | | 576,005 | | | 576,005 | | | 576,005 | | | 576,005 | |
Less core deposit and customer relationship intangibles, net | 23,366 | | | 25,154 | | | 26,995 | | | 28,851 | | | 30,934 | |
Tangible common equity (non-GAAP) | $ | 1,119,329 | | | $ | 1,023,191 | | | $ | 942,253 | | | $ | 1,058,507 | | | $ | 1,214,213 | |
| | | | | | | | | |
Common shares outstanding, net of treasury stock | 42,558,726 | | | 42,467,394 | | | 42,444,106 | | | 42,439,439 | | | 42,369,908 | |
Common equity (book value) per share (GAAP) | $ | 40.38 | | | $ | 38.25 | | | $ | 36.41 | | | $ | 39.19 | | | $ | 42.98 | |
Tangible book value per common share (non-GAAP) | $ | 26.30 | | | $ | 24.09 | | | $ | 22.20 | | | $ | 24.94 | | | $ | 28.66 | |
| | | | | | | | | |
Reconciliation of Tangible Common Equity Ratio (non-GAAP) | | | | | | | | | |
Tangible common equity (non-GAAP) | $ | 1,119,329 | | | $ | 1,023,191 | | | $ | 942,253 | | | $ | 1,058,507 | | | $ | 1,214,213 | |
| | | | | | | | | |
Total assets (GAAP) | $ | 20,182,544 | | | $ | 20,244,228 | | | $ | 19,682,950 | | | $ | 19,658,399 | | | $ | 19,230,879 | |
Less goodwill | 576,005 | | | 576,005 | | | 576,005 | | | 576,005 | | | 576,005 | |
Less core deposit and customer relationship intangibles, net | 23,366 | | | 25,154 | | | 26,995 | | | 28,851 | | | 30,934 | |
Total tangible assets (non-GAAP) | $ | 19,583,173 | | | $ | 19,643,069 | | | $ | 19,079,950 | | | $ | 19,053,543 | | | $ | 18,623,940 | |
Tangible common equity ratio (non-GAAP) | 5.72 | % | | 5.21 | % | | 4.94 | % | | 5.56 | % | | 6.52 | % |
| | | | | | | | | |
Reconciliation of Adjusted Tangible Common Equity Ratio (non-GAAP) | | | | | | | | | |
Tangible common equity (non-GAAP) | $ | 1,119,329 | | | $ | 1,023,191 | | | $ | 942,253 | | | $ | 1,058,507 | | | $ | 1,214,213 | |
Accumulated other comprehensive loss | 566,919 | | | 620,006 | | | 650,636 | | | 486,918 | | | 286,921 | |
Adjusted tangible common equity (non-GAAP) | $ | 1,686,248 | | | $ | 1,643,197 | | $ | — | | $ | 1,592,889 | | $ | — | | $ | 1,545,425 | | $ | — | | $ | 1,501,134 | |
| | | | | | | | | |
Total tangible assets (non-GAAP) | $ | 19,583,173 | | | $ | 19,643,069 | | | $ | 19,079,950 | | | $ | 19,053,543 | | | $ | 18,623,940 | |
Adjusted tangible common equity ratio (non-GAAP) | 8.61 | % | | 8.37 | % | | 8.35 | % | | 8.11 | % | | 8.06 | % |
| | | | | | | | | |
(1) Computed on a tax-equivalent basis using an effective tax rate of 21%. |
| | | | | | | | | | | | | | | |
Non-GAAP Reconciliations (Dollars in thousands, except per share data) | | | For the Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
Reconciliation of Annualized Return on Average Tangible Common Equity (non-GAAP) | | | | | | | |
Net income available to common stockholders (GAAP) | | | | | $ | 50,763 | | | $ | 41,076 | |
Plus core deposit and customer relationship intangibles amortization, net of tax(1) | | | | | 1,413 | | | 1,623 | |
Net income available to common stockholders excluding intangible amortization (non-GAAP) | | | | | $ | 52,176 | | | $ | 42,699 | |
| | | | | | | |
Average common equity (GAAP) | | | | | $ | 1,655,860 | | | $ | 2,003,424 | |
Less average goodwill | | | | | 576,005 | | | 576,005 | |
Less average core deposit and customer relationship intangibles, net | | | | | 24,238 | | | 31,931 | |
Average tangible common equity (non-GAAP) | | | | | $ | 1,055,617 | | | $ | 1,395,488 | |
Annualized return on average common equity (GAAP) | | | | | 12.43 | % | | 8.32 | % |
Annualized return on average tangible common equity (non-GAAP) | | | | | 20.05 | % | | 12.41 | % |
| | | | | | | |
Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP) | | | | | | | |
Net interest income (GAAP) | | | | | $ | 152,212 | | | $ | 134,679 | |
Plus tax-equivalent adjustment(1) | | | | | 2,209 | | | 2,119 | |
Net interest income, fully tax-equivalent (non-GAAP) | | | | | $ | 154,421 | | | $ | 136,798 | |
| | | | | | | |
Average earning assets | | | | | $ | 18,392,649 | | | $ | 17,757,067 | |
| | | | | | | |
Annualized net interest margin (GAAP) | | | | | 3.36 | % | | 3.08 | % |
Annualized net interest margin, fully tax-equivalent (non-GAAP) | | | | | 3.40 | | | 3.12 | |
Net purchase accounting discount accretion on loans included in annualized net interest margin | | | | | 0.02 | | | 0.05 | |
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Reconciliation of Adjusted Efficiency Ratio (non-GAAP) | | | | | | | |
Net interest income (GAAP) | | | | | $ | 152,212 | | | $ | 134,679 | |
Tax-equivalent adjustment(1) | | | | | 2,209 | | | 2,119 | |
Fully tax-equivalent net interest income | | | | | 154,421 | | | 136,798 | |
Noninterest income (GAAP) | | | | | 29,999 | | | 34,569 | |
Securities (gains)/losses, net | | | | | 1,104 | | | (2,872) | |
Unrealized (gain)/loss on equity securities, net | | | | | (193) | | | 283 | |
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Valuation adjustment on servicing rights | | | | | — | | | (1,658) | |
Adjusted revenue (non-GAAP) | | | | | $ | 185,331 | | | $ | 167,120 | |
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Total noninterest expenses (GAAP) | | | | | $ | 111,043 | | | $ | 110,797 | |
Less: | | | | | | | |
Core deposit and customer relationship intangibles amortization | | | | | 1,788 | | | 2,054 | |
Partnership investment in tax credit projects | | | | | 538 | | | 77 | |
(Gain)/loss on sales/valuation of assets, net | | | | | 1,115 | | | 46 | |
Acquisition, integration and restructuring costs | | | | | 1,673 | | | 576 | |
Core expenses (non-GAAP) | | | | | $ | 105,929 | | | $ | 108,044 | |
Efficiency ratio (GAAP) | | | | | 60.94 | % | | 65.46 | % |
Adjusted efficiency ratio, fully tax-equivalent (non-GAAP) | | | | | 57.16 | % | | 64.65 | % |
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(1) Computed on a tax-equivalent basis using an effective tax rate of 21%. |
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Non-GAAP Reconciliations (Dollars in thousands, except per share data) | | | For the Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
Reconciliation of Annualized Ratio of Core Expenses to Average Assets (non-GAAP) | | | | | | | |
Total noninterest expenses (GAAP) | | | | | $ | 111,043 | | | $ | 110,797 | |
Core expenses (non-GAAP) | | | | | 105,929 | | | 108,044 | |
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Average assets | | | | | $ | 20,118,005 | | | $ | 19,228,872 | |
Total noninterest expenses to average assets (GAAP) | | | | | 2.24 | % | | 2.34 | % |
Core expenses to average assets (non-GAAP) | | | | | 2.14 | % | | 2.28 | % |
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Acquisition, integration and restructuring costs | | | | | | | |
Salaries and employee benefits | | | | | $ | 74 | | | $ | 340 | |
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Professional fees | | | | | 934 | | | 236 | |
Advertising | | | | | 122 | | | — | |
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Other noninterest expenses | | | | | 543 | | | — | |
Total acquisition, integration and restructuring costs | | | | | $ | 1,673 | | | $ | 576 | |
After tax impact on diluted earnings per common share(1) | | | | | $ | 0.03 | | | $ | 0.01 | |
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(1) Computed on a tax-equivalent basis using an effective tax rate of 21%. |
Non-GAAP Financial Measures
This Quarterly Report on Form 10-Q contains references to financial measures which are not defined by generally accepted accounting principles ("GAAP"). Management believes the non-GAAP measures are helpful for investors to analyze and evaluate HTLF's financial condition and operating results. However, these non-GAAP measures have inherent limitations and should not be considered a substitute for operating results determined in accordance with GAAP. Additionally, because non-GAAP measures are not standardized, it may not be possible to compare the non-GAAP measures presented in this section with other companies' non-GAAP measures. Reconciliations of each non-GAAP measure to the most directly comparable GAAP measure may be found in the financial tables above.
The non-GAAP measures presented in this Quarterly Report on Form 10-Q, management's reason for including each measure and the method of calculating each measure are presented below:
•Annualized net interest margin, fully tax-equivalent, adjusts net interest income for the tax-favored status of certain loans and securities. Management believes this measure enhances the comparability of net interest income arising from taxable and tax-exempt sources.
•Adjusted efficiency ratio, fully tax equivalent, expresses noninterest expenses as a percentage of fully tax-equivalent net interest income and noninterest income. This adjusted efficiency ratio is presented on a tax-equivalent basis which adjusts net interest income and noninterest expenses for the tax favored status of certain loans, securities, and tax credit projects. Management believes the presentation of this non-GAAP measure provides supplemental useful information for proper understanding of the financial results as it enhances the comparability of income and expenses arising from taxable and nontaxable sources and excludes specific items as noted in the reconciliation contained in this Quarterly Report on Form 10-Q.
•Net interest income, fully tax equivalent, is net income adjusted for the tax-favored status of certain loans and securities. Management believes this measure enhances the comparability of net interest income arising from taxable and tax-exempt sources.
•Tangible book value per common share is total common equity less goodwill and core deposit and customer relationship intangibles, net, divided by common shares outstanding, net of treasury. This measure is included as it is considered to be a critical metric to analyze and evaluate use of equity, financial condition and capital strength.
•Tangible common equity ratio is total common equity less goodwill and core deposit and customer relationship intangibles, net, divided by total assets less goodwill and core deposit and customer relationship intangibles, net. This measure is included as it is considered to be a critical metric to analyze and evaluate financial condition and capital strength.
•Adjusted tangible common equity ratio is total common equity less goodwill, core deposit and customer relationship intangibles, net, and accumulated other comprehensive loss 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 excluding the variability of accumulated other comprehensive income (loss).
•Annualized return on average tangible common equity is net income excluding intangible amortization calculated as (1) net income excluding tax-effected core deposit and customer relationship intangibles amortization, divided by (2) average common equity less goodwill and core deposit and customer relationship intangibles, net. This measure is included as it is considered to be a critical metric to analyze and evaluate use of equity, financial condition and capital strength.
•Annualized ratio of core expenses to average assets adjusts noninterest expenses to exclude specific items noted in the reconciliation. Management includes this measure as it is considered to be a critical metric to analyze and evaluate controllable expenses related to primary business operations.
RESULTS OF OPERATIONS
Net Interest Margin and Net Interest Income
HTLF's management seeks to optimize net interest income and net interest margin through the growth of earning assets and management of asset and liability positions because they are key indicators of HTLF's profitability.
Net interest income is the difference between interest income on earning assets and interest expense paid on interest bearing liabilities. As such, net interest income is affected by changes in volumes and yields on earning assets and the volume and rates paid on interest bearing liabilities. Net interest margin is the ratio of net interest income to average earning assets.
For the Quarters ended March 31, 2023 and 2022
Net interest margin, expressed as a percentage of average earning assets, was 3.36% (3.40% on a fully tax-equivalent basis, non-GAAP) during the first quarter of 2023 compared to 3.08% (3.12% on a fully tax-equivalent basis, non-GAAP) during the first quarter of 2022. For the quarters ended March 31, 2023 and 2022, net interest margin included 2 basis points and 5 basis points, respectively, of net purchase accounting discount amortization. HTLF's net interest margin may be impacted in future periods as a result of market pressures to increase deposit pricing and the strategic decision to increase wholesale deposits to maintain strong liquidity during the current banking disruptions.
Total interest income and average earning asset changes for the first quarter of 2023 compared to the first quarter of 2022 were:
•Total interest income was $217.0 million compared to $141.3 million, which was an increase of $75.7 million or 54% and primarily attributable to an increase in average earning assets and higher yields.
•Total interest income on a tax-equivalent basis (non-GAAP) was $219.2 million, which was an increase of $75.8 million or 53% from $143.4 million.
•Average earning assets increased $635.6 million or 4% to $18.39 billion compared to $17.76 billion.
•The average rate on earning assets increased 156 basis points to 4.83% compared to 3.27%, which was primarily due to recent interest rate increases.
Total interest expense and average interest bearing liability changes for the first quarter of 2023 compared to the first quarter of 2022 were:
•Total interest expense was $64.8 million, an increase of $58.2 million from $6.6 million, which was attributable to an increase in the average interest rate paid and an increase in average interest bearing liabilities.
•The average interest rate paid on interest bearing liabilities increased 183 basis points to 2.09% compared to 0.26%.
•Average interest bearing deposits increased $2.03 billion or 20% to $11.99 billion from $9.96 billion, including an increase of $1.04 billion in wholesale deposits.
•The average interest rate paid on interest bearing deposits increased 180 basis points to 1.92% compared to 0.12%.
•Average borrowings increased $102.9 million or 21% to $594.7 million from $491.8 million, and the average interest rate paid on borrowings was 5.37% compared to 2.97%.
Net interest income changes for the first quarter of 2023 compared to the first quarter of 2022 were:
•Net interest income totaled $152.2 million compared to $134.7 million, which was an increase of $17.5 million or 13%.
•Net interest income on a tax-equivalent basis (non-GAAP) totaled $154.4 million compared to $136.8 million, which was an increase of $17.6 million or 13%.
See "Analysis of Average Balances, Tax-Equivalent Yields and Rates" for additional information relating to net interest income on a fully tax-equivalent basis, which is not defined by GAAP.
HTLF attempts to manage its balance sheet to minimize the effect that a change in interest rates has on its net interest income. Management continues to work toward improving both its earning assets and funding mix through targeted organic growth
strategies, which management believes will result in additional net interest income. HTLF models and reviews simulations using various improving and deteriorating interest rate scenarios to assist in monitoring its exposure to interest rate risk. Based on these simulations, it is management's opinion that HTLF maintains a well-balanced and manageable interest rate posture. Item 3 of Part I of this Quarterly Report on Form 10-Q contains additional information about the results of the most recent net interest income simulations. Note 6 to the consolidated financial statements included in this Quarterly Report on Form 10-Q contains a detailed discussion of the derivative instruments utilized to manage its interest rate risk.
The following tables set forth certain information relating to 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) |
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| For the Quarter Ended |
| March 31, 2023 | | December 31, 2022 | | March 31, 2022 |
| Average Balance | | Interest | | Rate | | Average Balance | | Interest | | Rate | | Average Balance | | Interest | | Rate |
Earning Assets | | | | | | | | | | | | | | | | | |
Securities: | | | | | | | | | | | | | | | | | |
Taxable | $ | 6,096,888 | | | $ | 55,976 | | | 3.72 | % | | $ | 6,122,313 | | | $ | 53,178 | | | 3.45 | % | | $ | 6,501,664 | | | $ | 32,620 | | | 2.03 | % |
Nontaxable(1) | 922,676 | | | 7,630 | | | 3.35 | | | 890,368 | | | 7,762 | | | 3.46 | | | 1,106,951 | | | 7,851 | | | 2.88 | |
Total securities | 7,019,564 | | | 63,606 | | | 3.67 | | | 7,012,681 | | | 60,940 | | | 3.45 | | | 7,608,615 | | | 40,471 | | | 2.16 | |
Interest on deposits with other banks and short-term investments | 105,400 | | | 1,131 | | | 4.35 | | | 151,405 | | | 1,410 | | | 3.69 | | | 216,451 | | | 71 | | | 0.13 | |
Federal funds sold | — | | | — | | | — | | | 739 | | | 11 | | | 5.91 | | | 11 | | | — | | | — | |
Loans:(2) | | | | | | | | | | | | | | | | | |
Commercial and industrial(1) | 3,459,317 | | | 49,907 | | | 5.85 | | | 3,346,843 | | | 45,290 | | | 5.37 | | | 2,744,336 | | | 27,053 | | | 4.00 | |
PPP loans | 9,970 | | | 26 | | | 1.06 | | | 12,252 | | | 397 | | | 12.86 | | | 132,050 | | | 4,323 | | | 13.28 | |
Owner occupied commercial real estate | 2,289,002 | | | 26,769 | | | 4.74 | | | 2,277,055 | | | 26,194 | | | 4.56 | | | 2,243,522 | | | 21,278 | | | 3.85 | |
Non-owner occupied commercial real estate | 2,331,318 | | | 30,749 | | | 5.35 | | | 2,286,298 | | | 29,273 | | | 5.08 | | | 2,060,548 | | | 21,163 | | | 4.17 | |
Real estate construction | 1,099,026 | | | 18,131 | | | 6.69 | | | 1,050,802 | | | 16,585 | | | 6.26 | | | 847,250 | | | 9,276 | | | 4.44 | |
Agricultural and agricultural real estate | 835,648 | | | 11,353 | | | 5.51 | | | 785,647 | | | 10,159 | | | 5.13 | | | 745,348 | | | 7,006 | | | 3.81 | |
Residential mortgage | 852,561 | | | 9,273 | | | 4.41 | | | 858,767 | | | 9,168 | | | 4.24 | | | 843,881 | | | 8,085 | | | 3.89 | |
Consumer | 501,236 | | | 8,242 | | | 6.67 | | | 499,849 | | | 7,426 | | | 5.89 | | | 426,659 | | | 4,655 | | | 4.42 | |
Less: allowance for credit losses-loans | (110,393) | | | — | | | — | | | (106,500) | | | — | | | — | | | (111,604) | | | — | | | — | |
Net loans | 11,267,685 | | | 154,450 | | | 5.56 | | | 11,011,013 | | | 144,492 | | | 5.21 | | | 9,931,990 | | | 102,839 | | | 4.20 | |
Total earning assets | 18,392,649 | | | 219,187 | | | 4.83 | % | | 18,175,838 | | | 206,853 | | | 4.52 | % | | 17,757,067 | | | 143,381 | | | 3.27 | % |
Nonearning Assets | 1,725,356 | | | | | | | 1,738,011 | | | | | | | 1,472,805 | | | | | |
Total Assets | $ | 20,118,005 | | | | | | | $ | 19,913,849 | | | | | | | $ | 19,229,872 | | | | | |
Interest Bearing Liabilities | | | | | | | | | | | | | | | | | |
Savings | $ | 9,730,494 | | | $ | 37,893 | | | 1.58 | % | | $ | 9,987,692 | | | $ | 25,950 | | | 1.03 | % | | $ | 8,889,950 | | | $ | 2,394 | | | 0.11 | % |
Time deposits | 2,257,047 | | | 19,005 | | | 3.41 | | | 1,322,094 | | | 6,265 | | | 1.88 | | | 1,071,675 | | | 583 | | | 0.22 | |
Short-term borrowings | 222,772 | | | 2,422 | | | 4.41 | | | 298,804 | | | 2,223 | | | 2.95 | | | 119,588 | | | 46 | | | 0.16 | |
Other borrowings | 371,921 | | | 5,446 | | | 5.94 | | | 371,442 | | | 5,043 | | | 5.39 | | | 372,187 | | | 3,560 | | | 3.88 | |
Total interest bearing liabilities | 12,582,234 | | | 64,766 | | | 2.09 | % | | 11,980,032 | | | 39,481 | | | 1.31 | % | | 10,453,400 | | | 6,583 | | | 0.26 | % |
Noninterest Bearing Liabilities | | | | | | | | | | | | | | | | | |
Noninterest bearing deposits | 5,518,326 | | | | | | | 6,009,432 | | | | | | | 6,497,753 | | | | | |
Accrued interest and other liabilities | 250,880 | | | | | | | 264,941 | | | | | | | 164,590 | | | | | |
Total noninterest bearing liabilities | 5,769,206 | | | | | | | 6,274,373 | | | | | | | 6,662,343 | | | | | |
Equity | 1,766,565 | | | | | | | 1,659,444 | | | | | | | 2,114,129 | | | | | |
Total Liabilities and Equity | $ | 20,118,005 | | | | | | | $ | 19,913,849 | | | | | | | $ | 19,229,872 | | | | | |
Net interest income, fully tax-equivalent (non-GAAP)(1)(3) | | | $ | 154,421 | | | | | | | $ | 167,372 | | | | | | | $ | 136,798 | | | |
Net interest spread(1) | | | | | 2.74 | % | | | | | | 3.21 | % | | | | | | 3.01 | % |
Net interest income, fully tax-equivalent to total earning assets (non-GAAP)(1)(3) | | | | | 3.40 | % | | | | | | 3.65 | % | | | | | | 3.12 | % |
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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) Refer to "Non-GAAP Financial Measures" for additional information on the usage and presentation of these non-GAAP measures, and refer to the financial tables under "Financial Highlights" for the reconciliations to the most directly comparable GAAP measures. |
The following table presents the dollar amount of changes in interest income and interest expense for the major components of interest earning assets and interest bearing liabilities, in thousands. It quantifies the changes in interest income and interest expense related to changes in the average outstanding balances (volume) and those changes caused by fluctuating interest rates. For each category of interest earning assets and interest bearing liabilities, information is provided on changes attributable to (i) changes in volume, calculated by multiplying the difference between the average balance for the current period and the average balance for the prior period by the rate for the prior period, and (ii) changes in rate, calculated by multiplying the difference between the rate for the current period and the rate for the prior period by the average balance for the prior period. The unallocated change has been allocated pro rata to volume and rate variances.
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| Three Months Ended |
| March 31, 2023 Compared to March 31, 2022 Change Due to | | March 31, 2023 Compared to December 31, 2022 Changes Due to | | March 31, 2022 Compared to March 31, 2021 Change Due to |
| Volume | | Rate | | Net | | Volume | | Rate | | Net | | Volume | | Rate | | Net |
Earnings Assets/Interest Income | | | | | | | | | | | | | | | | | |
Investment securities: | | | | | | | | | | | | | | | | | |
Taxable | $ | (13,693) | | | $ | 37,049 | | | $ | 23,356 | | | $ | (1,529) | | | $ | 4,327 | | | $ | 2,798 | | | $ | 12,144 | | | $ | (9,967) | | | $ | 2,177 | |
Nontaxable(1) | (5,403) | | | 5,182 | | | $ | (221) | | | 946 | | | (1,078) | | | $ | (132) | | | 5,403 | | | (3,252) | | | 2,151 | |
Interest bearing deposits | (274) | | | 1,334 | | | $ | 1,060 | | | (1,431) | | | 1,152 | | | $ | (279) | | | 4 | | | 1 | | | 5 | |
Federal funds sold | — | | | — | | | $ | — | | | (6) | | | (5) | | | $ | (11) | | | — | | | (1) | | | (1) | |
Loans(1)(2) | 15,144 | | | 36,467 | | | $ | 51,611 | | | 2,548 | | | 7,410 | | | $ | 9,958 | | | 8,488 | | | (18,652) | | | (10,164) | |
Total earning assets | (4,226) | | | 80,032 | | | 75,806 | | | 528 | | | 11,806 | | | 12,334 | | | 26,039 | | | (31,871) | | | (5,832) | |
Liabilities/Interest Expense | | | | | | | | | | | | | | | | | |
Interest bearing deposits: | | | | | | | | | | | | | | | | | |
Savings | 248 | | | 35,251 | | | $ | 35,499 | | | (4,506) | | | 16,449 | | | $ | 11,943 | | | 1,049 | | | (1,085) | | | (36) | |
Time deposits | 1,307 | | | 17,115 | | | $ | 18,422 | | | 5,913 | | | 6,827 | | | $ | 12,740 | | | (230) | | | (1,152) | | | (1,382) | |
Short-term borrowings | 73 | | | 2,303 | | | $ | 2,376 | | | (2,894) | | | 3,093 | | | $ | 199 | | | (59) | | | (47) | | | (106) | |
Other borrowings | (18) | | | 1,904 | | | $ | 1,886 | | | 5 | | | 398 | | | $ | 403 | | | (1,611) | | | 1,871 | | | 260 | |
Total interest bearing liabilities | 1,610 | | | 56,573 | | | 58,183 | | | (1,482) | | | 26,767 | | | 25,285 | | | (851) | | | (413) | | | (1,264) | |
Net interest income | $ | (5,836) | | | $ | 23,459 | | | $ | 17,623 | | | $ | 2,010 | | | $ | (14,961) | | | $ | (12,951) | | | $ | 26,890 | | | $ | (31,458) | | | $ | (4,568) | |
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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 average loans outstanding. |
Provision For Credit Losses
The allowance for credit losses is established through provision expense to provide, in management's opinion, an appropriate allowance for credit losses. The following table shows the components of provision for credit losses for the three months ended March 31, 2023 and 2022, in thousands:
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| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
Provision expense for credit losses-loans | | | | | $ | 2,184 | | | $ | 2,628 | |
Provision expense for credit losses-unfunded commitments | | | | | 890 | | | 617 | |
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Total provision expense | | | | | $ | 3,074 | | | $ | 3,245 | |
The provision expense for credit losses for loans was $2.2 million for the first quarter of 2023, which was a decrease of $444,000 or 17% from provision expense of $2.6 million recorded in the first quarter of 2022. The provision expense for the first quarter of 2023 compared to the first quarter of 2022 was impacted by several factors, including:
•Provision expense for individually assessed loans totaled $2.5 million in the first quarter of 2023,
•Provision expense for the first quarter of 2022 was negatively impacted by two charge-offs totaling $9.2 million related to two lending relationships with collateral deficiencies due to customer fraud,
•Net recoveries of $1.0 million compared to net charge-offs of $12.2 million, and
•Use of a macroeconomic outlook which anticipated a moderate recession developing withing the next twelve months compared to an improved macroeconomic outlook.
The size of the loan portfolio, the level of organic loan growth including government guaranteed loans, changes in credit quality and the variability that can occur in the factors, including the impact of economic conditions, are all considered when determining the appropriateness of the allowance for credit losses and will contribute to the variability in the provision for credit losses 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 estimates set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations contained in HTLF's Annual Report on Form 10-K for the year ended December
31, 2022, "Allowance For Credit Losses" and "Provision for Credit Losses" in Item 2 of this Quarterly Report on Form 10-Q and Note 4, "Allowance for Credit Losses," to the consolidated financial statements included herein.
Management believes the allowance for credit losses as of March 31, 2023, was at a level commensurate with the overall risk exposure of the loan portfolio. However, deterioration in economic conditions, including a recession, could cause certain borrowers to experience difficulty and impede their ability to meet debt service. Due to the uncertainty of future economic conditions, including ongoing concerns regarding higher interest rates, supply chain challenges, workforce shortages and wage pressures, the provision for credit losses could be volatile in future quarters.
Noninterest Income
The tables below show noninterest income for the three months ended March 31, 2023 and 2022, in thousands:
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| Three Months Ended March 31, | | |
| 2023 | | 2022 | | Change | | % Change |
Service charges and fees | $ | 17,136 | | | $ | 15,251 | | | $ | 1,885 | | | 12 | % |
Loan servicing income | 714 | | | 286 | | | 428 | | | 150 | |
Trust fees | 5,657 | | | 6,079 | | | (422) | | | (7) | |
Brokerage and insurance commissions | 696 | | | 869 | | | (173) | | | (20) | |
Capital markets fees | 2,449 | | | 3,039 | | | (590) | | | (19) | |
Securities (losses)/gains, net | (1,104) | | | 2,872 | | | (3,976) | | | (138) | |
Unrealized gain/(loss) on equity securities, net | 193 | | | (283) | | | 476 | | | 168 | |
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Net gains on sale of loans held for sale | 1,831 | | | 3,411 | | | (1,580) | | | (46) | |
Valuation adjustment on servicing rights | — | | | 1,658 | | | (1,658) | | | (100) | |
Income on bank owned life insurance | 964 | | | 524 | | | 440 | | | 84 | |
Other noninterest income | 1,463 | | | 863 | | | 600 | | | 70 | |
Total noninterest income | $ | 29,999 | | | $ | 34,569 | | | $ | (4,570) | | | (13) | % |
Total noninterest income was $30.0 million during the first three months of 2023 compared to $34.6 million during the first three months of 2022, a decrease of $4.6 million or 13%. Notable changes in noninterest income categories for the three months ended March 31, 2023 and 2022 are as follows:
Service Charges and Fees
The following tables summarize the changes in service charges and fees for the three months ended March 31, 2023 and 2022, in thousands:
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| Three Months Ended March 31, | | | | |
| 2023 | | 2022 | | Change | | % Change |
Service charges and fees on deposit accounts | $ | 4,911 | | | $ | 4,395 | | | $ | 516 | | | 12 | % |
Overdraft fees | 2,969 | | | 2,825 | | | 144 | | | 5 | |
Customer service and other service fees | 93 | | | 81 | | | 12 | | | 15 | |
Credit card fee income | 7,003 | | | 5,649 | | | 1,354 | | | 24 | |
Debit card income | 2,160 | | | 2,301 | | | (141) | | | (6) | |
Total service charges and fees | $ | 17,136 | | | $ | 15,251 | | | $ | 1,885 | | | 12 | % |
The increase in service charges and fees on deposit accounts was primarily attributable to a larger customer base. The increase in credit card fee income was primarily the result of a larger commercial credit card customer base and increased utilization.
Management is monitoring and assessing industry changes related to the consumer overdraft fees, and any future changes could negatively impact overdraft fee income.
Loan Servicing Income
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. The
following tables show the changes in loan servicing income for the three months ended March 31, 2023, and 2022, in thousands:
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| Three Months Ended March 31, | | | | |
| 2023 | | 2022 | | Change | | % Change |
Commercial and agricultural loan servicing fees(1) | $ | 473 | | | $ | 237 | | | $ | 236 | | | 100 | % |
Residential mortgage servicing fees | 451 | | | 454 | | | (3) | | | (1) | |
Mortgage servicing rights amortization | (210) | | | (405) | | | 195 | | | 48 | |
Total loan servicing income | $ | 714 | | | $ | 286 | | | $ | 428 | | | 150 | % |
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(1) Includes servicing fees for commercial, commercial real estate, agricultural and agricultural real estate loans. |
Securities Losses/Gains, Net
For the first quarter of 2023, net security losses totaled $1.1 million compared to net gains of $2.9 million for the first quarter of 2022, a decrease of $4.0 million.
Net Gains on Sale of Loans Held for Sale
For the first quarter of 2023, net gains on sale of loans held for sale totaled $1.8 million, which was a decrease of $1.6 million or 46% from $3.4 million in the same quarter of 2022. Loans sold to investors in the first quarter of 2023 totaled $38.1 million compared to $98.3 million during the first quarter of 2022, which was a decrease of $60.2 million or 61%. The decrease was primarily attributable to a reduction in residential mortgage activity due to recent increases in residential mortgage loan interest rates.
Valuation Adjustment on Servicing Rights
The valuation adjustment on servicing rights was $0 for the first quarter of 2023 compared to $1.7 million for the first quarter of 2022. HTLF sold its mortgage servicing rights portfolio in the first quarter of 2023. HTLF recovered its valuation allowance in the first quarter of 2022 due to recent increases in residential mortgage loan interest rates.
Noninterest Expenses
The tables below show noninterest expenses for the three months ended March 31, 2023, and 2022, in thousands:
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| Three Months Ended March 31, | | |
| 2023 | | 2022 | | Change | | % Change |
Salaries and employee benefits | $ | 62,149 | | | $ | 66,174 | | | $ | (4,025) | | | (6) | % |
Occupancy | 7,209 | | | 7,362 | | | (153) | | | (2) | |
Furniture and equipment | 2,915 | | | 3,519 | | | (604) | | | (17) | |
Professional fees | 16,076 | | | 15,156 | | | 920 | | | 6 | |
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Advertising | 1,985 | | | 1,555 | | | 430 | | | 28 | |
Core deposit and customer relationship intangibles amortization | 1,788 | | | 2,054 | | | (266) | | | (13) | |
Other real estate and loan collection expenses | 155 | | | 195 | | | (40) | | | (21) | |
Loss on sales/valuations of assets, net | 1,115 | | | 46 | | | 1,069 | | | 2,324 | |
Acquisition, integration and restructuring costs | 1,673 | | | 576 | | | 1,097 | | | 190 | |
Partnership investment in tax credit projects | 538 | | | 77 | | | 461 | | | 599 | |
Other noninterest expenses | 15,440 | | | 14,083 | | | 1,357 | | | 10 | |
Total noninterest expenses | $ | 111,043 | | | $ | 110,797 | | | $ | 246 | | | — | % |
For the first three months of 2023, noninterest expenses totaled $111.0 million compared to $110.8 million during the first three months of 2022, an increase of $246,000 or less than 1%.
Notable changes in noninterest expense categories for the three months ended March 31, 2023 and 2022 are as follows:
Salaries and employee benefits
Salaries and employee benefits totaled $62.1 million for the first quarter of 2023 compared to $66.2 million for the first quarter of 2022, which was a decrease of $4.0 million or 6%. The decrease was primarily attributable to a reduction of full-time
equivalent employees and lower incentive compensation expense. Full-time equivalent employees totaled 1,991 compared to 2,208, which was a decrease of 217 or 10%.
Occupancy
Occupancy expense totaled $7.2 million for the first quarter of 2023, which was a decrease of $153,000 or 2% from $7.4 million for the first quarter of 2022.
Furniture and Equipment
Furniture and equipment expense totaled $2.9 million for the first quarter of 2023, which was a decrease of $604,000 or 17% from $3.5 million for the first quarter of 2022.
The decreases in occupancy expense and furniture and equipment expense are primarily attributable to the decreased number of branch locations as a result of HTLF's branch optimization strategy. At March 31, 2023, HTLF had 119 branches compared to 130 at March 31, 2022.
Professional Fees
Professional fees totaled $16.1 million for the first quarter of 2023 compared to $15.2 million for the first quarter of 2022, which was an increase of $920,000 or 6%. FDIC insurance assessments totaled $3.3 million compared to $1.6 million, an increase of $1.7 million due to assessment rate changes that were effective with the first quarter 2023 assessment.
Loss on sales/valuations of assets, net
Net losses on sales/valuations of assets were $1.1 million for the first quarter of 2023 compared to $46,000 for the first quarter of 2022. HTLF recorded $813,000 of losses on fixed assets associated with branch optimization activities and a loss of $193,000 associated with the sale of the mortgage servicing rights portfolio in the first quarter of 2023.
Acquisition, integration and restructuring costs
Acquisition, integration and restructuring costs totaled $1.7 million in the first quarter of 2023 compared to $576,000 in the first quarter of 2022, an increase of $1.1 million due to the progression of the charter consolidation project which will continue through the end of 2023.
Efficiency Ratio
One of HTLF's strategic priorities is to improve its adjusted efficiency ratio, on a fully tax-equivalent basis (non-GAAP), with the goal of maintaining it at or below 57%. During the first quarter of 2023, the efficiency ratio was 60.94% (57.16% on an adjusted fully tax-equivalent basis, non-GAAP) compared to 65.46% (64.65% on an adjusted fully tax-equivalent basis, non-GAAP) for the first quarter of 2022.
HTLF continues to pursue strategies to improve operational efficiency, which include the following initiatives:
Consolidation of its bank charters
Charter consolidation is designed to eliminate redundancies and improve HTLF’s operating efficiency and capacity to support ongoing product and service enhancements and current and future growth. Through the end of the first quarter of 2023, six charters have been consolidated into HTLF Bank, and subsequent to March 31, 2023, one additional charter was consolidated. The consolidated charters are now operating as divisions of HTLF Bank. The remaining charters are expected to be consolidated throughout the remainder of 2023.
Consolidation restructuring costs are projected to be $19-20 million with approximately $8-$9 million of expenses remaining to be incurred in 2023. Total costs incurred since the project started in the fourth quarter of 2021 through March 31, 2023, were $11.0 million, of which $1.7 million was incurred in the first quarter of 2023. HTLF has realized some operating efficiencies and financial benefits with the completed charter consolidations. The resulting efficiencies and expansion in capacity are projected to generate benefits of approximately $20 million annually when the project is completed with core operating expenses expected to decline to 2.10% or less of average assets.
Branch optimization strategy
HTLF continues to review its branch network and physical facilities as part of its branch optimization strategy and anticipates closing 2-3 branches in 2023, which may result in write-downs of fixed assets in future periods.
Income Taxes
The effective tax rate was 22.50% for the first quarter of 2023 compared to 21.95% for the first quarter of 2022. The following items impacted the first quarter 2023 and 2022 tax calculations:
•Solar energy tax credits of $310,000 compared to $0.
•Federal low-income housing tax credits of $311,000 compared to $135,000.
•New markets tax credits of $90,000 compared to $75,000.
•Historic rehabilitation tax credits of $258,000 compared to $63,000.
•Tax-exempt interest income as a percentage of pre-tax income of 12.20% compared to 14.44%.
•Tax benefit of $46,000 compared to $172,000 resulting from the vesting of restricted stock units.
•Tax expense of $929,000 compared to $58,000 resulting from the disallowed interest expense related to tax-exempt loans and securities, aligning with increases in total interest expense.
FINANCIAL CONDITION
Total assets were $20.18 billion at March 31, 2023, a decrease of $61.7 million or less than 1% from $20.24 billion at December 31, 2022. Securities represented 35% of total assets at both March 31, 2023, and December 31, 2022.
LENDING ACTIVITIES
Total loans held to maturity were $11.50 billion at March 31, 2023, and $11.43 billion at December 31, 2022, an increase of $67.0 million or 1%.
The following table shows the changes in loan balances by loan category since December 31, 2022, in thousands:
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| March 31, 2023 | | December 31, 2022 | | Change | | % Change |
Commercial and industrial | $ | 3,498,345 | | | $ | 3,464,414 | | | $ | 33,931 | | | 1 | % |
Paycheck Protection Program ("PPP") | 8,258 | | 11,025 | | (2,767) | | | (25) | |
Owner occupied commercial real estate | 2,312,538 | | 2,265,307 | | 47,231 | | | 2 | |
Non-owner occupied commercial real estate | 2,421,341 | | 2,330,940 | | 90,401 | | | 4 | |
Real estate construction | 1,102,186 | | 1,076,082 | | 26,104 | | | 2 | |
Agricultural and agricultural real estate | 810,183 | | 920,510 | | (110,327) | | | (12) | |
Residential mortgage | 841,084 | | 853,361 | | (12,277) | | | (1) | |
Consumer | 501,418 | | 506,713 | | (5,295) | | | (1) | |
Total loans held to maturity | $ | 11,495,353 | | | $ | 11,428,352 | | | $ | 67,001 | | | 1 | % |
The loan growth in the first three months of 2023 was primarily in commercial, commercial real estate and real estate construction, which was attributable to an emphasis on organic loan growth, expansion of specific commercial and agribusiness lending teams and further market penetration in various HTLF growth markets.
Notable changes in the loan portfolio include:
•Commercial and industrial loans increased $33.9 million or 1% to $3.50 billion at March 31, 2023, compared to $3.46 billion at December 31, 2022.
•Owner occupied commercial real estate loans increased $47.2 million or 2% to $2.31 billion at March 31, 2023, compared to $2.27 billion at December 31, 2022.
•Non-owner occupied commercial real estate loans increased $90.4 million or 4% to $2.42 billion at March 31, 2023, compared to $2.33 billion at December 31, 2022.
•Real estate construction loans increased $26.1 million or 2% to $1.10 billion at March 31, 2023, compared to $1.08 billion at December 31, 2022.
•Agricultural and agricultural real estate loans decreased $110.3 million or 12% to $810.2 million at March 31, 2023 compared to $920.5 million at December 31, 2022, which was attributable to paydowns of credit lines and delayed utilization primarily due to weather concerns in the California markets.
The table below presents the composition of the loan portfolio as of March 31, 2023, and December 31, 2022, in thousands:
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| March 31, 2023 | | December 31, 2022 |
| Amount | | Percent | | Amount | | Percent |
Loans receivable held to maturity: | | | | | | | |
Commercial and industrial | $ | 3,498,345 | | | 30.43 | % | | $ | 3,464,414 | | | 30.31 | % |
PPP | 8,258 | | 0.07 | | | 11,025 | | 0.10 | |
Owner occupied commercial real estate | 2,312,538 | | 20.12 | | | 2,265,307 | | 19.82 | |
Non-owner occupied commercial real estate | 2,421,341 | | 21.06 | | | 2,330,940 | | 20.40 | |
Real estate construction | 1,102,186 | | 9.59 | | | 1,076,082 | | 9.42 | |
Agricultural and agricultural real estate | 810,183 | | | 7.05 | | | 920,510 | | | 8.05 | |
Residential mortgage | 841,084 | | | 7.32 | | | 853,361 | | | 7.47 | |
Consumer | 501,418 | | | 4.36 | | | 506,713 | | | 4.43 | |
Gross loans receivable held to maturity | 11,495,353 | | | 100.00 | % | | 11,428,352 | | | 100.00 | % |
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Allowance for credit losses-loans | (112,707) | | | | | (109,483) | | | |
Loans receivable, net | $ | 11,382,646 | | | | | $ | 11,318,869 | | | |
ALLOWANCE FOR CREDIT LOSSES
The process utilized by HTLF to determine the appropriateness of the allowance for credit losses is considered a critical accounting practice. 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 estimates section of HTLF's Annual Report on Form 10-K for the year ended December 31, 2022.
Total Allowance for Lending Related Credit Losses
The total allowance for lending related credit losses was $133.8 million at March 31, 2023, which was 1.16% of loans, compared to $129.7 million or 1.13% of loans at December 31, 2022. The following table shows, in thousands, the components of the allowance for lending related credit losses as of March 31, 2023, and December 31, 2022:
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| March 31, 2023 | | December 31, 2022 | |
| Amount | | % of Allowance | | Amount | | % of Allowance | |
Quantitative | $ | 86,462 | | | 64.62 | % | | $ | 84,409 | | | 65.09 | % | |
Qualitative/Economic Forecast | 47,331 | | | 35.38 | | | 45,270 | | | 34.91 | | |
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Total | $ | 133,793 | | | 100.00 | % | | $ | 129,679 | | | 100.00 | % | |
Quantitative Allowance
The quantitative allowance increased $2.1 million or 2% to $86.5 million or 65% of the total allowance for lending related credit losses at March 31, 2023, compared to $84.4 million or 65% of the total allowance at December 31, 2022. Specific reserves for individually assessed loans totaled $9.6 million at March 31, 2023, an increase of $2.5 million or 35% from $7.1 million at December 31, 2022.
Qualitative Allowance/Economic Forecast
The qualitative allowance totaled $47.3 million or 35% of the total allowance for lending related credit losses at March 31, 2023, compared to $45.3 million or 35% at December 31, 2022.
HTLF has access to various third-party economic forecast scenarios provided by Moody's, which are updated quarterly in HTLF's methodology. HTLF continued to use a one year reasonable and supportable forecast period. At March 31, 2023, Moody's March 14, 2023, baseline forecast scenario was utilized, and management considered other downturn forecast scenarios, which anticipated a moderate recession developing withing the next twelve months, in addition to the baseline forecast to support the macroeconomic outlook used in the allowance for credit losses calculation.
Allowance for Credit Losses-Loans
The tables below present the changes in the allowance for credit losses for loans during the three months ended March 31, 2023 and 2022, in thousands:
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| Three Months Ended March 31, |
| 2023 | | 2022 |
Balance at beginning of period | $ | 109,483 | | | $ | 110,088 | |
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Provision for credit losses | 2,184 | | | 2,628 | |
Recoveries on loans previously charged off | 3,191 | | | 1,023 | |
Charge-offs on loans | (2,151) | | | (13,217) | |
Balance at end of period | $ | 112,707 | | | $ | 100,522 | |
Allowance for credit losses for loans as a percent of loans | 0.98 | % | | 0.99 | % |
Annualized ratio of net charge offs/(recoveries) to average loans | (0.04) | % | | 0.49 | % |
The allowance for credit losses for loans totaled $112.7 million at March 31, 2023, compared to $109.5 million at December 31, 2022, and $100.5 million at March 31, 2022. The allowance for credit losses for loans at March 31, 2023, was 0.98% of loans compared to 0.96% of loans at December 31, 2022. The following items impacted the allowance for credit losses for loans for the three months ended March 31, 2023:
•Provision expense for individually assessed loans totaled $2.5 million in the first quarter of 2023.
•Net recoveries for the first three months of 2023 totaled $1.0 million compared to net charge-offs of $12.2 million for the first three months of 2022, which was a decrease of $13.2 million. Included in net charge-offs for the first three months of 2022 were two charge-offs due to customer fraud totaling $9.2 million related to two lending relationships which had collateral deficiencies.
•Nonpass loans increased $13.5 million or 3% to $546.8 million at March 31, 2023, from $533.3 million at December 31, 2022.
The following tables show, in thousands, the changes in the allowance for unfunded commitments for the three months ended March 31, 2023 and 2022:
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| Three Months Ended March 31, |
| 2023 | | 2022 |
Balance at beginning of period | $ | 20,196 | | | $ | 15,462 | |
Impact of ASU 2016-13 adoption on January 1, 2020 | — | | | — | |
Adjusted balance at January 1, 2020 | 20,196 | | | 15,462 | |
Provision for credit losses | 890 | | | 617 | |
Balance at end of period | $ | 21,086 | | | $ | 16,079 | |
The allowance for unfunded commitments totaled $21.1 million as of March 31, 2023, compared to $20.2 million as of December 31, 2022, and $16.1 million as of March 31, 2022. Unfunded commitments increased $138.2 million or 3% to $4.87 billion at March 31, 2023, compared to $4.73 billion at December 31, 2022.
CREDIT QUALITY AND NONPERFORMING ASSETS
The internal rating system for the credit quality of its loans is a series of grades reflecting management's risk assessment, based on its analysis of the borrower's financial condition. The "pass" category consists of all loans that are not in the "nonpass" category and categorized into a range of loan grades that reflect increasing, though still acceptable, risk. Movement of risk through the various grade levels in the pass category is monitored for early identification of credit deterioration. For more information on this internal rating system, see Note 3, "Loans" of the consolidated financial statements in this Quarterly Report on Form 10-Q.
The nonpass loans totaled $546.8 million or 4.8% of total loans as of March 31, 2023, compared to $533.3 million or 4.7% of total loans as of December 31, 2022. As of March 31, 2023, the nonpass loans consisted of approximately 49% watch loans and 51% substandard loans compared to approximately 48% watch loans and 52% substandard loans as of December 31, 2022. The percent of nonpass loans on nonaccrual status as of March 31, 2023, was 11%.
Included in the nonpass loans at March 31, 2023, were $1.4 million of nonpass PPP loans as a result of risk ratings on non-PPP related credits. HTLF's risk rating methodology assigns a risk rating to the whole lending relationship. No allowance was
recorded related to the PPP loans because of the 100% government guarantee through the United States Small Business Administration ("SBA").
The table below presents the amounts of nonperforming loans and other nonperforming assets on the dates indicated, in thousands:
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| March 31, | | December 31, |
| 2023 | | 2022 | | 2022 | | 2021 |
Nonaccrual loans | $ | 58,066 | | | $ | 64,174 | | | $ | 58,231 | | | $ | 69,369 | |
Loans contractually past due 90 days or more | 174 | | | 246 | | | 273 | | | 550 | |
Total nonperforming loans | 58,240 | | | 64,420 | | | 58,504 | | | 69,919 | |
Other real estate | 7,438 | | | 1,422 | | | 8,401 | | | 1,927 | |
Other repossessed assets | 24 | | | 34 | | | 26 | | | 43 | |
Total nonperforming assets | $ | 65,702 | | | $ | 65,876 | | | $ | 66,931 | | | $ | 71,889 | |
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Nonperforming loans to total loans | 0.51 | % | | 0.63 | % | | 0.51 | % | | 0.70 | % |
Nonperforming assets to total loans plus repossessed property | 0.57 | | | 0.65 | | | 0.59 | | | 0.72 | |
Nonperforming assets to total assets | 0.33 | | | 0.34 | | | 0.33 | | | 0.37 | |
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The schedules below summarize the changes in nonperforming assets during the three months ended March 31, 2023, in thousands:
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| Nonperforming Loans | | Other Real Estate Owned | | Other Repossessed Assets | | Total Nonperforming Assets |
December 31, 2022 | $ | 58,504 | | | $ | 8,401 | | | $ | 26 | | | $ | 66,931 | |
Loan foreclosures | (219) | | | 211 | | | 8 | | | — | |
Net loan recoveries | 1,040 | | | — | | | — | | | 1,040 | |
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New nonperforming loans | 4,626 | | | — | | | — | | | 4,626 | |
Reduction of nonperforming loans(1) | (5,711) | | | — | | | — | | | (5,711) | |
OREO/Repossessed assets sales proceeds | — | | | (1,132) | | | (4) | | | (1,136) | |
OREO/Repossessed assets writedowns, net | — | | | (42) | | | (6) | | | (48) | |
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March 31, 2023 | $ | 58,240 | | | $ | 7,438 | | | $ | 24 | | | $ | 65,702 | |
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(1) Includes principal reductions and transfers to performing status. |
Total nonperforming assets decreased $1.2 million or 2% to $65.7 million or 0.33% of total assets at March 31, 2023, compared to $66.9 million or 0.33% of total assets at December 31, 2022. Nonperforming loans were $58.2 million at March 31, 2023, compared to $58.5 million at December 31, 2022, which represented 0.51% of total loans at both March 31, 2023, and December 31, 2022. At March 31, 2023, approximately $40.0 million or 69% of HTLF's nonperforming loans had individual loan balances exceeding $1.0 million and represented loans to fifteen borrowers. The portion of the nonperforming nonresidential real estate loans covered by government guarantees totaled $9.0 million and $12.5 million at March 31, 2023, and December 31, 2022, respectively.
SECURITIES
The composition of the securities portfolio is managed to ensure liquidity needs are met while maximizing the return on the portfolio within the established HTLF risk appetite parameters and in consideration of the impact it has on HTLF's asset/liability position. Securities represented 35% of total assets at both March 31, 2023, and December 31, 2022. Total securities carried at fair value as of March 31, 2023, were $6.10 billion, a decrease of $50.5 million or 1% from $6.15 billion at December 31, 2022.
As of March 31, 2023, and December 31, 2022, securities with a carrying value of $2.96 billion and $1.49 billion, respectively, were pledged to secure public and trust deposits, short-term borrowings and for other purposes as required or permitted by law. HTLF pledged additional securities totaling $1.48 billion to increase borrowing capacity with various short-term borrowing programs. As of March 31, 2023, approximately $3.83 billion of securities remained available to pledge.
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, 2023, and December 31, 2022, in thousands:
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| March 31, 2023 | | December 31, 2022 | |
| Amount | | Percent | | Amount | | Percent | |
U.S. treasuries | $ | 31,932 | | | 0.46 | % | | $ | 31,699 | | | 0.45 | % | |
U.S. agencies | 43,584 | | | 0.62 | | | 43,135 | | | 0.61 | | |
Obligations of states and political subdivisions | 1,720,020 | | | 24.57 | | | 1,708,840 | | | 24.24 | | |
Mortgage-backed securities - agency | 1,757,469 | | | 25.10 | | | 1,772,105 | | | 25.13 | | |
Mortgage-backed securities - non-agency | 2,117,882 | | | 30.25 | | | 2,181,876 | | | 30.94 | | |
Commercial mortgage-backed securities - agency | 86,022 | | | 1.23 | | | 85,123 | | | 1.21 | | |
Commercial mortgage-backed securities - non-agency | 657,874 | | | 9.40 | | | 659,459 | | | 9.35 | | |
Asset-backed securities | 435,523 | | | 6.22 | | | 416,054 | | | 5.90 | | |
Corporate bonds | 57,845 | | | 0.83 | | | 57,942 | | | 0.82 | | |
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Equity securities with a readily determinable fair value | 20,604 | | | 0.29 | | | 20,314 | | | 0.29 | | |
Other securities | 72,364 | | | 1.03 | | | 74,567 | | | 1.06 | | |
Total securities | $ | 7,001,119 | | | 100.00 | % | | $ | 7,051,114 | | | 100.00 | % | |
HTLF's securities portfolio had an expected modified duration of 6.19 years as of both March 31, 2023, and December 31, 2022.
At March 31, 2023, HTLF had $72.4 million of other securities, including capital stock in each Federal Home Loan Bank ("FHLB") of which each of its Banks is a member. All these securities were classified as other securities held at cost.
DEPOSITS
Total deposits were $17.68 billion as of March 31, 2023, compared to $17.51 billion at December 31, 2022, an increase of $168.3 million or 1%. As of March 31, 2023, 35% of HTLF's deposits were uninsured and uncollateralized.
HTLF maintains a granular and diverse deposit base. As of March 31, 2023, no Bank Market represented more than 12% of total customers deposits, and no major industry represented more than 10% of total customer deposits.
The following table shows the changes in deposit balances by deposit type since year-end 2022, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 | | Change | | % Change |
Demand-customer | $ | 5,119,554 | | | $ | 5,701,340 | | | $ | (581,786) | | | (10) | % |
Savings-customer | 8,647,396 | | | 8,903,747 | | | (256,351) | | | (3) | |
Savings-wholesale | 609,213 | | | 1,090,644 | | | (481,431) | | | (44) | |
Total savings | 9,256,609 | | | 9,994,391 | | | (737,782) | | | (7) | |
Time-customer | 1,071,476 | | | 851,539 | | | 219,937 | | | 26 | |
Time-wholesale | 2,233,707 | | | 965,739 | | | 1,267,968 | | | 131 | |
Total time | 3,305,183 | | | 1,817,278 | | | 1,487,905 | | | 82 | |
Total deposits | $ | 17,681,346 | | | $ | 17,513,009 | | | $ | 168,337 | | | 1 | % |
| | | | | | | |
Total customer deposits | $ | 14,838,426 | | | $ | 15,456,626 | | | $ | (618,200) | | | (4) | % |
Total wholesale deposits | 2,842,920 | | | 2,056,383 | | | 786,537 | | | 38 | % |
Total deposits | $ | 17,681,346 | | | $ | 17,513,009 | | | $ | 168,337 | | | |
At March 31, 2023, HTLF had $2.84 billion of wholesale deposits, of which $609.2 million were included in savings deposits and $2.23 billion were included in time deposits. HTLF had $1.09 billion of wholesale savings deposits and $965.7 million of wholesale time deposits at December 31, 2022.
The table below presents the composition of deposits by category as of March 31, 2023, and December 31, 2022, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Amount | | Percent | | Amount | | Percent |
Demand-customer | $ | 5,119,554 | | | 28.95 | % | | $ | 5,701,340 | | | 32.55 | % |
Savings-customer | 8,647,396 | | | 48.91 | | | 8,903,747 | | | 50.85 | |
Savings-wholesale | 609,213 | | | 3.45 | | | 1,090,644 | | | 6.23 | |
Time-customer | 1,071,476 | | | 6.06 | | | 851,539 | | | 4.86 | |
Time-wholesale | 2,233,707 | | | 12.63 | | | 965,739 | | | 5.51 | |
Total | $ | 17,681,346 | | | 100.00 | % | | $ | 17,513,009 | | | 100.00 | % |
SHORT-TERM BORROWINGS
Short-term borrowings, which HTLF defines as borrowings with an original maturity of one year or less, were as follows as of March 31, 2023, and December 31, 2022, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 | | Change | | % Change |
Securities sold under agreement to repurchase | $ | 81,641 | | | $ | 95,303 | | | $ | (13,662) | | | (14) | % |
| | | | | | | |
Advances from the FHLB | 1,000 | | | 50,000 | | | (49,000) | | | (98) | |
Advances from the federal discount window | — | | | 224,000 | | | (224,000) | | | (100) | |
Other short-term borrowings | 9,696 | | | 6,814 | | | 2,882 | | | 42 | |
Total | $ | 92,337 | | | $ | 376,117 | | | $ | (283,780) | | | (75) | % |
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 Banks own FHLB stock in one of the Chicago, Dallas, Des Moines or Topeka FHLBs, enabling them to borrow funds from their respective FHLB for short-term or long-term purposes under a variety of programs. Short-term borrowings totaled $92.3 million at March 31, 2023, compared to $376.1 million at December 31, 2022, a decrease of $283.8 million or 75%.
The Banks pledged securities that provided borrowing capacity totaling $476.9 million as of March 31, 2023, to the BTFP, which is a Federal Reserve Bank program created in the first quarter of 2023 to assist banks in meeting all the needs of depositors. There were no advances from the BTFP during the first quarter of 2023.
The Banks provide retail repurchase agreements to their customers as a cash management tool, which sweep excess funds from demand deposit accounts into these agreements. 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 $81.6 million at March 31, 2023, compared to $95.3 million at December 31, 2022, a decrease of $13.7 million or 14%.
HTLF renewed its revolving credit line agreement with an unaffiliated bank on June 14, 2022. This revolving credit line agreement, which has $100.0 million of borrowing capacity, is included in short-term borrowings, and the primary purpose of this credit line agreement is to provide liquidity. No advances occurred on this line during the first three months of 2023, and the outstanding balance was $0 at both March 31, 2023, and December 31, 2022.
OTHER BORROWINGS
The outstanding balances of other borrowings, which HTLF 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, 2023, and December 31, 2022, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 | | Change | | % Change |
Advances from the FHLB | $ | 710 | | | $ | 740 | | | $ | (30) | | | (4) | % |
| | | | | | | |
Trust preferred securities | 148,565 | | | 148,284 | | | 281 | | | — | |
| | | | | | | |
| | | | | | | |
Contracts payable | 80 | | | 82 | | | (2) | | | (2) | |
Subordinated notes | 222,742 | | | 222,647 | | | 95 | | | — | |
| | | | | | | |
Total | $ | 372,097 | | | $ | 371,753 | | | $ | 344 | | | — | % |
A schedule of HTLF's trust preferred securities outstanding excluding deferred issuance costs as of March 31, 2023, is as follows, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amount Issued | | Issuance Date | | Interest Rate | | Interest Rate as of 3/31/2023(1) | | | Maturity Date | | Callable Date |
Heartland Financial Statutory Trust IV | $ | 10,310 | | | 03/17/2004 | | 2.75% over LIBOR | | 7.66% | | | 03/17/2034 | | 06/17/2023 |
Heartland Financial Statutory Trust V | 20,619 | | | 01/27/2006 | | 1.33% over LIBOR | | 6.16 | | | 04/07/2036 | | 07/07/2023 |
Heartland Financial Statutory Trust VI | 20,619 | | | 06/21/2007 | | 1.48% over LIBOR | | 6.35 | | | 09/15/2037 | | 06/15/2023 |
Heartland Financial Statutory Trust VII | 18,042 | | | 06/26/2007 | | 1.48% over LIBOR | | 6.44 | | | 09/01/2037 | | 06/01/2023 |
Morrill Statutory Trust I | 9,393 | | | 12/19/2002 | | 3.25% over LIBOR | | 8.38 | | | 12/26/2032 | | 06/26/2023 |
Morrill Statutory Trust II | 9,115 | | | 12/17/2003 | | 2.85% over LIBOR | | 7.76 | | | 12/17/2033 | | 06/17/2023 |
Sheboygan Statutory Trust I | 6,812 | | | 09/17/2003 | | 2.95% over LIBOR | | 7.86 | | | 09/17/2033 | | 06/17/2023 |
CBNM Capital Trust I | 4,570 | | | 09/10/2004 | | 3.25% over LIBOR | | 8.12 | | | 12/15/2034 | | 06/15/2023 |
Citywide Capital Trust III | 6,619 | | | 12/19/2003 | | 2.80% over LIBOR | | 7.60 | | | 12/19/2033 | | 07/23/2023 |
Citywide Capital Trust IV | 4,483 | | | 09/30/2004 | | 2.20% over LIBOR | | 7.12 | | | 09/30/2034 | | 05/23/2023 |
Citywide Capital Trust V | 12,480 | | | 05/31/2006 | | 1.54% over LIBOR | | 6.41 | | | 07/25/2036 | | 06/15/2023 |
OCGI Statutory Trust III | 3,022 | | | 06/27/2002 | | 3.65% over LIBOR | | 8.91 | | | 09/30/2032 | | 06/30/2023 |
OCGI Capital Trust IV | 5,525 | | | 09/23/2004 | | 2.50% over LIBOR | | 7.37 | | | 12/15/2034 | | 06/15/2023 |
BVBC Capital Trust II | 7,329 | | | 04/10/2003 | | 3.25% over LIBOR | | 8.06 | | | 04/24/2033 | | 07/24/2023 |
BVBC Capital Trust III | 9,627 | | | 07/29/2005 | | 1.60% over LIBOR | | 6.76 | | | 09/30/2035 | | 06/30/2023 |
Total trust preferred costs | 148,565 | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
(1) Effective weighted average interest rate as of March 31, 2023, was 7.60%. |
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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, HTLF 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 HTLF and each of its Banks 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.
HTLF's capital ratios are calculated in accordance with Federal Reserve Board instructions and are required regulatory financial measures. The following table illustrates the 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) |
March 31, 2023 | 14.98 | % | | 12.02 | % | | 11.28 | % | | 9.25 | % |
Minimum capital requirement | 8.00 | | | 6.00 | | | 4.50 | | | 4.00 | |
Well capitalized requirement | 10.00 | | | 8.00 | | | 6.50 | | | 5.00 | |
Minimum capital requirement, including fully-phased in capital conservation buffer | 10.50 | | | 8.50 | | | 7.00 | | | N/A |
Risk-weighted assets | $ | 15,035,898 | | | $ | 15,035,898 | | | $ | 15,035,898 | | | N/A |
Average assets | N/A | | N/A | | N/A | | $ | 19,528,724 | |
| | | | | | | |
December 31, 2022 | 14.76 | % | | 11.81 | % | | 11.07 | % | | 9.13 | % |
Minimum capital requirement | 8.00 | | | 6.00 | | | 4.50 | | | 4.00 | |
Well capitalized requirement | 10.00 | | | 8.00 | | | 6.50 | | | 5.00 | |
Minimum capital requirement, including fully-phased in capital conservation buffer | 10.50 | | | 8.50 | | | 7.00 | | | N/A |
Risk-weighted assets | $ | 14,937,128 | | | $ | 14,937,128 | | | $ | 14,937,128 | | | N/A |
Average assets | N/A | | N/A | | N/A | | $ | 19,322,778 | |
Retained earnings that could be available for the payment of dividends to HTLF from its banks totaled approximately $756.5 million and $702.2 million at March 31, 2023, and December 31, 2022, respectively, under the most restrictive minimum capital requirements. Retained earnings that could be available for the payment of dividends to HTLF from its banks totaled approximately $456.3 million and $403.9 million at March 31, 2023, and December 31, 2022, respectively, under the capital requirements to remain well capitalized. These dividends are the principal source of funds to pay dividends on HTLF's common and preferred stock and to pay interest and principal on its debt.
As of March 31, 2023, management believes regulatory capital ratio buffers would withstand any changes in regulatory rules that require the inclusion of unrealized losses in the total investment portfolio and remain well capitalized.
On June 26, 2020, HTLF issued and sold 4.6 million depositary shares, each representing a 1/400th interest in a share of 7.00% Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, Series E. The depositary shares are listed on The Nasdaq Global Select Market under the symbol "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.
On August 8, 2022, HTLF filed a universal shelf registration statement with the SEC to register debt or equity securities. This shelf registration statement, which was effective immediately, provides HTLF with the ability to raise capital, subject to market conditions and SEC rules and limitations, if the board of directors decides to do so. This registration statement permits HTLF, from time to time, in one or more public offerings, to offer debt securities, subordinated notes, common stock, preferred stock, depositary shares, warrants, rights or units of any combination of these securities. The amount of securities that may be offered was not specified in the registration statement, and the terms of any future offerings are to be established at the time of the offering. The registration statement expires on August 8, 2025.
COMMITMENTS AND CONTRACTUAL OBLIGATIONS
Commitments and Contractual Obligations
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Banks evaluate the creditworthiness of customers to which they extend a credit commitment on a case-by-case basis and may require collateral to secure any credit extended. The amount of collateral obtained is based upon management's credit evaluation of the counterparty. 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 the Banks to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. At March 31, 2023, and December 31, 2022, commitments to extend credit aggregated $4.87 billion and $4.73 billion, respectively. Standby letters of credit aggregated $55.6 million at March 31, 2023, and $55.1 million at December 31, 2022.
At March 31, 2023, and December 31, 2022, HTLF's banks had $614.3 million and $682.9 million, respectively, of standby letters of credit with the respective FHLB to secure public funds and municipal deposits.
Contractual obligations and other commitments were disclosed in HTLF's Annual Report on Form 10-K for the year ended December 31, 2022. There have been no other material changes to HTLF's contractual obligations and other commitments since the Annual Report on Form 10-K was filed.
There are certain legal proceedings pending against HTLF and its subsidiaries at March 31, 2023, that are ordinary routine litigation incidental to business.
HTLF continues to explore opportunities to expand the size of its banking footprint by opportunistically augmenting organic growth by identifying acquisition targets that complement or supplement its current banking strategy. This includes transactions that increase penetration in existing geographic Bank Markets and expansion into adjacent markets, as well as acquisitions of fee income businesses that complement and build on existing businesses or further meet the needs of customers. Future expenditures relating to expansion efforts, in addition to those identified above, cannot be estimated at this time.
Derivative Financial Instruments
HTLF 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. HTLF 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 6 to the consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information on derivative financial instruments.
LIQUIDITY
Liquidity refers to the 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 HTLF principally depends on cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings and its ability to borrow funds in the money or capital markets.
At March 31, 2023, HTLF had $362.1 million of cash and cash equivalents, time deposits in other financial institutions of $1.7 million and securities carried at fair value of $6.10 billion. Management expects the securities portfolio to produce cash flows of approximately $1.3 billion over the next twelve months.
Management of investing and financing activities, and market conditions, determine the level and the stability of net interest cash flows. Management attempts to mitigate the impact of changes in market interest rates to the extent possible, so that balance sheet growth is the principal determinant of growth in net interest cash flows.
The Banks' FHLB memberships give them the ability to borrow funds for short-term and long-term purposes under a variety of programs. 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. In the event of short-term liquidity needs, HTLF's banks may purchase federal funds from each other or from correspondent banks and may also borrow from the Federal Reserve Bank, including the BTFP.
Additional funding is provided by long-term debt and short-term borrowings. As of March 31, 2023, HTLF had $372.1 million of long-term debt outstanding, and it is an important funding source because of its multi-year borrowing structure.
During the first quarter of 2023, HTLF shifted out of overnight borrowings and into brokered CDs, which allowed for more immediate funding availability through various sources. HTLF pledged additional securities totaling $1.48 billion to increase borrowing capacity, and as of March 31, 2023, pledged securities totaled $2.96 billion. As of March 31, 2023, approximately $3.83 billion of securities remained available to pledge.
The following table shows the source of funding, balance outstanding and available borrowing capacity as of March 31, 2023, dollars in thousands:
| | | | | | | | | | | | | | |
| | As of March 31, 2023 |
Source | | Outstanding | | Available |
Federal Reserve Discount Window | | $ | — | | | $ | 1,604,904 | |
Bank Term Funding Program | | — | | | 476,925 | |
Federal Home Loan Bank | | 1,711 | | | 679,588 | |
Federal Funds | | — | | | 247,500 | |
Wholesale deposits/brokered CDs | | 2,842,920 | | | 1,689,420 | |
Total | | $ | 2,844,631 | | | $ | 4,698,337 | |
HTLF is focused on loan growth and strives to fund loan growth with the least expensive source of deposits, sales of securities or borrowings. Management believes it is unlikely HTLF would be required to sell securities at a loss for such funding needs. The securities portfolio is expected to produce cash flows of approximately $1.3 billion over the next twelve months, which could be used to fund loan growth. Additionally, growing deposits will continue to be a focus. During the first quarter of 2023, HTLF initiated a deposit campaign that resulted in over 8,000 new consumer deposit accounts. HTLF offers the ICS and CDARS products accessed through the Intrafi network of financial institutions, which helps to reduce the amount of pledged securities.
On a consolidated basis, HTLF maintains a large balance of short-term securities that, when combined with cash from operations, management 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 Banks and the issuance of debt and equity securities.
At March 31, 2023, the parent company had cash of $284.4 million. Additionally, HTLF has a revolving credit agreement with an unaffiliated bank, which was renewed most recently on June 14, 2022. The revolving credit agreement has $100.0 million of maximum borrowing capacity, of which none was outstanding at March 31, 2023. This credit agreement contains specific financial covenants, all of which HTLF complied with as of March 31, 2023.
The ability of HTLF to pay dividends to its stockholders is dependent upon dividends paid to HTLF by its Banks. The Banks are subject to statutory and regulatory restrictions on the amount they may pay in dividends. To maintain acceptable capital ratios at HTLF's Banks, certain portions of their retained earnings are not available for the payment of dividends.
HTLF has filed a universal shelf registration statement with the SEC that provides HTLF the ability to raise both debt and capital, subject to SEC rules and limitations, if HTLF's board of directors decides to do so. This registration statement expires in August 2025.
Management believes that cash on hand, cash flows from operations and cash availability under existing borrower programs and facilities will be sufficient to meet any recurring and additional operating cash needs in 2023.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market prices and rates. HTLF'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 HTLF's assets, liabilities and off-balance sheet contracts. HTLF'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 the Banks, and, on a consolidated basis, by HTLF's executive management and board of directors. At least quarterly, a detailed review of the balance sheet risk profile is performed for HTLF and each of its Banks. Included in these reviews are interest rate sensitivity analyses, which simulate changes in net interest income in response to various interest rate scenarios. These analyses consider current portfolio rates, existing maturities, repricing opportunities and market interest rates, in addition to prepayments and growth under different interest rate assumptions. Selected strategies are modeled prior to implementation to determine their effect on HTLF's interest rate risk profile and net interest income.
The core interest rate risk analysis utilized 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 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, 2023, and March 31, 2022, provided the following results, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 |
| Net Interest Margin | | % Change From Base | | Net Interest Margin | | % Change From Base |
Year 1 | | | | | | | |
Down 100 Basis Points | $ | 632,070 | | | (1.32) | % | | $ | 528,585 | | | (1.79) | % |
Base | 640,512 | | | — | | | 538,243 | | | — | |
Up 200 Basis Points | 654,132 | | | 2.13 | | | 560,459 | | | 4.13 | |
Year 2 | | | | | | | |
Down 100 Basis Points | $ | 658,497 | | | 2.81 | % | | $ | 517,169 | | | (3.92) | % |
Base | 688,624 | | | 7.51 | | | 557,176 | | | 3.52 | |
Up 200 Basis Points | 713,149 | | | 11.34 | | | 610,213 | | | 13.37 | |
HTLF uses derivative financial instruments to manage the impact of changes in interest rates on its future interest income or interest expense. HTLF 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 6 to the consolidated financial statements included in this Quarterly Report on Form 10-Q.
HTLF 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 HTLF 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 sheets 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 management, including the Chief Executive Officer and Chief Financial Officer, the Chief Executive Officer and Chief Financial Officer have concluded that:
•HTLF's disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) were effective.
•During the three months ended March 31, 2023, there have been no changes in 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, the internal controls over financial reporting.
PART II
ITEM 1. LEGAL PROCEEDINGS
There are certain legal proceedings pending against HTLF and its subsidiaries at March 31, 2023, that are ordinary routine litigation incidental to business.
ITEM 1A. RISK FACTORS
There have been no material changes in the risk factors applicable to HTLF from those disclosed in Part I, Item 1A. "Risk Factors" in HTLF's 2022 Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On March 17, 2020, the board of directors authorized management to acquire and hold up to 5% of capital or $85.9 million as of March 31, 2023, as treasury shares at any one time. HTLF and its affiliated purchasers made no purchases of its common stock during the quarter ended March 31, 2023.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
ITEM 5. OTHER INFORMATION
None
ITEM 6. 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. | | |
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) |
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Dated: May 5, 2023 |