HEARTLAND FINANCIAL USA INC - Quarter Report: 2022 March (Form 10-Q)
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, 2022
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For transition period from __________ to __________
Commission File Number: 001-15393
HEARTLAND FINANCIAL USA, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
42-1405748
(I.R.S. employer identification number)
1398 Central Avenue, Dubuque, Iowa 52001
(Address of principal executive offices)(Zip Code)
(563) 589-2100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
| Title of Each Class | Trading Symbol | Name of each exchange on which registered | ||||||
| Common Stock, par value $1.00 per share | HTLF | Nasdaq Stock Market | ||||||
| Depositary Shares, each representing 1/400th interest in a share of 7.00% Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, Series E | HTLFP | Nasdaq Stock Market | ||||||
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 6, 2022, the Registrant had outstanding 42,370,210 shares of common stock, $1.00 par value per share.
HEARTLAND FINANCIAL USA, INC.
Form 10-Q Quarterly Report
Table of Contents
| Part I | |||||
| Part II | |||||
PART I
ITEM 1. FINANCIAL STATEMENTS
| HEARTLAND FINANCIAL USA, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data) | |||||||||||
| March 31, 2022 (Unaudited) | December 31, 2021 | ||||||||||
| ASSETS | |||||||||||
| Cash and due from banks | $ | 198,559 | $ | 163,895 | |||||||
| Interest bearing deposits with other banks and other short-term investments | 406,343 | 271,704 | |||||||||
| Cash and cash equivalents | 604,902 | 435,599 | |||||||||
| Time deposits in other financial institutions | 2,894 | 2,894 | |||||||||
| Securities: | |||||||||||
Carried at fair value (cost of $7,411,885 at March 31, 2022, and $7,536,338 at December 31, 2021) | 7,025,243 | 7,530,374 | |||||||||
Held to maturity, net of allowance for credit losses of $0 at both March 31, 2022, and December 31, 2021 (fair value of $86,486 at March 31, 2022, and $94,139 at December 31, 2021) | 81,785 | 84,709 | |||||||||
| Other investments, at cost | 82,751 | 82,567 | |||||||||
| Loans held for sale | 22,685 | 21,640 | |||||||||
| Loans receivable: | |||||||||||
| Held to maturity | 10,177,385 | 9,954,572 | |||||||||
| Allowance for credit losses | (100,522) | (110,088) | |||||||||
| Loans receivable, net | 10,076,863 | 9,844,484 | |||||||||
| Premises, furniture and equipment, net | 199,679 | 204,999 | |||||||||
| Premises, furniture and equipment held for sale | 14,073 | 10,828 | |||||||||
| Other real estate, net | 1,422 | 1,927 | |||||||||
| Goodwill | 576,005 | 576,005 | |||||||||
| Core deposit intangibles and customer relationship intangibles, net | 30,934 | 32,988 | |||||||||
| Servicing rights, net | 8,102 | 6,890 | |||||||||
| Cash surrender value on life insurance | 192,267 | 191,722 | |||||||||
| Other assets | 311,274 | 246,923 | |||||||||
| TOTAL ASSETS | $ | 19,230,879 | $ | 19,274,549 | |||||||
| LIABILITIES AND EQUITY | |||||||||||
| LIABILITIES: | |||||||||||
| Deposits: | |||||||||||
| Demand | $ | 6,376,249 | $ | 6,495,326 | |||||||
| Savings | 9,236,427 | 8,897,909 | |||||||||
| Time | 1,054,008 | 1,024,020 | |||||||||
| Total deposits | 16,666,684 | 16,417,255 | |||||||||
| Short-term borrowings | 107,372 | 131,597 | |||||||||
| Other borrowings | 372,290 | 372,072 | |||||||||
| Accrued expenses and other liabilities | 152,676 | 171,447 | |||||||||
| TOTAL LIABILITIES | 17,299,022 | 17,092,371 | |||||||||
| STOCKHOLDERS' EQUITY: | |||||||||||
Preferred stock (par value $1 per share; authorized 6,104 shares at both March 31, 2022, and December 31, 2021; none issued or outstanding at both March 31, 2022, and December 31, 2021) | — | — | |||||||||
Series A Junior Participating preferred stock (par value $1 per share; authorized 16,000 shares; none issued or outstanding at both March 31, 2022, and December 31, 2021) | — | — | |||||||||
Series B Fixed Rate Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares authorized at both March 31, 2022 and December 31, 2021; none issued or outstanding at both March 31, 2022 and December 31, 2021) | — | — | |||||||||
Series C Senior Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares authorized at both March 31, 2022, and December 31, 2021; none issued or outstanding at both March 31, 2022, and December 31, 2021) | — | — | |||||||||
Series D Senior Non-Cumulative Perpetual Convertible Preferred Stock (par value $1 per share; 3,000 shares authorized at both March 31, 2022, and December 31, 2021; none issued or outstanding at both March 31, 2022, and December 31, 2021) | — | — | |||||||||
Series E Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 11,500 shares authorized at both March 31, 2022, and December 31, 2021; 11,500 shares issued and outstanding at both March 31, 2022 and December 31, 2021) | 110,705 | 110,705 | |||||||||
Common stock (par value $1 per share; 60,000,000 shares authorized at both March 31, 2022, and December 31, 2021; issued 42,369,908 shares at March 31, 2022, and 42,275,264 shares at December 31, 2021) | 42,370 | 42,275 | |||||||||
| Capital surplus | 1,073,048 | 1,071,956 | |||||||||
| Retained earnings | 992,655 | 962,994 | |||||||||
| Accumulated other comprehensive loss | (286,921) | (5,752) | |||||||||
| TOTAL STOCKHOLDERS' EQUITY | 1,931,857 | 2,182,178 | |||||||||
| TOTAL LIABILITIES AND EQUITY | $ | 19,230,879 | $ | 19,274,549 | |||||||
| See accompanying notes to consolidated financial statements. | |||||||||||
| HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands, except per share data) | |||||||||||
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| INTEREST INCOME: | |||||||||||
| Interest and fees on loans | $ | 102,369 | $ | 112,439 | |||||||
| Interest on securities: | |||||||||||
| Taxable | 32,620 | 30,443 | |||||||||
| Nontaxable | 6,202 | 4,503 | |||||||||
| Interest on federal funds sold | — | 1 | |||||||||
| Interest on interest bearing deposits in other financial institutions | 71 | 66 | |||||||||
| TOTAL INTEREST INCOME | 141,262 | 147,452 | |||||||||
| INTEREST EXPENSE: | |||||||||||
| Interest on deposits | 2,977 | 4,395 | |||||||||
| Interest on short-term borrowings | 46 | 152 | |||||||||
Interest on other borrowings (includes $0 and $(591) of interest benefit related to derivatives reclassified from accumulated other comprehensive income (loss) for the three months ended March 31, 2022 and 2021, respectively) | 3,560 | 3,300 | |||||||||
| TOTAL INTEREST EXPENSE | 6,583 | 7,847 | |||||||||
| NET INTEREST INCOME | 134,679 | 139,605 | |||||||||
| Provision (benefit) for credit losses | 3,245 | (648) | |||||||||
| NET INTEREST INCOME AFTER PROVISION (BENEFIT) FOR CREDIT LOSSES | 131,434 | 140,253 | |||||||||
| NONINTEREST INCOME: | |||||||||||
| Service charges and fees | 15,251 | 13,671 | |||||||||
| Loan servicing income | 286 | 838 | |||||||||
| Trust fees | 6,079 | 5,777 | |||||||||
| Brokerage and insurance commissions | 869 | 853 | |||||||||
Securities gains (losses), net (includes $1,991 and $(30) of net security gains (losses) reclassified from accumulated other comprehensive income (loss) for the three months ended March 31, 2022 and 2021, respectively) | 2,872 | (30) | |||||||||
| Unrealized gain on equity securities, net | (283) | (110) | |||||||||
| Net gains on sale of loans held for sale | 3,411 | 6,420 | |||||||||
| Valuation adjustment on servicing rights | 1,658 | 917 | |||||||||
| Income on bank owned life insurance | 524 | 829 | |||||||||
| Other noninterest income | 3,902 | 1,152 | |||||||||
| TOTAL NONINTEREST INCOME | 34,569 | 30,317 | |||||||||
| NONINTEREST EXPENSES: | |||||||||||
| Salaries and employee benefits | 66,174 | 59,062 | |||||||||
| Occupancy | 7,362 | 7,918 | |||||||||
| Furniture and equipment | 3,519 | 3,093 | |||||||||
| Professional fees | 15,156 | 13,490 | |||||||||
| Advertising | 1,555 | 1,469 | |||||||||
| Core deposit and customer relationship intangibles amortization | 2,054 | 2,516 | |||||||||
| Other real estate and loan collection expenses | 195 | 135 | |||||||||
| Loss on sales/valuations of assets, net | 46 | 194 | |||||||||
| Acquisition, integration and restructuring costs | 576 | 2,928 | |||||||||
| Partnership investment in tax credit projects | 77 | 35 | |||||||||
| Other noninterest expenses | 14,083 | 11,583 | |||||||||
| TOTAL NONINTEREST EXPENSES | 110,797 | 102,423 | |||||||||
| INCOME BEFORE INCOME TAXES | 55,206 | 68,147 | |||||||||
Income taxes (includes $503 and $143 of income tax expense reclassified from accumulated other comprehensive income (loss) for the three months ended March 31, 2022 and 2021, respectively) | 12,117 | 15,333 | |||||||||
| NET INCOME | 43,089 | 52,814 | |||||||||
| Preferred dividends | (2,013) | (2,013) | |||||||||
| NET INCOME AVAILABLE TO COMMON STOCKHOLDERS | $ | 41,076 | $ | 50,801 | |||||||
| EARNINGS PER COMMON SHARE - BASIC | $ | 0.97 | $ | 1.20 | |||||||
| EARNINGS PER COMMON SHARE - DILUTED | $ | 0.97 | $ | 1.20 | |||||||
| CASH DIVIDENDS DECLARED PER COMMON SHARE | $ | 0.27 | $ | 0.22 | |||||||
| See accompanying notes to consolidated financial statements. | |||||||||||
| HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Dollars in thousands) | |||||||||||
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| NET INCOME | $ | 43,089 | $ | 52,814 | |||||||
| OTHER COMPREHENSIVE INCOME (LOSS) | |||||||||||
| Securities: | |||||||||||
| Net change in unrealized loss on securities | (378,690) | (90,869) | |||||||||
| Reclassification adjustment for net (gains) losses realized in net income | (1,991) | 30 | |||||||||
| Income taxes | 99,370 | 23,761 | |||||||||
| Other comprehensive loss on securities | (281,311) | (67,078) | |||||||||
| Derivatives used in cash flow hedging relationships: | |||||||||||
| Net change in unrealized gain on derivatives | — | 1,888 | |||||||||
| Reclassification adjustment for net (gains) losses on derivatives realized in net income | 181 | (597) | |||||||||
| Income taxes | (39) | (272) | |||||||||
| Other comprehensive income on cash flow hedges | 142 | 1,019 | |||||||||
| Other comprehensive loss | (281,169) | (66,059) | |||||||||
| TOTAL COMPREHENSIVE INCOME (LOSS) | $ | (238,080) | $ | (13,245) | |||||||
| See accompanying notes to consolidated financial statements. | |||||||||||
| HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) | |||||||||||
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Net income | $ | 43,089 | $ | 52,814 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 6,831 | 6,801 | |||||||||
| Provision (benefit) for credit losses | 3,245 | (648) | |||||||||
| Net amortization of premium on securities | 19,352 | 8,991 | |||||||||
| Securities (gains) losses, net | (2,872) | 30 | |||||||||
| Unrealized gain on equity securities, net | 283 | 110 | |||||||||
| Stock based compensation | 2,704 | 2,760 | |||||||||
| Loans originated for sale | (99,331) | (124,380) | |||||||||
| Proceeds on sales of loans held for sale | 101,260 | 145,200 | |||||||||
| Net gains on sale of loans held for sale | (2,974) | (5,908) | |||||||||
| Decrease in accrued interest receivable | 6,282 | 26 | |||||||||
| Increase in prepaid expenses | (4,765) | (578) | |||||||||
| Increase (decrease) in accrued interest payable | (100) | 236 | |||||||||
| Capitalization of servicing rights | (437) | (512) | |||||||||
| Valuation adjustment on servicing rights | (1,658) | (917) | |||||||||
| Loss on sales/valuations of assets, net | 46 | 194 | |||||||||
| Net excess tax benefit from stock based compensation | 172 | 153 | |||||||||
| Other, net | 12,652 | (17,816) | |||||||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES | 83,779 | 66,556 | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
| Purchase of time deposits in other financial institutions | — | (9) | |||||||||
| Proceeds from the sale of securities available for sale | 824,071 | 207,067 | |||||||||
| Proceeds from the sale of securities held to maturity | 2,337 | — | |||||||||
| Proceeds from the maturity of and principal paydowns on securities available for sale | 290,347 | 159,773 | |||||||||
| Proceeds from the maturity of and principal paydowns on securities held to maturity | 1,067 | 3,909 | |||||||||
| Proceeds from the sale, maturity of, redemption of and principal paydowns on other investments | 1,982 | 1,003 | |||||||||
| Purchase of securities available for sale | (1,007,992) | (709,690) | |||||||||
| Purchase of other investments | (1,385) | (685) | |||||||||
| Net increase in loans | (235,696) | (29,674) | |||||||||
| Purchase of bank owned life insurance policies | (5) | (22) | |||||||||
| Capital expenditures | (2,544) | (3,776) | |||||||||
| Proceeds from the sale of equipment | 214 | 1,311 | |||||||||
| Proceeds on sale of OREO and other repossessed assets | 1,157 | 1,209 | |||||||||
| NET CASH USED BY INVESTING ACTIVITIES | $ | (126,447) | $ | (369,584) | |||||||
| HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (Unaudited) (Dollars in thousands) | |||||||||||
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Net increase (decrease) in demand deposits | $ | (119,077) | $ | 487,136 | |||||||
| Net increase in savings deposits | 338,518 | 159,547 | |||||||||
| Net increase (decrease) in time deposit accounts | 29,988 | (67,537) | |||||||||
| Net decrease in short-term borrowings | (24,225) | (27,275) | |||||||||
| Repayments of other borrowings | (79) | (107,807) | |||||||||
| Proceeds from issuance of common stock | 274 | 196 | |||||||||
| Dividends paid | (13,428) | (11,273) | |||||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | 211,971 | 432,987 | |||||||||
| Net increase in cash and cash equivalents | 169,303 | 129,959 | |||||||||
| Cash and cash equivalents at beginning of year | 435,599 | 337,903 | |||||||||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 604,902 | $ | 467,862 | |||||||
| Supplemental disclosures: | |||||||||||
| Cash paid for income/franchise taxes | $ | 32 | $ | 15,744 | |||||||
| Cash paid for interest | 6,683 | 7,611 | |||||||||
| Loans transferred to OREO | 653 | 585 | |||||||||
| Transfer of premises from premises, furniture and equipment, net, to premises, furniture and equipment held for sale | 3,250 | 1,140 | |||||||||
| Transfer of premises from premises, furniture and equipment held for sale to premises, furniture and equipment, net | — | 6 | |||||||||
| Dividends declared, not paid | 2,013 | 2,013 | |||||||||
| See accompanying notes to consolidated financial statements. | |||||||||||
| HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited) (Dollars in thousands, except per share data) | |||||||||||||||||||||||||||||||||||
| Heartland Financial USA, Inc. Stockholders' Equity | |||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Capital Surplus | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Equity | ||||||||||||||||||||||||||||||
| Balance at January 1, 2021 | $ | 110,705 | $ | 42,094 | $ | 1,062,083 | $ | 791,630 | $ | 72,719 | $ | 2,079,231 | |||||||||||||||||||||||
| Comprehensive income (loss) | 52,814 | (66,059) | (13,245) | ||||||||||||||||||||||||||||||||
| Cash dividends declared: | |||||||||||||||||||||||||||||||||||
Preferred, $175.00 per share | (2,013) | (2,013) | |||||||||||||||||||||||||||||||||
Common, $0.22 per share | (9,260) | (9,260) | |||||||||||||||||||||||||||||||||
Issuance of 79,813 shares of common stock | 80 | (1,346) | (1,266) | ||||||||||||||||||||||||||||||||
| Stock based compensation | 2,760 | 2,760 | |||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | 110,705 | $ | 42,174 | $ | 1,063,497 | $ | 833,171 | $ | 6,660 | $ | 2,056,207 | |||||||||||||||||||||||
| Balance at January 1, 2022 | $ | 110,705 | $ | 42,275 | $ | 1,071,956 | $ | 962,994 | $ | (5,752) | $ | 2,182,178 | |||||||||||||||||||||||
| Comprehensive income (loss) | 43,089 | (281,169) | (238,080) | ||||||||||||||||||||||||||||||||
| Cash dividends declared: | |||||||||||||||||||||||||||||||||||
Preferred, $175.00 per share | (2,013) | (2,013) | |||||||||||||||||||||||||||||||||
Common, $0.27 per share | (11,415) | (11,415) | |||||||||||||||||||||||||||||||||
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 | |||||||||||||||||||||||
| 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, 2021, 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 24, 2022. 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, 2022, are not necessarily indicative of the results expected for the year ending December 31, 2022.
Earnings Per Share
Basic earnings per share is determined using net income available to common stockholders and weighted average common shares outstanding. Diluted earnings per share is computed by dividing net income available to common stockholders by the weighted average common shares and assumed incremental common shares issued. Amounts used in the determination of basic and diluted earnings per share for the three months ended March 31, 2022, and 2021, are shown in the table below, dollars and number of shares in thousands, except per share data:
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net income | $ | 43,089 | $ | 52,814 | |||||||
| Preferred dividends | (2,013) | (2,013) | |||||||||
| Net income available to stockholders | $ | 41,076 | $ | 50,801 | |||||||
| Weighted average common shares outstanding for basic earnings per share | 42,360 | 42,174 | |||||||||
| Assumed incremental common shares issued upon vesting of outstanding restricted stock units | 181 | 162 | |||||||||
| Weighted average common shares for diluted earnings per share | 42,541 | 42,336 | |||||||||
| Earnings per common share — basic | $ | 0.97 | $ | 1.20 | |||||||
| Earnings per common share — diluted | $ | 0.97 | $ | 1.20 | |||||||
| Number of antidilutive common stock equivalents excluded from diluted earnings per share computation | — | 25 | |||||||||
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.
Effect of New Financial Accounting Standards
ASU 2018-16
In October 2018, the FASB issued ASU 2018-16, "Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting." In the United States, eligible benchmark interest rates under Topic 815 are interest rates on direct Treasury obligations of the U.S. government, the London Interbank Offered Rate ("LIBOR") swap rate, and the Overnight Index Swap ("OIS") Rate based on the Fed Funds Effective Rate. When the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, in August 2017, it introduced the Securities Industry and Financial Markets Association ("SIFMA") Municipal Swap Rate as the fourth permissible U.S. benchmark rate. ASU 2018-16 adds the OIS rate based on the Secured Overnight Financing Rate ("SOFR") as a U.S. benchmark interest rate to facilitate the LIBOR to SOFR transition and provide sufficient lead time for entities to prepare for changes to interest rate risk hedging strategies for both risk
management and hedge accounting purposes. ASU 2018-16 became effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years and the financial statement impact immediately upon adoption was immaterial. The future financial statement impact will depend on any new contracts entered into using new benchmark rates, as well as any existing contracts that are migrated from LIBOR to new benchmark interest rates. HTLF has a formal working group that is responsible for the planning, assessment and execution of the transition from LIBOR as an interest rate benchmark to term SOFR. Currently, HTLF has adjustable rate loans, several debt obligations and securities and derivative instruments in place that reference LIBOR-based rates. HTLF’s transition plan included the cessation in new contracts of the use of LIBOR as a reference rate at December 31, 2021.
ASU 2020-04
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform," which provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For loan and lease agreements that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate, and the modifications would be considered "minor" with the result that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement, with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for derivative accounting. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-04 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic within the ASC, ASU 2020-04 must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. HTLF anticipates that ASU 2020-04 will simplify any modifications executed between the selected start date and December 31, 2022 that are directly related to LIBOR transition by allowing prospective recognition of the continuation of the contract, rather than extinguishment of the old contract that would result in writing off unamortized fees/costs. Management will continue to actively assess the impacts of ASU 2020-04 and the related opportunities and risks involved in the LIBOR transition.
ASU 2022-02
In March 2022, the 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 is effective for entities that have adopted ASU 2016-13 for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. These amendments should be applied prospectively. If an entity elects to early adopt ASU 2022-02 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes the interim period. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. Management is assessing the impact of ASU 2022-02 on its results of operations, financial position and financial statement disclosures.
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, 2022, and December 31, 2021, are summarized in the table below, in thousands:
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||||||||||
| March 31, 2022 | |||||||||||||||||||||||
| U.S. treasuries | $ | 998 | $ | 3 | $ | — | $ | 1,001 | |||||||||||||||
| U.S. agencies | 89,827 | 24 | (3,742) | 86,109 | |||||||||||||||||||
| Obligations of states and political subdivisions | 1,808,169 | 274 | (170,526) | 1,637,917 | |||||||||||||||||||
| Mortgage-backed securities - agency | 2,264,657 | 1,510 | (138,004) | 2,128,163 | |||||||||||||||||||
| Mortgage-backed securities - non-agency | 2,071,559 | 4,529 | (62,152) | 2,013,936 | |||||||||||||||||||
| Commercial mortgage-backed securities - agency | 127,563 | 107 | (9,115) | 118,555 | |||||||||||||||||||
| Commercial mortgage-backed securities - non-agency | 699,703 | — | (5,740) | 693,963 | |||||||||||||||||||
| Asset-backed securities | 321,155 | 320 | (4,055) | 317,420 | |||||||||||||||||||
| Corporate bonds | 7,723 | 33 | (108) | 7,648 | |||||||||||||||||||
| Total debt securities | 7,391,354 | 6,800 | (393,442) | 7,004,712 | |||||||||||||||||||
| Equity securities with a readily determinable fair value | 20,531 | — | — | 20,531 | |||||||||||||||||||
| Total | $ | 7,411,885 | $ | 6,800 | $ | (393,442) | $ | 7,025,243 | |||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||
| U.S. treasuries | $ | 997 | $ | 11 | $ | — | $ | 1,008 | |||||||||||||||
| U.S. agencies | 193,932 | 264 | (812) | 193,384 | |||||||||||||||||||
| Obligations of states and political subdivisions | 2,045,386 | 56,263 | (16,616) | 2,085,033 | |||||||||||||||||||
| Mortgage-backed securities - agency | 2,388,601 | 11,870 | (51,182) | 2,349,289 | |||||||||||||||||||
| Mortgage-backed securities - non-agency | 1,749,838 | 4,570 | (11,029) | 1,743,379 | |||||||||||||||||||
| Commercial mortgage-backed securities - agency | 125,397 | 1,429 | (2,914) | 123,912 | |||||||||||||||||||
| Commercial mortgage-backed securities - non-agency | 600,253 | 998 | (363) | 600,888 | |||||||||||||||||||
| Asset-backed securities | 408,167 | 2,803 | (1,317) | 409,653 | |||||||||||||||||||
| Corporate bonds | 2,979 | 61 | — | 3,040 | |||||||||||||||||||
| Total debt securities | 7,515,550 | 78,269 | (84,233) | 7,509,586 | |||||||||||||||||||
| Equity securities with a readily determinable fair value | 20,788 | — | — | 20,788 | |||||||||||||||||||
| Total | $ | 7,536,338 | $ | 78,269 | $ | (84,233) | $ | 7,530,374 | |||||||||||||||
The amortized cost, gross unrealized gains and losses and estimated fair values of held to maturity securities as of March 31, 2022, and December 31, 2021, are summarized in the table below, in thousands:
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | Allowance for Credit Losses | |||||||||||||||||||||||||
| March 31, 2022 | |||||||||||||||||||||||||||||
| Obligations of states and political subdivisions | $ | 81,785 | $ | 4,714 | $ | (13) | $ | 86,486 | $ | — | |||||||||||||||||||
| Total | $ | 81,785 | $ | 4,714 | $ | (13) | $ | 86,486 | $ | — | |||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||
| Obligations of states and political subdivisions | $ | 84,709 | $ | 9,430 | $ | — | $ | 94,139 | $ | — | |||||||||||||||||||
| Total | $ | 84,709 | $ | 9,430 | $ | — | $ | 94,139 | $ | — | |||||||||||||||||||
As of March 31, 2022, and December 31, 2021, HTLF had $25.4 million and $29.4 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, 2022, 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, 2022 | |||||||||||
| Amortized Cost | Estimated Fair Value | ||||||||||
| Due in 1 year or less | $ | 1,328 | $ | 1,333 | |||||||
| Due in 1 to 5 years | 10,563 | 10,440 | |||||||||
| Due in 5 to 10 years | 142,958 | 132,583 | |||||||||
| Due after 10 years | 1,751,868 | 1,588,319 | |||||||||
| Total debt securities | 1,906,717 | 1,732,675 | |||||||||
| Mortgage and asset-backed securities | 5,484,637 | 5,272,037 | |||||||||
| Equity securities with a readily determinable fair value | 20,531 | 20,531 | |||||||||
| Total investment securities | $ | 7,411,885 | $ | 7,025,243 | |||||||
The amortized cost and estimated fair value of debt securities held to maturity at March 31, 2022, 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, 2022 | |||||||||||
| Amortized Cost | Estimated Fair Value | ||||||||||
| Due in 1 year or less | $ | 4,095 | $ | 4,104 | |||||||
| Due in 1 to 5 years | 37,309 | 37,998 | |||||||||
| Due in 5 to 10 years | 34,300 | 36,918 | |||||||||
| Due after 10 years | 6,081 | 7,466 | |||||||||
| Total debt securities | 81,785 | 86,486 | |||||||||
As of March 31, 2022, and December 31, 2021, securities with a carrying value of $1.22 billion and $1.66 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, 2022 and 2021, are summarized as follows, in thousands:
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Proceeds from sales | $ | 824,071 | $ | 207,067 | |||||||
| Gross security gains | 6,941 | 445 | |||||||||
| Gross security losses | 4,950 | 475 | |||||||||
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, 2022, and December 31, 2021. 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, 2021, and December 31, 2020, 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, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. agencies | $ | 66,819 | $ | (1,701) | 8 | $ | 17,475 | $ | (2,041) | 1 | $ | 84,294 | $ | (3,742) | 9 | ||||||||||||||||||||||||||||||||||||||
| Obligations of states and political subdivisions | 1,321,666 | (124,133) | 305 | 297,576 | (46,393) | 69 | 1,619,242 | (170,526) | 374 | ||||||||||||||||||||||||||||||||||||||||||||
| Mortgage-backed securities - agency | 1,439,275 | (82,994) | 311 | 617,833 | (55,010) | 40 | 2,057,108 | (138,004) | 351 | ||||||||||||||||||||||||||||||||||||||||||||
| Mortgage-backed securities - non-agency | 1,288,511 | (58,783) | 154 | 93,072 | (3,369) | 7 | 1,381,583 | (62,152) | 161 | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial mortgage-backed securities - agency | 47,449 | (2,204) | 18 | 57,260 | (6,911) | 7 | 104,709 | (9,115) | 25 | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial mortgage-backed securities - non-agency | 621,766 | (5,526) | 61 | 14,030 | (214) | 2 | 635,796 | (5,740) | 63 | ||||||||||||||||||||||||||||||||||||||||||||
| Asset-backed securities | 98,835 | (3,882) | 18 | 9,299 | (173) | 4 | 108,134 | (4,055) | 22 | ||||||||||||||||||||||||||||||||||||||||||||
| Corporate bonds | 5,613 | (108) | 3 | — | — | — | 5,613 | (108) | 3 | ||||||||||||||||||||||||||||||||||||||||||||
| Total temporarily impaired securities | $ | 4,889,934 | $ | (279,331) | 878 | $ | 1,106,545 | $ | (114,111) | 130 | $ | 5,996,479 | $ | (393,442) | 1,008 | ||||||||||||||||||||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. agencies | $ | 100,839 | $ | (812) | 2 | $ | — | $ | — | — | $ | 100,839 | $ | (812) | 2 | ||||||||||||||||||||||||||||||||||||||
| Obligations of states and political subdivisions | 596,866 | (10,115) | 113 | 236,329 | (6,501) | 49 | 833,195 | (16,616) | 162 | ||||||||||||||||||||||||||||||||||||||||||||
| Mortgage-backed securities - agency | 1,383,808 | (33,291) | 83 | 474,724 | (17,891) | 19 | 1,858,532 | (51,182) | 102 | ||||||||||||||||||||||||||||||||||||||||||||
| Mortgage-backed securities - non-agency | 929,515 | (10,870) | 27 | 23,821 | (159) | 5 | 953,336 | (11,029) | 32 | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial mortgage-backed securities - agency | 26,999 | (689) | 8 | 53,025 | (2,225) | 5 | 80,024 | (2,914) | 13 | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial mortgage-backed securities - non-agency | 74,450 | (145) | 3 | 14,124 | (218) | 2 | 88,574 | (363) | 5 | ||||||||||||||||||||||||||||||||||||||||||||
| Asset-backed securities | 113,945 | (1,201) | 6 | 13,799 | (116) | 6 | 127,744 | (1,317) | 12 | ||||||||||||||||||||||||||||||||||||||||||||
| Total temporarily impaired securities | $ | 3,226,422 | $ | (57,123) | 242 | $ | 815,822 | $ | (27,110) | 86 | $ | 4,042,244 | $ | (84,233) | 328 | ||||||||||||||||||||||||||||||||||||||
| Securities held to maturity | Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair Value | Unrealized Losses | Count | Fair Value | Unrealized Losses | Count | Fair Value | Unrealized Losses | Count | |||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Obligations of states and political subdivisions | $ | 1,590 | $ | (13) | 2 | $ | — | $ | — | — | $ | 1,590 | $ | (13) | 2 | ||||||||||||||||||||||||||||||||||||||
| Total temporarily impaired securities | $ | 1,590 | (13) | 2 | 2 | $ | — | $ | — | — | $ | 1,590 | (13) | 2 | |||||||||||||||||||||||||||||||||||||||
HTLF had no securities held to maturity with unrealized losses at December 31, 2021.
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 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, 2022 and 2021.
The unrealized losses on HTLF's obligations of states and political subdivisions are the result of changes in market interest rates or widening of market spreads subsequent to the initial purchase of the securities. Management monitors the published credit ratings of these securities and the stability of the underlying municipalities. Because the decline in fair value is attributable to changes in interest rates or widening market spreads due to insurance company downgrades and not underlying credit quality, and because 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, 2022 and 2021.
In the first quarter of 2022, HTLF sold two obligations of states and political subdivisions securities from the held to maturity portfolio. Because the underlying credit quality of the individual securities showed significant deterioration, it was unlikely HTLF would recover the remaining basis of the securities prior to maturity and therefore inconsistent with HTLF's original intent upon purchase and classification of these held to maturity securities. The carrying value of these securities was $2.2 million, and the associated gross gains were $100,000.
The credit loss model under ASC 326-30, applicable to held to maturity debt securities, requires the recognition of lifetime expected credit losses through an allowance account at the time when the security is purchased. The following tables present, in thousands, the activity in the allowance for credit losses for securities held to maturity by obligations of states and political subdivisions securities for the three months ended March 31, 2022 and 2021:
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Beginning balance | $ | — | $ | 51 | |||||||
| Provision (benefit) for credit losses | — | (3) | |||||||||
| Balance at period end | $ | — | $ | 48 | |||||||
Based on HTLF's credit loss model applicable to held to maturity debt securities, no allowance for credit losses was required at both March 31, 2022 and December 31, 2021.
The following table summarizes, in thousands, the carrying amount of HTLF's held to maturity debt securities by investment rating as of March 31, 2022 and December 31, 2021, which are updated quarterly and used to monitor the credit quality of the securities:
| March 31, 2022 | December 31, 2021 | ||||||||||
| Rating | |||||||||||
| AAA | $ | 3,294 | $ | 3,265 | |||||||
| AA, AA+, AA- | 54,944 | 61,471 | |||||||||
| A+, A, A- | 18,626 | 15,034 | |||||||||
| BBB | 4,921 | 4,939 | |||||||||
| Not Rated | — | — | |||||||||
| Total | $ | 81,785 | $ | 84,709 | |||||||
Included in other securities were shares of stock in each Federal Home Loan Bank (the "FHLB") of Des Moines, Chicago, Dallas, San Francisco and Topeka at an amortized cost of $23.0 million at March 31, 2022 and $22.6 million at December 31, 2021.
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, 2022, and December 31, 2021, did not consider the investments to be impaired.
NOTE 3: LOANS
Loans as of March 31, 2022, and December 31, 2021, were as follows, in thousands:
| March 31, 2022 | December 31, 2021 | ||||||||||
| Loans receivable held to maturity: | |||||||||||
| Commercial and industrial | $ | 2,814,513 | $ | 2,645,085 | |||||||
| Paycheck Protection Program ("PPP") | 74,065 | 199,883 | |||||||||
| Owner occupied commercial real estate | 2,266,076 | 2,240,334 | |||||||||
| Non-owner occupied commercial real estate | 2,161,761 | 2,010,591 | |||||||||
| Real estate construction | 842,483 | 856,119 | |||||||||
| Agricultural and agricultural real estate | 766,443 | 753,753 | |||||||||
| Residential real estate | 825,242 | 829,283 | |||||||||
| Consumer | 426,802 | 419,524 | |||||||||
| Total loans receivable held to maturity | 10,177,385 | 9,954,572 | |||||||||
| Allowance for credit losses | (100,522) | (110,088) | |||||||||
| Loans receivable, net | $ | 10,076,863 | $ | 9,844,484 | |||||||
As of March 31, 2022, and December 31, 2021, HTLF had $33.0 million and $35.3 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, 2022, and December 31, 2021, 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, 2022 | |||||||||||||||||||||||||||||||||||
| Commercial and industrial | $ | 2,956 | $ | 22,844 | $ | 25,800 | $ | 13,503 | $ | 2,801,010 | $ | 2,814,513 | |||||||||||||||||||||||
| PPP | — | — | — | — | 74,065 | 74,065 | |||||||||||||||||||||||||||||
| Owner occupied commercial real estate | 37 | 17,938 | 17,975 | 9,284 | 2,256,792 | 2,266,076 | |||||||||||||||||||||||||||||
| Non-owner occupied commercial real estate | 506 | 15,507 | 16,013 | 12,244 | 2,149,517 | 2,161,761 | |||||||||||||||||||||||||||||
| Real estate construction | 31 | 21,366 | 21,397 | 2,015 | 840,468 | 842,483 | |||||||||||||||||||||||||||||
| Agricultural and agricultural real estate | 80 | 2,587 | 2,667 | 9,594 | 756,849 | 766,443 | |||||||||||||||||||||||||||||
| Residential real estate | — | 7,875 | 7,875 | 863 | 824,379 | 825,242 | |||||||||||||||||||||||||||||
| Consumer | — | 8,795 | 8,795 | — | 426,802 | 426,802 | |||||||||||||||||||||||||||||
| Total | $ | 3,610 | $ | 96,912 | $ | 100,522 | $ | 47,503 | $ | 10,129,882 | $ | 10,177,385 | |||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||||||||
| Commercial and industrial | $ | 4,562 | $ | 23,176 | $ | 27,738 | $ | 13,551 | $ | 2,631,534 | $ | 2,645,085 | |||||||||||||||||||||||
| PPP | — | — | — | — | 199,883 | 199,883 | |||||||||||||||||||||||||||||
| Owner occupied commercial real estate | 105 | 19,109 | 19,214 | 8,552 | 2,231,782 | 2,240,334 | |||||||||||||||||||||||||||||
| Non-owner occupied commercial real estate | 610 | 17,298 | 17,908 | 12,557 | 1,998,034 | 2,010,591 | |||||||||||||||||||||||||||||
| Real estate construction | — | 22,538 | 22,538 | — | 856,119 | 856,119 | |||||||||||||||||||||||||||||
| Agricultural and agricultural real estate | 2,369 | 2,844 | 5,213 | 13,773 | 739,980 | 753,753 | |||||||||||||||||||||||||||||
| Residential real estate | — | 8,427 | 8,427 | 855 | 828,428 | 829,283 | |||||||||||||||||||||||||||||
| Consumer | — | 9,050 | 9,050 | — | 419,524 | 419,524 | |||||||||||||||||||||||||||||
| Total | $ | 7,646 | $ | 102,442 | $ | 110,088 | $ | 49,288 | $ | 9,905,284 | $ | 9,954,572 | |||||||||||||||||||||||
HTLF had $10.1 million of troubled debt restructured loans at March 31, 2022, of which $9.3 million were classified as nonaccrual and $882,000 were accruing according to the restructured terms. HTLF had $10.4 million of troubled debt restructured loans at December 31, 2021, of which $9.5 million were classified as nonaccrual and $817,000 were accruing according to the restructured terms.
HTLF had no troubled debt restructured loans that were modified in the during the three months ended March 31, 2022, and March 31, 2021. The provisions of the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"), which modified troubled debt restructured loan classification, expired on January 1, 2022, and any new troubled debt restructured loan modifications are evaluated in accordance with generally accepted accounting principles.
At March 31, 2022, there were no commitments to extend credit to any of the borrowers with an existing troubled debt restructured loan.
HTLF had no troubled debt restructured loans for which there was a payment default during the three months ended March 31, 2022, and March 31, 2021, that had been modified during the twelve-month period prior to default.
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.
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, 2022, and December 31, 2021.
The following tables show the risk category of loans by loan category and year of origination as of March 31, 2022, and December 31, 2021, in thousands:
| As of March 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 | $ | 282,325 | $ | 563,865 | $ | 321,463 | $ | 142,201 | $ | 82,846 | $ | 490,118 | $ | 771,746 | $ | 2,654,564 | |||||||||||||||||||||||||||||||
| Watch | 1,133 | 12,201 | 10,346 | 9,644 | 6,049 | 3,309 | 28,376 | 71,058 | |||||||||||||||||||||||||||||||||||||||
| Substandard | 2,512 | 14,886 | 5,700 | 12,662 | 7,939 | 16,922 | 28,270 | 88,891 | |||||||||||||||||||||||||||||||||||||||
| Commercial and industrial total | $ | 285,970 | $ | 590,952 | $ | 337,509 | $ | 164,507 | $ | 96,834 | $ | 510,349 | $ | 828,392 | $ | 2,814,513 | |||||||||||||||||||||||||||||||
| PPP | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | — | $ | 60,429 | $ | 4,463 | $ | — | $ | — | $ | — | $ | — | $ | 64,892 | |||||||||||||||||||||||||||||||
| Watch | — | 1,797 | 31 | — | — | — | — | 1,828 | |||||||||||||||||||||||||||||||||||||||
| Substandard | — | 7,326 | 19 | — | — | — | — | 7,345 | |||||||||||||||||||||||||||||||||||||||
| PPP total | $ | — | $ | 69,552 | $ | 4,513 | $ | — | $ | — | $ | — | $ | — | $ | 74,065 | |||||||||||||||||||||||||||||||
| Owner occupied commercial real estate | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 186,033 | $ | 896,361 | $ | 312,517 | $ | 306,341 | $ | 148,493 | $ | 275,086 | $ | 20,300 | $ | 2,145,131 | |||||||||||||||||||||||||||||||
| Watch | 2,944 | 6,266 | 17,523 | 6,524 | 8,556 | 10,802 | 35 | 52,650 | |||||||||||||||||||||||||||||||||||||||
| Substandard | 3,373 | 11,363 | 9,387 | 12,087 | 3,553 | 26,782 | 1,750 | 68,295 | |||||||||||||||||||||||||||||||||||||||
| Owner occupied commercial real estate total | $ | 192,350 | $ | 913,990 | $ | 339,427 | $ | 324,952 | $ | 160,602 | $ | 312,670 | $ | 22,085 | $ | 2,266,076 | |||||||||||||||||||||||||||||||
| Non-owner occupied commercial real estate | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 238,611 | $ | 602,044 | $ | 257,093 | $ | 330,145 | $ | 211,111 | $ | 286,939 | $ | 31,114 | $ | 1,957,057 | |||||||||||||||||||||||||||||||
| Watch | 206 | 2,757 | 11,098 | 26,639 | 20,512 | 38,483 | — | 99,695 | |||||||||||||||||||||||||||||||||||||||
| Substandard | 2,807 | 12,768 | 9,148 | 20,609 | 1,821 | 57,856 | — | 105,009 | |||||||||||||||||||||||||||||||||||||||
| Non-owner occupied commercial real estate total | $ | 241,624 | $ | 617,569 | $ | 277,339 | $ | 377,393 | $ | 233,444 | $ | 383,278 | $ | 31,114 | $ | 2,161,761 | |||||||||||||||||||||||||||||||
| Real estate construction | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 117,525 | $ | 378,301 | $ | 149,415 | $ | 98,294 | $ | 14,036 | $ | 9,362 | $ | 15,009 | $ | 781,942 | |||||||||||||||||||||||||||||||
| Watch | — | 3,058 | 1,033 | — | 44,468 | 3,697 | 13 | 52,269 | |||||||||||||||||||||||||||||||||||||||
| Substandard | — | 2,548 | 49 | 486 | 5,098 | 91 | — | 8,272 | |||||||||||||||||||||||||||||||||||||||
| Real estate construction total | $ | 117,525 | $ | 383,907 | $ | 150,497 | $ | 98,780 | $ | 63,602 | $ | 13,150 | $ | 15,022 | $ | 842,483 | |||||||||||||||||||||||||||||||
| Agricultural and agricultural real estate | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 72,343 | $ | 195,360 | $ | 97,315 | $ | 45,549 | $ | 29,107 | $ | 49,812 | $ | 215,800 | $ | 705,286 | |||||||||||||||||||||||||||||||
| Watch | 421 | 3,694 | 5,630 | 2,051 | 2,002 | 2,739 | 3,126 | 19,663 | |||||||||||||||||||||||||||||||||||||||
| Substandard | 880 | 7,186 | 943 | 3,747 | 14,517 | 8,633 | 5,588 | 41,494 | |||||||||||||||||||||||||||||||||||||||
| Agricultural and agricultural real estate total | $ | 73,644 | $ | 206,240 | $ | 103,888 | $ | 51,347 | $ | 45,626 | $ | 61,184 | $ | 224,514 | $ | 766,443 | |||||||||||||||||||||||||||||||
| Residential real estate | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 59,105 | $ | 303,926 | $ | 78,252 | $ | 46,766 | $ | 44,833 | $ | 246,933 | $ | 23,456 | $ | 803,271 | |||||||||||||||||||||||||||||||
| Watch | — | 484 | 157 | 736 | 1,435 | 6,915 | — | 9,727 | |||||||||||||||||||||||||||||||||||||||
| Substandard | 101 | 2,036 | 385 | 42 | 1,984 | 7,696 | — | 12,244 | |||||||||||||||||||||||||||||||||||||||
| Residential real estate total | $ | 59,206 | $ | 306,446 | $ | 78,794 | $ | 47,544 | $ | 48,252 | $ | 261,544 | $ | 23,456 | $ | 825,242 | |||||||||||||||||||||||||||||||
| Consumer | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 17,097 | $ | 59,774 | $ | 17,754 | $ | 11,299 | $ | 7,365 | $ | 26,551 | $ | 279,886 | $ | 419,726 | |||||||||||||||||||||||||||||||
| Watch | 3 | 472 | 73 | 332 | 366 | 664 | 1,784 | 3,694 | |||||||||||||||||||||||||||||||||||||||
| Substandard | 31 | 222 | 306 | 161 | 248 | 2,005 | 409 | 3,382 | |||||||||||||||||||||||||||||||||||||||
| Consumer total | $ | 17,131 | $ | 60,468 | $ | 18,133 | $ | 11,792 | $ | 7,979 | $ | 29,220 | $ | 282,079 | $ | 426,802 | |||||||||||||||||||||||||||||||
| Total Pass | $ | 973,039 | $ | 3,060,060 | $ | 1,238,272 | $ | 980,595 | $ | 537,791 | $ | 1,384,801 | $ | 1,357,311 | $ | 9,531,869 | |||||||||||||||||||||||||||||||
| Total Watch | 4,707 | 30,729 | 45,891 | 45,926 | 83,388 | 66,609 | 33,334 | 310,584 | |||||||||||||||||||||||||||||||||||||||
| Total Substandard | 9,704 | 58,335 | 25,937 | 49,794 | 35,160 | 119,985 | 36,017 | 334,932 | |||||||||||||||||||||||||||||||||||||||
| Total Loans | $ | 987,450 | $ | 3,149,124 | $ | 1,310,100 | $ | 1,076,315 | $ | 656,339 | $ | 1,571,395 | $ | 1,426,662 | $ | 10,177,385 | |||||||||||||||||||||||||||||||
| As of December 31, 2021 | Amortized Cost Basis of Term Loans by Year of Origination | ||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | 2018 | 2017 | 2016 and Prior | Revolving | Total | ||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 604,659 | $ | 359,533 | $ | 203,960 | $ | 89,694 | $ | 171,709 | $ | 330,094 | $ | 708,525 | $ | 2,468,174 | |||||||||||||||||||||||||||||||
| Watch | 10,633 | 12,790 | 12,550 | 8,210 | 3,611 | 14,976 | 24,626 | 87,396 | |||||||||||||||||||||||||||||||||||||||
| Substandard | 19,888 | 6,391 | 13,050 | 8,535 | 6,619 | 12,052 | 22,980 | 89,515 | |||||||||||||||||||||||||||||||||||||||
| Commercial and industrial total | $ | 635,180 | $ | 378,714 | $ | 229,560 | $ | 106,439 | $ | 181,939 | $ | 357,122 | $ | 756,131 | $ | 2,645,085 | |||||||||||||||||||||||||||||||
| PPP | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 146,370 | $ | 25,707 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 172,077 | |||||||||||||||||||||||||||||||
| Watch | 10,726 | 127 | — | — | — | — | — | 10,853 | |||||||||||||||||||||||||||||||||||||||
| Substandard | 16,932 | 21 | — | — | — | — | — | 16,953 | |||||||||||||||||||||||||||||||||||||||
| PPP total | $ | 174,028 | $ | 25,855 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 199,883 | |||||||||||||||||||||||||||||||
| Owner occupied commercial real estate | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 940,043 | $ | 328,052 | $ | 315,497 | $ | 180,936 | $ | 115,142 | $ | 189,647 | $ | 34,233 | $ | 2,103,550 | |||||||||||||||||||||||||||||||
| Watch | 4,676 | 13,956 | 7,759 | 10,501 | 15,032 | 6,830 | 35 | 58,789 | |||||||||||||||||||||||||||||||||||||||
| Substandard | 11,958 | 20,769 | 13,734 | 2,809 | 13,912 | 13,063 | 1,750 | 77,995 | |||||||||||||||||||||||||||||||||||||||
| Owner occupied commercial real estate total | $ | 956,677 | $ | 362,777 | $ | 336,990 | $ | 194,246 | $ | 144,086 | $ | 209,540 | $ | 36,018 | $ | 2,240,334 | |||||||||||||||||||||||||||||||
| Non-owner occupied commercial real estate | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 609,968 | $ | 263,093 | $ | 315,815 | $ | 236,823 | $ | 152,059 | $ | 166,792 | $ | 28,728 | $ | 1,773,278 | |||||||||||||||||||||||||||||||
| Watch | 4,754 | 9,109 | 35,496 | 29,227 | 4,865 | 35,901 | — | 119,352 | |||||||||||||||||||||||||||||||||||||||
| Substandard | 15,722 | 10,612 | 21,798 | 3,599 | 14,023 | 51,766 | 441 | 117,961 | |||||||||||||||||||||||||||||||||||||||
| Non-owner occupied commercial real estate total | $ | 630,444 | $ | 282,814 | $ | 373,109 | $ | 269,649 | $ | 170,947 | $ | 254,459 | $ | 29,169 | $ | 2,010,591 | |||||||||||||||||||||||||||||||
| Real estate construction | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 381,283 | $ | 206,879 | $ | 169,606 | $ | 14,197 | $ | 7,163 | $ | 7,823 | $ | 14,507 | $ | 801,458 | |||||||||||||||||||||||||||||||
| Watch | 2,704 | 858 | 2,145 | 44,846 | — | — | 14 | 50,567 | |||||||||||||||||||||||||||||||||||||||
| Substandard | — | 50 | 46 | 3,944 | — | 54 | — | 4,094 | |||||||||||||||||||||||||||||||||||||||
| Real estate construction total | $ | 383,987 | $ | 207,787 | $ | 171,797 | $ | 62,987 | $ | 7,163 | $ | 7,877 | $ | 14,521 | $ | 856,119 | |||||||||||||||||||||||||||||||
| Agricultural and agricultural real estate | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 217,179 | $ | 102,030 | $ | 47,927 | $ | 32,913 | $ | 22,029 | $ | 35,548 | $ | 220,065 | $ | 677,691 | |||||||||||||||||||||||||||||||
| Watch | 4,018 | 10,390 | 4,688 | 2,270 | 33 | 2,038 | 2,948 | 26,385 | |||||||||||||||||||||||||||||||||||||||
| Substandard | 9,250 | 1,095 | 4,910 | 15,825 | 3,212 | 8,859 | 6,526 | 49,677 | |||||||||||||||||||||||||||||||||||||||
| Agricultural and agricultural real estate total | $ | 230,447 | $ | 113,515 | $ | 57,525 | $ | 51,008 | $ | 25,274 | $ | 46,445 | $ | 229,539 | $ | 753,753 | |||||||||||||||||||||||||||||||
| Residential real estate | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 311,292 | $ | 86,355 | $ | 50,762 | $ | 53,773 | $ | 43,619 | $ | 230,566 | $ | 29,017 | $ | 805,384 | |||||||||||||||||||||||||||||||
| Watch | 3,928 | 1,499 | 750 | 1,452 | 734 | 1,977 | 1,000 | 11,340 | |||||||||||||||||||||||||||||||||||||||
| Substandard | 2,528 | 444 | 410 | 2,317 | 1,139 | 5,721 | — | 12,559 | |||||||||||||||||||||||||||||||||||||||
| Residential real estate total | $ | 317,748 | $ | 88,298 | $ | 51,922 | $ | 57,542 | $ | 45,492 | $ | 238,264 | $ | 30,017 | $ | 829,283 | |||||||||||||||||||||||||||||||
| Consumer | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 69,172 | $ | 20,258 | $ | 13,051 | $ | 9,001 | $ | 10,986 | $ | 18,202 | $ | 271,034 | $ | 411,704 | |||||||||||||||||||||||||||||||
| Watch | 555 | 309 | 392 | 373 | 113 | 591 | 2,210 | 4,543 | |||||||||||||||||||||||||||||||||||||||
| Substandard | 267 | 204 | 218 | 236 | 363 | 1,611 | 378 | 3,277 | |||||||||||||||||||||||||||||||||||||||
| Consumer total | $ | 69,994 | $ | 20,771 | $ | 13,661 | $ | 9,610 | $ | 11,462 | $ | 20,404 | $ | 273,622 | $ | 419,524 | |||||||||||||||||||||||||||||||
| Total Pass | $ | 3,279,966 | $ | 1,391,907 | $ | 1,116,618 | $ | 617,337 | $ | 522,707 | $ | 978,672 | $ | 1,306,109 | $ | 9,213,316 | |||||||||||||||||||||||||||||||
| Total Watch | 41,994 | 49,038 | 63,780 | 96,879 | 24,388 | 62,313 | 30,833 | 369,225 | |||||||||||||||||||||||||||||||||||||||
| Total Substandard | 76,545 | 39,586 | 54,166 | 37,265 | 39,268 | 93,126 | 32,075 | 372,031 | |||||||||||||||||||||||||||||||||||||||
| Total Loans | $ | 3,398,505 | $ | 1,480,531 | $ | 1,234,564 | $ | 751,481 | $ | 586,363 | $ | 1,134,111 | $ | 1,369,017 | $ | 9,954,572 | |||||||||||||||||||||||||||||||
Included in the nonpass loans at March 31, 2022 and December 31, 2021 were $9.2 million and $27.8 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.
As of March 31, 2022, HTLF had $980,000 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, 2022, and December 31, 2021, 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, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | $ | 3,786 | $ | 225 | $ | 246 | $ | 4,257 | $ | 2,792,688 | $ | 17,568 | $ | 2,814,513 | |||||||||||||||||||||||||||
| PPP | — | — | — | — | 74,046 | 19 | 74,065 | ||||||||||||||||||||||||||||||||||
| Owner occupied commercial real estate | 517 | 23 | — | 540 | 2,254,044 | 11,492 | 2,266,076 | ||||||||||||||||||||||||||||||||||
| Non-owner occupied commercial real estate | 1,099 | — | — | 1,099 | 2,147,671 | 12,991 | 2,161,761 | ||||||||||||||||||||||||||||||||||
| Real estate construction | 332 | — | — | 332 | 839,754 | 2,397 | 842,483 | ||||||||||||||||||||||||||||||||||
| Agricultural and agricultural real estate | 2,051 | 282 | — | 2,333 | 752,664 | 11,446 | 766,443 | ||||||||||||||||||||||||||||||||||
| Residential real estate | 991 | 139 | — | 1,130 | 817,174 | 6,938 | 825,242 | ||||||||||||||||||||||||||||||||||
| Consumer | 659 | 139 | — | 798 | 424,681 | 1,323 | 426,802 | ||||||||||||||||||||||||||||||||||
| Total gross loans receivable held to maturity | $ | 9,435 | $ | 808 | $ | 246 | $ | 10,489 | $ | 10,102,722 | $ | 64,174 | $ | 10,177,385 | |||||||||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | $ | 1,024 | $ | 183 | $ | 541 | $ | 1,748 | $ | 2,625,109 | $ | 18,228 | $ | 2,645,085 | |||||||||||||||||||||||||||
| PPP | — | — | — | — | 199,883 | — | 199,883 | ||||||||||||||||||||||||||||||||||
| Owner occupied commercial real estate | 130 | — | — | 130 | 2,229,054 | 11,150 | 2,240,334 | ||||||||||||||||||||||||||||||||||
| Non-owner occupied commercial real estate | 3,929 | — | — | 3,929 | 1,993,346 | 13,316 | 2,010,591 | ||||||||||||||||||||||||||||||||||
| Real estate construction | 238 | 50 | — | 288 | 855,463 | 368 | 856,119 | ||||||||||||||||||||||||||||||||||
| Agricultural and agricultural real estate | 687 | — | — | 687 | 737,380 | 15,686 | 753,753 | ||||||||||||||||||||||||||||||||||
| Residential real estate | 767 | 46 | 9 | 822 | 819,294 | 9,167 | 829,283 | ||||||||||||||||||||||||||||||||||
| Consumer | 251 | 57 | — | 308 | 417,762 | 1,454 | 419,524 | ||||||||||||||||||||||||||||||||||
| Total gross loans receivable held to maturity | $ | 7,026 | $ | 336 | $ | 550 | $ | 7,912 | $ | 9,877,291 | $ | 69,369 | $ | 9,954,572 | |||||||||||||||||||||||||||
Loans delinquent 30 to 89 days as a percent of total loans were 0.10% at March 31, 2022, compared to 0.07% at December 31, 2021. Changes in credit risk are monitored on a continuous basis as part of relationship management, and changes in risk ratings are made when identified. 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, 2022 and March 31, 2021. As of March 31, 2022, and December 31, 2021, HTLF had $27.9 million and $25.5 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, 2022, and March 31, 2021, were as follows, in thousands:
| Commercial and Industrial | PPP | Owner Occupied Commercial Real Estate | Non-Owner Occupied Commercial Real Estate | Real Estate Construction | Agricultural and Agricultural Real Estate | Residential Real Estate | Consumer | Total | |||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 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 | |||||||||||||||||||||||||||||||||||
| Commercial and Industrial | PPP | Owner Occupied Commercial Real Estate | Non-Owner Occupied Commercial Real Estate | Real Estate Construction | Agricultural and Agricultural Real Estate | Residential Real Estate | Consumer | Total | |||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | 38,818 | $ | — | $ | 20,001 | $ | 20,873 | $ | 20,080 | $ | 7,129 | $ | 11,935 | $ | 12,770 | $ | 131,606 | |||||||||||||||||||||||||||||||||||
| Charge-offs | (948) | — | (41) | — | — | (318) | (21) | (798) | (2,126) | ||||||||||||||||||||||||||||||||||||||||||||
| Recoveries | 293 | — | 53 | — | 2 | 21 | 5 | 302 | 676 | ||||||||||||||||||||||||||||||||||||||||||||
| Provision (benefit) | (2,068) | — | (597) | 3,821 | (151) | 279 | (907) | (361) | 16 | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | 36,095 | $ | — | $ | 19,416 | $ | 24,694 | $ | 19,931 | $ | 7,111 | $ | 11,012 | $ | 11,913 | $ | 130,172 | |||||||||||||||||||||||||||||||||||
Management allocates the allowance for credit losses by pools of risk within each loan portfolio. The allocation of the allowance for credit losses by loan portfolio is made for analytical purposes and is not necessarily indicative of the trend of future loan losses in any particular category. The total allowance for credit losses is available to absorb losses from any segment of the loan portfolio.
Changes in the allowance for credit losses on unfunded commitments for the three months ended March 31, 2022 and March 31, 2021, were as follows:
| For the Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Balance at December 31, | $ | 15,462 | $ | 15,280 | |||||||
| Provision (benefit) | 617 | (661) | |||||||||
| Balance at March 31, | $ | 16,079 | $ | 14,619 | |||||||
NOTE 5: GOODWILL, CORE DEPOSIT PREMIUM AND OTHER INTANGIBLE ASSETS
HTLF had goodwill of $576.0 million at both March 31, 2022 and December 31, 2021. HTLF conducts its annual internal assessment of the goodwill both at the consolidated level and at its subsidiaries as of September 30. HTLF performed its annual quantitative assessment of goodwill as of September 30, 2021, which was the most recent annual assessment, and there was no goodwill impairment.
HTLF's intangible assets consist of core deposit intangibles, mortgage servicing rights, customer relationship intangibles, and commercial servicing rights. The gross carrying amount of these intangible assets and the associated accumulated amortization at March 31, 2022, and December 31, 2021, are presented in the table below, in thousands:
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||||||||||||
| Amortizing intangible assets: | |||||||||||||||||||||||||||||||||||
| Core deposit intangibles | $ | 101,185 | $ | 70,375 | $ | 30,810 | $ | 101,185 | $ | 68,330 | $ | 32,855 | |||||||||||||||||||||||
| Customer relationship intangibles | 1,177 | 1,053 | 124 | 1,177 | 1,044 | 133 | |||||||||||||||||||||||||||||
| Mortgage servicing rights | 13,227 | 5,125 | 8,102 | 12,790 | 6,378 | 6,412 | |||||||||||||||||||||||||||||
| Commercial servicing rights | 7,054 | 7,054 | — | 7,054 | 6,576 | 478 | |||||||||||||||||||||||||||||
| Total | $ | 122,643 | $ | 83,607 | $ | 39,036 | $ | 122,206 | $ | 82,328 | $ | 39,878 | |||||||||||||||||||||||
The following table shows the estimated future amortization expense for amortizable intangible assets, in thousands:
| Core Deposit Intangibles | Customer Relationship Intangibles | Mortgage Servicing Rights | Total | ||||||||||||||||||||
| Nine months ending December 31, 2022 | $ | 5,656 | $ | 26 | $ | 1,309 | $ | 6,991 | |||||||||||||||
| Year ending December 31, | |||||||||||||||||||||||
| 2023 | 6,739 | 33 | 1,698 | 8,470 | |||||||||||||||||||
| 2024 | 5,591 | 33 | 1,456 | 7,080 | |||||||||||||||||||
| 2025 | 4,700 | 32 | 1,213 | 5,945 | |||||||||||||||||||
| 2026 | 3,533 | — | 970 | 4,503 | |||||||||||||||||||
| 2027 | 2,601 | — | 728 | 3,329 | |||||||||||||||||||
| Thereafter | 1,990 | — | 728 | 2,718 | |||||||||||||||||||
| Total | $ | 30,810 | $ | 124 | $ | 8,102 | $ | 39,036 | |||||||||||||||
Projections of amortization expense for mortgage servicing rights are based on existing asset balances and the existing interest rate environment as of March 31, 2022. HTLF's actual experience may be significantly different depending upon changes in mortgage interest rates and market conditions. Mortgage loans serviced for others at First Bank & Trust were approximately $728.9 million at March 31, 2022, compared to $723.3 million at December 31, 2021. Custodial escrow balances maintained in connection with the mortgage loan servicing portfolio were approximately $8.2 million at March 31, 2022, and $4.5 million at December 31, 2021.
Fees collected for the servicing of mortgage loans for others were $454,000 and $464,000 for the three months ended March 31, 2022 and March 31, 2021, respectively.
The following table summarizes, in thousands, the changes in capitalized mortgage servicing rights for the three months ended March 31, 2022, and March 31, 2021:
| 2022 | 2021 | ||||||||||
| Balance at January 1, | $ | 6,412 | $ | 5,189 | |||||||
| Originations | 437 | 512 | |||||||||
| Amortization | (405) | (400) | |||||||||
| Valuation allowance | 1,658 | 917 | |||||||||
| Balance at period end | $ | 8,102 | $ | 6,218 | |||||||
| Mortgage servicing rights, net to servicing portfolio | 1.11 | % | 0.83 | % | |||||||
Mortgage rights are initially recorded at fair value in net gains on sale of loans held for sale when they are capitalized through loan sales. Fair value is based on market prices for comparable servicing contracts, when available, or based on a valuation model that calculates the present value of estimated future net servicing income.
Mortgage rights are subsequently measured using the amortization method, which requires the asset to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Servicing rights are evaluated for impairment at each HTLF subsidiary based upon the fair value of the assets as compared to the carrying amount. Impairment is recognized through a valuation allowance for specific tranches to the extent that fair value is less than the carrying amount at each HTLF subsidiary, and a valuation adjustment is recorded into noninterest income.
At March 31, 2022, no valuation allowance was required on the mortgage servicing rights 15-year tranche, and no valuation allowance was required on the mortgage servicing rights 30-year tranche. At December 31, 2021, a $327,000 valuation allowance was required on the mortgage servicing rights 15-year tranche and a $1.3 million valuation allowance was required on the mortgage servicing rights 30-year tranche.
For the three months ended March 31, 2022 and March 31, 2021, a valuation adjustment of $1.7 million and $917,000, respectively, were recorded for the total mortgage servicing rights portfolio.
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, 2022, and December 31, 2021:
| 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 | ||||||||||||||||||||||||||||||
| March 31, 2022 | $ | 1,597 | $ | 1,696 | $ | — | $ | 6,505 | $ | 6,800 | $ | — | |||||||||||||||||||||||
| December 31, 2021 | 1,607 | 1,280 | 327 | 6,463 | 5,132 | 1,331 | |||||||||||||||||||||||||||||
The fair value of mortgage servicing rights is calculated based upon a discounted cash flow analysis. Cash flow assumptions, including prepayment speeds, servicing costs and escrow earnings of the mortgage servicing rights are considered in the calculation. The following table presents key assumptions used to value the mortgage servicing rights as of March 31, 2022, and December 31, 2021, dollars in thousands:
| As of | |||||||||||
| March 31, 2022 | December 31, 2021 | ||||||||||
| Weighted average constant prepayment rate | 9.80 | % | 13.40 | % | |||||||
| Weighted average discount rate | 9.01 | % | 9.02 | % | |||||||
| Fair value of mortgage servicing rights | $ | 8,496 | $ | 6,412 | |||||||
The average capitalization rate of mortgage servicing rights for the first three months of 2022 ranged from 83 to 111 basis points compared to a range of 76 to 112 basis points for the first three months of 2021.
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 interest rate risk. 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.
In addition, interest rate-related derivative instruments generally contain language outlining collateral pledging requirements for each counterparty. Collateral must be posted when the market value exceeds certain threshold limits which are determined by the credit ratings of each counterparty. HTLF was required to pledge no cash as collateral at both March 31, 2022 and December 31, 2021. At both March 31, 2022 and December 31, 2021, no collateral was required to be pledged by HTLF's counterparties.
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
During the third quarter of 2021, the interest rate swap transactions associated with Heartland Financial Statutory VI and VII were terminated, and the debt was converted to variable rate subordinated debentures. In addition, HTLF had two swap transactions associated with an unaffiliated bank, one of which matured in the second quarter, and the other was terminated in the third quarter. The underlying debt with the unaffiliated bank was paid off in the third quarter of 2021. For the next twelve months, HTLF estimates that cash payments and reclassification from accumulated other comprehensive income (loss) to interest expense related to the terminated swaps will total $733,000.
At both March 31, 2022 and December 31, 2021, HTLF had no derivative instruments designated as cash flow hedges.
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 $1.7 million and $3.8 million of cash as collateral for these fair value hedges at March 31, 2022, and December 31, 2021, respectively.
The table below identifies the notional amount, fair value and balance sheet category of HTLF's fair value hedges at March 31, 2022, and December 31, 2021, in thousands:
| Notional Amount | Fair Value | Balance Sheet Category | |||||||||||||||
| March 31, 2022 | |||||||||||||||||
| Fair value hedges | $ | 2,875 | $ | (25) | Other liabilities | ||||||||||||
| December 31, 2021 | |||||||||||||||||
| Fair value hedges | $ | 16,755 | $ | (1,208) | Other liabilities | ||||||||||||
The table below identifies the gains and losses recognized on HTLF's fair value hedges for the three months ended March 31, 2022, and March 31, 2021, in thousands:
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Gain recognized in interest income on fair value hedges | $ | 1,183 | $ | 763 | |||||||
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, 2022, and December 31, 2021, in thousands:
| Notional Amount | Fair Value | Balance Sheet Category | |||||||||||||||
| March 31, 2022 | |||||||||||||||||
| Embedded derivatives | $ | 7,397 | $ | (92) | Other liabilities | ||||||||||||
| December 31, 2021 | |||||||||||||||||
| Embedded derivatives | $ | 7,496 | $ | (317) | Other liabilities | ||||||||||||
The table below identifies the gains and losses recognized on HTLF's embedded derivatives for the three months ended March 31, 2022, and March 31, 2021, in thousands:
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Gain (loss) recognized in other noninterest income on embedded derivatives | $ | 225 | $ | (129) | |||||||
Back-to-Back Loan Swaps
HTLF has interest rate swap loan relationships with customers to meet their financing needs. 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 $9.9 million of collateral at March 31, 2022 compared to $24.1 million as of December 31, 2021, respectively, as collateral related to these back-to-back swaps. HTLF's counterparties were required to pledge $4.3 million at March 31, 2022 compared to $0 at December 31, 2021. 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, 2022 and March 31, 2021, 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, 2022, and December 31, 2021, in thousands:
| Notional Amount | Fair Value | Balance Sheet Category | Weighted Average Receive Rate | Weighted Average Pay Rate | |||||||||||||||||||||||||
| March 31, 2022 | |||||||||||||||||||||||||||||
| Customer interest rate swaps | $ | 557,807 | $ | 11,565 | Other assets | 4.33 | % | 2.97 | % | ||||||||||||||||||||
| Customer interest rate swaps | 557,807 | 11,565 | Other liabilities | 2.97 | 4.33 | ||||||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||
| Customer interest rate swaps | $ | 463,069 | $ | 23,574 | Other assets | 4.44 | % | 2.35 | % | ||||||||||||||||||||
| Customer interest rate swaps | 463,069 | (23,574) | Other liabilities | 2.35 | 4.44 | ||||||||||||||||||||||||
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 in order to economically hedge the effect of future changes in interest rates on the commitments to fund the loans as well as on residential mortgage loans available for sale. The fair value of these commitments is recorded on the consolidated balance sheets, with the changes in fair value recorded in the consolidated statements of income as a component of gains on sale of loans held for sale. These derivative contracts are designated as free standing derivative contracts and are not designated against specific assets and liabilities on the consolidated balance sheets or forecasted transactions and therefore do not qualify for hedge accounting treatment. HTLF was required to pledge no collateral at both March 31, 2022, and December 31, 2021. HTLF's counterparties were required to pledge no collateral at both March 31, 2022 and December 31, 2021, 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, 2022, and December 31, 2021, in thousands:
| Balance Sheet Category | Notional Amount | Fair Value | |||||||||||||||
| March 31, 2022 | |||||||||||||||||
| Interest rate lock commitments (mortgage) | Other assets | $ | 34,751 | $ | 696 | ||||||||||||
| Forward commitments | Other assets | 40,000 | 1,008 | ||||||||||||||
| Forward commitments | Other liabilities | 7,500 | (35) | ||||||||||||||
| Undesignated interest rate swaps | Other assets | 7,397 | 92 | ||||||||||||||
| December 31, 2021 | |||||||||||||||||
| Interest rate lock commitments (mortgage) | Other assets | $ | 37,046 | $ | 1,306 | ||||||||||||
| Forward commitments | Other assets | 19,000 | 32 | ||||||||||||||
| Forward commitments | Other liabilities | 35,500 | (95) | ||||||||||||||
| Undesignated interest rate swaps | Other assets | 7,496 | 317 | ||||||||||||||
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, 2022, and March 31, 2021, in thousands:
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Interest rate lock commitments (mortgage) | $ | (1,195) | $ | (1,485) | |||||||
| Forward commitments | 1,036 | 1,906 | |||||||||
| Undesignated interest rate swaps | (225) | 129 | |||||||||
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 values premises, furniture and equipment held for sale based on third-party appraisals less estimated disposal costs. HTLF considers third party appraisals, as well as independent fair value assessments from realtors or persons involved in selling bank premises, furniture and equipment, in determining the fair value of particular properties. Accordingly, the valuation of premises, furniture and equipment held for sale is subject to significant external and internal judgment. 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.
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, 2022, and December 31, 2021, 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, 2022, and December 31, 2021, 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, 2022 | |||||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Securities available for sale | |||||||||||||||||||||||
| U.S. treasuries | $ | 1,001 | $ | 1,001 | $ | — | $ | — | |||||||||||||||
| U.S. agencies | 86,109 | — | 86,109 | — | |||||||||||||||||||
| Obligations of states and political subdivisions | 1,637,917 | — | 1,637,917 | — | |||||||||||||||||||
| Mortgage-backed securities - agency | 2,128,163 | — | 2,128,163 | — | |||||||||||||||||||
| Mortgage-backed securities - non-agency | 2,013,936 | — | 2,013,936 | — | |||||||||||||||||||
| Commercial mortgage-backed securities - agency | 118,555 | — | 118,555 | — | |||||||||||||||||||
| Commercial mortgage-backed securities - non-agency | 693,963 | — | 693,963 | — | |||||||||||||||||||
| Asset-backed securities | 317,420 | — | 317,420 | — | |||||||||||||||||||
| Corporate bonds | 7,648 | — | 7,648 | — | |||||||||||||||||||
| Equity securities with a readily determinable fair value | 20,531 | — | 20,531 | — | |||||||||||||||||||
Derivative financial instruments(1) | 11,657 | — | 11,657 | — | |||||||||||||||||||
| Interest rate lock commitments | 696 | — | — | 696 | |||||||||||||||||||
| Forward commitments | 1,008 | — | 1,008 | — | |||||||||||||||||||
| Total assets at fair value | $ | 7,038,604 | $ | 1,001 | $ | 7,036,907 | $ | 696 | |||||||||||||||
| Liabilities | |||||||||||||||||||||||
Derivative financial instruments(2) | $ | 11,682 | $ | — | $ | 11,682 | $ | — | |||||||||||||||
| Forward commitments | 35 | — | 35 | — | |||||||||||||||||||
| Total liabilities at fair value | $ | 11,717 | $ | — | $ | 11,717 | $ | — | |||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Securities available for sale | |||||||||||||||||||||||
| U.S. treasuries | $ | 1,008 | $ | 1,008 | $ | — | $ | — | |||||||||||||||
| U.S. agencies | 193,384 | — | 193,384 | — | |||||||||||||||||||
| Obligations of states and political subdivisions | 2,085,033 | — | 2,085,033 | — | |||||||||||||||||||
| Mortgage-backed securities - agency | 2,349,289 | — | 2,349,289 | — | |||||||||||||||||||
| Mortgage-backed securities - non-agency | 1,743,379 | — | 1,743,379 | — | |||||||||||||||||||
| Commercial mortgage-backed securities - agency | 123,912 | — | 123,912 | — | |||||||||||||||||||
| Commercial mortgage-backed securities - non-agency | 600,888 | — | 600,888 | — | |||||||||||||||||||
| Asset-backed securities | 409,653 | — | 409,653 | — | |||||||||||||||||||
| Corporate bonds | 3,040 | — | 3,040 | — | |||||||||||||||||||
| Equity securities with a readily determinable fair value | 20,788 | — | 20,788 | — | |||||||||||||||||||
Derivative financial instruments(1) | 23,891 | — | 23,891 | — | |||||||||||||||||||
| Interest rate lock commitments | 1,306 | — | — | 1,306 | |||||||||||||||||||
| Forward commitments | 32 | — | 32 | — | |||||||||||||||||||
| Total assets at fair value | $ | 7,555,603 | $ | 1,008 | $ | 7,553,289 | $ | 1,306 | |||||||||||||||
| Liabilities | |||||||||||||||||||||||
Derivative financial instruments(2) | $ | 25,099 | $ | — | $ | 25,099 | $ | — | |||||||||||||||
| Forward commitments | 95 | — | 95 | — | |||||||||||||||||||
| Total liabilities at fair value | $ | 25,194 | $ | — | $ | 25,194 | $ | — | |||||||||||||||
| (1) Includes back-to-back loan swaps and free standing derivative instruments. | |||||||||||||||||||||||
| (2) Includes embedded derivatives, fair value hedges, and back-to-back loan swaps. | |||||||||||||||||||||||
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, 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 | $ | 10,547 | $ | — | $ | — | $ | 10,547 | $ | 4,186 | |||||||||||||||||||
| Owner occupied commercial real estate | 9,247 | — | — | 9,247 | 129 | ||||||||||||||||||||||||
| Non-owner occupied commercial real estate | 11,738 | — | — | 11,738 | — | ||||||||||||||||||||||||
| Real estate construction | 1,984 | — | — | 1,984 | — | ||||||||||||||||||||||||
| Agricultural and agricultural real estate | 9,514 | — | — | 9,514 | 3,104 | ||||||||||||||||||||||||
| Residential real estate | 863 | — | — | 863 | — | ||||||||||||||||||||||||
| Total collateral dependent individually assessed loans | $ | 43,893 | $ | — | $ | — | $ | 43,893 | $ | 7,419 | |||||||||||||||||||
| Loans held for sale | $ | 22,685 | $ | — | $ | 22,685 | $ | — | $ | (228) | |||||||||||||||||||
| Other real estate owned | 1,422 | — | — | 1,422 | 5 | ||||||||||||||||||||||||
| Premises, furniture and equipment held for sale | 14,073 | — | — | 14,073 | 128 | ||||||||||||||||||||||||
| Servicing rights | 8,102 | — | — | 8,102 | (1,658) | ||||||||||||||||||||||||
Fair Value Measurements at December 31, 2021 | |||||||||||||||||||||||||||||
| Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Year-to- Date (Gains) Losses | |||||||||||||||||||||||||
| Collateral dependent individually assessed loans: | |||||||||||||||||||||||||||||
| Commercial and industrial | $ | 8,989 | $ | — | $ | — | $ | 8,989 | $ | 275 | |||||||||||||||||||
| Owner occupied commercial real estate | 8,447 | — | — | 8,447 | — | ||||||||||||||||||||||||
| Non-owner occupied commercial real estate | 11,946 | — | — | 11,946 | 1,637 | ||||||||||||||||||||||||
| Agricultural and agricultural real estate | 11,404 | — | — | 11,404 | 372 | ||||||||||||||||||||||||
| Residential real estate | 855 | — | — | 855 | — | ||||||||||||||||||||||||
| Total collateral dependent individually assessed loans | $ | 41,641 | $ | — | $ | — | $ | 41,641 | $ | 2,284 | |||||||||||||||||||
| Loans held for sale | $ | 21,640 | $ | — | $ | 21,640 | $ | — | $ | (813) | |||||||||||||||||||
| Other real estate owned | 1,927 | — | — | 1,927 | 686 | ||||||||||||||||||||||||
| Premises, furniture and equipment held for sale | 10,828 | — | — | 10,828 | 241 | ||||||||||||||||||||||||
| Servicing rights | 6,890 | — | — | 6,890 | (1,088) | ||||||||||||||||||||||||
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 3/31/2022 | Valuation Technique | Unobservable Input | Range (Weighted Average) | ||||||||||||||||||||
| Interest rate lock commitments | $ | 696 | Discounted cash flows | Closing ratio | 0-99% (88%)(1) | ||||||||||||||||||
| Other real estate owned | 1,422 | Modified appraised value | Third party appraisal | (2) | |||||||||||||||||||
| Appraisal discount | 0-10%(3) | ||||||||||||||||||||||
| Servicing rights | 8,102 | Discounted cash flows | Discount rate | 9 - 11% (9.01%)(4) | |||||||||||||||||||
| Constant prepayment rate | 9.8 - 20.0% (9.08%)(4) | ||||||||||||||||||||||
| Premises, furniture and equipment held for sale | 14,073 | Modified appraised value | Third party appraisal | (2) | |||||||||||||||||||
| Appraisal discount | 0-10%(3) | ||||||||||||||||||||||
| Collateral dependent individually assessed loans: | |||||||||||||||||||||||
| Commercial | 10,547 | Modified appraised value | Third party appraisal | (2) | |||||||||||||||||||
| Appraisal discount | 0-6%(3) | ||||||||||||||||||||||
| Owner occupied commercial real estate | 9,247 | Modified appraised value | Third party appraisal | (2) | |||||||||||||||||||
| Appraisal discount | 0-7%(3) | ||||||||||||||||||||||
| Non-owner occupied commercial real estate | 11,738 | Modified appraised value | Third party appraisal | (2) | |||||||||||||||||||
| Appraisal discount | 0-10%(3) | ||||||||||||||||||||||
| Real estate construction | 1,984 | Modified appraised value | Third party appraisal | (2) | |||||||||||||||||||
| Appraisal discount | 0-10%(3) | ||||||||||||||||||||||
| Agricultural and agricultural real estate | 9,514 | Modified appraised value | Third party appraisal | (2) | |||||||||||||||||||
| Appraisal discount | 0-9%(3) | ||||||||||||||||||||||
| Residential real estate | 863 | Modified appraised value | Third party appraisal | (2) | |||||||||||||||||||
| Appraisal discount | 0-7%(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 fair value measurement are the value indices, which are weighted-average spreads to LIBOR based on maturity groups. | |||||||||||||||||||||||
| Fair Value at 12/31/2021 | Valuation Technique | Unobservable Input | Range (Weighted Average) | ||||||||||||||||||||
| Interest rate lock commitments | $ | 1,306 | Discounted cash flows | Closing ratio | 0-99% (88%)(1) | ||||||||||||||||||
| Other real estate owned | 1,927 | Modified appraised value | Third party appraisal | (2) | |||||||||||||||||||
| Appraisal discount | 0-10%(3) | ||||||||||||||||||||||
| Servicing rights | 6,890 | Discounted cash flows | Discount rate | 9 - 11% (9.02%)(4) | |||||||||||||||||||
| Constant prepayment rate | 13.1 - 18.6% (13.4%)(4) | ||||||||||||||||||||||
| Premises, furniture and equipment held for sale | 10,828 | Modified appraised value | Third party appraisal | (2) | |||||||||||||||||||
| Appraisal discount | 0-10%(3) | ||||||||||||||||||||||
| Collateral dependent individually assessed loans: | |||||||||||||||||||||||
| Commercial and industrial | 8,989 | Modified appraised value | Third party appraisal | (2) | |||||||||||||||||||
| Appraisal discount | 0-6%(3) | ||||||||||||||||||||||
| Owner occupied commercial real estate | 8,447 | Modified appraised value | Third party appraisal | (2) | |||||||||||||||||||
| Appraisal discount | 0-7%(3) | ||||||||||||||||||||||
| Non-owner occupied commercial real estate | 11,946 | Modified appraised value | Third party appraisal | (2) | |||||||||||||||||||
| Appraisal discount | 0-10%(3) | ||||||||||||||||||||||
| Agricultural and agricultural real estate | 11,404 | Modified appraised value | Third party appraisal | (2) | |||||||||||||||||||
| Appraisal discount | 0-7%(3) | ||||||||||||||||||||||
| Residential real estate | 855 | Modified appraised value | Third party appraisal | (2) | |||||||||||||||||||
| Appraisal discount | 0-7%(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, 2022 | For the Year Ended December 31, 2021 | ||||||||||
| Balance at January 1, | $ | 1,306 | $ | 1,827 | |||||||
| Total net gains included in earnings | (1,196) | (2,345) | |||||||||
| Issuances | 1,774 | 15,403 | |||||||||
| Settlements | (1,188) | (13,579) | |||||||||
| Balance at period end | $ | 696 | $ | 1,306 | |||||||
Gains included in gains (losses) on sale of loans held for sale attributable to interest rate lock commitments held at March 31, 2022, and December 31, 2021, were $696,000 and $1.3 million, 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, 2022, and December 31, 2021, 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, 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 | $ | 604,902 | $ | 604,902 | $ | 604,902 | $ | — | $ | — | |||||||||||||||||||
| Time deposits in other financial institutions | 2,894 | 2,894 | 2,894 | — | — | ||||||||||||||||||||||||
| Securities: | |||||||||||||||||||||||||||||
| Carried at fair value | 7,025,243 | 7,025,243 | 1,001 | 7,024,242 | — | ||||||||||||||||||||||||
| Held to maturity | 81,785 | 86,486 | — | 86,486 | — | ||||||||||||||||||||||||
Other investments | 82,751 | 82,751 | — | 82,751 | — | ||||||||||||||||||||||||
| Loans held for sale | 22,685 | 22,685 | — | 22,685 | — | ||||||||||||||||||||||||
| Loans, net: | |||||||||||||||||||||||||||||
| Commercial and industrial | 2,788,713 | 2,760,104 | — | 2,749,557 | 10,547 | ||||||||||||||||||||||||
| PPP | 74,065 | 74,065 | — | 74,065 | — | ||||||||||||||||||||||||
| Owner occupied commercial real estate | 2,248,101 | 2,236,484 | — | 2,227,237 | 9,247 | ||||||||||||||||||||||||
| Non-owner occupied commercial real estate | 2,145,748 | 2,138,428 | — | 2,126,690 | 11,738 | ||||||||||||||||||||||||
| Real estate construction | 821,086 | 829,465 | — | 827,481 | 1,984 | ||||||||||||||||||||||||
| Agricultural and agricultural real estate | 763,776 | 756,586 | — | 747,072 | 9,514 | ||||||||||||||||||||||||
| Residential real estate | 817,367 | 817,762 | — | 816,899 | 863 | ||||||||||||||||||||||||
| Consumer | 418,007 | 421,081 | — | 421,081 | — | ||||||||||||||||||||||||
Total Loans, net | 10,076,863 | 10,033,975 | — | 9,990,082 | 43,893 | ||||||||||||||||||||||||
| Cash surrender value on life insurance | 192,267 | 192,267 | — | 192,267 | — | ||||||||||||||||||||||||
Derivative financial instruments(1) | 11,657 | 11,657 | — | 11,657 | — | ||||||||||||||||||||||||
| Interest rate lock commitments | 696 | 696 | — | — | 696 | ||||||||||||||||||||||||
| Forward commitments | 1,008 | 1,008 | — | 1,008 | — | ||||||||||||||||||||||||
| Financial liabilities: | |||||||||||||||||||||||||||||
| Deposits | |||||||||||||||||||||||||||||
Demand deposits | 6,376,249 | 6,376,249 | — | 6,376,249 | — | ||||||||||||||||||||||||
Savings deposits | 9,236,427 | 9,236,427 | — | 9,236,427 | — | ||||||||||||||||||||||||
Time deposits | 1,054,008 | 1,054,008 | — | 1,054,008 | — | ||||||||||||||||||||||||
| Short term borrowings | 107,372 | 107,372 | — | 107,372 | — | ||||||||||||||||||||||||
| Other borrowings | 372,290 | 373,288 | — | 373,288 | — | ||||||||||||||||||||||||
Derivative financial instruments(2) | 11,682 | 11,682 | — | 11,682 | — | ||||||||||||||||||||||||
| Forward commitments | 35 | 35 | — | 35 | — | ||||||||||||||||||||||||
| (1) Includes embedded derivatives, back-to-back loan swaps and fair value hedges. | |||||||||||||||||||||||||||||
| (2) Includes cash flow hedges, fair value hedges, back-to-back loan swaps and free standing derivative instruments. | |||||||||||||||||||||||||||||
| Fair Value Measurements at December 31, 2021 | |||||||||||||||||||||||||||||
| 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 | $ | 435,599 | $ | 435,599 | $ | 435,599 | $ | — | $ | — | |||||||||||||||||||
| Time deposits in other financial institutions | 2,894 | 2,894 | 2,894 | — | — | ||||||||||||||||||||||||
| Securities: | |||||||||||||||||||||||||||||
| Carried at fair value | 7,530,374 | 7,530,374 | 1,008 | 7,529,366 | — | ||||||||||||||||||||||||
| Held to maturity | 84,709 | 94,139 | — | 94,139 | — | ||||||||||||||||||||||||
Other investments | 82,567 | 82,567 | — | 82,567 | — | ||||||||||||||||||||||||
| Loans held for sale | 21,640 | 21,640 | — | 21,640 | — | ||||||||||||||||||||||||
| Loans, net: | |||||||||||||||||||||||||||||
| Commercial and industrial | 2,617,347 | 2,603,001 | — | 2,594,012 | 8,989 | ||||||||||||||||||||||||
| PPP | 199,883 | 199,883 | — | 199,883 | — | ||||||||||||||||||||||||
| Owner occupied commercial real estate | 2,221,120 | 2,222,030 | — | 2,213,583 | 8,447 | ||||||||||||||||||||||||
| Non-owner occupied commercial real estate | 1,992,683 | 1,998,161 | — | 1,986,215 | 11,946 | ||||||||||||||||||||||||
| Real estate construction | 833,581 | 844,578 | — | 844,578 | — | ||||||||||||||||||||||||
| Agricultural and agricultural real estate | 748,540 | 749,238 | — | 737,834 | 11,404 | ||||||||||||||||||||||||
| Residential real estate | 820,856 | 819,178 | — | 818,323 | 855 | ||||||||||||||||||||||||
| Consumer | 410,474 | 415,487 | — | 415,487 | — | ||||||||||||||||||||||||
Total Loans, net | 9,844,484 | 9,851,556 | — | 9,809,915 | 41,641 | ||||||||||||||||||||||||
| Cash surrender value on life insurance | 191,722 | 191,722 | — | 191,722 | — | ||||||||||||||||||||||||
Derivative financial instruments(1) | 23,891 | 23,891 | — | 23,891 | — | ||||||||||||||||||||||||
| Interest rate lock commitments | 1,306 | 1,306 | — | — | 1,306 | ||||||||||||||||||||||||
| Forward commitments | 32 | 32 | — | 32 | — | ||||||||||||||||||||||||
| Financial liabilities: | |||||||||||||||||||||||||||||
| Deposits | |||||||||||||||||||||||||||||
Demand deposits | 6,495,326 | 6,495,326 | — | 6,495,326 | — | ||||||||||||||||||||||||
Savings deposits | 8,897,909 | 8,897,909 | — | 8,897,909 | — | ||||||||||||||||||||||||
Time deposits | 1,024,020 | 1,024,020 | — | 1,024,020 | — | ||||||||||||||||||||||||
| Short term borrowings | 131,597 | 131,597 | — | 131,597 | — | ||||||||||||||||||||||||
| Other borrowings | 372,072 | 373,194 | — | 373,194 | — | ||||||||||||||||||||||||
Derivative financial instruments(1) | 25,099 | 25,099 | — | 25,099 | — | ||||||||||||||||||||||||
| Forward commitments | 95 | 95 | — | 95 | — | ||||||||||||||||||||||||
| (1) Includes back-to-back loan swaps and free standing derivative instruments. | |||||||||||||||||||||||||||||
| (2) Includes embedded derivatives, fair value hedges, and back-to-back loan 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 counter-party.
Interest Rate Lock Commitments — The fair value of interest rate lock commitments is estimated using an internal valuation model, which includes grouping the interest rate lock commitments by interest rate and terms, applying an estimated closing ratio based on historical experience, and then multiplying by quoted investor prices determined to be reasonably applicable to the loan commitment groups based on interest rate, terms, and rate lock expiration dates of the loan commitment group.
Forward Commitments — The fair value of these instruments is estimated using an internal valuation model, which includes current trade pricing for similar financial instruments.
Deposits — The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. If the fair value of the fixed maturity certificates of deposit is calculated at less than the carrying amount, the carrying value of these deposits is reported as the fair value.
Short-term and Other Borrowings — Rates currently available to 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, 2022, 1,014,149 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 $172,000 of tax benefit during the three months ended March 31, 2022 and a tax benefit of $153,000 during the three months ended March 31, 2021, 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 March 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 March 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 and are not entitled to dividends until vested.
A summary of the RSUs outstanding as of March 31, 2022, and March 31, 2021, and changes during the three months ended March 31, 2022 and 2021, follows:
| 2022 | 2021 | ||||||||||||||||||||||
| Shares | Weighted-Average Grant Date Fair Value | Shares | Weighted-Average Grant Date Fair Value | ||||||||||||||||||||
| Outstanding at January 1, | 389,885 | $ | 44.19 | 348,275 | $ | 38.22 | |||||||||||||||||
| Granted | 178,611 | 50.20 | 170,317 | 52.08 | |||||||||||||||||||
| Vested | (125,343) | 43.85 | (106,255) | 44.14 | |||||||||||||||||||
| Forfeited | (12,656) | 45.70 | (4,215) | 50.59 | |||||||||||||||||||
Outstanding at March 31, | 430,497 | $ | 46.74 | 408,122 | $ | 42.11 | |||||||||||||||||
Total compensation costs recorded for RSUs were $2.7 million and $2.8 million for the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, there were $13.1 million of total unrecognized compensation costs related to the Plan for RSUs that are expected to be recognized through 2025.
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 Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, 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. These forward-looking statements are generally identified by the use of words such as "believe," "expect," "anticipate," "plan," "intend," "estimate," "project," "may," "will," "would," "could," "should," "opportunity," "potential" or other similar or negative expressions of these words or phrases. Although HTLF has made these statements based on management's experience, beliefs, expectations, assumptions and best estimate of future events, the ability of the company 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 the company currently believes could have a material effect on its operations and future prospects include, among others, those described below and in the risk factors in HTLF's reports filed with the Securities and Exchange Commission ("SEC"), including 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, 2021:
•COVID-19 Pandemic Risks, including risks related to the ongoing COVID-19 pandemic and measures enacted by the U.S. federal and state governments and adopted by private businesses in response to the COVID-19 pandemic;
•Economic and Market Conditions Risks, including risks related to changes in the U.S. economy in general and in the local economies in which HTLF conducts its operations and future civil unrest, natural disasters, 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 and 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 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 competitive forces impacting our business and strategic acquisition risks;
•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. In addition, many of these risks and uncertainties are currently amplified by and may continue to be amplified by the COVID-19 pandemic and the impact of varying governmental responses that affect HTLF’s employees, customers and the economies where they operate. 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, 2021. There have been no significant changes in the critical accounting estimates or the assumptions and judgments utilized in applying these estimates since December 31, 2021.
OVERVIEW
Heartland Financial USA, Inc. is a financial services company operating under the brand name HTLF. HTLF's independently branded and chartered banks 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 including residential mortgage, wealth management, investments and insurance. As of March 31, 2022, HTLF had eleven banking subsidiaries with 130 locations.
HTLF's results of operations depend primarily on net interest income, which is the difference between interest income from interest earning assets and interest expense on interest bearing liabilities. Noninterest income, which includes service charges and fees, loan servicing income, trust income, brokerage and insurance commissions, securities gains, 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 and equipment costs, professional fees, advertising, core deposit and customer relationship intangibles amortization and other real estate and loan collection expenses.
HTLF reported the following results for the quarter ended March 31, 2022, compared to the quarter ended March 31, 2021:
•net income available to common stockholders of $41.1 million compared to $50.8 million, a decrease of $9.7 million or 19%,
•earnings per diluted common share of $0.97 compared to $1.20, a decrease of $0.23 or 19%,
•net interest income of $134.7 million compared to $139.6 million, a decrease of $4.9 million or 4%, which was primarily attributable to lower yields and a reduction of $5.8 million in total Paycheck Protection Program ("PPP") loan interest income,
•return on average common equity was 8.32% compared to 10.49%,
•return on average assets was 0.91% compared to 1.19%, and
•return on average tangible common equity (non-GAAP) was 12.41% compared to 15.90%.
For the first quarter of 2022, net interest margin was 3.08% (3.12% on a fully tax-equivalent basis, non-GAAP), which compares to 3.44% (3.48% on a fully tax-equivalent basis, non-GAAP) for the first quarter of 2021.
The efficiency ratio on a fully tax-equivalent basis (non-GAAP) was 64.65% for the first quarter of 2022 compared to 56.61% for the same quarter of 2021.
Total assets were $19.23 billion at March 31, 2022, a decrease of $43.7 million or less than 1% since December 31, 2021. Securities represented 37% of total assets at March 31, 2022, and 40% of total assets at December 31, 2021. Total loans held to maturity were $10.18 billion at March 31, 2022 compared to $9.95 billion at December 31, 2021, which was an increase of $222.8 million or 2%. Excluding total Paycheck Protection Program ("PPP") loans, total loans held to maturity increased $348.6 million or 4% since year-end 2021.
The total allowance for lending related credit losses was $116.6 million or 1.15% of total loans at March 31, 2022, compared to $125.6 million or 1.26% of total loans at December 31, 2021.
Total deposits were $16.67 billion as of March 31, 2022, compared to $16.42 billion at December 31, 2021, an increase of $249.4 million or 2%.
Total equity was $1.93 billion at March 31, 2022, compared to $2.18 billion at December 31, 2021. Book value per common share was $42.98 at March 31, 2022, compared to $49.00 at year-end 2021. The unrealized loss on securities available for sale, net of applicable taxes, was $285.7 million at March 31, 2022, compared to an unrealized loss of $4.4 million, net of applicable taxes, at December 31, 2021.
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.
2022 Developments
Charter Consolidation Update
The HTLF Board of Directors unanimously approved a plan to consolidate its eleven bank charters. The consolidation project is underway, and the project is expected to be completed by the end of 2023. The remaining estimated restructuring costs of the project are approximately $17.0 million. The ongoing financial benefits from consolidation are expected to be approximately $20.0 million annually when the project is completed and are expected to arise from the elimination of redundancies and improved operating processes. The consolidation will also increase operating capacity to be leveraged with future growth and provide better alignment of products and services.
| FINANCIAL HIGHLIGHTS | |||||||||||
| (Dollars in thousands, except per share data) | Three Months Ended March 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| STATEMENT OF INCOME DATA | |||||||||||
| Interest income | $ | 141,262 | $ | 147,452 | |||||||
| Interest expense | 6,583 | 7,847 | |||||||||
| Net interest income | 134,679 | 139,605 | |||||||||
| Provision (benefit) for credit losses | 3,245 | (648) | |||||||||
| Net interest income after provision (benefit) for credit losses | 131,434 | 140,253 | |||||||||
| Noninterest income | 34,569 | 30,317 | |||||||||
| Noninterest expenses | 110,797 | 102,423 | |||||||||
| Income taxes | 12,117 | 15,333 | |||||||||
| Net income | 43,089 | 52,814 | |||||||||
| Preferred dividends | (2,013) | (2,013) | |||||||||
| Net income available to common stockholders | $ | 41,076 | $ | 50,801 | |||||||
| KEY PERFORMANCE RATIOS | |||||||||||
| Annualized return on average assets | 0.91 | % | 1.19 | % | |||||||
| Annualized return on average common equity (GAAP) | 8.32 | 10.49 | |||||||||
Annualized return on average tangible common equity (non-GAAP)(1) | 12.41 | 15.90 | |||||||||
| Annualized ratio of net charge-offs to average loans | 0.49 | 0.06 | |||||||||
| Annualized net interest margin (GAAP) | 3.08 | 3.44 | |||||||||
Annualized net interest margin, fully tax-equivalent (non-GAAP)(1) | 3.12 | 3.48 | |||||||||
Efficiency ratio, fully tax-equivalent (non-GAAP)(1) | 64.65 | 56.61 | |||||||||
| Dollars in thousands, expect per share data | As Of and For the Quarter Ended | ||||||||||||||||||||||||||||
| 3/31/2022 | 12/31/2021 | 9/30/2021 | 6/30/2021 | 3/31/2021 | |||||||||||||||||||||||||
| BALANCE SHEET DATA | |||||||||||||||||||||||||||||
| Investments | $ | 7,189,779 | $ | 7,697,650 | $ | 7,618,622 | $ | 6,706,226 | $ | 6,530,723 | |||||||||||||||||||
| Loans held for sale | 22,685 | 21,640 | 37,078 | 33,248 | 43,037 | ||||||||||||||||||||||||
| Loans receivable held to maturity | 10,177,385 | 9,954,572 | 9,854,907 | 10,012,014 | 10,050,456 | ||||||||||||||||||||||||
| Allowance for credit losses | 100,522 | 110,088 | 117,533 | 120,726 | 130,172 | ||||||||||||||||||||||||
| Total assets | 19,230,879 | 19,274,549 | 18,996,225 | 18,371,006 | 18,244,427 | ||||||||||||||||||||||||
Total deposits | 16,666,684 | 16,417,255 | 16,022,243 | 15,615,118 | 15,559,051 | ||||||||||||||||||||||||
| Long-term obligations | 372,290 | 372,072 | 371,765 | 271,244 | 349,514 | ||||||||||||||||||||||||
| Common equity | 1,821,152 | 2,071,473 | 2,061,547 | 2,049,081 | 1,945,502 | ||||||||||||||||||||||||
| Dollars in thousands, expect per share data | As Of and For the Quarter Ended | ||||||||||||||||||||||||||||
| 3/31/2022 | 12/31/2021 | 9/30/2021 | 6/30/2021 | 3/31/2021 | |||||||||||||||||||||||||
| COMMON SHARE DATA | |||||||||||||||||||||||||||||
| Book value per common share (GAAP) | $ | 42.98 | $ | 49.00 | $ | 48.79 | $ | 48.50 | $ | 46.13 | |||||||||||||||||||
Tangible book value per common share (non-GAAP)(1) | $ | 28.66 | $ | 34.59 | $ | 34.33 | $ | 33.98 | $ | 31.53 | |||||||||||||||||||
| Common shares outstanding, net of treasury stock | 42,369,908 | 42,275,264 | 42,250,092 | 42,245,452 | 42,173,675 | ||||||||||||||||||||||||
Tangible common equity ratio (non-GAAP)(1) | 6.52 | % | 7.84 | % | 7.89 | % | 8.08 | % | 7.54 | % | |||||||||||||||||||
| (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 | |||||||||||||||||||||||||||||
| 3/31/2022 | 12/31/2021 | 9/30/2021 | 6/30/2021 | 3/31/2021 | |||||||||||||||||||||||||
| Reconciliation of Annualized Return on Average Tangible Common Equity (non-GAAP) | |||||||||||||||||||||||||||||
| Net income available to common stockholders (GAAP) | $ | 41,076 | $ | 47,568 | $ | 53,911 | $ | 59,593 | $ | 50,801 | |||||||||||||||||||
Plus core deposit and customer relationship intangibles amortization, net of tax(1) | 1,623 | 1,713 | 1,814 | 1,907 | 1,988 | ||||||||||||||||||||||||
| Net income excluding intangible amortization (non-GAAP) | $ | 42,699 | $ | 49,281 | $ | 55,725 | $ | 61,500 | $ | 52,789 | |||||||||||||||||||
| Average common equity (GAAP) | $ | 2,003,424 | $ | 2,061,973 | $ | 2,072,593 | $ | 1,980,904 | $ | 1,963,674 | |||||||||||||||||||
| Less average goodwill | 576,005 | 576,005 | 576,005 | 576,005 | 576,005 | ||||||||||||||||||||||||
| Less average core deposit and customer relationship intangibles, net | 31,931 | 34,018 | 36,279 | 38,614 | 41,399 | ||||||||||||||||||||||||
| Average tangible common equity (non-GAAP) | $ | 1,395,488 | $ | 1,451,950 | $ | 1,460,309 | $ | 1,366,285 | $ | 1,346,270 | |||||||||||||||||||
| Annualized return on average common equity (GAAP) | 8.32 | % | 9.15 | % | 10.32 | % | 12.07 | % | 10.49 | % | |||||||||||||||||||
| Annualized return on average tangible common equity (non-GAAP) | 12.41 | % | 13.47 | % | 15.14 | % | 18.05 | % | 15.90 | % | |||||||||||||||||||
| Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP) | |||||||||||||||||||||||||||||
| Net interest income (GAAP) | $ | 134,679 | $ | 137,194 | $ | 142,543 | $ | 141,218 | $ | 139,605 | |||||||||||||||||||
Plus tax-equivalent adjustment(1) | 2,119 | 1,975 | 1,714 | 1,762 | 1,761 | ||||||||||||||||||||||||
| Net interest income, fully tax-equivalent (non-GAAP) | $ | 136,798 | $ | 139,169 | $ | 144,257 | $ | 142,980 | $ | 141,366 | |||||||||||||||||||
| Average earning assets | $ | 17,757,067 | $ | 17,681,917 | $ | 17,123,824 | $ | 16,819,978 | $ | 16,460,124 | |||||||||||||||||||
| Annualized net interest margin (GAAP) | 3.08 | % | 3.08 | % | 3.30 | % | 3.37 | % | 3.44 | % | |||||||||||||||||||
| Annualized net interest margin, fully tax-equivalent (non-GAAP) | 3.12 | 3.12 | 3.34 | 3.41 | 3.48 | ||||||||||||||||||||||||
| Net purchase accounting discount accretion on loans included in annualized net interest margin | 0.05 | 0.05 | 0.08 | 0.09 | 0.12 | ||||||||||||||||||||||||
| As Of and For the Quarter Ended | |||||||||||||||||||||||||||||
| 3/31/2022 | 12/31/2021 | 9/30/2021 | 6/30/2021 | 3/31/2021 | |||||||||||||||||||||||||
| Reconciliation of Tangible Book Value Per Common Share (non-GAAP) | |||||||||||||||||||||||||||||
| Common equity (GAAP) | $ | 1,821,152 | $ | 2,071,473 | $ | 2,061,547 | $ | 2,049,081 | $ | 1,945,502 | |||||||||||||||||||
| Less goodwill | 576,005 | 576,005 | 576,005 | 576,005 | 576,005 | ||||||||||||||||||||||||
| Less core deposit and customer relationship intangibles, net | 30,934 | 32,988 | 35,157 | 37,452 | 39,867 | ||||||||||||||||||||||||
| Tangible common equity (non-GAAP) | $ | 1,214,213 | $ | 1,462,480 | $ | 1,450,385 | $ | 1,435,624 | $ | 1,329,630 | |||||||||||||||||||
| Common shares outstanding, net of treasury stock | 42,369,908 | 42,275,264 | 42,250,092 | 42,245,452 | 42,173,675 | ||||||||||||||||||||||||
| Common equity (book value) per share (GAAP) | $ | 42.98 | $ | 49.00 | $ | 48.79 | $ | 48.50 | $ | 46.13 | |||||||||||||||||||
| Tangible book value per common share (non-GAAP) | $ | 28.66 | $ | 34.59 | $ | 34.33 | $ | 33.98 | $ | 31.53 | |||||||||||||||||||
| Reconciliation of Tangible Common Equity Ratio (non-GAAP) | |||||||||||||||||||||||||||||
| Tangible common equity (non-GAAP) | $ | 1,214,213 | $ | 1,462,480 | $ | 1,450,385 | $ | 1,435,624 | $ | 1,329,630 | |||||||||||||||||||
| Total assets (GAAP) | $ | 19,230,879 | $ | 19,274,549 | $ | 18,996,225 | $ | 18,371,006 | $ | 18,244,427 | |||||||||||||||||||
| Less goodwill | 576,005 | 576,005 | 576,005 | 576,005 | 576,005 | ||||||||||||||||||||||||
| Less core deposit and customer relationship intangibles, net | 30,934 | 32,988 | 35,157 | 37,452 | 39,867 | ||||||||||||||||||||||||
| Total tangible assets (non-GAAP) | $ | 18,623,940 | $ | 18,665,556 | $ | 18,385,063 | $ | 17,757,549 | $ | 17,628,555 | |||||||||||||||||||
| Tangible common equity ratio (non-GAAP) | 6.52 | % | 7.84 | % | 7.89 | % | 8.08 | % | 7.54 | % | |||||||||||||||||||
| (1) Computed on a tax-equivalent basis using an effective tax rate of 21%. | |||||||||||||||||||||||||||||
| Reconciliation of Efficiency Ratio (non-GAAP) | For the Quarter Ended | ||||||||||||||||||||||||||||
| 3/31/2022 | 12/31/2021 | 9/30/2021 | 6/30/2021 | 3/31/2021 | |||||||||||||||||||||||||
| Net interest income (GAAP) | $ | 134,679 | $ | 137,194 | $ | 142,543 | $ | 141,218 | $ | 139,605 | |||||||||||||||||||
Tax-equivalent adjustment(1) | 2,119 | 1,975 | 1,714 | 1,762 | 1,761 | ||||||||||||||||||||||||
| Fully tax-equivalent net interest income | 136,798 | 139,169 | 144,257 | 142,980 | 141,366 | ||||||||||||||||||||||||
| Noninterest income | 34,569 | 32,730 | 32,724 | 33,164 | 30,317 | ||||||||||||||||||||||||
| Securities (gains)/losses, net | (2,872) | (1,563) | (1,535) | (2,842) | 30 | ||||||||||||||||||||||||
| Unrealized (gain)/loss on equity securities, net | 283 | 27 | (112) | (83) | 110 | ||||||||||||||||||||||||
| Valuation adjustment on servicing rights | (1,658) | (502) | (195) | 526 | (917) | ||||||||||||||||||||||||
| Adjusted revenue (non-GAAP) | $ | 167,120 | $ | 169,861 | $ | 175,139 | $ | 173,745 | $ | 170,906 | |||||||||||||||||||
| Total noninterest expenses (GAAP) | $ | 110,797 | $ | 115,386 | $ | 110,627 | $ | 103,376 | $ | 102,423 | |||||||||||||||||||
| Less: | |||||||||||||||||||||||||||||
| Core deposit and customer relationship intangibles amortization | 2,054 | 2,169 | 2,295 | 2,415 | 2,516 | ||||||||||||||||||||||||
| Partnership investment in tax credit projects | 77 | 2,549 | 2,374 | 1,345 | 35 | ||||||||||||||||||||||||
| (Gain)/loss on sales/valuation of assets, net | 46 | 214 | (3) | 183 | 194 | ||||||||||||||||||||||||
| Acquisition, integration and restructuring costs | 576 | 1,989 | 204 | 210 | 2,928 | ||||||||||||||||||||||||
| Adjusted noninterest expenses (non-GAAP) | $ | 108,044 | $ | 108,465 | $ | 105,757 | $ | 99,223 | $ | 96,750 | |||||||||||||||||||
| Efficiency ratio, fully tax-equivalent (non-GAAP) | 64.65 | % | 63.86 | % | 60.38 | % | 57.11 | % | 56.61 | % | |||||||||||||||||||
| Acquisition, integration and restructuring costs | |||||||||||||||||||||||||||||
| Salaries and employee benefits | $ | 340 | $ | — | $ | — | $ | 44 | $ | 534 | |||||||||||||||||||
| Occupancy | — | — | — | 1 | 9 | ||||||||||||||||||||||||
| Furniture and equipment | — | — | 7 | 41 | 607 | ||||||||||||||||||||||||
| Professional fees | 236 | 1,989 | 145 | 63 | 670 | ||||||||||||||||||||||||
| Advertising | — | — | 11 | 6 | 156 | ||||||||||||||||||||||||
| Loss on sales/valuations of assets, net | — | — | 39 | — | — | ||||||||||||||||||||||||
| Other noninterest expenses | — | — | 2 | 55 | 952 | ||||||||||||||||||||||||
| Total acquisition, integration and restructuring costs | $ | 576 | $ | 1,989 | $ | 204 | $ | 210 | $ | 2,928 | |||||||||||||||||||
After tax impact on diluted earnings per common share(1) | $ | 0.01 | $ | 0.05 | $ | — | $ | — | $ | 0.05 | |||||||||||||||||||
| (1) Computed on a tax-equivalent basis using an effective tax rate of 21%. | |||||||||||||||||||||||||||||
Non-GAAP Financial Measures
This Quarterly Report on Form 10-Q contains references to financial measures which are not defined by generally accepted accounting principles ("GAAP"). Management believes the non-GAAP measures are helpful for investors to analyze and evaluate 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.
•Efficiency ratio, fully tax equivalent, expresses noninterest expenses as a percentage of fully tax-equivalent net interest income and noninterest income. This efficiency ratio is presented on a tax-equivalent basis which adjusts net interest income and noninterest expenses for the tax favored status of certain loans, securities, and tax credit projects. Management believes the presentation of this non-GAAP measure provides supplemental useful information for proper understanding of the financial results as it enhances the comparability of income and expenses arising from taxable and nontaxable sources and excludes specific items as noted in the reconciliation 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.
•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.
RESULTS OF OPERATIONS
Net Interest Margin and Net Interest Income
Management closely monitors and manages net interest income and net interest margin, the results of which are shared with investors because they are important indicators of the company's profitability as well as the growth and mix of earning assets.
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.
HTLF's ability to maintain a favorable net interest margin has been the result of an increase in average earning assets and a favorable deposit mix. Also contributing to HTLF's ability to maintain its net interest margin has been the amortization of purchase accounting discounts associated with acquisitions completed since 2015.
For the Quarters ended March 31, 2022 and 2021
Net interest margin, expressed as a percentage of average earning assets, was 3.08% (3.12% on a fully tax-equivalent basis, non-GAAP) during the first quarter of 2022, compared to 3.44% (3.48% on a fully tax-equivalent basis, non-GAAP) during the first quarter of 2021. For the quarters ended March 31, 2022 and 2021, net interest margin included 5 basis points and 12 basis points, respectively, of net purchase accounting discount amortization.
Total interest income and average earning asset changes for the first quarter of 2022 compared to the first quarter of 2021 were:
•Total interest income was $141.3 million, which was a decrease of $6.2 million or 4% from $147.5 million and was primarily attributable to lower yields and a reduction of total Paycheck Protection Program ("PPP") loan interest income. PPP loan interest income totaled $4.3 million compared to $10.1 million, which was a decrease of $5.8 million or 57%.
•Total interest income on a tax-equivalent basis (non-GAAP) was $143.4 million, which was a decrease of $5.8 million or 4% from $149.2 million.
•Average earning assets increased $1.30 billion or 8% to $17.76 billion compared to $16.46 billion, which was primarily attributable to increases in the securities portfolio.
•The average rate on earning assets decreased 41 basis points to 3.27% compared to 3.68%, which was primarily due to a shift in the mix of earning assets. Total average securities were 43% of total average earning assets compared to 39%.
Total interest expense and average interest bearing liability changes for the first quarter of 2022 compared to the first quarter of 2021 were:
•Total interest expense was $6.6 million, a decrease of $1.3 million or 16% from $7.8 million, based on a decrease in the average interest rate paid, which was partially offset by an increase in average interest bearing liabilities.
•The average interest rate paid on interest bearing liabilities decreased to 0.26% compared to 0.32%.
•Average interest bearing deposits increased $695.6 million or 8% to $9.96 billion from $9.27 billion which was primarily attributable to deposit growth.
•The average interest rate paid on interest bearing deposits decreased 7 basis points to 0.12% compared to 0.19%.
•Average borrowings decreased $159.4 million or 24% to $491.8 million from $651.2 million, which was primarily attributable to reduced advances from the PPP lending fund used to fund PPP loans to borrowers. Average advances from the PPP lending fund were $0 compared to $143.7 million. The average interest rate paid on borrowings was 2.97% compared to 2.15%.
Net interest income decreased for the first quarter of 2022 compared to the first quarter of 2021:
•Net interest income totaled $134.7 million compared to $139.6 million, which was a decrease of $4.9 million or 4%. Total PPP loan interest income was $4.3 million compared to $10.1 million, which was a decrease of $5.8 million or 57%.
•Net interest income on a tax-equivalent basis (non-GAAP) totaled $136.8 million compared to $141.4 million, which was a decrease of $4.6 million or 3%.
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.
Management believes net interest margin expressed in dollars will continue to increase as the amount of earning assets grows. The Federal Reserve has indicated it will closely assess economic data but has signaled it may make as many as five additional increases to the federal funds interest rates in 2022. Ultimately, the timing and magnitude of any such changes are uncertain and will depend on domestic and global economic conditions. Any increases to the federal funds rate in 2022 would positively impact HTLF's net interest income due to its asset sensitive balance sheet.
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 produces and reviews simulations of various interest rate scenarios to assist in monitoring its exposure to interest rate risk. Based on these simulations, it is management's opinion that 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 table sets 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.
ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES (1) (DOLLARS IN THOUSANDS) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| For the Quarter Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2022 | December 31, 2021 | March 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Average Balance | Interest | Rate | Average Balance | Interest | Rate | Average Balance | Interest | Rate | |||||||||||||||||||||||||||||||||||||||||||||
| Earning Assets | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Securities: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Taxable | $ | 6,501,664 | $ | 32,620 | 2.03 | % | $ | 6,730,511 | $ | 30,637 | 1.81 | % | $ | 5,693,097 | $ | 30,443 | 2.17 | % | |||||||||||||||||||||||||||||||||||
Nontaxable(1) | 1,106,951 | 7,851 | 2.88 | 964,712 | 7,082 | 2.91 | 730,565 | 5,700 | 3.16 | ||||||||||||||||||||||||||||||||||||||||||||
| Total securities | 7,608,615 | 40,471 | 2.16 | 7,695,223 | 37,719 | 1.94 | 6,423,662 | 36,143 | 2.28 | ||||||||||||||||||||||||||||||||||||||||||||
| Interest on deposits with other banks and short-term investments | 216,451 | 71 | 0.13 | 218,809 | 86 | 0.16 | 204,488 | 66 | 0.13 | ||||||||||||||||||||||||||||||||||||||||||||
| Federal funds sold | 11 | — | — | — | — | — | 14,020 | 1 | 0.03 | ||||||||||||||||||||||||||||||||||||||||||||
Loans:(2) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial and industrial(1) | 2,744,336 | 27,053 | 4.00 | 2,614,685 | 26,465 | 4.02 | 2,500,250 | 28,222 | 4.58 | ||||||||||||||||||||||||||||||||||||||||||||
| PPP loans | 132,050 | 4,323 | 13.28 | 302,829 | 8,106 | 10.62 | 992,517 | 10,149 | 4.15 | ||||||||||||||||||||||||||||||||||||||||||||
| Owner occupied commercial real estate | 2,243,522 | 21,278 | 3.85 | 2,166,768 | 22,007 | 4.03 | 1,778,829 | 19,565 | 4.46 | ||||||||||||||||||||||||||||||||||||||||||||
| Non-owner occupied commercial real estate | 2,060,548 | 21,163 | 4.17 | 1,996,186 | 21,744 | 4.32 | 1,937,564 | 22,121 | 4.63 | ||||||||||||||||||||||||||||||||||||||||||||
| Real estate construction | 847,250 | 9,276 | 4.44 | 837,716 | 9,390 | 4.45 | 806,315 | 9,698 | 4.88 | ||||||||||||||||||||||||||||||||||||||||||||
| Agricultural and agricultural real estate | 745,348 | 7,006 | 3.81 | 697,521 | 7,089 | 4.03 | 681,279 | 8,051 | 4.79 | ||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage | 843,881 | 8,085 | 3.89 | 853,208 | 8,615 | 4.01 | 849,923 | 9,830 | 4.69 | ||||||||||||||||||||||||||||||||||||||||||||
| Consumer | 426,659 | 4,655 | 4.42 | 417,114 | 4,793 | 4.56 | 405,475 | 5,367 | 5.37 | ||||||||||||||||||||||||||||||||||||||||||||
| Less: allowance for credit losses-loans | (111,604) | — | — | (118,142) | — | — | (134,198) | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Net loans | 9,931,990 | 102,839 | 4.20 | 9,767,885 | 108,209 | 4.40 | 9,817,954 | 113,003 | 4.67 | ||||||||||||||||||||||||||||||||||||||||||||
| Total earning assets | 17,757,067 | 143,381 | 3.27 | % | 17,681,917 | 146,014 | 3.28 | % | 16,460,124 | 149,213 | 3.68 | % | |||||||||||||||||||||||||||||||||||||||||
| Nonearning Assets | 1,472,805 | 1,469,774 | 1,504,599 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Assets | $ | 19,229,872 | $ | 19,151,691 | $ | 17,964,723 | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest Bearing Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Savings | $ | 8,889,950 | $ | 2,394 | 0.11 | % | $ | 8,609,596 | $ | 2,160 | 0.10 | % | $ | 8,032,308 | $ | 2,430 | 0.12 | % | |||||||||||||||||||||||||||||||||||
| Time deposits | 1,071,675 | 583 | 0.22 | 1,048,785 | 1,008 | 0.38 | 1,233,682 | 1,965 | 0.65 | ||||||||||||||||||||||||||||||||||||||||||||
| Short-term borrowings | 119,588 | 46 | 0.16 | 176,956 | 123 | 0.28 | 240,037 | 152 | 0.26 | ||||||||||||||||||||||||||||||||||||||||||||
| Other borrowings | 372,187 | 3,560 | 3.88 | 371,918 | 3,554 | 3.79 | 411,132 | 3,300 | 3.26 | ||||||||||||||||||||||||||||||||||||||||||||
| Total interest bearing liabilities | 10,453,400 | 6,583 | 0.26 | % | 10,207,255 | 6,845 | 0.27 | % | 9,917,159 | 7,847 | 0.32 | ||||||||||||||||||||||||||||||||||||||||||
| Noninterest Bearing Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Noninterest bearing deposits | 6,497,753 | 6,607,095 | 5,778,571 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Accrued interest and other liabilities | 164,590 | 164,663 | 194,614 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total noninterest bearing liabilities | 6,662,343 | 6,771,758 | 5,973,185 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity | 2,114,129 | 2,172,678 | 2,074,379 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Liabilities and Equity | $ | 19,229,872 | $ | 19,151,691 | $ | 17,964,723 | |||||||||||||||||||||||||||||||||||||||||||||||
Net interest income, fully tax-equivalent (non-GAAP)(1)(3) | $ | 136,798 | $ | 139,169 | $ | 141,366 | |||||||||||||||||||||||||||||||||||||||||||||||
Net interest spread(1) | 3.01 | % | 3.01 | % | 3.36 | % | |||||||||||||||||||||||||||||||||||||||||||||||
Net interest income, fully tax-equivalent to total earning assets (non-GAAP)(1)(3) | 3.12 | % | 3.12 | % | 3.48 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| (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. | |||||||||||||||||||||||||||||||||||||||||||||||||||||
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, 2022 and 2021, in thousands:
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Provision expense for credit losses-loans | $ | 2,628 | $ | 16 | |||||||
| Provision expense (benefit) for credit losses-unfunded commitments | 617 | (661) | |||||||||
| Provision expense (benefit) for credit losses-held to maturity securities | — | (3) | |||||||||
| Total provision expense (benefit) | $ | 3,245 | $ | (648) | |||||||
The provision expense for credit losses for loans was $3.2 million for the first quarter of 2022, which was a change of $3.9 million from provision benefit of $648,000 recorded in the first quarter of 2021. The provision expense for the first quarter of 2022 was negatively impacted by two charge-offs totaling $9.2 million related to two lending relationships for which information received subsequent to March 31, 2022, indicated collateral deficiencies due to customer fraud. Provision expense was positively impacted in the first quarter by the following items:
•decrease in nonperforming loans of $27.5 million to $64.4 million or 0.63% of total loans compared to $91.9 million or 0.91% of total loans at March 31, 2021,
•nonpass loans declined to 6.3% of total loans as of March 31, 2022 compared to 11.5% of total loans at March 31, 2021,
•loans delinquent 30-89 days as a percent of total loans fell to 0.10% compared to 0.16% at March 31, 2021, and
•improved macroeconomic factors compared to the first quarter of 2021.
Given 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, such as economic conditions, considered when determining the appropriateness of the allowance for credit losses, the provision for credit losses will vary from quarter to quarter. For additional details on the specific factors considered in establishing the allowance for credit losses, refer to the discussion of critical accounting 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, 2021, "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, 2022, was at a level commensurate with the overall risk exposure of the loan portfolio. However, deterioration in current economic conditions could cause certain borrowers to experience difficulty. Due to the uncertainty of future economic conditions resulting from the COVID-19 pandemic and other economic headwinds, including recent concerns over COVID-19 variants, inflation, supply chain challenges, workforce shortages and wage pressures, the provision for credit losses could be volatile over the next several quarters.
Noninterest Income
The table below shows noninterest income for the three months ended March 31, 2022 and 2021, in thousands:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | Change | % Change | ||||||||||||||||||||
| Service charges and fees | $ | 15,251 | $ | 13,671 | $ | 1,580 | 12 | % | |||||||||||||||
| Loan servicing income | 286 | 838 | (552) | (66) | |||||||||||||||||||
| Trust fees | 6,079 | 5,777 | 302 | 5 | |||||||||||||||||||
| Brokerage and insurance commissions | 869 | 853 | 16 | 2 | |||||||||||||||||||
| Securities gains/(losses), net | 2,872 | (30) | 2,902 | 9,673 | |||||||||||||||||||
| Unrealized loss on equity securities, net | (283) | (110) | (173) | (157) | |||||||||||||||||||
| Net gains on sale of loans held for sale | 3,411 | 6,420 | (3,009) | (47) | |||||||||||||||||||
| Valuation adjustment on servicing rights | 1,658 | 917 | 741 | 81 | |||||||||||||||||||
| Income on bank owned life insurance | 524 | 829 | (305) | (37) | |||||||||||||||||||
| Other noninterest income | 3,902 | 1,152 | 2,750 | 239 | |||||||||||||||||||
| Total noninterest income | $ | 34,569 | $ | 30,317 | $ | 4,252 | 14 | % | |||||||||||||||
Total noninterest income was $34.6 million during the first quarter of 2022 compared to $30.3 million during the first quarter of 2021, an increase of $4.3 million or 14%.
Notable changes in noninterest income categories for the three months ended March 31, 2022 and 2021 are as follows:
Service Charges and Fees
The following table summarizes the changes in service charges and fees for the three months ended March 31, 2022 and 2021, in thousands:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | Change | % Change | ||||||||||||||||||||
| Service charges and fees on deposit accounts | $ | 4,395 | $ | 3,936 | $ | 459 | 12 | % | |||||||||||||||
| Overdraft fees | 2,825 | 2,592 | 233 | 9 | |||||||||||||||||||
| Customer service and other service fees | 81 | 46 | 35 | 76 | |||||||||||||||||||
| Credit card fee income | 5,649 | 4,308 | 1,341 | 31 | |||||||||||||||||||
| Debit card income | 2,301 | 2,789 | (488) | (17) | |||||||||||||||||||
| Total service charges and fees | $ | 15,251 | $ | 13,671 | $ | 1,580 | 12 | % | |||||||||||||||
The increase in credit card fee income and the decrease in debit card income is primarily the result of an overall shift in the industry from debit card use to credit card use.
Management is monitoring and assessing the 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 table shows the changes in loan servicing income for the three months ended March 31, 2022, and 2021, in thousands:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | Change | % Change | ||||||||||||||||||||
Commercial and agricultural loan servicing fees(1) | $ | 237 | $ | 774 | $ | (537) | (69) | % | |||||||||||||||
| Residential mortgage servicing fees | 454 | 464 | (10) | (2) | |||||||||||||||||||
| Mortgage servicing rights amortization | (405) | (400) | (5) | (1) | |||||||||||||||||||
| Total loan servicing income | $ | 286 | $ | 838 | $ | (552) | (66) | % | |||||||||||||||
| (1) Includes servicing fees for commercial, commercial real estate, agricultural and agricultural real estate loans. | |||||||||||||||||||||||
Securities Gains, Net
For the first quarter of 2022, net securities gains totaled $2.9 million compared to net securities losses of $30,000 for the first quarter of 2021, which was an increase of $2.9 million. During the first quarter of 2022, the portfolio was repositioned to lessen the sensitivity to rising interest rates.
Net Gains on Sale of Loans Held for Sale
During the first quarter of 2022, net gains on sale of loans held for sale totaled $3.4 million compared to $6.4 million during the same period in 2021, a decrease of $3.0 million or 47%. Loans sold to investors in the first quarter of 2022 totaled $98.3 million compared to $139.3 million during the first quarter of 2021, which was a decrease of $41.0 million or 29% and primarily attributable to a reduction in residential mortgage loan refinancing activity due to recent increases in residential mortgage loan interest rates.
Valuation Adjustment on Servicing Rights
The valuation adjustment on servicing rights totaled $1.7 million for the first quarter of 2022 compared to $917,000 for the first quarter of 2021, which was an increase of $741,000 or 81%. The increase was primarily due to recent increases in residential mortgage loan interest rates.
Other Noninterest Income
Other noninterest income totaled $3.9 million for the first quarter of 2022, which was an increase of $2.8 million from $1.2 million for the first quarter of 2021. Commercial swap fee income and syndication income totaled $3.0 million in the first quarter of 2022 compared to $77,000 for the first quarter of 2021.
Noninterest Expenses
The table below shows noninterest expenses for the three months ended March 31, 2022, and 2021, in thousands:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | Change | % Change | ||||||||||||||||||||
| Salaries and employee benefits | $ | 66,174 | $ | 59,062 | $ | 7,112 | 12 | % | |||||||||||||||
| Occupancy | 7,362 | 7,918 | (556) | (7) | |||||||||||||||||||
| Furniture and equipment | 3,519 | 3,093 | 426 | 14 | |||||||||||||||||||
| Professional fees | 15,156 | 13,490 | 1,666 | 12 | |||||||||||||||||||
| Advertising | 1,555 | 1,469 | 86 | 6 | |||||||||||||||||||
| Core deposit and customer relationship intangibles amortization | 2,054 | 2,516 | (462) | (18) | |||||||||||||||||||
| Other real estate and loan collection expenses | 195 | 135 | 60 | 44 | |||||||||||||||||||
| (Gain)/loss on sales/valuations of assets, net | 46 | 194 | (148) | (76) | |||||||||||||||||||
| Acquisition, integration and restructuring costs | 576 | 2,928 | (2,352) | (80) | |||||||||||||||||||
| Partnership investment in tax credit projects | 77 | 35 | 42 | 120 | |||||||||||||||||||
| Other noninterest expenses | 14,083 | 11,583 | 2,500 | 22 | |||||||||||||||||||
| Total noninterest expenses | $ | 110,797 | $ | 102,423 | $ | 8,374 | 8 | % | |||||||||||||||
For the first quarter of 2022, noninterest expenses totaled $110.8 million compared to $102.4 million during the first quarter of 2021, an increase of $8.4 million or 8%.
Notable changes in noninterest expense categories for the three months ended March 31, 2022 and 2021 are as follows:
Salaries and employee benefits
Salaries and employee benefits increased $7.1 million or 12% to $66.2 million for the first quarter of 2022 compared to $59.1 million for the first quarter of 2021. The increase for the quarterly comparison was primarily attributable to higher salary expenses as a result of more full-time equivalent employees, inflationary wage pressures and normalized health care usage. Full-time equivalent employees totaled 2,208 at March 31, 2022 compared to 2,131 at March 31, 2021, which was primarily attributable to the addition of specialized commercial and agribusiness lending teams.
Professional Fees
Professional fees increased $1.7 million or 12% to $15.2 million for the first quarter of 2022 compared to $13.5 million for the same period of 2021. The increase for the three month period was primarily attributable to higher cloud based computing expenses.
Acquisition, integration and restructuring costs
Acquisition, integration and restructuring costs decreased $2.4 million or 80% to $576,000 for the first quarter of 2022 compared to $2.9 million for the first quarter of 2021. The expenses incurred in the first quarter of 2022 were primarily related to the charter consolidation project and will continue through the end of 2023. The expenses incurred in the first quarter of 2021 were primarily attributable to the AimBank conversion in February 2021.
Other noninterest expenses
Other noninterest expenses totaled $14.1 million for the first quarter of 2022 compared to $11.6 million for the first quarter of 2021, which was an increase of $2.5 million or 22%. The following items impacted the first quarter of 2022 compared to the first quarter of 2021:
•Travel and staff and customer entertainment expenses increased $651,000 to $1.1 million from $482,000. In-person meetings and events were limited in the first quarter of 2021 due to the pandemic.
•Credit card processing and rebate expenses increased $1.2 million or 53% to $3.5 million from $2.3 million, which was primarily attributable to increased volume.
•Fraud losses increased $581,000 or 160% to $945,000 from $364,000. The increase was primarily attributable to check fraud and wire fraud transactions given the heightened fraud environment.
Efficiency Ratio
One of HTLF's strategic priorities is to improve its efficiency ratio, on a fully tax-equivalent basis (non-GAAP), with the goal of reducing to below 57%. During the first quarter of 2022, the efficiency ratio on a fully tax-equivalent basis (non-GAAP) increased by 804 basis points to 64.65% in comparison with 56.61% for the quarter ended March 31, 2021, which was primarily attributable to the decrease in net interest income and the increase in noninterest expenses as noted above.
HTLF continues to pursue strategies to improve operational efficiency, which include the following initiatives:
•The consolidation of its eleven bank charters. Two key tenets of the charter consolidation project are the retention of brand identities and local market decision-making, as well as the management and maintenance of operational and administrative functions in Dubuque, Iowa. The ongoing financial benefits from consolidation are expected to be approximately $20 million annually when the project is completed and are expected to arise from the elimination of redundancies and improved operating processes. The consolidation will also increase operating capacity to be leveraged with future growth and provide better alignment of products and services. The charter consolidation is expected to be completed by the end of 2023.
•A reduction in HTLF's branch network by approximately 8% is expected through its branch optimization strategy.
In spite of cost savings initiatives, management believes the efficiency ratio could remain elevated in the next several quarters due to wage pressures, workforce shortages, supply chain disruptions and inflation.
Income Taxes
The effective tax rate was 21.95% for the first quarter of 2022 compared to 22.50% for the first quarter of 2021. The following items impacted the first quarter 2022 and 2021 tax calculations:
•Solar energy tax credits of $0 compared to $97,000.
•Federal low-income housing tax credits of $135,000 in each quarterly calculation.
•New markets tax credits of $75,000 in each quarterly calculation.
•Historic rehabilitation tax credits of $63,000 compared to $0.
•Tax-exempt interest income as a percentage of pre-tax income of 12.42% compared to 9.72%.
•Tax benefit of $172,000 compared to $153,000 resulting from the vesting of restricted stock units.
FINANCIAL CONDITION
Total assets were $19.23 billion at March 31, 2022, a decrease of $43.7 million or less than 1% from $19.27 billion at December 31, 2021. Securities represented 37% and 40% of total assets at March 31, 2022, and December 31, 2021, respectively.
LENDING ACTIVITIES
HTLF's board of directors establishes an acceptable level of credit risk appetite, and the subsidiary banks follow certain centralized lending policies and procedures that are designed to provide for a level of credit risk commensurate within the defined risk parameters. A reporting system supplements the review process by providing management and the board with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies, nonperforming loans and potential problem loans.
HTLF originates commercial and industrial loans and owner occupied commercial real estate loans for a wide variety of business purposes, including lines of credit for working capital and operational purposes and term loans for the acquisition of equipment and real estate. Although most loans are made on a secured basis, loans may be made on an unsecured basis if warranted by the overall financial condition of the borrower. Terms of commercial business loans generally range from one to five years. Commercial loans are primarily made based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The risks in the commercial and industrial portfolio include the unpredictability of the cash flow of the borrowers and the variability in the value of the collateral securing the loans. Owner occupied commercial real estate loans are dependent upon the cash flow of the borrowers and the collateral value of the real estate.
HTLF originated PPP loans in 2020 ("PPP I") totaling $1.20 billion and acquired $53.1 million of PPP loans in the AimBank transaction. Additionally, in 2021, HTLF originated $473.9 million of PPP II loans. At March 31, 2022, HTLF had $5.7 million of PPP I loans outstanding. PPP II loans outstanding at March 31, 2022 totaled $68.4 million, which was net of $2.4 million of unamortized deferred fees. Both PPP I and PPP II loans are 100% SBA guaranteed, and borrowers may be eligible to have an amount up to the entire principal balance forgiven and paid by the SBA. All PPP loans also carry a zero risk rating for regulatory capital purposes. Because these loans are 100% guaranteed by the SBA, there is no allowance recorded related to the PPP loans.
Non-owner occupied commercial real estate loans provide financing for various non-owner occupied or income producing properties. Real estate construction loans are generally short-term or interim loans that provide financing for acquiring or developing commercial income properties, multi-family projects or single-family residential homes. The collateral required for most of these loans is based upon the discounted market value of the collateral. Non-owner occupied commercial real estate loans are typically dependent, in large part, on sufficient income from the properties securing the loans to cover the operating expenses and debt service. Real estate construction loans involve additional risks because funds are advanced based upon estimates of costs and the estimated value of the completed project. Additionally, real estate construction loans have a greater risk of default in a weaker economy because the source of repayment is reliant on the successful and timely sale of the project. Personal guarantees are frequently required as a tertiary form of repayment. In addition, when underwriting loans for commercial real estate, careful consideration is given to the property's operating history, future operating projections, current and projected occupancy, location and physical condition.
Agricultural and agricultural real estate loans, many of which are secured by crops, machinery and real estate, are provided to finance capital improvements and farm operations as well as acquisitions of livestock and machinery. Agricultural and agricultural real estate loans present unique credit risks relating to adverse weather conditions, loss of livestock due to disease or other reasons, changes in market prices for agricultural products and the impact of government regulations. The ultimate repayment of agricultural and agricultural real estate loans is dependent upon the profitable operation or management of the agricultural entity. Loans secured by farm equipment, livestock or crops may not provide an adequate source of repayment because of damage or depreciation. In underwriting agricultural and agricultural real estate loans, lending personnel work closely with their customers to review budgets and cash flow projections for crop production for the ensuing year. These budgets and cash flow projections are monitored closely during the year and reviewed with the customers at least annually.
Lending personnel work closely with governmental agencies, including the SBA and U.S. Department of Agriculture's Rural Development Business and Industry Program Farm Service Agency, to help agricultural customers obtain credit enhancement products, such as loan guarantees, longer-term funding or interest assistance, to reduce risk.
Residential real estate loans are originated for the purchase or refinancing of single family residential properties. Residential real estate loans are dependent upon the borrower's ability to repay the loan and the underlying collateral value. The acquisition of First Bank & Trust in Lubbock, Texas, in 2018 included its wholly owned mortgage subsidiary, PrimeWest Mortgage Corporation, which was merged into First Bank & Trust in April 2020. First Bank & Trust provides mortgage loans to customers in Texas and has expanded to also serve the mortgage needs of customers in many of HTLF's markets. First Bank & Trust services the conventional mortgage loans it sells into the secondary market.
Consumer lending includes home equity lines and term loans, motor vehicle, home improvement and small personal credit lines. Consumer loans typically have shorter terms, lower balances, higher yields and higher risks of default than one-to-four-family residential mortgage loans. Consumer loan collections are dependent on the borrower's continuing financial stability and are therefore more likely to be affected by adverse personal circumstances. Risk is reduced through underwriting criteria, which include credit verification, appraisals, a review of the borrower's financial condition, and personal cash flows. A security interest, with title insurance when necessary, is taken in the underlying real estate.
Total loans held to maturity were $10.18 billion at March 31, 2022, and $9.95 billion at December 31, 2021, an increase of $222.8 million or 2%. Excluding PPP loans, total loans held to maturity increased $348.6 million or 4% since year-end 2021.
The following table shows the changes in loan balances by loan category since December 31, 2021, in thousands:
| March 31, 2022 | December 31, 2021 | Change | % Change | ||||||||||||||||||||
| Commercial and industrial | $ | 2,814,513 | $ | 2,645,085 | $ | 169,428 | 6 | % | |||||||||||||||
| PPP | 74,065 | 199,883 | (125,818) | (63) | % | ||||||||||||||||||
| Owner occupied commercial real estate | 2,266,076 | 2,240,334 | 25,742 | 1 | |||||||||||||||||||
| Non-owner occupied commercial real estate | 2,161,761 | 2,010,591 | 151,170 | 8 | |||||||||||||||||||
| Real estate construction | 842,483 | 856,119 | (13,636) | (2) | |||||||||||||||||||
| Agricultural and agricultural real estate | 766,443 | 753,753 | 12,690 | 2 | |||||||||||||||||||
| Residential mortgage | 825,242 | 829,283 | (4,041) | — | |||||||||||||||||||
| Consumer | 426,802 | 419,524 | 7,278 | 2 | |||||||||||||||||||
| Total loans held to maturity | $ | 10,177,385 | $ | 9,954,572 | $ | 222,813 | 2 | % | |||||||||||||||
Notable changes in the loan portfolio include:
•Commercial and industrial loans increased $169.4 million or 6% to $2.81 billion at March 31, 2022 compared to $2.65 billion at December 31, 2021.
•PPP loans decreased $125.8 million or 63% to $74.1 million at March 31, 2022 compared to $199.9 million at year-end 2021. PPP I loans decreased $21.4 million or 79%, and PPP II loans decreased $104.4 million or 60% during the first three months of 2022 due to forgiveness payments from the SBA. Approximately 96% of total PPP loans have been forgiven.
•Non-owner occupied commercial real estate loans increased $151.2 million or 8% to $2.16 billion at March 31, 2022 compared to $2.01 billion at year-end 2021.
The table below presents the composition of the loan portfolio as of March 31, 2022, and December 31, 2021, in thousands:
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Amount | Percent | Amount | Percent | ||||||||||||||||||||
| Loans receivable held to maturity: | |||||||||||||||||||||||
| Commercial and industrial | $ | 2,814,513 | 27.65 | % | $ | 2,645,085 | 26.57 | % | |||||||||||||||
| PPP | 74,065 | 0.73 | 199,883 | 2.01 | |||||||||||||||||||
| Owner occupied commercial real estate | 2,266,076 | 22.27 | 2,240,334 | 22.51 | |||||||||||||||||||
| Non-owner occupied commercial real estate | 2,161,761 | 21.24 | 2,010,591 | 20.20 | |||||||||||||||||||
| Real estate construction | 842,483 | 8.28 | 856,119 | 8.60 | |||||||||||||||||||
| Agricultural and agricultural real estate | 766,443 | 7.53 | 753,753 | 7.57 | |||||||||||||||||||
| Residential mortgage | 825,242 | 8.11 | 829,283 | 8.33 | |||||||||||||||||||
| Consumer | 426,802 | 4.19 | 419,524 | 4.21 | |||||||||||||||||||
| Gross loans receivable held to maturity | 10,177,385 | 100.00 | % | 9,954,572 | 100.00 | % | |||||||||||||||||
| Allowance for credit losses-loans | (100,522) | (110,088) | |||||||||||||||||||||
| Loans receivable, net | $ | 10,076,863 | $ | 9,844,484 | |||||||||||||||||||
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, 2021.
Total Allowance for Lending Related Credit Losses
The total allowance for lending related credit losses was $116.6 million at March 31, 2022, which was 1.15% of loans, compared to $125.6 million or 1.26% of loans at December 31, 2021. The following table shows, in thousands, the components of the allowance for lending related credit losses as of March 31, 2022, and December 31, 2021:
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Amount | % of Allowance | Amount | % of Allowance | ||||||||||||||||||||
| Quantitative | $ | 81,547 | 69.94 | % | $ | 88,635 | 70.59 | % | |||||||||||||||
| Qualitative | 25,279 | 21.68 | 25,445 | 20.27 | |||||||||||||||||||
| Economic Forecast | 9,775 | 8.38 | 11,470 | 9.14 | |||||||||||||||||||
| Total | $ | 116,601 | 100.00 | % | $ | 125,550 | 100.00 | % | |||||||||||||||
Quantitative Allowance
The quantitative allowance decreased $7.1 million to $81.5 million or 70% of the total allowance for lending related credit losses at March 31, 2022, compared to $88.6 million or 71% of the total allowance at December 31, 2021. Positively impacting the quantitative allowance was a reduction of $95.7 million in nonpass loans since year-end 2021. Included in the quantitative allowance for March 31, 2022, and December 31, 2021, were specific reserves of $3.6 million and $7.6 million, respectively.
Qualitative Allowance
The qualitative allowance totaled $25.3 million or 22% of the total allowance for lending related credit losses at March 31, 2022, compared to $25.4 million or 20% at December 31, 2021. Management assesses several risk factors in the qualitative calculation, and in making its assessment at March 31, 2022, adjusted the level of several factors based on current market conditions and credit quality trends.
Economic Forecasting
The economic forecast allowance was $9.8 million or 8% of the total allowance for lending related credit losses at March 31, 2022, compared to $11.5 million or 9% of the total allowance for lending related credit losses at December 31, 2021. HTLF has access to various third-party economic forecast scenarios provided by Moody's, which are updated quarterly in the methodology. At March 31, 2022, Moody's March 8, 2022, baseline forecast scenario was utilized, which was the most currently available forecast, and HTLF continued to use a one year reasonable and supportable forecast period.
For the March 31, 2022 calculation, the economic outlook factors used to develop the allowance retained a measured level of caution and uncertainty that management deemed appropriate for lingering economic headwinds, such as COVID-19 variants, inflation, supply chain challenges, workforce shortages and wage pressures, that are yet to be resolved.
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, 2022 and 2021, in thousands:
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Balance at beginning of period | $ | 110,088 | $ | 131,606 | |||||||
| Provision (benefit) for credit losses | 2,628 | 16 | |||||||||
| Recoveries on loans previously charged off | 1,023 | 676 | |||||||||
| Charge-offs on loans | (13,217) | (2,126) | |||||||||
| Balance at end of period | $ | 100,522 | $ | 130,172 | |||||||
| Allowance for credit losses for loans as a percent of loans | 0.99 | % | 1.30 | % | |||||||
| Annualized ratio of net charge offs to average loans | 0.49 | % | 0.06 | % | |||||||
The allowance for credit losses for loans totaled $100.5 million at March 31, 2022, compared to $110.1 million at December 31, 2021, and $130.2 million at March 31, 2021. The allowance for credit losses for loans at March 31, 2022, was 0.99% of loans compared to 1.11% of loans at December 31, 2021. The following items have impacted the allowance for credit losses for loans for the three months ended March 31, 2022:
•Net charge offs for the first three months of 2022 totaled $12.2 million compared to $1.5 million for the first three months of 2021, which was an increase of $10.7 million. Included in net charge-offs for the first quarter of 2022 were two charge-offs totaling $9.2 million related to two lending relationships for which information received subsequent to March 31, 2022, indicated collateral deficiencies due to customer fraud as well as a charge-off totaling $2.6 million related to one agricultural-related credit that had been substantially reserved for in a prior period.
•Nonpass loans decreased $95.7 million or 13% to $645.5 million at March 31, 2022 from $741.3 million at December 31, 2021.
The following tables show, in thousands, the changes in the allowance for unfunded commitments for the three months ended March 31, 2022 and 2021:
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Balance at beginning of period | $ | 15,462 | $ | 15,280 | |||||||
| Provision (benefit) for credit losses | 617 | (661) | |||||||||
| Balance at end of period | $ | 16,079 | $ | 14,619 | |||||||
The allowance for unfunded commitments totaled $16.1 million as of March 31, 2022, compared to $15.5 million as of December 31, 2021, and $14.6 million as of March 31, 2021. Unfunded commitments increased $300.1 million to $4.13 billion at March 31, 2022 compared to $3.83 billion at December 31, 2021.
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 of the consolidated financial statements in this Quarterly Report on Form 10-Q.
The nonpass loans totaled $645.5 million or 6.3% of total loans as of March 31, 2022 compared to $741.3 million or 7.4% of total loans as of December 31, 2021. As of March 31, 2022, the nonpass loans consisted of approximately 48% watch loans and 52% substandard loans. The percent of nonpass loans on nonaccrual status as of March 31, 2022, was 10%.
Included in the nonpass loans at March 31, 2022 were $9.2 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% SBA guarantee.
The table below presents the amounts of nonperforming loans and other nonperforming assets on the dates indicated, in thousands:
| March 31, | December 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2021 | 2020 | ||||||||||||||||||||
| Nonaccrual loans | $ | 64,174 | $ | 91,718 | $ | 69,369 | $ | 87,386 | |||||||||||||||
| Loans contractually past due 90 days or more | 246 | 171 | 550 | 720 | |||||||||||||||||||
| Total nonperforming loans | 64,420 | 91,889 | 69,919 | 88,106 | |||||||||||||||||||
| Other real estate | 1,422 | 6,236 | 1,927 | 6,624 | |||||||||||||||||||
| Other repossessed assets | 34 | 239 | 43 | 240 | |||||||||||||||||||
| Total nonperforming assets | $ | 65,876 | $ | 98,364 | $ | 71,889 | $ | 94,970 | |||||||||||||||
Performing troubled debt restructured loans(1) | $ | 882 | $ | 2,394 | $ | 817 | $ | 2,370 | |||||||||||||||
| Nonperforming loans to total loans | 0.63 | % | 0.91 | % | 0.70 | % | 0.88 | % | |||||||||||||||
| Nonperforming assets to total loans plus repossessed property | 0.65 | 0.98 | 0.72 | 0.95 | |||||||||||||||||||
| Nonperforming assets to total assets | 0.34 | 0.54 | 0.37 | 0.53 | |||||||||||||||||||
| (1) Represents accruing troubled debt restructured loans performing according to their restructured terms. | |||||||||||||||||||||||
The performing troubled debt restructured loans above do not include any loan modifications initially made under COVID-19 modification programs. The COVID-19 modification programs expired on January 1, 2022.
The schedules below summarize the changes in nonperforming assets during the three months ended March 31, 2022, in thousands:
| Nonperforming Loans | Other Real Estate Owned | Other Repossessed Assets | Total Nonperforming Assets | ||||||||||||||||||||
| December 31, 2021 | $ | 69,919 | $ | 1,927 | $ | 43 | $ | 71,889 | |||||||||||||||
| Loan foreclosures | (689) | 653 | 36 | — | |||||||||||||||||||
| Net loan charge-offs | (12,194) | — | — | (12,194) | |||||||||||||||||||
| New nonperforming loans | 15,832 | — | — | 15,832 | |||||||||||||||||||
Reduction of nonperforming loans(1) | (8,448) | — | — | (8,448) | |||||||||||||||||||
| OREO/Repossessed assets sales proceeds | — | (1,116) | (41) | (1,157) | |||||||||||||||||||
| OREO/Repossessed assets writedowns, net | — | (42) | (4) | (46) | |||||||||||||||||||
| March 31, 2022 | $ | 64,420 | $ | 1,422 | $ | 34 | $ | 65,876 | |||||||||||||||
| (1) Includes principal reductions and transfers to performing status. | |||||||||||||||||||||||
Total nonperforming assets decreased $6.0 million or 8% to $65.9 million or 0.34% of total assets at March 31, 2022, compared to $71.9 million or 0.37% of total assets at December 31, 2021. Nonperforming loans were $64.4 million at March 31, 2022, compared to $69.9 million at December 31, 2021, which represented 0.63% and 0.70% of total loans at March 31, 2022, and December 31, 2021, respectively. At March 31, 2022, approximately $38.4 million or 60% of HTLF's nonperforming loans had individual loan balances exceeding $1.0 million and represented loans to thirteen borrowers. The portion of the nonperforming nonresidential real estate loans covered by government guarantees totaled $14.8 million at March 31, 2022, compared to $14.5 million at December 31, 2021.
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 37% and 40% of total assets at March 31, 2022, and December 31, 2021, respectively. Total securities carried at fair value as of March 31, 2022, were $7.03 billion, a decrease of $505.1 million or 7% from $7.53 billion at December 31, 2021.
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, 2022, and December 31, 2021, in thousands:
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Amount | Percent | Amount | Percent | ||||||||||||||||||||
| U.S. treasuries | $ | 1,001 | 0.01 | % | $ | 1,008 | 0.01 | % | |||||||||||||||
| U.S. agencies | 86,109 | 1.20 | 193,384 | 2.51 | |||||||||||||||||||
| Obligations of states and political subdivisions | 1,719,702 | 23.92 | 2,169,742 | 28.19 | |||||||||||||||||||
| Mortgage-backed securities - agency | 2,128,163 | 29.60 | 2,349,289 | 30.52 | |||||||||||||||||||
| Mortgage-backed securities - non-agency | 2,013,936 | 28.01 | 1,743,379 | 22.65 | |||||||||||||||||||
| Commercial mortgage-backed securities - agency | 118,555 | 1.65 | 123,912 | 1.61 | |||||||||||||||||||
| Commercial mortgage-backed securities - non-agency | 693,963 | 9.65 | 600,888 | 7.81 | |||||||||||||||||||
| Asset-backed securities | 317,420 | 4.41 | 409,653 | 5.32 | |||||||||||||||||||
| Corporate bonds | 7,648 | 0.11 | 3,040 | 0.04 | |||||||||||||||||||
| Equity securities with a readily determinable fair value | 20,531 | 0.29 | 20,788 | 0.27 | |||||||||||||||||||
| Other securities | 82,751 | 1.15 | 82,567 | 1.07 | |||||||||||||||||||
| Total securities | $ | 7,189,779 | 100.00 | % | $ | 7,697,650 | 100.00 | % | |||||||||||||||
HTLF's securities portfolio had an expected modified duration of 5.54 years as of March 31, 2022, compared to 5.26 years as of December 31, 2021.
At March 31, 2022, HTLF had $82.8 million of other securities, including capital stock in each Federal Home Loan Bank ("FHLB") of which each of its bank subsidiaries is a member. All of these securities were classified as other securities held at cost.
DEPOSITS
Total deposits were $16.67 billion as of March 31, 2022, compared to $16.42 billion at December 31, 2021, an increase of $249.4 million or 2%.
The following table shows the changes in deposit balances by deposit type since year-end 2021, in thousands:
| March 31, 2022 | December 31, 2021 | Change | % Change | ||||||||||||||||||||
| Demand deposits | $ | 6,376,249 | $ | 6,495,326 | $ | (119,077) | (2) | % | |||||||||||||||
| Savings deposits | 9,236,427 | 8,897,909 | 338,518 | 4 | |||||||||||||||||||
| Time deposits | 1,054,008 | 1,024,020 | 29,988 | 3 | |||||||||||||||||||
| Total | $ | 16,666,684 | $ | 16,417,255 | $ | 249,429 | 2 | % | |||||||||||||||
The table below presents the composition of deposits by category as of March 31, 2022, and December 31, 2021, in thousands:
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Amount | Percent | Amount | Percent | ||||||||||||||||||||
| Demand | $ | 6,376,249 | 38.26 | % | $ | 6,495,326 | 39.57 | % | |||||||||||||||
| Savings | 9,236,427 | 55.42 | 8,897,909 | 54.20 | |||||||||||||||||||
| Time | 1,054,008 | 6.32 | 1,024,020 | 6.23 | |||||||||||||||||||
| Total | $ | 16,666,684 | 100.00 | % | $ | 16,417,255 | 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, 2022, and December 31, 2021, in thousands:
| March 31, 2022 | December 31, 2021 | Change | % Change | ||||||||||||||||||||
| Securities sold under agreement to repurchase | $ | 95,466 | $ | 122,996 | $ | (27,530) | (22) | % | |||||||||||||||
| Other short-term borrowings | 11,906 | 8,601 | 3,305 | 38 | |||||||||||||||||||
| Total | $ | 107,372 | $ | 131,597 | $ | (24,225) | (18) | % | |||||||||||||||
Short-term borrowings generally include federal funds purchased, securities sold under agreements to repurchase, short-term FHLB advances and discount window borrowings from the Federal Reserve Bank. These funding alternatives are utilized in varying degrees depending on their pricing and availability. All of HTLF's bank subsidiaries own FHLB stock in one of the Chicago, Dallas, Des Moines, San Francisco or Topeka FHLBs, enabling them to borrow funds from their respective FHLB for short-term or long-term purposes under a variety of programs. The amount of short-term borrowings was $107.4 million at March 31, 2022, compared to $131.6 million at December 31, 2021, a decrease of $24.2 million or 18%.
All of the bank subsidiaries provide retail repurchase agreements to their customers as a cash management tool, which sweep excess funds from demand deposit accounts into these agreements. Although the aggregate balance of these retail repurchase agreements is subject to variation, the account relationships represented by these balances are principally local. The balances of retail repurchase agreements were $95.5 million at March 31, 2022, compared to $123.0 million at December 31, 2021, a decrease of $27.5 million or 22%.
HTLF renewed its revolving credit line agreement with an unaffiliated bank on June 14, 2021. This revolving credit line agreement, which has $75.0 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 2022, and the outstanding balance was $0 at both March 31, 2022, and December 31, 2021.
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, 2022, and December 31, 2021, in thousands:
| March 31, 2022 | December 31, 2021 | Change | % Change | ||||||||||||||||||||
| Advances from the FHLB | $ | 829 | $ | 898 | $ | (69) | (8) | % | |||||||||||||||
| Trust preferred securities | 147,558 | 147,316 | 242 | — | |||||||||||||||||||
| Contracts payable for purchase of real estate and other assets | 1,543 | 1,593 | (50) | (3) | |||||||||||||||||||
| Subordinated notes | 222,360 | 222,265 | 95 | — | |||||||||||||||||||
| Total | $ | 372,290 | $ | 372,072 | $ | 218 | — | % | |||||||||||||||
As of March 31, 2022, the amount of other borrowings was $372.3 million, an increase of $218,000 or less than 1% since year-end 2021.
On September 8, 2021, HTLF closed its public offering of $150.0 million aggregate principal amount of its 2.75% Fixed-to-Floating Rate Subordinated Notes due 2031 (the "subordinated notes"). The net proceeds of the subordinated notes totaled $147.6 million. The notes were registered under HTLF’s effective shelf registration statement and qualify as Tier 2 capital for
regulatory purposes. The net proceeds are expected to be used for general corporate purposes, which may include, without limitation, providing capital to support HTLF's organic growth or growth through strategic acquisitions, financing investments, capital expenditures, investments in the subsidiary banks as regulatory capital, and repaying indebtedness. The subordinated notes have a fixed interest rate of 2.75% until September 15, 2026, at which time the interest rate will be reset quarterly to a benchmark interest rate, which is expected to be three-month term Secure Overnight Financing Rate ("SOFR") plus a spread of 210 basis points. The subordinated notes mature on September 15, 2031, and become redeemable at HTLF's option on September 15, 2026.
HTLF has a non-revolving credit facility with an unaffiliated bank, and at both March 31, 2022 and December 31, 2021, no balance was outstanding on this non-revolving credit line. At March 31, 2022, $3.5 million of borrowing capacity was available on this non-revolving credit facility, of which no balance was drawn.
A schedule of HTLF's trust preferred securities outstanding excluding deferred issuance costs as of March 31, 2022, is as follows, in thousands:
| Amount Issued | Issuance Date | Interest Rate | Interest Rate as of 3/31/2022(1) | Maturity Date | Callable Date | |||||||||||||||||||||||||||||||||
| Heartland Financial Statutory Trust IV | $ | 10,310 | 03/17/2004 | 2.75% over LIBOR | 3.67% | 03/17/2034 | 06/17/2022 | |||||||||||||||||||||||||||||||
| Heartland Financial Statutory Trust V | 20,619 | 01/27/2006 | 1.33% over LIBOR | 1.57 | 04/07/2036 | 07/07/2022 | ||||||||||||||||||||||||||||||||
| Heartland Financial Statutory Trust VI | 20,619 | 06/21/2007 | 1.48% over LIBOR | 2.31 | 09/15/2037 | 06/15/2022 | ||||||||||||||||||||||||||||||||
| Heartland Financial Statutory Trust VII | 18,042 | 06/26/2007 | 1.48% over LIBOR | 2.00 | 09/01/2037 | 06/01/2022 | ||||||||||||||||||||||||||||||||
| Morrill Statutory Trust I | 9,299 | 12/19/2002 | 3.25% over LIBOR | 4.22 | 12/26/2032 | 06/26/2022 | ||||||||||||||||||||||||||||||||
| Morrill Statutory Trust II | 9,004 | 12/17/2003 | 2.85% over LIBOR | 3.77 | 12/17/2033 | 06/17/2022 | ||||||||||||||||||||||||||||||||
| Sheboygan Statutory Trust I | 6,725 | 09/17/2003 | 2.95% over LIBOR | 3.87 | 09/17/2033 | 06/17/2022 | ||||||||||||||||||||||||||||||||
| CBNM Capital Trust I | 4,520 | 09/10/2004 | 3.25% over LIBOR | 4.08 | 12/15/2034 | 06/15/2022 | ||||||||||||||||||||||||||||||||
| Citywide Capital Trust III | 6,563 | 12/19/2003 | 2.80% over LIBOR | 3.10 | 12/19/2033 | 07/23/2022 | ||||||||||||||||||||||||||||||||
| Citywide Capital Trust IV | 4,425 | 09/30/2004 | 2.20% over LIBOR | 2.68 | 09/30/2034 | 05/23/2022 | ||||||||||||||||||||||||||||||||
| Citywide Capital Trust V | 12,255 | 05/31/2006 | 1.54% over LIBOR | 2.37 | 07/25/2036 | 06/15/2022 | ||||||||||||||||||||||||||||||||
| OCGI Statutory Trust III | 3,014 | 06/27/2002 | 3.65% over LIBOR | 3.89 | 09/30/2032 | 06/30/2022 | ||||||||||||||||||||||||||||||||
| OCGI Capital Trust IV | 5,469 | 09/23/2004 | 2.50% over LIBOR | 3.33 | 12/15/2034 | 06/15/2022 | ||||||||||||||||||||||||||||||||
| BVBC Capital Trust II | 7,288 | 04/10/2003 | 3.25% over LIBOR | 3.57 | 04/24/2033 | 07/24/2022 | ||||||||||||||||||||||||||||||||
| BVBC Capital Trust III | 9,449 | 07/29/2005 | 1.60% over LIBOR | 2.61 | 09/30/2035 | 06/30/2022 | ||||||||||||||||||||||||||||||||
| Total trust preferred costs | 147,601 | |||||||||||||||||||||||||||||||||||||
| Less: deferred issuance costs | (43) | |||||||||||||||||||||||||||||||||||||
| $ | 147,558 | |||||||||||||||||||||||||||||||||||||
(1) Effective weighted average interest rate as of March 31, 2022, was 3.06%. | ||||||||||||||||||||||||||||||||||||||
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 bank subsidiaries as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the categorization of any of these entities.
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, 2022 | 15.65 | % | 12.30 | % | 11.46 | % | 8.71 | % | |||||||||||||||
| 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 | $ | 13,189,572 | $ | 13,189,572 | $ | 13,189,572 | N/A | ||||||||||||||||
| Average assets | N/A | N/A | N/A | $ | 18,633,619 | ||||||||||||||||||
| December 31, 2021 | 15.90 | % | 12.39 | % | 11.53 | % | 8.57 | % | |||||||||||||||
| 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 | $ | 12,829,318 | $ | 12,829,318 | $ | 12,829,318 | N/A | ||||||||||||||||
| Average assets | N/A | N/A | N/A | $ | 18,553,872 | ||||||||||||||||||
At March 31, 2022, and December 31, 2021, retained earnings that could be available for the payment of dividends to meet the minimum capital requirements totaled $771.1 million and $758.6 million, respectively. Retained earnings that could be available for the payment of dividends to HTLF from its banks totaled approximately $507.5 million and $502.1 million at March 31, 2022, and December 31, 2021, 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.
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, 2019, 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, 2022.
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. HTLF's bank subsidiaries evaluate the creditworthiness of customers to which they extend a credit commitment on a case-by-case basis and may require collateral to secure any credit extended. The amount of collateral obtained is based upon management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties. Standby letters of credit and financial guarantees are conditional commitments issued by the bank subsidiaries to guarantee the performance of a
customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. At March 31, 2022, and December 31, 2021, commitments to extend credit aggregated $3.72 billion and $3.83 billion, respectively. Standby letters of credit aggregated $50.7 million at March 31, 2022, and $51.4 million at December 31, 2021.
At March 31, 2022, and December 31, 2021, HTLF's banks had $800.7 million and $735.3 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, 2021. 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.
HTLF continues to explore opportunities to expand the size of its banking footprint. In the current banking industry environment, HTLF seeks these opportunities for growth through acquisitions. HTLF is primarily focused on possible acquisitions in the markets it currently serves, in which there would be an opportunity to increase market share, achieve efficiencies and provide greater convenience for current customers. However, HTLF may also pursue acquisitions in areas outside of its current geographic footprint. Future expenditures relating to expansion efforts, in addition to those identified above, cannot be estimated at this time.
Derivative Financial Instruments
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, 2022, HTLF had $604.9 million of cash and cash equivalents, time deposits in other financial institutions of $2.9 million and securities carried at fair value of $7.03 billion.
Management of investing and financing activities, and market conditions, determine the level and the stability of net interest cash flows. Management attempts to mitigate the impact of changes in market interest rates to the extent possible, so that balance sheet growth is the principal determinant of growth in net interest cash flows.
Short-term borrowing balances are dependent on commercial cash management and smaller correspondent bank relationships and, as a result, will normally fluctuate. Management believes these balances, on average, to be stable sources of funds; however, HTLF intends to rely on deposit growth and additional FHLB and discount window borrowings as needed in the future.
Additional funding is provided by long-term debt and short-term borrowings. In the event of short-term liquidity needs, HTLF's banks may purchase federal funds from each other or from correspondent banks and may also borrow from the Federal Reserve Bank. As of March 31, 2022, short-term borrowings outstanding totaled $107.4 million.
As of March 31, 2022, HTLF had $372.3 million of long-term debt outstanding, and it is an important funding source because of its multi-year borrowing structure. Additionally, the subsidiary banks' FHLB memberships give them the ability to borrow funds for short-term and long-term purposes under a variety of programs. At March 31, 2022, HTLF had $790.0 million of borrowing capacity under these programs. Additionally, at March 31, 2022, HTLF had $554.0 million of borrowing capacity at the Federal Reserve Banks' discount window.
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 bank subsidiaries and the issuance of debt and equity securities.
At March 31, 2022, the parent company had cash of $214.2 million. Additionally, HTLF has a revolving credit agreement and non-revolving credit line with an unaffiliated bank, which is renewed annually, most recently on June 14, 2021. The revolving credit agreement has $75.0 million of maximum borrowing capacity, of which none was outstanding at March 31, 2022. At March 31, 2022, $3.5 million was available on the non-revolving credit line. These credit agreements contain specific financial covenants, all of which HTLF complied with as of March 31, 2022.
The ability of HTLF to pay dividends to its stockholders is dependent upon dividends paid to HTLF by its subsidiaries. The bank subsidiaries are subject to statutory and regulatory restrictions on the amount they may pay in dividends. To maintain acceptable capital ratios at HTLF's bank subsidiaries, 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 2022.
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 2022.
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 bank subsidiaries 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 bank subsidiaries. Included in these reviews are interest rate sensitivity analyses, which simulate changes in net interest income in response to various interest rate scenarios. These analyses consider current portfolio rates, existing maturities, repricing opportunities and market interest rates, in addition to prepayments and growth under different interest rate assumptions. Selected strategies are modeled prior to implementation to determine their effect on 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, 2022, and March 31, 2021, provided the following results, in thousands:
| 2022 | 2021 | ||||||||||||||||||||||
| Net Interest Margin | % Change From Base | Net Interest Margin | % Change From Base | ||||||||||||||||||||
| Year 1 | |||||||||||||||||||||||
| Down 100 Basis Points | $ | 528,585 | (1.79) | % | $ | 492,640 | (2.09) | % | |||||||||||||||
| Base | 538,243 | — | 503,131 | — | |||||||||||||||||||
| Up 200 Basis Points | 560,459 | 4.13 | 529,261 | 5.19 | |||||||||||||||||||
| Year 2 | |||||||||||||||||||||||
| Down 100 Basis Points | $ | 517,169 | (3.92) | % | $ | 454,170 | (9.73) | % | |||||||||||||||
| Base | 557,176 | 3.52 | 489,874 | (2.63) | |||||||||||||||||||
| Up 200 Basis Points | 610,213 | 13.37 | 562,260 | 11.75 | |||||||||||||||||||
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, 2022, 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, 2022, 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 2021 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 $91.1 million as of March 31, 2022, 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, 2022.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
Exhibits
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| 101 | Financial statement formatted in Inline Extensible Business Reporting Language: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Changes in Equity, and (vi) the Notes to Consolidated Financial Statements. | |||||||||||||
| 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.
| HEARTLAND FINANCIAL USA, INC. | ||
| (Registrant) | ||
| /s/ Bruce K. Lee | ||
| By: Bruce K. Lee | ||
| President and Chief Executive Officer | ||
| (Principal Executive Officer and Duly Authorized Officer) | ||
| /s/ Bryan R. McKeag | ||
| By: Bryan R. McKeag | ||
| Executive Vice President and Chief Financial Officer | ||
| (Principal Financial Officer and Duly Authorized Officer) | ||
| /s/ Janet M. Quick | ||
| By: Janet M. Quick | ||
| Executive Vice President and Deputy Chief Financial Officer | ||
| (Principal Accounting Officer and Duly Authorized Officer) | ||
| Dated: May 9, 2022 | ||