NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The interim unaudited consolidated financial statements contained herein should be read in conjunction with the audited consolidated financial statements and accompanying notes to the consolidated financial statements for the fiscal year ended December 31, 2019, included in the Form 10-K of Heartland Financial USA, Inc. ("Heartland") filed with the Securities and Exchange Commission ("SEC") on February 26, 2020. Footnote disclosures to the interim unaudited consolidated financial statements which would substantially duplicate the disclosure contained in the footnotes to the audited consolidated financial statements have been omitted.
The financial information of Heartland included herein has been prepared in accordance with U.S. generally accepted accounting principles for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X. Such information reflects all adjustments (consisting of normal recurring adjustments), that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of the interim period ended June 30, 2020, are not necessarily indicative of the results expected for the year ending December 31, 2020.
Earnings Per Share
Basic earnings per share is determined using net income available to common stockholders and weighted average common shares outstanding. Diluted earnings per share is computed by dividing net income available to common stockholders by the weighted average common shares and assumed incremental common shares issued. Amounts used in the determination of basic and diluted earnings per share for the three- and six--month periods ended June 30, 2020, and 2019, are shown in the table below:
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Three Months Ended
June 30,
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(Dollars and number of shares in thousands, except per share data)
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2020
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|
2019
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Net income available to stockholders
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$
|
30,131
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|
|
$
|
45,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding for basic earnings per share
|
36,881
|
|
|
35,744
|
|
Assumed incremental common shares issued upon vesting of outstanding restricted stock units
|
35
|
|
|
135
|
|
Weighted average common shares for diluted earnings per share
|
36,916
|
|
|
35,879
|
|
Earnings per common share — basic
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$
|
0.82
|
|
|
$
|
1.26
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|
Earnings per common share — diluted
|
$
|
0.82
|
|
|
$
|
1.26
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|
Number of antidilutive common stock equivalents excluded from diluted earnings per share computation
|
54
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|
|
7
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|
|
|
|
|
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Six Months Ended
June 30,
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(Dollars and number of shares in thousands, except per share data)
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2020
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|
2019
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|
|
|
|
|
|
|
|
|
|
|
|
Net income available to stockholders
|
$
|
50,171
|
|
|
$
|
76,666
|
|
|
|
|
|
Weighted average common shares outstanding for basic earnings per share
|
36,851
|
|
|
35,157
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|
Assumed incremental common shares issued upon vesting of outstanding restricted stock units
|
69
|
|
|
138
|
|
Weighted average common shares for diluted earnings per share
|
36,920
|
|
|
35,295
|
|
Earnings per common share — basic
|
$
|
1.36
|
|
|
$
|
2.18
|
|
Earnings per common share — diluted
|
$
|
1.36
|
|
|
$
|
2.17
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|
Number of antidilutive common stock equivalents excluded from diluted earnings per share computation
|
1
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|
|
7
|
|
Subsequent Events - Heartland has evaluated subsequent events that may require recognition or disclosure through the filing date of this Quarterly Report on Form 10-Q with the SEC.
Effect of New Financial Accounting Standards
ASU 2016-13
On January 1, 2020, Heartland adopted Accounting Standards Update ("ASU") 2016-13, "Financial Instruments - Credit Losses (Topic 326),", which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss ("CECL") methodology. Also on January 1, 2020, Heartland adopted ASU 2019-04, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments," which amended certain provisions contained in ASU 2016-13, particularly by including accrued interest in the definition of amortized cost, as well as by clarifying that loan extension and renewal options in the original or modified contract that are not unconditionally cancelable by the entity should be considered in the entity's determination of expected credit losses. Also on January 1, 2020, Heartland adopted ASU 2019-11, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses," which amended certain aspects of ASU 2016-13.
The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, which includes loans held to maturity and held to maturity debt securities. It also applies to available for sale debt securities and off-balance sheet unfunded loan commitments. Heartland adopted ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized cost basis and off-balance sheet unfunded loan commitments. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP.
Heartland's adoption of ASU 2016-13 resulted in an increase of $12.1 million to the allowance for credit losses related to loans, which included the addition of $6.0 million of purchased credit impaired discount on previously acquired loans and a cumulative-effect adjustment to retained earnings totaling $4.6 million, net of taxes of $1.5 million. Heartland adopted ASU 2016-13 using the prospective transition approach for loans purchased with credit deterioration ("PCD") that were previously classified as purchased credit impaired ("PCI") and accounted for under Accounting Standards Codification ("ASC") 310-30. In accordance with ASC 326, Heartland did not reassess whether PCI loans met the criteria of PCD loans as of the adoption date.
The adoption of ASU 2016-13 resulted in an increase of $13.6 million to the allowance for unfunded commitments and a cumulative-effect adjustment to retained earnings totaling $10.2 million, net of taxes of $3.4 million.
The adoption of ASU 2016-13 also established an allowance for credit losses for Heartland's held to maturity debt securities of $158,000 and a cumulative-effect adjustment to retained earnings totaling $118,000, net of taxes of $40,000. Heartland did not record an allowance for credit losses for Heartland's available for sale debt securities upon adoption of ASU 2016-13.
The total result of the adoption of ASU 2016-13 was a cumulative-effect adjustment to Heartland's retained earnings of $14.9 million, net of taxes of $5.0 million.
Heartland elected to not measure an allowance for credit losses on accrued interest as such accrued interest is written off in a timely manner when deemed uncollectible. Any such write-off of accrued interest will reverse previously recognized interest income. Heartland elected to not include accrued interest within the presentation and disclosures of the carrying amount of financial assets held at amortized cost. This election is applicable to the various disclosures included within the consolidated financial statements and notes contained in this Quarterly Report on Form 10-Q.
The adoption of ASU 2019-04 did not have a material impact on Heartland's results of operation or financial condition.
Heartland elected not to utilize the regulatory transition relief issued by federal regulatory authorities in the first quarter of 2020, which allowed banking institutions to delay the impact of CECL on regulatory capital because the impact on the capital ratios of Heartland and its subsidiary banks was not significant.
Loans Held to Maturity
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost, which is the principal amount outstanding, net of cumulative charge-offs, unamortized net deferred loan origination fees and costs and unamortized premiums or discounts on purchased loans. Heartland has a loan policy which establishes the credit risk appetite, lending standards and underwriting criteria designed so that Heartland may extend credit in a prudent and sound manner. The Heartland board of directors reviews and approves the loan policy on a regular basis. A reporting system supplements the review process by providing management and the board with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming loans and potential problem loans.
Heartland originates commercial and industrial loans and owner occupied commercial real estate loans for a wide variety of business purposes, including lines of credit for capital and operating purposes and term loans for real estate and equipment purchases. Non-owner occupied commercial real estate loans provide financing for various non-owner occupied or income producing properties. Real estate construction loans are generally short-term or interim loans that provide financing for acquiring or developing commercial income properties, multi-family projects or single-family residential homes. Agricultural and agricultural real estate loans provide financing for capital improvements and farm operations, as well as livestock and machinery purchases. Residential real estate loans are originated for the purchase or refinancing of single family residential properties. Consumer loans include loans for motor vehicles, home improvement, home equity and personal lines of credit.
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Heartland’s policy is to discontinue the accrual of interest income on any loan when, in the opinion of management, there is a reasonable doubt as to the timely collection of the interest and principal, normally when a loan is 90 days past due. When interest accruals are deemed uncollectible, interest credited to income in the current year is reversed and interest accrued in prior years is charged to the allowance for credit losses. A loan can be restored to accrual status if the borrower has resumed paying the full amount of the scheduled contractual interest and principal payments on the loan, and (1) all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within a reasonable period of time, and (2) there is a sustained period of repayment performance (generally a minimum of six months) by the borrower in accordance with the scheduled contractual terms.
Allowance for Credit Losses on Loans
The allowance for credit losses is a valuation account that is deducted from the loans held to maturity amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of the amounts previously charged off.
Heartland's allowance model is designed to consider the current contractual term of the loan, defined as starting as of the most recent renewal date and ending at maturity date. Prepayments are implicit in the model.
Management's estimation of expected credit losses is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Historical loss experience is generally the starting point for estimating expected credit losses. Adjustments are made to historical loss experience to reflect differences in asset-specific risk characteristics, such as underwriting standards, portfolio mix or asset terms and differences in economic conditions, both current conditions and reasonable and supportable forecasts. If Heartland is not able to make or obtain reasonable and supportable forecasts for the entire life of the financial asset, it is required to estimate expected credit losses for the remaining life using an approach that reverts to historical credit loss information. The components of the allowance for credit losses are described more specifically below.
Quantitative Factors
The quantitative component of the allowance for credit losses is measured using historical loss experience using a look-back period, currently over the most recent 12 years, on a pool basis for loans with similar risk characteristics. Heartland utilizes third-party software to calculate the expected credit losses. The risks in the commercial and industrial loan portfolio include the unpredictability of the cash flow of the borrowers and the variability in the value of the collateral securing the loans. Owner occupied commercial real estate loans are dependent upon the cash flow of the borrowers and the collateral value of the real estate. Non-owner occupied commercial real estate loans are typically dependent, in large part, on sufficient income from the properties securing the loans to cover the operating expenses and debt service. Real estate construction loans involve additional risks because funds are advanced based upon estimates of costs and the estimated value of the completed project. Additionally, real estate construction loans have a greater risk of default in a weaker economy because the source of repayment is reliant on the successful and timely sale of the project. Agricultural and agricultural real estate loans are dependent upon the profitable operation or management of the farm property securing the loan. Loans secured by farm equipment, livestock or crops may not provide an adequate source of repayment because of damage or depreciation. Residential real estate loans are dependent upon the borrower's ability to repay the loan and the underlying collateral value. Consumer loans are dependent upon the borrower's personal financial circumstances and continued financial stability.
If a loan no longer shares similar risk characteristics with other loans in the pool and does not share similar risk characteristics with another pool, it is evaluated on an individual basis and is not included in the collective evaluation. Heartland will individually assess loans that are collateral dependent. A loan is collateral-dependent when the debtor is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. For those loans that are deemed collateral dependent and in foreclosure the impairment will be recognized by creating a specific reserve against
the loan with a corresponding charge to provision expense. In most cases, the specific reserve will be charged off in the same quarter as the loss is probable. Individually assessed loans will be considered non-accrual since it is probable that the collection of all principal and interest will not occur. In some cases when foreclosure is not probable, but Heartland believes certain loans do not share the same risk characteristics with the like loans in the pool, the standard allows for these loans to be individually assessed. All individually assessed calculations are completed at least annually.
Qualitative Factors
Heartland's allowance methodology also has a qualitative component, the purpose of which is to provide management with a means to take into consideration changes in current conditions that could potentially have an effect, up or down, on the level of recognized loan losses, that, for whatever reason, fail to show up in the quantitative analysis performed in determining its base loan loss rates.
Heartland utilizes the following qualitative factors:
•changes in lending policies and procedures
•changes in the nature and volume of loans
•experience and ability of management
•changes in the credit quality of the loan portfolio
•risk in acquired portfolios
•concentrations of credit
•other external factors
The qualitative adjustments are based on the comparison of the current condition to the average condition over the look back period. The adjustment amount can be either positive or negative depending whether or not the current condition is better or worse than the historical average. Heartland incorporates the adjustments for changes in current conditions using an overlay method. The adjustments are applied as a percentage adjustment in addition to the calculated historical loss rates of each pool. These adjustments reflect the extent to which Heartland expects current conditions to differ from the conditions that existed for the period over which historical information was evaluated. Heartland utilizes anchoring to determine the minimum and maximum amount of qualitative allowance for credit losses, which is determined by comparing the highest and lowest historical rate to the average loss rate to calculate the rate for the adjustment.
Economic Forecasting
Heartland utilizes an overlay method for its economic forecasting component, similar to the method utilized for the qualitative factors. The length of the reasonable and supportable forecast period is a judgmental determination based on the level to which the entity can support its forecast of economic conditions that drive its estimate of expected loss. Heartland compares forecasted economic indices, such as unemployment and gross domestic product, to the economic conditions that existed over Heartland's look-back period.
It is expected that actual economic conditions will, in many circumstances, turn out differently than forecasted because the ultimate outcomes during the forecast period may be affected by events that were unforeseen, such as economic disruption and fiscal or monetary policy actions, which are exacerbated by longer forecasting periods. This uncertainty would be relevant to the entity’s confidence level as to the outcomes being forecasted. That is, an entity is likely less confident in the ultimate outcome of events that will occur at the end of the forecast period as compared to the beginning. As a result, actual future economic conditions may not be an effective indicator of the quality of management’s forecasting process, including the length of the forecast period.
Heartland has access to various third-party economic forecast scenarios provided by Moody's, which are updated quarterly in Heartland's methodology. Because Heartland is applying the economic forecast adjustment qualitatively, the concept of "reversion to the historical mean" does not apply. For Heartland's January 1, 2020 calculation, a two-year reasonable and supportable forecast period was used. Because of the economic uncertainty associated with COVID-19, Heartland utilized a one-year reasonable and supportable forecast period for the calculation of both the March 31, 2020, and June 30, 2020, allowance for credit losses.
Allowance for Credit Losses on Unfunded Loan Commitments
Heartland estimates expected credit losses over the contractual term of the loan for the unfunded portion of the loan commitment that is not unconditionally cancellable by Heartland. Management uses an estimated average utilization rate to determine the exposure at default. The allowance for unfunded commitments is recorded in the Accrued Expenses and Other Liabilities section of the consolidated balance sheets.
Allowance for Credit Losses on Held to Maturity Debt Securities
Heartland measures expected credit losses on held to maturity debt securities on a collective basis based on security type. The estimate of expected credit losses considers historical credit information that is adjusted for current conditions and supportable forecasts. Heartland's held to maturity debt securities consist primarily of investment grade obligations of states and political subdivisions. The forecast and forecast period used in the calculation of allowance for credit losses on loans is used in calculating the allowance for credit losses on held to maturity debt securities, and Heartland utilizes a third-party to calculate the expected credit losses.
Allowance for Credit Losses on Available for Sale ("AFS") Debt Securities
ASU 2016-13 modifies the impairment model for AFS debt securities. AFS debt securities in unrealized loss positions are evaluated for credit related loss at least quarterly. The decline in fair value of an AFS debt security due to credit loss results in recording an allowance for credit losses to the extent the fair value is less than the amortized cost basis. Declines in fair value that have not been recorded through an allowance for credit losses, such as declines due to changes in market interest rates, are recorded through other comprehensive income, net of applicable taxes. Although these evaluations involve significant judgment, an unrealized loss in the fair value of a debt security is generally considered to not be related to credit when the fair value of the security is below the carrying value primarily due to changes in risk-free interest rates, there has not been significant deterioration in the financial condition of the issuer, and Heartland does not intend to sell nor does it believe it will be required to sell the security before the recovery of its cost basis.
Heartland did not record an allowance for credit losses on AFS debt securities upon adoption of ASU 2016-13 or at June 30, 2020.
ASU 2017-04
In January 2017, the Financial Accounting Standards Board ("FASB") issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350)." The amendments in this ASU simplify the subsequent measurement of goodwill by eliminating step two from the goodwill impairment test. Instead, an entity performs only step one of its quantitative goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and then recognizing the impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized cannot exceed the total amount of goodwill allocated to that reporting unit. An entity has the option to perform a qualitative assessment for a reporting unit to determine if the quantitative step one impairment test is necessary. This ASU is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and is applied prospectively. Early adoption was permitted, including in an interim period for impairment tests performed after January 1, 2017. Heartland adopted ASU 2017-04 in the first quarter of 2020.
Heartland used this approach to evaluate its goodwill during the second quarter of 2020, as an unprecedented deterioration in economic conditions triggered by the COVID-19 pandemic caused a significant decline in stock market valuations, including Heartland's common stock price. Based on this goodwill impairment assessment, Heartland concluded that its goodwill was not impaired.
ASU 2018-13
In August 2018, the FASB issued ASU 2018-13, "Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." ASU 2018-13 eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities are no longer required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy but are required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption was permitted. Heartland adopted this ASU on January 1, 2020, as required, and because ASU 2018-13 only revised disclosure requirements, the adoption of this ASU did not have a material impact on its results of operations, financial position and liquidity.
ASU 2018-16
In October 2018, the FASB issued ASU 2018-16, "Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting." In the United States, eligible benchmark interest rates under Topic 815 are interest rates on direct Treasury obligations of the U.S. government, the London Interbank Offered Rate ("LIBOR") swap rate, and the Overnight Index Swap ("OIS") Rate based on the Fed Funds Effective Rate. When the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, in August 2017, it introduced the Securities Industry and Financial Markets Association ("SIFMA") Municipal Swap Rate as the fourth permissible U.S. benchmark rate. ASU 2018-16 adds the OIS rate based on the Secured Overnight Financing Rate ("SOFR") as a U.S. benchmark interest rate to facilitate the LIBOR to SOFR
transition and provide sufficient lead time for entities to prepare for changes to interest rate risk hedging strategies for both risk management and hedge accounting purposes. ASU 2018-16 became effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years and the financial statement impact immediately upon adoption was immaterial. The future financial statement impact will depend on any new contracts entered into using new benchmark rates, as well as any existing contracts that are migrated from LIBOR to new benchmark interest rates. Heartland is currently evaluating the impact of the transition from LIBOR as an interest rate benchmark to other potential alternative reference rates, including but not limited to the SOFR. Currently, Heartland has adjustable rate loans, several debt obligations and derivative instruments in place that reference LIBOR-based rates. The transition from LIBOR is expected to take place at the end of 2021, and management will continue to actively assess the related opportunities and risks involved in this transition.
ASU 2019-12
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes." ASU 2019-12 simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. ASU 2019-12 also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. Heartland intends to adopt this ASU on January 1, 2021, as required, and the adoption is not expected to have a material impact on its results of operations, financial position and liquidity.
ASU 2020-02
In February 2020, the FASB issued ASU 2020-02, "Financial Instruments - Credit losses (Topic 326) and Leases (Topic 842)," which incorporates SEC Staff Accounting Bulletin ("SAB") 119 (updated from SAB 102) into the ASC by aligning SEC recommended policies and procedures with ASC 326. ASU 2020-02 was effective immediately for Heartland and had no significant impact on its results of operations, financial position and liquidity.
ASU 2020-03
In March 2020, the FASB issued ASU 2020-03, "Codification Improvements to Financial Instruments," which revised a wide variety of topics in the ASC with the intent to make the ASC easier to understand and apply by eliminating inconsistencies and providing clarifications. ASU 2020-03 was effective immediately upon its release, and the adoption did not have a material impact on Heartland's results of operations, financial position and liquidity.
ASU 2020-04
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform," which provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For loan and lease agreements that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate, and the modifications would be considered "minor" with the result that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement, with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for derivative accounting. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-04 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic within the ASC, ASU 2020-04 must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. Heartland anticipates that ASU 2020-04 will simplify any modifications executed between the selected start date and December 31, 2022 that are directly related to LIBOR transition by allowing prospective recognition of the continuation of the contract, rather than extinguishment of the old contract that would result in writing off unamortized fees/costs. Management will continue to actively assess the impacts of ASU 2020-04 and the related opportunities and risks involved in the LIBOR transition.
NOTE 2: ACQUISITIONS
Pending Acquisition
Johnson Bank branches
On June 9, 2020, Arizona Bank & Trust ("AB&T"), which is a wholly-owned subsidiary of Heartland headquartered in Phoenix, Arizona, entered into a purchase and assumption agreement, pursuant to which AB&T will acquire certain assets and will assume substantially all of the deposits and certain other liabilities of Johnson Bank's Arizona operations, which includes four banking centers. Johnson Bank is a wholly-owned subsidiary of Johnson Financial Group, Inc., headquartered in Racine, Wisconsin. Johnson Insurance Services is not a part of this transaction.
Under the terms of the purchase and assumption agreement, AB&T will acquire Johnson Bank's Arizona banking centers, which had deposits of approximately $415.3 million and loans of approximately $168.1 million as of June 30, 2020. The actual amount of deposits assumed and loans acquired will be determined at closing. Because the purchase and assumption agreement was signed on June 9, 2020, and the transaction is expected to close in the fourth quarter of 2020, the transaction had no impact on Heartland's consolidated financial statements for the six months ended June 30, 2020.
Pending Acquisition
AIM Bancshares, Inc.
On February 11, 2020, Heartland entered into a definitive merger agreement to acquire AIM Bancshares, Inc., and its wholly-owned subsidiary, AimBank, headquartered in Levelland, Texas. Shareholders of AIM Bancshares will receive 207.0 shares of Heartland common stock and $685.00 of cash for each share of AIM Bancshares. The transaction value will change due to fluctuations in the price of Heartland common stock and is subject to certain potential adjustments as set forth in the merger agreement. Simultaneous with the closing of the transaction, AimBank will merge into Heartland's Texas-based subsidiary, First Bank & Trust, and the combined entity will operate as First Bank & Trust. As of June 30, 2020, AimBank had total assets of $1.95 billion, $1.19 billion of gross loans outstanding, and $1.69 billion of deposits. Heartland and AIM Bancshares, Inc. are currently reviewing the corporate structure and terms of the transaction. Because the merger agreement was signed on February 11, 2020 and the transaction did not close prior to June 30, 2020, the transaction had no impact on Heartland's consolidated financial statements for the six months ended June 30, 2020.
Rockford Bank and Trust Company
On November 30, 2019, Heartland's Illinois Bank & Trust subsidiary completed its acquisition of substantially all of the assets and substantially all of the deposits and certain other liabilities of Rockford Bank and Trust Company, headquartered in Rockford, Illinois. Rockford Bank and Trust Company was a wholly-owned subsidiary of Moline, Illinois-based QCR Holdings, Inc. As of the closing date, Rockford Bank and Trust Company had, at fair value, total assets of $495.7 million, which included $354.0 million of gross loans held to maturity, and $430.3 million of deposits. The all-cash payment was approximately $46.6 million.
Blue Valley Ban Corp.
On May 10, 2019, Heartland completed the acquisition of Blue Valley Ban Corp. ("BVBC") and its wholly-owned subsidiary, Bank of Blue Valley, headquartered in Overland Park, Kansas. Based on Heartland's closing common stock price of $44.78 per share on May 10, 2019, the aggregate consideration paid to BVBC common shareholders was $92.3 million, which was paid by delivery of 2,060,258 shares of Heartland common stock. On the closing date, in addition to this merger consideration, Heartland provided BVBC the funds necessary to repay outstanding debt of $6.9 million, and Heartland assumed $16.1 million of trust preferred securities at fair value. Immediately following the closing of the transaction, Bank of Blue Valley was merged with and into Heartland's wholly-owned Kansas subsidiary, Morrill & Janes Bank and Trust Company, and the combined entity operates under the Bank of Blue Valley brand. As of the closing date, BVBC had, at fair value, total assets of $766.2 million, total loans held to maturity of $542.0 million, and total deposits of $617.1 million. The transaction was a tax-free reorganization with respect to the stock consideration received by the stockholders of BVBC.
NOTE 3: SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair values of debt securities available for sale and equity securities with a readily determinable fair value that are carried at fair value as of June 30, 2020, and December 31, 2019, are summarized in the table below, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair
Value
|
June 30, 2020
|
|
|
|
|
|
|
|
U.S. government corporations and agencies
|
$
|
5,745
|
|
|
$
|
97
|
|
|
$
|
—
|
|
|
$
|
5,842
|
|
Mortgage and asset-backed securities
|
3,130,605
|
|
|
45,792
|
|
|
(41,958)
|
|
|
3,134,439
|
|
Obligations of states and political subdivisions
|
919,665
|
|
|
49,828
|
|
|
(2,814)
|
|
|
966,679
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
4,056,015
|
|
|
95,717
|
|
|
(44,772)
|
|
|
4,106,960
|
|
Equity securities with a readily determinable fair value
|
19,391
|
|
|
—
|
|
|
—
|
|
|
19,391
|
|
Total
|
$
|
4,075,406
|
|
|
$
|
95,717
|
|
|
$
|
(44,772)
|
|
|
$
|
4,126,351
|
|
December 31, 2019
|
|
|
|
|
|
|
|
U.S. government corporations and agencies
|
$
|
9,844
|
|
|
$
|
49
|
|
|
$
|
—
|
|
|
$
|
9,893
|
|
Mortgage and asset-backed securities
|
2,579,081
|
|
|
17,200
|
|
|
(19,003)
|
|
|
2,577,278
|
|
Obligations of states and political subdivisions
|
704,073
|
|
|
12,516
|
|
|
(9,399)
|
|
|
707,190
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
3,292,998
|
|
|
29,765
|
|
|
(28,402)
|
|
|
3,294,361
|
|
Equity securities with a readily determinable fair value
|
18,435
|
|
|
—
|
|
|
—
|
|
|
18,435
|
|
Total
|
$
|
3,311,433
|
|
|
$
|
29,765
|
|
|
$
|
(28,402)
|
|
|
$
|
3,312,796
|
|
The amortized cost, gross unrealized gains and losses and estimated fair values of held to maturity securities as of June 30, 2020, and December 31, 2019, are summarized in the table below, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair
Value
|
|
Allowance for Credit Losses
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
$
|
90,641
|
|
|
$
|
10,916
|
|
|
$
|
—
|
|
|
$
|
101,557
|
|
|
$
|
(62)
|
|
Total
|
$
|
90,641
|
|
|
$
|
10,916
|
|
|
$
|
—
|
|
|
$
|
101,557
|
|
|
$
|
(62)
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
$
|
91,324
|
|
|
$
|
9,160
|
|
|
$
|
—
|
|
|
$
|
100,484
|
|
|
$
|
—
|
|
Total
|
$
|
91,324
|
|
|
$
|
9,160
|
|
|
$
|
—
|
|
|
$
|
100,484
|
|
|
$
|
—
|
|
As of June 30, 2020, Heartland had $14.5 million of accrued interest receivable, which is included in other assets on the consolidated balance sheet. Heartland does not consider accrued interest receivable in the carrying amount of financial assets held at amortized cost basis or in the allowance for credit losses calculation.
The amortized cost and estimated fair value of investment securities carried at fair value at June 30, 2020, by contractual maturity, are as follows, in thousands. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
Amortized Cost
|
|
Estimated Fair Value
|
Due in 1 year or less
|
$
|
9,026
|
|
|
$
|
9,079
|
|
Due in 1 to 5 years
|
22,916
|
|
|
23,333
|
|
Due in 5 to 10 years
|
77,716
|
|
|
81,897
|
|
Due after 10 years
|
815,752
|
|
|
858,212
|
|
Total debt securities
|
925,410
|
|
|
972,521
|
|
Mortgage and asset-backed securities
|
3,130,605
|
|
|
3,134,439
|
|
Equity securities with a readily determinable fair value
|
19,391
|
|
|
19,391
|
|
Total investment securities
|
$
|
4,075,406
|
|
|
$
|
4,126,351
|
|
The amortized cost and estimated fair value of debt securities held to maturity at June 30, 2020, by contractual maturity, are as follows, in thousands. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
Amortized Cost
|
|
Estimated Fair Value
|
Due in 1 year or less
|
$
|
1,814
|
|
|
$
|
1,840
|
|
Due in 1 to 5 years
|
17,582
|
|
|
18,389
|
|
Due in 5 to 10 years
|
59,986
|
|
|
65,872
|
|
Due after 10 years
|
11,259
|
|
|
15,456
|
|
Total debt securities
|
90,641
|
|
|
101,557
|
|
Allowance for credit losses
|
(62)
|
|
|
—
|
|
Total investment securities
|
$
|
90,579
|
|
|
$
|
101,557
|
|
As of June 30, 2020, and December 31, 2019, securities with a carrying value of $2.07 billion and $509.6 million, respectively, were pledged to secure public and trust deposits, short-term borrowings and for other purposes as required or permitted by law.
Gross gains and losses realized related to the sales of securities carried at fair value for the three- and six-month periods ended June 30, 2020 and 2019, are summarized as follows, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Proceeds from sales
|
$
|
182,749
|
|
|
$
|
760,743
|
|
|
$
|
511,639
|
|
|
$
|
1,194,897
|
|
Gross security gains
|
3,958
|
|
|
5,522
|
|
|
6,862
|
|
|
7,930
|
|
Gross security losses
|
1,952
|
|
|
1,942
|
|
|
3,198
|
|
|
2,775
|
|
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 Heartland's securities portfolio as of June 30, 2020, and December 31, 2019. The investments were segregated into two categories: those that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss
position for 12 months or more. The reference point for determining how long an investment was in an unrealized loss position was June 30, 2019, and December 31, 2018, 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
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage and asset-backed securities
|
$
|
1,070,001
|
|
|
$
|
(23,591)
|
|
|
81
|
|
|
$
|
392,756
|
|
|
$
|
(18,367)
|
|
|
19
|
|
|
$
|
1,462,757
|
|
|
$
|
(41,958)
|
|
|
100
|
|
Obligations of states and political subdivisions
|
104,108
|
|
|
(2,814)
|
|
|
97
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
104,108
|
|
|
(2,814)
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
$
|
1,174,109
|
|
|
$
|
(26,405)
|
|
|
178
|
|
|
$
|
392,756
|
|
|
$
|
(18,367)
|
|
|
19
|
|
|
$
|
1,566,865
|
|
|
$
|
(44,772)
|
|
|
197
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage and asset-backed securities
|
$
|
1,231,732
|
|
|
$
|
(14,189)
|
|
|
150
|
|
|
$
|
241,232
|
|
|
$
|
(4,814)
|
|
|
58
|
|
|
$
|
1,472,964
|
|
|
$
|
(19,003)
|
|
|
208
|
|
Obligations of states and political subdivisions
|
387,534
|
|
|
(9,399)
|
|
|
50
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
387,534
|
|
|
(9,399)
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
$
|
1,619,266
|
|
|
$
|
(23,588)
|
|
|
200
|
|
|
$
|
241,232
|
|
|
$
|
(4,814)
|
|
|
58
|
|
|
$
|
1,860,498
|
|
|
$
|
(28,402)
|
|
|
258
|
|
Heartland had no securities held to maturity with unrealized losses at June 30, 2020, or December 31, 2019.
On January 1, 2020, Heartland adopted the amendments within ASU 2016-13, which replaced the legacy GAAP other-than-temporary impairment ("OTTI") model with a credit loss model. The credit loss model under ASC 326-30, applicable to AFS debt securities, requires the recognition of credit losses through an allowance account, but retains the concept from the OTTI model that credit losses are recognized once securities become impaired. See Note 1, "Basis of Presentation," to the consolidated financial statements included herein for a discussion of the impact of the adoption of ASU 2016-13. Heartland reviews the investment securities portfolio at the security level on a quarterly basis for potential credit losses, which takes into consideration numerous factors, and the relative significance of any single factor can vary by security. Some factors Heartland may consider include changes in security ratings, financial condition of the issuer, as well as security and industry specific economic conditions. In addition, with regard to debt securities, Heartland may also evaluate payment structure, whether there are defaulted payments or expected defaults, prepayment speeds and the value of any underlying collateral. For certain debt securities in unrealized loss positions, Heartland prepares cash flow analyses to compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security.
The remaining unrealized losses on Heartland's mortgage and asset-backed securities are the result of changes in market interest rates or widening of market spreads subsequent to the initial purchase of the securities. The losses are not related to concerns regarding the underlying credit of the issuers or the underlying collateral. It is expected that the securities will not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates or widening market spreads and not credit quality, and because Heartland has the intent and ability to hold these investments until a market price recovery or to maturity and does not believe it will be required to sell the securities before maturity, no credit losses were recognized on these securities during the three and six months ended June 30, 2020.
The remaining unrealized losses on Heartland's obligations of states and political subdivisions are the result of changes in market interest rates or widening of market spreads subsequent to the initial purchase of the securities. Management monitors the published credit ratings of these securities and the stability of the underlying municipalities. Because the decline in fair value is attributable to changes in interest rates or widening market spreads due to insurance company downgrades and not underlying credit quality, and because Heartland has the intent and ability to hold these investments until a market price recovery or to maturity and does not believe it will be required to sell the securities before maturity, no credit losses were recognized on these securities during the three and six months ended June 30, 2020.
The credit loss model under ASC 326-30, applicable to held to maturity debt securities, requires the recognition of lifetime expected credit losses through an allowance account at the time when the security is purchased. The following table presents, in
thousands, the activity in the allowance for credit losses for securities held to maturity by major security type for the three- and six months ended June 30, 2020:
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
Balance at March 31, 2020
|
$
|
197
|
|
Provision for credit losses
|
(135)
|
|
Balance at June 30, 2020
|
$
|
62
|
|
|
|
|
Obligations of states and political subdivisions
|
Balance at December 31, 2019
|
$
|
—
|
|
Impact of ASU 2016-13 adoption
|
158
|
|
Provision for credit losses
|
(96)
|
|
Balance at June 30, 2020
|
$
|
62
|
|
The following table summarizes, in thousands, the carrying amount of Heartland's held to maturity debt securities by investment rating as of June 30, 2020, which are updated quarterly and used to monitor the credit quality of the securities:
|
|
|
|
|
|
Rating
|
Obligations of states and political subdivisions
|
AAA
|
$
|
3,086
|
|
AA, AA+, AA-
|
16,947
|
|
A+, A, A-
|
13,750
|
|
BBB
|
6,102
|
|
Not Rated
|
50,756
|
|
Total
|
$
|
90,641
|
|
Included in other securities were shares of stock in each Federal Home Loan Bank (the "FHLB") of Des Moines, Chicago, Dallas, San Francisco and Topeka at an amortized cost of $20.9 million at June 30, 2020 and $16.8 million at December 31, 2019.
The Heartland banks are required by federal law to maintain FHLB stock as members of the various FHLBs. These equity securities are "restricted" in that they can only be sold back to the respective institutions from which they were acquired or another member institution at par. Therefore, the FHLB stock is less liquid than other marketable equity securities, and the fair value approximates amortized cost. Heartland considers its FHLB stock as a long-term investment that provides access to competitive products and liquidity. Heartland evaluates impairment in these investments based on the ultimate recoverability of the par value and, at June 30, 2020, did not consider the investments to be other than temporarily impaired.
NOTE 4: LOANS
Loans as of June 30, 2020, and December 31, 2019, were as follows, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
Loans receivable held to maturity:
|
|
|
|
Commercial and industrial
|
$
|
2,364,400
|
|
|
$
|
2,530,809
|
|
Paycheck Protection Program ("PPP")
|
1,124,430
|
|
|
—
|
|
Owner occupied commercial real estate
|
1,433,271
|
|
|
1,472,704
|
|
Non-owner occupied commercial real estate
|
1,543,623
|
|
|
1,495,877
|
|
Real estate construction
|
1,115,843
|
|
|
1,027,081
|
|
Agricultural and agricultural real estate
|
520,773
|
|
|
565,837
|
|
Residential real estate
|
735,762
|
|
|
832,277
|
|
Consumer
|
408,728
|
|
|
443,332
|
|
Total loans receivable held to maturity
|
9,246,830
|
|
|
8,367,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses
|
(119,937)
|
|
|
(70,395)
|
|
Loans receivable, net
|
$
|
9,126,893
|
|
|
$
|
8,297,522
|
|
On January 1, 2020, Heartland adopted ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)," and results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. Additionally, Heartland reclassified its loan categories to align more closely with Federal Deposit Insurance Corporation ("FDIC") reporting requirements and classification codes, and all prior periods have been adjusted. As of June 30, 2020, Heartland had $34.5 million of accrued interest receivable, which is included in other assets on the consolidated balance sheet. Heartland does not consider accrued interest receivable in the allowance for credit losses calculation.
The following table shows the balance in the allowance for credit losses at June 30, 2020, and December 31, 2019, and the related loan balances, disaggregated on the basis of measurement methodology, in thousands. As of June 30, 2020, loans individually assessed are collateral dependent and in the process of foreclosure or no longer share the same risk characteristics of the other loans in the pool. All other loans are collectively evaluated for losses. Loans individually evaluated were considered impaired at December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance For Credit Losses
|
|
|
|
|
|
Gross Loans Receivable Held to Maturity
|
|
|
|
|
|
Individually Evaluated for Credit Losses
|
|
Collectively Evaluated for Credit Losses
|
|
Total
|
|
Loans Individually Evaluated for Credit Losses
|
|
Loans Collectively Evaluated for Credit Losses
|
|
Total
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
2,068
|
|
|
$
|
30,463
|
|
|
$
|
32,531
|
|
|
$
|
14,731
|
|
|
$
|
2,349,669
|
|
|
$
|
2,364,400
|
|
PPP
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,124,430
|
|
|
1,124,430
|
|
Owner occupied commercial real estate
|
13,446
|
|
|
9,956
|
|
|
23,402
|
|
|
21,588
|
|
|
1,411,683
|
|
|
1,433,271
|
|
Non-owner occupied commercial real estate
|
29
|
|
|
10,133
|
|
|
10,162
|
|
|
3,550
|
|
|
1,540,073
|
|
|
1,543,623
|
|
Real estate construction
|
51
|
|
|
28,616
|
|
|
28,667
|
|
|
258
|
|
|
1,115,585
|
|
|
1,115,843
|
|
Agricultural and agricultural real estate
|
2,086
|
|
|
3,615
|
|
|
5,701
|
|
|
17,065
|
|
|
503,708
|
|
|
520,773
|
|
Residential real estate
|
240
|
|
|
9,064
|
|
|
9,304
|
|
|
4,783
|
|
|
730,979
|
|
|
735,762
|
|
Consumer
|
317
|
|
|
9,853
|
|
|
10,170
|
|
|
688
|
|
|
408,040
|
|
|
408,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
18,237
|
|
|
$
|
101,700
|
|
|
$
|
119,937
|
|
|
$
|
62,663
|
|
|
$
|
9,184,167
|
|
|
$
|
9,246,830
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
6,276
|
|
|
$
|
24,511
|
|
|
$
|
30,787
|
|
|
$
|
31,814
|
|
|
$
|
2,498,995
|
|
|
$
|
2,530,809
|
|
Owner occupied commercial real estate
|
351
|
|
|
7,863
|
|
|
8,214
|
|
|
9,468
|
|
|
1,463,236
|
|
|
1,472,704
|
|
Non-owner occupied commercial real estate
|
33
|
|
|
7,769
|
|
|
7,802
|
|
|
1,730
|
|
|
1,494,147
|
|
|
1,495,877
|
|
Real estate construction
|
—
|
|
|
11,599
|
|
|
11,599
|
|
|
685
|
|
|
1,026,396
|
|
|
1,027,081
|
|
Agricultural and agricultural real estate
|
916
|
|
|
4,757
|
|
|
5,673
|
|
|
18,554
|
|
|
547,283
|
|
|
565,837
|
|
Residential real estate
|
176
|
|
|
1,328
|
|
|
1,504
|
|
|
20,678
|
|
|
811,599
|
|
|
832,277
|
|
Consumer
|
419
|
|
|
4,397
|
|
|
4,816
|
|
|
4,123
|
|
|
439,209
|
|
|
443,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
8,171
|
|
|
$
|
62,224
|
|
|
$
|
70,395
|
|
|
$
|
87,052
|
|
|
$
|
8,280,865
|
|
|
$
|
8,367,917
|
|
The following tables present the amortized cost basis for loans on nonaccrual status and accruing loans past due 90 days or more at June 30, 2020, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual
Loans with an
Allowance for
Credit Losses
|
|
Nonaccrual Loans
with No Allowance
for Credit Losses
|
|
Total
Nonaccrual
Loans
|
|
Accruing Loans
Past Due 90+ Days
|
June 30, 2020
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
11,630
|
|
|
$
|
9,812
|
|
|
$
|
21,442
|
|
|
$
|
—
|
|
Owner occupied commercial real estate
|
20,860
|
|
|
4,725
|
|
25,585
|
|
|
—
|
|
Non-owner occupied commercial real estate
|
349
|
|
|
3,412
|
|
3,761
|
|
|
—
|
|
Real estate construction
|
1,298
|
|
|
75
|
|
1,373
|
|
|
—
|
|
Agricultural and agricultural real estate
|
11,864
|
|
|
7,476
|
|
19,340
|
|
|
83
|
|
Residential mortgage
|
9,468
|
|
|
6,116
|
|
15,584
|
|
|
1,207
|
|
Consumer
|
4,167
|
|
|
357
|
|
4,524
|
|
|
70
|
|
Total
|
$
|
59,636
|
|
|
$
|
31,973
|
|
|
$
|
91,609
|
|
|
$
|
1,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heartland recognized $0 of interest income on nonaccrual loans during the three- and six months ended June 30, 2020.
Heartland had $6.6 million of troubled debt restructured loans at June 30, 2020, of which $4.0 million were classified as nonaccrual and $2.6 million were accruing according to the restructured terms. Heartland had $7.6 million of troubled debt
restructured loans at December 31, 2019, of which $3.8 million were classified as nonaccrual and $3.8 million were accruing according to the restructured terms.
The following tables provide information on troubled debt restructured loans that were modified during the three- and six-month periods ended June 30, 2020, and June 30, 2019, dollars in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
|
|
2019
|
|
|
|
|
|
Number
of Loans
|
|
Pre-
Modification
Recorded
Investment
|
|
Post-
Modification
Recorded
Investment
|
|
Number
of Loans
|
|
Pre-
Modification
Recorded
Investment
|
|
Post-
Modification
Recorded
Investment
|
Commercial
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
PPP
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
Owner occupied commercial real estate
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
Non-owner occupied commercial real estate
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
Real estate construction
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
Agricultural and agricultural real estate
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
Residential real estate
|
1
|
|
|
60
|
|
|
66
|
|
3
|
|
|
240
|
|
|
246
|
Consumer
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
Total
|
1
|
|
|
$
|
60
|
|
|
$
|
66
|
|
|
3
|
|
|
$
|
240
|
|
|
$
|
246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
|
|
2019
|
|
|
|
|
|
Number
of Loans
|
|
Pre-
Modification
Recorded
Investment
|
|
Post-
Modification
Recorded
Investment
|
|
Number
of Loans
|
|
Pre-
Modification
Recorded
Investment
|
|
Post-
Modification
Recorded
Investment
|
Commercial 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
|
2
|
|
|
92
|
|
|
98
|
|
|
4
|
|
|
276
|
|
|
288
|
|
Consumer
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
2
|
|
|
$
|
92
|
|
|
$
|
98
|
|
|
4
|
|
|
$
|
276
|
|
|
$
|
288
|
|
The pre-modification and post-modification recorded investment represents amounts as of the date of loan modification. The difference between the pre-modification investment and post-modification investment amounts on Heartland's residential real estate troubled debt restructured loans for the three- and six months ended June 30, 2020, is due to principal deferment collected from government guarantees and capitalized interest and escrow. At June 30, 2020, there were no commitments to extend credit to any of the borrowers with an existing troubled debt restructured loan. The tables above do not include any loan modifications made under COVID-19 modification programs. Refer to the "Overview" section of Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," for further information on these modifications.
The following table shows troubled debt restructured loans for which there was a payment default during the three- and six--month periods ended June 30, 2020, and June 30, 2019, that had been modified during the twelve-month period prior to default, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With Payment Defaults During the
Three Months Ended
June 30,
|
|
|
|
|
|
|
|
2020
|
|
|
|
2019
|
|
|
|
Number of Loans
|
|
Recorded Investment
|
|
Number of Loans
|
|
Recorded Investment
|
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
|
—
|
|
|
—
|
|
|
1
|
|
|
61
|
|
Consumer
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
—
|
|
|
$
|
—
|
|
|
1
|
|
|
$
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With Payment Defaults During the
Six Months Ended
June 30,
|
|
|
|
|
|
|
|
2020
|
|
|
|
2019
|
|
|
|
Number of Loans
|
|
Recorded Investment
|
|
Number of Loans
|
|
Recorded Investment
|
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
|
1
|
|
|
238
|
|
|
3
|
|
|
253
|
|
Consumer
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
1
|
|
|
$
|
238
|
|
|
3
|
|
|
$
|
253
|
|
Heartland's internal rating system is a series of grades reflecting management's risk assessment, based on its analysis of the borrower's financial condition. The "pass" category consists of all loans that are not in the "nonpass" category and categorized into a range of loan grades that reflect increasing, though still acceptable, risk. Movement of risk through the various grade levels in the pass category is monitored for early identification of credit deterioration.
The "nonpass" category consists of watch, substandard, doubtful and loss loans. The "watch" rating is attached to loans where the borrower exhibits negative trends in financial circumstances due to borrower specific or systemic conditions that, if left uncorrected, threaten the borrower's capacity to meet its debt obligations. The borrower is believed to have sufficient financial flexibility to react to and resolve its negative financial situation. These credits are closely monitored for improvement or deterioration.
The "substandard" rating is assigned to loans that are inadequately protected by the current net worth and repaying capacity of the borrower and that may be further at risk due to deterioration in the value of collateral pledged. Well-defined weaknesses jeopardize liquidation of the debt. These loans are still considered collectible; however, a distinct possibility exists that Heartland will sustain some loss if deficiencies are not corrected. Substandard loans may exhibit some or all of the following weaknesses: deteriorating financial trends, lack of earnings, inadequate debt service capacity, excessive debt and/or lack of liquidity.
The "doubtful" rating is assigned to loans where identified weaknesses in the borrowers' ability to repay the loan make collection or liquidation in full, on the basis of existing facts, conditions and values, highly questionable and improbable. These borrowers are usually in default, lack liquidity and capital, as well as resources necessary to remain as an operating entity. Specific pending events, such as capital injections, liquidations or perfection of liens on additional collateral, may strengthen the credit, thus deferring the rating of the loan as "loss" until the exact status of the loan can be determined. The loss rating is assigned to loans considered uncollectible. Heartland had no loans classified as loss or doubtful as of June 30, 2020 and December 31, 2019.
The following table shows the risk category of loans by loan category and year of origination as of June 30, 2020, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost Basis of Term Loans by Year of Origination
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
2015 and Prior
|
|
Revolving
|
|
Total
|
Commercial and industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
$
|
270,156
|
|
|
$
|
395,142
|
|
|
$
|
210,947
|
|
|
$
|
255,555
|
|
|
$
|
130,483
|
|
|
$
|
356,052
|
|
|
$
|
523,532
|
|
|
$
|
2,141,867
|
|
Watch
|
7,506
|
|
|
39,383
|
|
|
13,278
|
|
|
18,592
|
|
|
8,429
|
|
|
184
|
|
|
45,250
|
|
|
132,622
|
|
Substandard
|
3,672
|
|
|
8,052
|
|
|
21,695
|
|
|
14,822
|
|
|
11,150
|
|
|
12,701
|
|
|
17,819
|
|
|
89,911
|
|
Commercial and industrial total
|
$
|
281,334
|
|
|
$
|
442,577
|
|
|
$
|
245,920
|
|
|
$
|
288,969
|
|
|
$
|
150,062
|
|
|
$
|
368,937
|
|
|
$
|
586,601
|
|
|
$
|
2,364,400
|
|
PPP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
$
|
1,071,796
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,071,796
|
|
Watch
|
30,693
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
30,693
|
|
Substandard
|
21,941
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
21,941
|
|
PPP total
|
$
|
1,124,430
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,124,430
|
|
Owner occupied commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
$
|
139,436
|
|
|
$
|
307,221
|
|
|
$
|
277,311
|
|
|
$
|
175,702
|
|
|
$
|
122,807
|
|
|
$
|
252,559
|
|
|
$
|
31,445
|
|
|
$
|
1,306,481
|
|
Watch
|
5,865
|
|
|
6,529
|
|
|
5,467
|
|
|
29,782
|
|
|
4,585
|
|
|
8,422
|
|
|
100
|
|
|
60,750
|
|
Substandard
|
6,768
|
|
|
7,784
|
|
|
23,012
|
|
|
9,889
|
|
|
6,163
|
|
|
12,211
|
|
|
213
|
|
|
66,040
|
|
Owner occupied commercial real estate total
|
$
|
152,069
|
|
|
$
|
321,534
|
|
|
$
|
305,790
|
|
|
$
|
215,373
|
|
|
$
|
133,555
|
|
|
$
|
273,192
|
|
|
$
|
31,758
|
|
|
$
|
1,433,271
|
|
Non-owner occupied commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
$
|
174,914
|
|
|
$
|
403,907
|
|
|
$
|
249,906
|
|
|
$
|
176,422
|
|
|
$
|
113,130
|
|
|
$
|
285,323
|
|
|
$
|
29,731
|
|
|
$
|
1,433,333
|
|
Watch
|
254
|
|
|
2,520
|
|
|
26,360
|
|
|
17,152
|
|
|
8,868
|
|
|
16,265
|
|
|
475
|
|
|
71,894
|
|
Substandard
|
19,460
|
|
|
2,933
|
|
|
1,615
|
|
|
5,891
|
|
|
1,377
|
|
|
7,120
|
|
|
—
|
|
|
38,396
|
|
Non-owner occupied commercial real estate total
|
$
|
194,628
|
|
|
$
|
409,360
|
|
|
$
|
277,881
|
|
|
$
|
199,465
|
|
|
$
|
123,375
|
|
|
$
|
308,708
|
|
|
$
|
30,206
|
|
|
$
|
1,543,623
|
|
Real estate construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
$
|
136,140
|
|
|
$
|
423,116
|
|
|
$
|
314,934
|
|
|
$
|
82,944
|
|
|
$
|
31,864
|
|
|
$
|
32,028
|
|
|
$
|
15,820
|
|
|
$
|
1,036,846
|
|
Watch
|
329
|
|
|
17,548
|
|
|
20,447
|
|
|
10,418
|
|
|
16,931
|
|
|
1,189
|
|
|
824
|
|
|
67,686
|
|
Substandard
|
5,762
|
|
|
2,021
|
|
|
863
|
|
|
1,462
|
|
|
522
|
|
|
681
|
|
|
—
|
|
|
11,311
|
|
Real estate construction total
|
$
|
142,231
|
|
|
$
|
442,685
|
|
|
$
|
336,244
|
|
|
$
|
94,824
|
|
|
$
|
49,317
|
|
|
$
|
33,898
|
|
|
$
|
16,644
|
|
|
$
|
1,115,843
|
|
Agricultural and agricultural real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
$
|
60,973
|
|
|
$
|
91,129
|
|
|
$
|
52,319
|
|
|
$
|
34,156
|
|
|
$
|
17,330
|
|
|
$
|
40,204
|
|
|
$
|
120,864
|
|
|
$
|
416,975
|
|
Watch
|
3,117
|
|
|
7,501
|
|
|
5,293
|
|
|
1,153
|
|
|
2,027
|
|
|
3,914
|
|
|
9,307
|
|
|
32,312
|
|
Substandard
|
8,207
|
|
|
7,489
|
|
|
18,599
|
|
|
6,446
|
|
|
3,966
|
|
|
14,591
|
|
|
12,188
|
|
|
71,486
|
|
Agricultural and agricultural real estate total
|
$
|
72,297
|
|
|
$
|
106,119
|
|
|
$
|
76,211
|
|
|
$
|
41,755
|
|
|
$
|
23,323
|
|
|
$
|
58,709
|
|
|
$
|
142,359
|
|
|
$
|
520,773
|
|
Residential real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
$
|
47,582
|
|
|
$
|
82,571
|
|
|
$
|
119,637
|
|
|
$
|
89,920
|
|
|
$
|
56,886
|
|
|
$
|
275,367
|
|
|
$
|
27,211
|
|
|
$
|
699,174
|
|
Watch
|
82
|
|
|
3,050
|
|
|
880
|
|
|
1,619
|
|
|
349
|
|
|
7,291
|
|
|
346
|
|
|
13,617
|
|
Substandard
|
147
|
|
|
312
|
|
|
1,047
|
|
|
408
|
|
|
1,217
|
|
|
18,739
|
|
|
1,101
|
|
|
22,971
|
|
Residential real estate total
|
$
|
47,811
|
|
|
$
|
85,933
|
|
|
$
|
121,564
|
|
|
$
|
91,947
|
|
|
$
|
58,452
|
|
|
$
|
301,397
|
|
|
$
|
28,658
|
|
|
$
|
735,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost Basis of Term Loans by Year of Origination
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
2015 and Prior
|
|
Revolving
|
|
Total
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
$
|
18,844
|
|
|
$
|
32,474
|
|
|
$
|
21,239
|
|
|
$
|
15,111
|
|
|
$
|
4,718
|
|
|
$
|
22,982
|
|
|
$
|
280,592
|
|
|
$
|
395,960
|
|
Watch
|
—
|
|
|
335
|
|
|
385
|
|
|
193
|
|
|
247
|
|
|
744
|
|
|
1,874
|
|
|
3,778
|
|
Substandard
|
377
|
|
|
767
|
|
|
2,583
|
|
|
919
|
|
|
907
|
|
|
2,608
|
|
|
829
|
|
|
8,990
|
|
Consumer total
|
$
|
19,221
|
|
|
$
|
33,576
|
|
|
$
|
24,207
|
|
|
$
|
16,223
|
|
|
$
|
5,872
|
|
|
$
|
26,334
|
|
|
$
|
283,295
|
|
|
$
|
408,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Pass
|
$
|
1,919,841
|
|
|
$
|
1,735,560
|
|
|
$
|
1,246,293
|
|
|
$
|
829,810
|
|
|
$
|
477,218
|
|
|
$
|
1,264,515
|
|
|
$
|
1,029,195
|
|
|
$
|
8,502,432
|
|
Total Watch
|
47,846
|
|
|
76,866
|
|
|
72,110
|
|
|
78,909
|
|
|
41,436
|
|
|
38,009
|
|
|
58,176
|
|
|
413,352
|
|
Total Substandard
|
66,334
|
|
|
29,358
|
|
|
69,414
|
|
|
39,837
|
|
|
25,302
|
|
|
68,651
|
|
|
32,150
|
|
|
331,046
|
|
Total Loans
|
$
|
2,034,021
|
|
|
$
|
1,841,784
|
|
|
$
|
1,387,817
|
|
|
$
|
948,556
|
|
|
$
|
543,956
|
|
|
$
|
1,371,175
|
|
|
$
|
1,119,521
|
|
|
$
|
9,246,830
|
|
The following table shows Heartland's loan portfolio by credit quality indicator as of December 31, 2019, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
Nonpass
|
|
Total
|
Commercial and industrial
|
$
|
2,352,131
|
|
|
$
|
178,678
|
|
|
$
|
2,530,809
|
|
Owner occupied commercial real estate
|
1,369,290
|
|
|
103,414
|
|
|
1,472,704
|
|
Non-owner occupied commercial real estate
|
1,429,760
|
|
|
66,117
|
|
|
1,495,877
|
|
Real estate construction
|
984,736
|
|
|
42,345
|
|
|
1,027,081
|
|
Agricultural and agricultural real estate
|
454,272
|
|
|
111,565
|
|
|
565,837
|
|
Residential real estate
|
790,226
|
|
|
42,051
|
|
|
832,277
|
|
Consumer
|
430,733
|
|
|
12,599
|
|
|
443,332
|
|
Total loans receivable held to maturity
|
$
|
7,811,148
|
|
|
$
|
556,769
|
|
|
$
|
8,367,917
|
|
The nonpass category in the table above is comprised of approximately 60% watch loans and 40% substandard loans as of December 31, 2019. The percent of nonpass loans on nonaccrual status as of December 31, 2019, was 14%. Changes in credit risk are monitored on a continuous basis and changes in risk ratings are made when identified.
As of June 30, 2020, Heartland had $1.8 million of loans secured by residential real estate property that were in the process of foreclosure.
The following table sets forth information regarding Heartland's accruing and nonaccrual loans at June 30, 2020, and December 31, 2019, 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
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
4,587
|
|
|
$
|
228
|
|
|
$
|
—
|
|
|
$
|
4,815
|
|
|
$
|
2,338,143
|
|
|
$
|
21,442
|
|
|
$
|
2,364,400
|
|
PPP
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,124,430
|
|
|
—
|
|
|
1,124,430
|
|
Owner occupied commercial real estate
|
90
|
|
|
1,159
|
|
|
—
|
|
|
1,249
|
|
|
1,406,437
|
|
|
25,585
|
|
|
1,433,271
|
|
Non-owner occupied commercial real estate
|
2,776
|
|
|
158
|
|
|
—
|
|
|
2,934
|
|
|
1,536,928
|
|
|
3,761
|
|
|
1,543,623
|
|
Real estate construction
|
2,298
|
|
|
—
|
|
|
—
|
|
|
2,298
|
|
|
1,112,172
|
|
|
1,373
|
|
|
1,115,843
|
|
Agricultural and agricultural real estate
|
4,209
|
|
|
600
|
|
|
83
|
|
|
4,892
|
|
|
496,541
|
|
|
19,340
|
|
|
520,773
|
|
Residential real estate
|
483
|
|
|
1,242
|
|
|
1,207
|
|
|
2,932
|
|
|
717,246
|
|
|
15,584
|
|
|
735,762
|
|
Consumer
|
2,594
|
|
|
348
|
|
|
70
|
|
|
3,012
|
|
|
401,192
|
|
|
4,524
|
|
|
408,728
|
|
Total gross loans receivable held to maturity
|
$
|
17,037
|
|
|
$
|
3,735
|
|
|
$
|
1,360
|
|
|
$
|
22,132
|
|
|
$
|
9,133,089
|
|
|
$
|
91,609
|
|
|
$
|
9,246,830
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
5,121
|
|
|
$
|
904
|
|
|
$
|
3,899
|
|
|
$
|
9,924
|
|
|
$
|
2,491,110
|
|
|
$
|
29,775
|
|
|
$
|
2,530,809
|
|
Owner occupied commercial real estate
|
3,487
|
|
|
690
|
|
|
—
|
|
|
4,177
|
|
|
1,461,589
|
|
|
6,938
|
|
|
1,472,704
|
|
Non-owner occupied commercial real estate
|
614
|
|
|
81
|
|
|
—
|
|
|
695
|
|
|
1,493,619
|
|
|
1,563
|
|
|
1,495,877
|
|
Real estate construction
|
5,689
|
|
|
72
|
|
|
—
|
|
|
5,761
|
|
|
1,020,153
|
|
|
1,167
|
|
|
1,027,081
|
|
Agricultural and agricultural real estate
|
3,734
|
|
|
79
|
|
|
26
|
|
|
3,839
|
|
|
541,455
|
|
|
20,543
|
|
|
565,837
|
|
Residential real estate
|
4,166
|
|
|
24
|
|
|
180
|
|
|
4,370
|
|
|
814,840
|
|
|
13,067
|
|
|
832,277
|
|
Consumer
|
2,511
|
|
|
651
|
|
|
—
|
|
|
3,162
|
|
|
436,675
|
|
|
3,495
|
|
|
443,332
|
|
Total gross loans receivable held to maturity
|
$
|
25,322
|
|
|
$
|
2,501
|
|
|
$
|
4,105
|
|
|
$
|
31,928
|
|
|
$
|
8,259,441
|
|
|
$
|
76,548
|
|
|
$
|
8,367,917
|
|
Loans delinquent 30 to 89 days as a percent of total loans were 0.22% at June 30, 2020, compared to 0.33% at December 31, 2019. Changes in credit risk are monitored on a continuous basis and changes in risk ratings are made when identified. All individually assessed loans are reviewed at least annually.
As of December 31, 2019, the majority of Heartland's impaired loans were those that were nonaccrual, were past due 90 days or more and still accruing or have had their terms restructured in a troubled debt restructuring. The following table presents the unpaid principal balance that was contractually due at December 31, 2019, the outstanding loan balance recorded on the consolidated balance sheet at December 31, 2019, any related allowance recorded for those loans as of December 31, 2019, the
average outstanding loan balances recorded on the consolidated balance sheet during the year ended December 31, 2019, and the interest income recognized on the impaired loans during the year ended December 31, 2019, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
Principal
Balance
|
|
Loan
Balance
|
|
Related
Allowance
Recorded
|
|
Year-to-
Date
Avg.
Loan
Balance
|
|
Year-to-
Date
Interest
Income
Recognized
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
Impaired loans with a related allowance:
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
11,727
|
|
|
$
|
11,710
|
|
|
$
|
6,276
|
|
|
$
|
11,757
|
|
|
$
|
6
|
|
Owner occupied commercial real estate
|
712
|
|
|
712
|
|
|
352
|
|
|
1,435
|
|
|
22
|
|
Non-owner occupied commercial real estate
|
138
|
|
|
138
|
|
|
33
|
|
|
—
|
|
|
—
|
|
Real estate construction
|
17
|
|
|
17
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Agricultural and agricultural real estate
|
2,751
|
|
|
2,237
|
|
|
916
|
|
|
2,739
|
|
|
—
|
|
Residential real estate
|
1,378
|
|
|
1,378
|
|
|
176
|
|
|
1,116
|
|
|
—
|
|
Consumer
|
998
|
|
|
997
|
|
|
419
|
|
|
1,170
|
|
|
11
|
|
Total loans held to maturity
|
$
|
17,721
|
|
|
$
|
17,189
|
|
|
$
|
8,172
|
|
|
$
|
18,217
|
|
|
$
|
39
|
|
Impaired loans without a related allowance:
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
22,525
|
|
|
$
|
20,104
|
|
|
$
|
—
|
|
|
$
|
19,141
|
|
|
$
|
782
|
|
Owner occupied commercial real estate
|
8,756
|
|
|
8,756
|
|
|
—
|
|
|
8,337
|
|
|
341
|
|
Non-owner occupied commercial real estate
|
1,592
|
|
|
1,592
|
|
|
—
|
|
|
1,515
|
|
|
62
|
|
Real estate construction
|
668
|
|
|
668
|
|
|
—
|
|
|
636
|
|
|
26
|
|
Agricultural and agricultural real estate
|
19,113
|
|
|
16,317
|
|
|
—
|
|
|
16,837
|
|
|
60
|
|
Residential real estate
|
19,382
|
|
|
19,300
|
|
|
—
|
|
|
17,073
|
|
|
280
|
|
Consumer
|
3,135
|
|
|
3,126
|
|
|
—
|
|
|
4,182
|
|
|
45
|
|
Total loans held to maturity
|
$
|
75,171
|
|
|
$
|
69,863
|
|
|
$
|
—
|
|
|
$
|
67,721
|
|
|
$
|
1,596
|
|
Total impaired loans held to maturity:
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
34,252
|
|
|
$
|
31,814
|
|
|
$
|
6,276
|
|
|
$
|
30,898
|
|
|
$
|
788
|
|
Owner occupied commercial real estate
|
9,468
|
|
|
9,468
|
|
|
352
|
|
|
9,772
|
|
|
363
|
|
Non-owner occupied commercial real estate
|
1,730
|
|
|
1,730
|
|
|
33
|
|
|
1,515
|
|
|
62
|
|
Real estate construction
|
685
|
|
|
685
|
|
|
—
|
|
|
636
|
|
|
26
|
|
Agricultural and agricultural real estate
|
21,864
|
|
|
18,554
|
|
|
916
|
|
|
19,576
|
|
|
60
|
|
Residential real estate
|
20,760
|
|
|
20,678
|
|
|
176
|
|
|
18,189
|
|
|
280
|
|
Consumer
|
4,133
|
|
|
4,123
|
|
|
419
|
|
|
5,352
|
|
|
56
|
|
Total impaired loans held to maturity
|
$
|
92,892
|
|
|
$
|
87,052
|
|
|
$
|
8,172
|
|
|
$
|
85,938
|
|
|
$
|
1,635
|
|
On November 30, 2019, Heartland's Illinois Bank & Trust subsidiary completed the acquisition of substantially all of the assets and substantially all of the deposits and certain other liabilities of Rockford Bank & Trust Company, headquartered in Rockford, Illinois. As of November 30, 2019, Rockford Bank & Trust had gross loans of $366.6 million, and the estimated fair value of the loans acquired was $354.0 million.
On May 10, 2019, Heartland completed the acquisition of Blue Valley Ban Corp., parent company of Bank of Blue Valley, headquartered in Overland Park, Kansas. As of May 10, 2019, Blue Valley Ban Corp. had gross loans of $558.2 million, and the estimated fair value of the loans acquired was $542.0 million.
NOTE 5: ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses on loans for the three- and six- month periods ended June 30, 2020, and June 30, 2019, 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 March 31, 2020
|
$
|
32,463
|
|
|
$
|
—
|
|
|
$
|
10,336
|
|
|
$
|
8,321
|
|
|
$
|
22,951
|
|
|
$
|
4,797
|
|
|
$
|
8,725
|
|
|
$
|
9,757
|
|
|
|
|
|
|
$
|
97,350
|
|
Charge-offs
|
(2,767)
|
|
|
—
|
|
|
(213)
|
|
|
(19)
|
|
|
(84)
|
|
|
(1)
|
|
|
(235)
|
|
|
(245)
|
|
|
|
|
|
|
(3,564)
|
|
Recoveries
|
432
|
|
|
—
|
|
|
191
|
|
|
8
|
|
|
210
|
|
|
—
|
|
|
92
|
|
|
211
|
|
|
|
|
|
|
1,144
|
|
Provision
|
2,403
|
|
|
—
|
|
|
13,088
|
|
|
1,852
|
|
|
5,590
|
|
|
905
|
|
|
722
|
|
|
447
|
|
|
|
|
|
|
25,007
|
|
Balance at June 30, 2020
|
$
|
32,531
|
|
|
$
|
—
|
|
|
$
|
23,402
|
|
|
$
|
10,162
|
|
|
$
|
28,667
|
|
|
$
|
5,701
|
|
|
$
|
9,304
|
|
|
$
|
10,170
|
|
|
|
|
|
|
$
|
119,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
PPP
|
|
Owner Occupied Commercial Real Estate
|
|
Non-Owner Occupied Commercial Real Estate
|
|
Real Estate Construction
|
|
Agricultural and Agricultural
Real Estate
|
|
Residential
Real Estate
|
|
Consumer
|
|
|
|
|
|
Total
|
Balance at December 31, 2019
|
$
|
30,787
|
|
|
$
|
—
|
|
|
$
|
8,214
|
|
|
$
|
7,802
|
|
|
$
|
11,599
|
|
|
$
|
5,673
|
|
|
$
|
1,504
|
|
|
$
|
4,816
|
|
|
|
|
|
|
$
|
70,395
|
|
Impact of ASU 2016-13 adoption
|
3,147
|
|
|
—
|
|
|
(407)
|
|
|
(2,834)
|
|
|
3,413
|
|
|
(380)
|
|
|
4,817
|
|
|
4,315
|
|
|
|
|
|
|
12,071
|
|
Charge-offs
|
(8,363)
|
|
|
—
|
|
|
(213)
|
|
|
(19)
|
|
|
(105)
|
|
|
(254)
|
|
|
(314)
|
|
|
(597)
|
|
|
|
|
|
|
(9,865)
|
|
Recoveries
|
784
|
|
|
—
|
|
|
192
|
|
|
8
|
|
|
215
|
|
|
826
|
|
|
95
|
|
|
344
|
|
|
|
|
|
|
2,464
|
|
Provision
|
6,176
|
|
|
—
|
|
|
15,616
|
|
|
5,205
|
|
|
13,545
|
|
|
(164)
|
|
|
3,202
|
|
|
1,292
|
|
|
|
|
|
|
44,872
|
|
Balance at June 30, 2020
|
$
|
32,531
|
|
|
$
|
—
|
|
|
$
|
23,402
|
|
|
$
|
10,162
|
|
|
$
|
28,667
|
|
|
$
|
5,701
|
|
|
$
|
9,304
|
|
|
$
|
10,170
|
|
|
|
|
|
|
$
|
119,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
and
Industrial
|
|
Owner Occupied Commercial Real Estate
|
|
Non-Owner Occupied Commercial Real Estate
|
|
Real Estate Construction
|
|
Agricultural and Agricultural Real Estate
|
|
Residential
Real Estate
|
|
Consumer
|
|
|
|
|
|
Total
|
Balance at March 31, 2019
|
$
|
27,250
|
|
|
6,330
|
|
|
7,126
|
|
|
9,994
|
|
|
$
|
5,518
|
|
|
$
|
1,623
|
|
|
$
|
4,798
|
|
|
|
|
|
|
$
|
62,639
|
|
Charge-offs
|
(3,971)
|
|
|
(13)
|
|
|
—
|
|
|
(101)
|
|
|
(48)
|
|
|
(201)
|
|
|
(446)
|
|
|
|
|
|
|
(4,780)
|
|
Recoveries
|
276
|
|
|
4
|
|
|
60
|
|
|
124
|
|
|
1
|
|
|
34
|
|
|
574
|
|
|
|
|
|
|
1,073
|
|
Provision
|
4,125
|
|
|
(139)
|
|
|
296
|
|
|
(7)
|
|
|
515
|
|
|
136
|
|
|
(8)
|
|
|
|
|
|
|
4,918
|
|
Balance at June 30, 2019
|
$
|
27,680
|
|
|
$
|
6,182
|
|
|
$
|
7,482
|
|
|
$
|
10,010
|
|
|
$
|
5,986
|
|
|
$
|
1,592
|
|
|
$
|
4,918
|
|
|
|
|
|
|
$
|
63,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
and
Industrial
|
|
Owner Occupied Commercial Real Estate
|
|
Non-Owner Occupied Commercial Real Estate
|
|
Real Estate Construction
|
|
Agricultural and Agricultural
Real Estate
|
|
Residential
Real Estate
|
|
Consumer
|
|
|
|
|
|
Total
|
Balance at December 31, 2018
|
$
|
26,306
|
|
|
$
|
6,525
|
|
|
$
|
7,430
|
|
|
$
|
9,679
|
|
|
$
|
4,914
|
|
|
$
|
1,813
|
|
|
$
|
5,296
|
|
|
|
|
|
|
$
|
61,963
|
|
Charge-offs
|
(4,951)
|
|
|
(36)
|
|
|
—
|
|
|
(155)
|
|
|
(427)
|
|
|
(341)
|
|
|
(820)
|
|
|
|
|
|
|
(6,730)
|
|
Recoveries
|
584
|
|
|
93
|
|
|
100
|
|
|
128
|
|
|
329
|
|
|
86
|
|
|
744
|
|
|
|
|
|
|
2,064
|
|
Provision
|
5,741
|
|
|
(400)
|
|
|
(48)
|
|
|
358
|
|
|
1,170
|
|
|
34
|
|
|
(302)
|
|
|
|
|
|
|
6,553
|
|
Balance at June 30, 2019
|
$
|
27,680
|
|
|
$
|
6,182
|
|
|
$
|
7,482
|
|
|
$
|
10,010
|
|
|
$
|
5,986
|
|
|
$
|
1,592
|
|
|
$
|
4,918
|
|
|
|
|
|
|
$
|
63,850
|
|
Changes in the allowance for credit losses on unfunded commitments for the three- and six months ended June 30, 2020, were as follows:
|
|
|
|
|
|
|
|
|
Balance at March 31, 2020
|
|
$
|
15,468
|
|
Provision
|
|
1,924
|
|
Balance at June 30, 2020
|
|
$
|
17,392
|
|
|
|
|
Balance at December 31, 2019
|
|
$
|
248
|
|
Impact of ASU 2016-13 adoption
|
|
13,604
|
|
Provision
|
|
3,540
|
|
Balance at June 30, 2020
|
|
$
|
17,392
|
|
Prior to the adoption of ASU 2016-13, the allowance for credit losses on unfunded commitments was considered immaterial.
Management allocates the allowance for credit losses by pools of risk within each loan portfolio. The allocation of the allowance for credit losses by loan portfolio is made for analytical purposes and is not necessarily indicative of the trend of future loan losses in any particular category. The total allowance for credit losses is available to absorb losses from any segment of the loan portfolio.
NOTE 6: GOODWILL, CORE DEPOSIT PREMIUM AND OTHER INTANGIBLE ASSETS
Heartland had goodwill of $446.3 million at both June 30, 2020, and December 31, 2019. Heartland conducts its annual internal assessment of the goodwill both at the consolidated level and at its subsidiaries as of September 30. There was no goodwill impairment as of the most recent annual assessment. Due to the COVID-19 pandemic and economic conditions, an interim quantitative assessment of goodwill was performed during the second quarter of 2020, and no goodwill impairment was identified.
Heartland recorded $19.2 million of goodwill and $1.8 million of core deposit intangibles in connection with the acquisition of substantially all of the assets and substantially all of the deposits and certain other liabilities of Rockford Bank and Trust Company, headquartered in Rockford, Illinois on November 30, 2019.
Heartland recorded $35.4 million of goodwill and $11.4 million of core deposit intangibles in connection with the acquisition of Blue Valley Ban Corp., parent company of Bank of Blue Valley, headquartered in Overland Park, Kansas on May 10, 2019.
The core deposit intangibles recorded with the Blue Valley Ban Corp. acquisition is not deductible for tax purposes and is expected to be amortized over a period of 10 years on an accelerated basis.
Goodwill related to the Blue Valley Ban Corp. acquisition resulted from expected operational synergies, increased market presence, cross-selling opportunities, and expanded business lines and is not deductible for tax purposes.
The core deposit intangibles and goodwill recorded with the Rockford Bank and Trust Company acquisition of substantially all of the assets and substantially all of the deposits and certain other liabilities, is deductible for tax purposes and the core deposit intangibles are expected to be amortized over a period of 10 years on an accelerated basis.
Heartland's intangible assets consist of core deposit intangibles, mortgage servicing rights, customer relationship intangibles, and commercial servicing rights. The gross carrying amount of these intangible assets and the associated accumulated amortization at June 30, 2020, and December 31, 2019, are presented in the table below, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Amortizing intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Core deposit intangibles
|
$
|
96,821
|
|
|
$
|
53,996
|
|
|
$
|
42,825
|
|
|
$
|
96,821
|
|
|
$
|
48,338
|
|
|
$
|
48,483
|
|
Customer relationship intangibles
|
1,177
|
|
|
991
|
|
|
186
|
|
|
1,177
|
|
|
972
|
|
|
205
|
|
Mortgage servicing rights
|
9,375
|
|
|
4,890
|
|
|
4,485
|
|
|
7,886
|
|
|
2,265
|
|
|
5,621
|
|
Commercial servicing rights
|
6,990
|
|
|
6,006
|
|
|
984
|
|
|
6,952
|
|
|
5,837
|
|
|
1,115
|
|
Total
|
$
|
114,363
|
|
|
$
|
65,883
|
|
|
$
|
48,480
|
|
|
$
|
112,836
|
|
|
$
|
57,412
|
|
|
$
|
55,424
|
|
On April 30, 2019, Dubuque Bank and Trust Company closed on the sale of substantially all its servicing rights portfolio, which contained loans with an unpaid principal balance of $3.31 billion to PNC Bank, N.A. The transaction qualified as a sale, and $20.6 million of mortgage servicing rights were de-recognized on the consolidated balance sheet as of June 30, 2019. Cash of approximately $36.6 million was received during 2019, and Heartland recorded a gain on the sale of this portfolio of approximately $14.5 million. In the agreement, which included customary terms and conditions, Dubuque Bank and Trust Company provided interim servicing of the loans until the transfer date, which was August 1, 2019.
The following table shows the estimated future amortization expense for amortizable intangible assets, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core
Deposit
Intangibles
|
|
Customer
Relationship
Intangibles
|
|
Mortgage
Servicing
Rights
|
|
Commercial
Servicing
Rights
|
|
Total
|
Six months ending December 31, 2020
|
$
|
4,918
|
|
|
$
|
18
|
|
|
$
|
1,524
|
|
|
$
|
141
|
|
|
$
|
6,601
|
|
Year ending December 31,
|
|
|
|
|
|
|
|
|
|
2021
|
8,691
|
|
|
35
|
|
|
740
|
|
|
261
|
|
|
9,727
|
|
2022
|
7,102
|
|
|
34
|
|
|
635
|
|
|
232
|
|
|
8,003
|
|
2023
|
6,202
|
|
|
34
|
|
|
529
|
|
|
157
|
|
|
6,922
|
|
2024
|
5,108
|
|
|
33
|
|
|
423
|
|
|
98
|
|
|
5,662
|
|
2025
|
4,265
|
|
|
32
|
|
|
317
|
|
|
95
|
|
|
4,709
|
|
Thereafter
|
6,539
|
|
|
—
|
|
|
317
|
|
|
—
|
|
|
6,856
|
|
Total
|
$
|
42,825
|
|
|
$
|
186
|
|
|
$
|
4,485
|
|
|
$
|
984
|
|
|
$
|
48,480
|
|
Projections of amortization expense for mortgage servicing rights are based on existing asset balances and the existing interest rate environment as of June 30, 2020. Heartland's actual experience may be significantly different depending upon changes in mortgage interest rates and market conditions. Mortgage loans serviced for others were approximately $661.7 million at June 30, 2020 compared to $616.7 million at December 31, 2019. Custodial escrow balances maintained in connection with the mortgage loan servicing portfolio were approximately $12.7 million at June 30, 2020 and $5.0 million at December 31, 2019.
At June 30, 2020, the fair value of the mortgage servicing rights was estimated at $4.5 million compared to $5.6 million at December 31, 2019. The fair value of mortgage servicing rights is calculated based upon a discounted cash flow analysis. Cash flow assumptions, including prepayment speeds, servicing costs and escrow earnings of the mortgage servicing rights are considered in the calculation. The average constant prepayment rate was 17.10% for the June 30, 2020 valuation compared to 14.20% for the December 31, 2019 valuation. The discount rate was 9.02% for June 30, 2020 compared to 9.03% at December 31, 2019 valuations. The average capitalization rate for the first six months of 2020 ranged from 76 to 116 basis points compared to a range of 81 to 98 basis points for the first six months of 2019. Fees collected for the servicing of mortgage loans for others were $410,000 and $427,000 for the quarter ended June 30, 2020 and June 30, 2019, respectively, and $819,000 and $854,000 for the six-months ended June 30, 2020 and June 30, 2019.
The following table summarizes, in thousands, the changes in capitalized mortgage servicing rights for the six months ended June 30, 2020, and June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Balance at January 1,
|
$
|
5,621
|
|
|
$
|
29,363
|
|
Originations
|
1,490
|
|
|
342
|
|
Amortization
|
(1,070)
|
|
|
(2,395)
|
|
|
|
|
|
Sale of mortgage servicing rights
|
—
|
|
|
(20,556)
|
|
|
|
|
|
Valuation allowance
|
(1,556)
|
|
|
(953)
|
|
Balance at period end
|
$
|
4,485
|
|
|
$
|
5,801
|
|
|
|
|
|
Mortgage servicing rights, net to servicing portfolio
|
0.68
|
%
|
|
0.92
|
%
|
Heartland's commercial servicing portfolio is comprised of loans guaranteed by the Small Business Administration and United States Department of Agriculture that have been sold with servicing retained by Heartland, which totaled $74.2 million at June 30, 2020 and $82.1 million at December 31, 2019. The commercial servicing rights portfolio is separated into two tranches at the respective Heartland subsidiary, loans with a term of less than 20 years and loans with a term of more than 20 years. Fees collected for the servicing of commercial loans for others were $54,000 and $230,000 for the quarter ended June 30, 2020 and June 30, 2019, respectively, and $172,000 and $610,000 for the six-months ended June 30, 2020 and June 30, 2019.
The fair value of each commercial servicing rights portfolio is calculated based upon a discounted cash flow analysis. Cash flow assumptions, including prepayment speeds and servicing costs, are considered in the calculation. The range of average constant prepayment rates for the valuations was 15.22% to 19.56% as of June 30, 2020, compared to 14.25% to 18.08% as of December 31, 2019. The discount rate range was 8.04% to 14.40% for the June 30, 2020, valuations compared to 10.65% to 13.94% for the December 31, 2019, valuations. The capitalization rate for both 2020 and 2019 ranged from 310 to 445 basis points. The total fair value of Heartland's commercial servicing rights was estimated at $1.4 million as of June 30, 2020, and $1.6 million as of December 31, 2019.
The following table summarizes, in thousands, the changes in capitalized commercial servicing rights for the six-months ended June 30, 2020, and June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Balance at January 1,
|
$
|
1,115
|
|
|
$
|
1,709
|
|
|
|
|
|
Originations
|
38
|
|
|
73
|
|
Amortization
|
(169)
|
|
|
(403)
|
|
|
|
|
|
Balance at period end
|
$
|
984
|
|
|
$
|
1,379
|
|
Fair value of commercial servicing rights
|
$
|
1,417
|
|
|
$
|
1,851
|
|
Commercial servicing rights, net to servicing portfolio
|
1.32
|
%
|
|
1.52
|
%
|
Mortgage and commercial servicing rights are initially recorded at fair value in net gains on sale of loans held for sale when they are acquired through loan sales. Fair value is based on market prices for comparable servicing contracts, when available, or based on a valuation model that calculates the present value of estimated future net servicing income.
Mortgage and commercial servicing rights are subsequently measured using the amortization method, which requires the asset to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Servicing rights are evaluated for impairment at each Heartland subsidiary based upon the fair value of the assets as compared to the carrying amount. Impairment is recognized through a valuation allowance for specific tranches to the extent that fair value is less than carrying amount at each Heartland subsidiary. At June 30, 2020, a $516,000 valuation allowance was required on the mortgage servicing rights 15-year tranche and a $2.0 million valuation allowance was required on the mortgage servicing rights 30-year tranche. At December 31, 2019, a $114,000 valuation allowance was required on the mortgage servicing rights 15-year tranche and a $797,000 valuation allowance was required on the mortgage servicing rights 30-year tranche. At both June 30, 2020 and December 31, 2019, no valuation allowance was required on commercial servicing rights with a term less than 20 years and no valuation allowance was required on commercial servicing rights with a term greater than 20 years.
The following table summarizes, in thousands, the book value, the fair value of each tranche of the mortgage servicing rights and any recorded valuation allowance at each respective subsidiary at June 30, 2020, and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
Book Value 15-Year Tranche
|
|
Fair Value 15-Year Tranche
|
|
Impairment 15-Year Tranche
|
|
Book Value 30-Year Tranche
|
|
Fair Value 30-Year Tranche
|
|
Impairment 30-Year Tranche
|
|
|
|
|
|
|
|
|
|
|
|
|
First Bank & Trust
|
1,533
|
|
|
1,017
|
|
|
516
|
|
|
5,478
|
|
|
3,469
|
|
|
2,009
|
|
Total
|
$
|
1,533
|
|
|
$
|
1,017
|
|
|
$
|
516
|
|
|
$
|
5,478
|
|
|
$
|
3,469
|
|
|
$
|
2,009
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Bank & Trust
|
1,482
|
|
|
1,368
|
|
|
114
|
|
|
5,050
|
|
|
4,253
|
|
|
797
|
|
Total
|
$
|
1,482
|
|
|
$
|
1,368
|
|
|
$
|
114
|
|
|
$
|
5,050
|
|
|
$
|
4,253
|
|
|
$
|
797
|
|
The following table summarizes, in thousands, the book value, the fair value of each tranche of the commercial servicing rights and any recorded valuation allowance at each respective subsidiary at June 30, 2020, and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
Book Value
Less than
20 Years
|
|
Fair Value
Less than
20 Years
|
|
Impairment
Less than
20 Years
|
|
Book Value
More than
20 Years
|
|
Fair Value
More than
20 Years
|
|
Impairment
More than
20 Years
|
|
|
|
|
|
|
|
|
|
|
|
|
Premier Valley Bank
|
1
|
|
|
11
|
|
|
—
|
|
|
111
|
|
|
140
|
|
|
—
|
|
Wisconsin Bank & Trust
|
99
|
|
|
236
|
|
|
—
|
|
|
773
|
|
|
1,030
|
|
|
—
|
|
Total
|
$
|
100
|
|
|
$
|
247
|
|
|
$
|
—
|
|
|
$
|
884
|
|
|
$
|
1,170
|
|
|
$
|
—
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premier Valley Bank
|
1
|
|
|
13
|
|
|
—
|
|
|
135
|
|
|
161
|
|
|
—
|
|
Wisconsin Bank & Trust
|
128
|
|
|
272
|
|
|
—
|
|
|
851
|
|
|
1,148
|
|
|
—
|
|
Total
|
$
|
129
|
|
|
$
|
285
|
|
|
$
|
—
|
|
|
$
|
986
|
|
|
$
|
1,309
|
|
|
$
|
—
|
|
NOTE 7: DERIVATIVE FINANCIAL INSTRUMENTS
Heartland uses derivative financial instruments as part of its interest rate risk management strategy. As part of the strategy, Heartland considers the use of interest rate swaps, caps, floors, collars, and certain interest rate lock commitments and forward sales of securities related to mortgage banking activities. Heartland's current strategy includes the use of interest rate swaps, interest rate lock commitments and forward sales of mortgage securities. In addition, Heartland is facilitating back-to-back loan swaps to assist customers in managing interest rate risk. Heartland's objectives are to add stability to its net interest margin and to manage its exposure to movements in interest rates. The contract or notional amount of a derivative is used to determine, along with the other terms of the derivative, the amounts to be exchanged between the counterparties. Heartland is exposed to credit risk in the event of nonperformance by counterparties to financial instruments. Heartland minimizes this risk by entering into derivative contracts with counterparties that meet Heartland’s credit standards, and the contracts contain collateral provisions protecting the at-risk party. Heartland has not experienced any losses from nonperformance by these counterparties. Heartland monitors counterparty risk in accordance with the provisions of ASC 815.
In addition, interest rate-related derivative instruments generally contain language outlining collateral pledging requirements for each counterparty. Collateral must be posted when the market value exceeds certain threshold limits which are determined by credit ratings of each counterparty. Heartland was required to pledge $4.6 million of cash as collateral at June 30, 2020 compared to $1.9 million at December 31, 2019. At both June 30, 2020 and December 31, 2019, no collateral was required to be pledged by Heartland's counterparties.
Heartland's derivative and hedging instruments are recorded at fair value on the consolidated balance sheets. See Note 8, “Fair Value,” for additional fair value information and disclosures.
Cash Flow Hedges
Heartland has variable rate funding which creates exposure to variability in interest payments due to changes in interest rates. To manage the interest rate risk related to the variability of interest payments, Heartland has entered into various interest rate swap agreements. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are received or made on Heartland's variable-rate liabilities. For the six months ended June 30, 2020, the change in net unrealized losses on cash flow hedges reflects changes in the fair value of the swaps and
reclassification from accumulated other comprehensive income to interest expense totaling $600,000. For the next twelve months, Heartland estimates that cash payments and reclassification from accumulated other comprehensive income to interest expense will total $1.7 million.
Heartland entered into six forward starting interest rate swap transactions to effectively convert Heartland Financial Statutory Trust IV, V, VI, and VII, which total $85.0 million, as well as Morrill Statutory Trust I and II, which total $20.0 million, from variable rate subordinated debentures to fixed rate debt. For accounting purposes, these six swap transactions are designated as cash flow hedges of the changes in LIBOR, the benchmark interest rate being hedged, associated with the interest payments made on $105.0 million of Heartland's subordinated debentures that reset quarterly on a specified reset date. At inception, Heartland asserted that the underlying principal balance would remain outstanding throughout the hedge transaction, making it probable that sufficient LIBOR-based interest payments would exist through the maturity date of the swaps. During the first quarter of 2020, the interest rate swap transaction associated with Heartland Financial Statutory Trust VI, totaling $20.0 million, matured and the fixed rate debt has been converted to a variable rate subordinated debenture.
On May 18, 2018, Heartland acquired cash flow hedges related to OCGI Statutory Trust III and OCGI Capital Trust IV with notional amounts of $3.0 million and $6.0 million, respectively, in the First Bank Lubbock Bancshares, Inc. transaction. The cash flow hedges effectively convert OCGI Statutory Trust III and OGCI Capital Trust IV from variable rate subordinated debentures to fixed rate debt. These swaps are designated as cash flow hedges of the changes in LIBOR, the benchmark interest rate being hedged, associated with the interest payments made on $9.0 million of Heartland's subordinated debentures that reset quarterly on a specified reset date.
The table below identifies the balance sheet category and fair values of Heartland's derivative instruments designated as cash flow hedges at June 30, 2020, and December 31, 2019, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
Amount
|
|
Fair
Value
|
|
Balance
Sheet
Category
|
|
Receive
Rate
|
|
Weighted
Average
Pay Rate
|
|
Maturity
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
$
|
25,000
|
|
|
$
|
(373)
|
|
|
Other liabilities
|
|
0.299
|
%
|
|
2.255
|
%
|
|
03/17/2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
23,667
|
|
|
(207)
|
|
|
Other liabilities
|
|
2.677
|
|
|
3.674
|
|
|
05/10/2021
|
Interest rate swap
|
24,250
|
|
|
(2,621)
|
|
|
Other liabilities
|
|
2.685
|
|
|
5.425
|
|
|
07/24/2028
|
Interest rate swap
|
20,000
|
|
|
(1,702)
|
|
|
Other liabilities
|
|
0.313
|
|
|
2.390
|
|
|
06/15/2024
|
Interest rate swap
|
20,000
|
|
|
(1,596)
|
|
|
Other liabilities
|
|
0.350
|
|
|
2.352
|
|
|
03/01/2024
|
Interest rate swap
|
6,000
|
|
|
(97)
|
|
|
Other liabilities
|
|
0.313
|
|
|
1.866
|
|
|
06/15/2021
|
Interest rate swap
|
3,000
|
|
|
(49)
|
|
|
Other liabilities
|
|
1.219
|
|
|
1.878
|
|
|
06/30/2021
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
$
|
25,000
|
|
|
$
|
(167)
|
|
|
Other liabilities
|
|
1.900
|
%
|
|
2.255
|
%
|
|
03/17/2021
|
Interest rate swap
|
20,000
|
|
|
(67)
|
|
|
Other liabilities
|
|
2.043
|
|
|
3.355
|
|
|
01/07/2020
|
Interest rate swap
|
25,667
|
|
|
135
|
|
|
Other assets
|
|
4.215
|
|
|
3.674
|
|
|
05/10/2021
|
Interest rate swap
|
25,750
|
|
|
(1,384)
|
|
|
Other liabilities
|
|
4.280
|
|
|
5.425
|
|
|
07/24/2028
|
Interest rate swap
|
20,000
|
|
|
(614)
|
|
|
Other liabilities
|
|
1.894
|
|
|
2.390
|
|
|
06/15/2024
|
Interest rate swap
|
20,000
|
|
|
(561)
|
|
|
Other liabilities
|
|
1.907
|
|
|
2.352
|
|
|
03/01/2024
|
Interest rate swap
|
6,000
|
|
|
(15)
|
|
|
Other liabilities
|
|
1.894
|
|
|
1.866
|
|
|
06/15/2021
|
Interest rate swap
|
3,000
|
|
|
(9)
|
|
|
Other liabilities
|
|
1.831
|
|
|
1.878
|
|
|
06/30/2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below identifies the gains and losses recognized on Heartland's derivative instruments designated as cash flow hedges for the three- and six-month periods ended June 30, 2020, and June 30, 2019, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Portion
|
|
|
|
|
|
Ineffective Portion
|
|
|
|
Recognized in OCI
|
|
Reclassified from AOCI into Income
|
|
|
|
Recognized in Income on Derivatives
|
|
|
|
Amount of
Gain (Loss)
|
|
Category
|
|
Amount of
Gain (Loss)
|
|
Category
|
|
Amount of
Gain (Loss)
|
Three Months Ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
$
|
(100)
|
|
|
Interest expense
|
|
$
|
417
|
|
|
Other income
|
|
$
|
—
|
|
Six Months Ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
$
|
(3,963)
|
|
|
Interest expense
|
|
$
|
600
|
|
|
Other income
|
|
$
|
—
|
|
Three Months Ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
$
|
(2,163)
|
|
|
Interest expense
|
|
$
|
(100)
|
|
|
Other income
|
|
$
|
—
|
|
Six Months Ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
$
|
(3,503)
|
|
|
Interest expense
|
|
$
|
(265)
|
|
|
Other income
|
|
$
|
—
|
|
Fair Value Hedges
Heartland uses interest rate swaps to convert certain long term fixed rate loans to floating rates to hedge interest rate risk exposure. Heartland uses hedge accounting in accordance with ASC 815, with the unrealized gains and losses, representing the change in fair value of the derivative and the change in fair value of the risk being hedged on the related loan, being recorded in the consolidated statements of income. The ineffective portions of the unrealized gains or losses, if any, are recorded in interest income and interest expense in the consolidated statements of income. Heartland uses statistical regression to assess hedge effectiveness, both at the inception of the hedge as well as on a continual basis. The regression analysis involves regressing the periodic change in the fair value of the hedging instrument against the periodic changes in the fair value of the asset being hedged due to changes in the hedge risk.
Heartland was required to pledge $4.2 million and $3.4 million of cash as collateral for these fair value hedges at June 30, 2020, and December 31, 2019, respectively.
The table below identifies the notional amount, fair value and balance sheet category of Heartland's fair value hedges at June 30, 2020, and December 31, 2019, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount
|
|
Fair Value
|
|
Balance Sheet Category
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
Fair value hedges
|
$
|
21,048
|
|
|
$
|
(2,926)
|
|
|
Other liabilities
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Fair value hedges
|
21,250
|
|
|
(1,253)
|
|
|
Other liabilities
|
The table below identifies the gains and losses recognized on Heartland's fair value hedges for the three- and six- month periods ended June 30, 2020, and June 30, 2019, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss)
|
|
Income Statement Category
|
Three Months Ended June 30, 2020
|
|
|
|
|
Fair value hedges
|
|
$
|
4
|
|
|
Interest income
|
Six Months Ended June 30, 2020
|
|
|
|
|
Fair value hedges
|
|
$
|
(1,673)
|
|
|
Interest income
|
Three Months Ended June 30, 2019
|
|
|
|
|
Fair value hedges
|
|
$
|
(660)
|
|
|
Interest income
|
Six Months Ended June 30, 2019
|
|
|
|
|
Fair value hedges
|
|
$
|
(1,290)
|
|
|
Interest income
|
Embedded Derivatives
Heartland has fixed rate loans with embedded derivatives. The loans contain terms that affect the cash flows or value of the loan similar to a derivative instrument, and therefore are considered to contain an embedded derivative. The embedded derivatives are bifurcated from the loans because the terms of the derivative instrument are not clearly and closely related to the loans. The embedded derivatives are recorded at fair value on the consolidated balance sheets as a part of other assets, and changes in the fair value are a component of noninterest income. The table below identifies the notional amount, fair value and balance sheet category of Heartland's embedded derivatives at June 30, 2020, and December 31, 2019, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount
|
|
Fair Value
|
|
Balance Sheet Category
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivatives
|
$
|
9,416
|
|
|
$
|
827
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivatives
|
$
|
9,627
|
|
|
$
|
465
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below identifies the gains and losses recognized on Heartland's embedded derivatives for the three- and six--month periods ended June 30, 2020, and June 30, 2019, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss)
|
|
Income Statement Category
|
Three Months Ended June 30, 2020
|
|
|
|
|
Embedded derivatives
|
|
$
|
1
|
|
|
Other noninterest income
|
Six Months Ended June 30, 2020
|
|
|
|
|
Embedded derivatives
|
|
$
|
362
|
|
|
Other noninterest income
|
Three Months Ended June 30, 2019
|
|
|
|
|
Embedded derivatives
|
|
$
|
182
|
|
|
Other noninterest income
|
Six Months Ended June 30, 2019
|
|
|
|
|
Embedded derivatives
|
|
$
|
1,071
|
|
|
Other noninterest income
|
Back-to-Back Loan Swaps
Heartland has interest rate swap loan relationships with customers to meet their financing needs. Upon entering into these loan swaps, Heartland enters into offsetting positions with counterparties in order to minimize interest rate risk. These back-to-back loan swaps qualify as free standing financial derivatives with the fair values reported in other assets and other liabilities on the consolidated balance sheets. Heartland was required to post $51.6 million and $20.2 million as of June 30, 2020, and December 31, 2019, respectively, as collateral related to these back-to-back swaps. Heartland's counterparties were required to pledge $0 at June 30, 2020, and $0 at December 31, 2019. Any gains and losses on these back-to-back swaps are recorded in noninterest income on the consolidated statements of income, and for the three- and six months ended June 30, 2020 and June 30, 2019, no gain or loss was recognized. The table below identifies the balance sheet category and fair values of Heartland's derivative instruments designated as loan swaps at June 30, 2020, and December 31, 2019, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
Amount
|
|
Fair
Value
|
|
Balance Sheet
Category
|
|
Weighted
Average
Receive
Rate
|
|
Weighted
Average
Pay
Rate
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
Customer interest rate swaps
|
|
$
|
447,820
|
|
|
$
|
51,791
|
|
|
Other assets
|
|
4.47
|
%
|
|
2.53
|
%
|
Customer interest rate swaps
|
|
447,820
|
|
|
(51,791)
|
|
|
Other liabilities
|
|
2.53
|
|
|
4.47
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Customer interest rate swaps
|
|
$
|
374,191
|
|
|
$
|
16,927
|
|
|
Other assets
|
|
4.68
|
%
|
|
4.05
|
%
|
Customer interest rate swaps
|
|
374,191
|
|
|
(16,927)
|
|
|
Other liabilities
|
|
4.05
|
|
|
4.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Free Standing Derivatives
Heartland has entered into interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans and mortgage backed securities that are considered derivative instruments. Heartland enters into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of future changes in interest rates on the commitments to fund the loans as well as on residential mortgage loans available for sale. The fair value of these commitments is recorded on the consolidated balance sheets, with the changes in fair value recorded in the consolidated statements of income as a component of gains on sale of loans held for sale. These derivative contracts are designated as free standing derivative contracts and are not designated against specific assets and liabilities on the consolidated balance sheets or forecasted transactions and therefore do not qualify for hedge accounting treatment. Heartland was required to pledge no collateral at both June 30, 2020, and December 31, 2019. Heartland's counterparties were required to pledge no collateral at both June 30, 2020 and December 31, 2019, as collateral for these forward commitments.
Heartland acquired undesignated interest rate swaps in 2015. These swaps were entered into primarily for the benefit of customers seeking to manage their interest rate risk and are not designated against specific assets or liabilities on the consolidated balance sheet or forecasted transactions and therefore do not qualify for hedge accounting in accordance with ASC 815. These swaps are carried at fair value on the consolidated balance sheets as a component of other liabilities, with changes in the fair value recorded as a component of other noninterest income.
The table below identifies the balance sheet category and fair values of Heartland's other free standing derivative instruments not designated as hedging instruments at June 30, 2020, and December 31, 2019, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Category
|
|
Notional Amount
|
|
Fair Value
|
June 30, 2020
|
|
|
|
|
|
Interest rate lock commitments (mortgage)
|
Other assets
|
|
$
|
64,501
|
|
|
$
|
2,653
|
|
|
|
|
|
|
|
Forward commitments
|
Other assets
|
|
3,000
|
|
|
—
|
|
Forward commitments
|
Other liabilities
|
|
51,500
|
|
|
(281)
|
|
Undesignated interest rate swaps
|
Other liabilities
|
|
9,416
|
|
|
(827)
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
Interest rate lock commitments (mortgage)
|
Other assets
|
|
$
|
20,356
|
|
|
$
|
681
|
|
|
|
|
|
|
|
Forward commitments
|
Other assets
|
|
16,000
|
|
|
15
|
|
Forward commitments
|
Other liabilities
|
|
36,500
|
|
|
(113)
|
|
Undesignated interest rate swaps
|
Other liabilities
|
|
9,627
|
|
|
(465)
|
|
|
|
|
|
|
|
The table below identifies the income statement category of the gains and losses recognized in income on Heartland's other free standing derivative instruments not designated as hedging instruments for the three- and six-month periods ended June 30, 2020, and June 30, 2019, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Statement Category
|
|
Gain (Loss) Recognized
|
Three Months Ended June 30, 2020
|
|
|
|
Interest rate lock commitments (mortgage)
|
Net gains on sale of loans held for sale
|
|
$
|
1,296
|
|
Forward commitments
|
Net gains on sale of loans held for sale
|
|
962
|
|
Undesignated interest rate swaps
|
Other noninterest income
|
|
(1)
|
|
Six Months Ended June 30, 2020
|
|
|
|
Interest rate lock commitments (mortgage)
|
Net gains on sale of loans held for sale
|
|
$
|
2,994
|
|
Forward commitments
|
Net gains on sale of loans held for sale
|
|
(184)
|
|
Undesignated interest rate swaps
|
Other noninterest income
|
|
(362)
|
|
Three Months Ended June 30, 2019
|
|
|
|
Interest rate lock commitments (mortgage)
|
Net gains on sale of loans held for sale
|
|
$
|
552
|
|
Forward commitments
|
Net gains on sale of loans held for sale
|
|
(145)
|
|
Undesignated interest rate swaps
|
Other noninterest income
|
|
182
|
|
Six Months Ended June 30, 2019
|
|
|
|
Interest rate lock commitments (mortgage)
|
Net gains on sale of loans held for sale
|
|
$
|
816
|
|
|
|
|
|
Forward commitments
|
Net gains on sale of loans held for sale
|
|
(28)
|
|
Undesignated interest rate swaps
|
Other noninterest income
|
|
1,071
|
|
NOTE 8: FAIR VALUE
Heartland utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities carried at fair value, which include available for sale, trading securities and equity securities with a readily determinable fair value, and derivatives are recorded in the consolidated balance sheets at fair value on a recurring basis. Additionally, from time to time, Heartland may be required to record at fair value other assets on a nonrecurring basis such as loans held for sale, loans held to maturity and certain other assets including, but not limited to, mortgage servicing rights, commercial servicing rights and other real estate owned. These nonrecurring fair value adjustments typically involve application of the lower of cost or fair value accounting or write-downs of individual assets.
Fair Value Hierarchy
Under ASC 820, assets and liabilities are grouped at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1 — Valuation is based upon quoted prices for identical instruments in active markets.
Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, or similar instruments in markets that are not active, and model-based valuation techniques for all significant assumptions are observable in the market.
Level 3 — Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
The following is a description of valuation methodologies used for assets and liabilities recorded at fair value on a recurring or non-recurring basis.
Assets
Securities Available for Sale and Held to Maturity
Securities available for sale are recorded at fair value on a recurring basis. Securities held to maturity are generally recorded at cost and are recorded at fair value only to the extent a decline in fair value is determined to be other-than-temporary. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security's credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, as well as U.S. Treasury securities. Level 2 securities include U.S. government and agency securities, mortgage and asset-backed securities and private collateralized mortgage obligations, municipal bonds and corporate debt securities. On a quarterly basis, a secondary independent pricing service is used for the securities portfolio to validate the pricing from Heartland's primary pricing service.
Equity Securities with a Readily Determinable Fair Value
Equity securities with a readily determinable fair value generally include Community Reinvestment Act mutual funds and are classified as Level 2 due to the infrequent trading of these securities. The fair value is based on the price per share.
Loans Held for Sale
Loans held for sale are carried at the lower of cost or fair value on an aggregate basis. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, Heartland classifies loans held for sale subjected to nonrecurring fair value adjustments as Level 2.
Loans Held to Maturity
Heartland does not record loans held to maturity at fair value on a recurring basis. However, from time to time, certain loans are considered collateral dependent and an allowance for credit losses is established. The fair value of individually assessed loans is measured using the fair value of the collateral. In accordance with ASC 820, individually assessed loans measured at fair value are classified as nonrecurring Level 3 in the fair value hierarchy.
Premises, Furniture and Equipment Held for Sale
Heartland values premises, furniture and equipment held for sale based on third-party appraisals less estimated disposal costs. Heartland considers third party appraisals, as well as independent fair value assessments from Realtors or persons involved in selling bank premises, furniture and equipment, in determining the fair value of particular properties. Accordingly, the valuation of premises, furniture and equipment held for sale is subject to significant external and internal judgment. Heartland periodically reviews premises, furniture and equipment held for sale to determine if the fair value of the property, less disposal costs, has declined below its recorded book value and records any adjustments accordingly. Premises, furniture and equipment held for sale are classified as nonrecurring Level 3 in the fair value hierarchy.
Mortgage Servicing Rights
Mortgage servicing rights assets represent the value associated with servicing residential real estate loans that have been sold to outside investors with servicing retained. The fair value for servicing assets is determined through discounted cash flow analysis and utilizes discount rates, prepayment speeds and delinquency rate assumptions as inputs. All of the assumptions in the discounted cash flow analysis require a significant degree of management estimation and judgment. Mortgage servicing rights are subject to impairment testing. The carrying values of these rights are reviewed quarterly for impairment based upon the calculation of fair value as performed by an outside third party. For purposes of measuring impairment, the rights are stratified into certain risk characteristics including note type and note term. If the valuation model reflects a fair value less than the carrying value, mortgage servicing rights are adjusted to fair value through a valuation allowance. Heartland classifies mortgage servicing rights as nonrecurring with Level 3 measurement inputs.
Commercial Servicing Rights
Commercial servicing rights assets represent the value associated with servicing commercial loans guaranteed by the Small Business Administration and the United States Department of Agriculture that have been sold with servicing retained by Heartland. Heartland uses the amortization method (i.e., the lower of amortized cost or estimated fair value measured on a nonrecurring basis), not fair value measurement accounting, to determine the carrying value of its commercial servicing rights. The fair value for servicing assets is determined through market prices for comparable servicing contracts, when available, or through a valuation model that calculates the present value of estimated future net servicing income. Inputs utilized include discount rates, prepayment speeds and delinquency rate assumptions as inputs. All of these assumptions require a significant degree of management estimation and judgment. Commercial servicing rights are subject to impairment testing, and the carrying values of these rights are reviewed quarterly for impairment based upon the calculation of fair value as performed by an outside third party. If the valuation model reflects a fair value less than the carrying value, commercial servicing rights are adjusted to fair value through a valuation allowance. Heartland classifies commercial servicing rights as nonrecurring with Level 3 measurement inputs.
Derivative Financial Instruments
Heartland's current interest rate risk strategy includes interest rate swaps. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. To comply with the provisions of ASC 820, Heartland incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty's nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, Heartland has considered the impact of netting any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Although Heartland has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of June 30, 2020, and December 31, 2019, Heartland has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, Heartland has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
Interest rate lock commitments
Heartland uses an internal valuation model that relies on internally developed inputs to estimate the fair value of its interest rate lock commitments which is based on unobservable inputs that reflect management's assumptions and specific information about each borrower. Interest rate lock commitments are classified in Level 3 of the fair value hierarchy.
Forward commitments
The fair value of forward commitments are estimated using an internal valuation model, which includes current trade pricing for similar financial instruments in active markets that Heartland has the ability to access and are classified in Level 2 of the fair value hierarchy.
Other Real Estate Owned
Other real estate owned ("OREO") represents property acquired through foreclosures and settlements of loans. Property acquired is carried at the fair value of the property at the time of acquisition (representing the property's cost basis), plus any acquisition costs, or the estimated fair value of the property, less disposal costs. Heartland considers third party appraisals, as well as independent fair value assessments from realtors or persons involved in selling OREO, in determining the fair value of particular properties. Accordingly, the valuation of OREO is subject to significant external and internal judgment. Heartland periodically reviews OREO to determine if the fair value of the property, less disposal costs, has declined below its recorded book value and records any adjustments accordingly. OREO is classified as nonrecurring Level 3 of the fair value hierarchy.
The table below presents Heartland's assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2020, and December 31, 2019, in thousands, aggregated by the level in the fair value hierarchy within which those measurements fall:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
June 30, 2020
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
U.S. government corporations and agencies
|
$
|
5,842
|
|
|
$
|
4,547
|
|
|
$
|
1,295
|
|
|
$
|
—
|
|
Mortgage and asset-backed securities
|
3,134,439
|
|
|
—
|
|
|
3,134,439
|
|
|
—
|
|
Obligations of states and political subdivisions
|
966,679
|
|
|
—
|
|
|
966,679
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Equity securities with a readily determinable fair value
|
19,391
|
|
|
—
|
|
|
19,391
|
|
|
—
|
|
Derivative financial instruments(1)
|
52,618
|
|
|
—
|
|
|
52,618
|
|
|
—
|
|
Interest rate lock commitments
|
2,653
|
|
|
—
|
|
|
—
|
|
|
2,653
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
$
|
4,181,622
|
|
|
$
|
4,547
|
|
|
$
|
4,174,422
|
|
|
$
|
2,653
|
|
Liabilities
|
|
|
|
|
|
|
|
Derivative financial instruments(2)
|
$
|
62,189
|
|
|
$
|
—
|
|
|
$
|
62,189
|
|
|
$
|
—
|
|
Forward commitments
|
281
|
|
|
—
|
|
|
281
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
$
|
62,470
|
|
|
$
|
—
|
|
|
$
|
62,470
|
|
|
$
|
—
|
|
December 31, 2019
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
U.S. government corporations and agencies
|
$
|
9,893
|
|
|
$
|
8,503
|
|
|
$
|
1,390
|
|
|
$
|
—
|
|
Mortgage and asset-backed securities
|
2,577,278
|
|
|
—
|
|
|
2,577,278
|
|
|
—
|
|
Obligations of states and political subdivisions
|
707,190
|
|
|
—
|
|
|
707,190
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Equity securities
|
18,435
|
|
|
—
|
|
|
18,435
|
|
|
—
|
|
Derivative financial instruments(1)
|
17,527
|
|
|
—
|
|
|
17,527
|
|
|
—
|
|
Interest rate lock commitments
|
681
|
|
|
—
|
|
|
—
|
|
|
681
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
$
|
3,331,019
|
|
|
$
|
8,503
|
|
|
$
|
3,321,835
|
|
|
$
|
681
|
|
Liabilities
|
|
|
|
|
|
|
|
Derivative financial instruments(2)
|
$
|
21,462
|
|
|
$
|
—
|
|
|
$
|
21,462
|
|
|
$
|
—
|
|
Forward commitments
|
113
|
|
|
—
|
|
|
113
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
$
|
21,575
|
|
|
$
|
—
|
|
|
$
|
21,575
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
(1) Includes embedded derivatives, back-to-back loan swaps, fair value hedges, free standing derivative instruments and cash flow hedges.
|
|
|
|
|
|
|
|
(2) Includes cash flow hedges, fair value hedges, back-to-back loan swaps, embedded derivatives and free standing derivative instruments.
|
|
|
|
|
|
|
|
The tables below present Heartland's assets that are measured at fair value on a nonrecurring basis, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
June 30, 2020
|
|
|
|
|
|
|
|
|
|
Total
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Year-to-
Date (Gains)
Losses
|
Collateral dependent loans:
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
7,672
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,672
|
|
|
$
|
322
|
|
Owner occupied commercial real estate
|
3,982
|
|
|
—
|
|
|
—
|
|
|
3,982
|
|
|
—
|
|
Non-owner occupied commercial real estate
|
1,144
|
|
|
—
|
|
|
—
|
|
|
1,144
|
|
|
—
|
|
Real estate construction
|
132
|
|
|
—
|
|
|
—
|
|
|
132
|
|
|
—
|
|
Agricultural and agricultural real estate
|
11,358
|
|
|
—
|
|
|
—
|
|
|
11,358
|
|
|
—
|
|
Residential real estate
|
563
|
|
|
—
|
|
|
—
|
|
|
563
|
|
|
52
|
|
Consumer
|
162
|
|
|
—
|
|
|
—
|
|
|
162
|
|
|
—
|
|
Total collateral dependent loans
|
$
|
25,013
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
25,013
|
|
|
$
|
374
|
|
Loans held for sale
|
$
|
54,382
|
|
|
$
|
—
|
|
|
$
|
54,382
|
|
|
$
|
—
|
|
|
$
|
(2,001)
|
|
Other real estate owned
|
5,539
|
|
|
—
|
|
|
—
|
|
|
5,539
|
|
|
651
|
|
Premises, furniture and equipment held for sale
|
567
|
|
|
—
|
|
|
—
|
|
|
567
|
|
|
—
|
|
Servicing rights
|
4,485
|
|
|
—
|
|
|
—
|
|
|
4,485
|
|
|
1,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
December 31, 2019
|
|
|
|
|
|
|
|
|
|
Total
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Year-to-
Date (Gains)
Losses
|
Collateral dependent impaired loans:
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
15,173
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,173
|
|
|
$
|
1,114
|
|
Owner occupied commercial real estate
|
1,352
|
|
|
—
|
|
|
—
|
|
|
1,352
|
|
|
—
|
|
Non-owner occupied commercial real estate
|
1,305
|
|
|
—
|
|
|
—
|
|
|
1,305
|
|
|
—
|
|
Real estate construction
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Agricultural and agricultural real estate
|
12,623
|
|
|
—
|
|
|
—
|
|
|
12,623
|
|
|
1,254
|
|
Residential real estate
|
4,978
|
|
|
—
|
|
|
—
|
|
|
4,978
|
|
|
82
|
|
Consumer
|
1,033
|
|
|
—
|
|
|
—
|
|
|
1,033
|
|
|
—
|
|
Total collateral dependent impaired loans
|
$
|
36,464
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
36,464
|
|
|
$
|
2,450
|
|
Loans held for sale
|
$
|
26,748
|
|
|
$
|
—
|
|
|
$
|
26,748
|
|
|
$
|
—
|
|
|
$
|
(980)
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
6,914
|
|
|
—
|
|
|
—
|
|
|
6,914
|
|
|
947
|
|
Premises, furniture and equipment held for sale
|
2,967
|
|
|
—
|
|
|
—
|
|
|
2,967
|
|
|
735
|
|
Servicing rights
|
5,621
|
|
|
—
|
|
|
—
|
|
|
5,621
|
|
|
911
|
|
The following tables present additional quantitative information about assets measured at fair value on a recurring and nonrecurring basis and for which Heartland has utilized Level 3 inputs to determine fair value, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
6/30/2020
|
|
Valuation
Technique
|
|
Unobservable
Input
|
|
Range
(Weighted Average)
|
Interest rate lock commitments
|
$
|
2,653
|
|
|
Discounted cash flows
|
|
Closing ratio
|
|
0-99% (88%)(1)
|
Other real estate owned
|
5,539
|
|
|
Modified appraised value
|
|
Third party appraisal
|
|
(2)
|
|
|
|
|
|
Appraisal discount
|
|
0-10%(3)
|
Servicing rights
|
4,485
|
|
|
Discounted cash flows
|
|
Third party valuation
|
|
(4)
|
Premises, furniture and equipment held for sale
|
567
|
|
|
Modified appraised value
|
|
Third party appraisal
|
|
(2)
|
|
|
|
|
|
Appraisal discount
|
|
0-10%(3)
|
Collateral dependent impaired loans:
|
|
|
|
|
|
|
|
Commercial
|
7,672
|
|
|
Modified appraised value
|
|
Third party appraisal
|
|
(2)
|
|
|
|
|
|
Appraisal discount
|
|
0-10%(3)
|
Owner occupied commercial real estate
|
3,982
|
|
|
Modified appraised value
|
|
Third party appraisal
|
|
(2)
|
|
|
|
|
|
Appraisal discount
|
|
0-8%(3)
|
Non-owner occupied commercial real estate
|
1,144
|
|
|
Modified appraised value
|
|
Third party appraisal
|
|
(2)
|
|
|
|
|
|
Appraisal discount
|
|
0-7%(3)
|
Real estate construction
|
132
|
|
|
Modified appraised value
|
|
Third party appraisal
|
|
(2)
|
|
|
|
|
|
Appraisal discount
|
|
0-10%(3)
|
Agricultural and agricultural real estate
|
11,358
|
|
|
Modified appraised value
|
|
Third party appraisal
|
|
(2)
|
|
|
|
|
|
Appraisal discount
|
|
0-8%(3)
|
Residential real estate
|
563
|
|
|
Modified appraised value
|
|
Third party appraisal
|
|
(2)
|
|
|
|
|
|
Appraisal discount
|
|
0-6%(3)
|
Consumer
|
162
|
|
|
Modified appraised value
|
|
Third party valuation
|
|
(2)
|
|
|
|
|
|
Valuation 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
12/31/2019
|
|
Valuation
Technique
|
|
Unobservable
Input
|
|
Range
(Weighted Average)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate lock commitments
|
$
|
681
|
|
|
Discounted cash flows
|
|
Closing ratio
|
|
0-99% (90%)(1)
|
Other real estate owned
|
6,914
|
|
|
Modified appraised value
|
|
Third party appraisal
|
|
(2)
|
|
|
|
|
|
Appraisal discount
|
|
0-10%(3)
|
|
|
|
|
|
|
|
|
Servicing rights
|
5,621
|
|
|
Discounted cash flows
|
|
Third party valuation
|
|
(4)
|
Premises, furniture and equipment held for sale
|
2,967
|
|
|
Modified appraised value
|
|
Third party appraisal
|
|
(2)
|
|
|
|
|
|
Appraisal discount
|
|
0-10%(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral dependent impaired loans:
|
|
|
|
|
|
|
|
Commercial
|
15,173
|
|
|
Modified appraised value
|
|
Third party appraisal
|
|
(2)
|
|
|
|
|
|
Appraisal discount
|
|
0-25%(3)
|
Owner occupied commercial real estate
|
1,352
|
|
|
Modified appraised value
|
|
Third party appraisal
|
|
(2)
|
|
|
|
|
|
Appraisal discount
|
|
0-14%(3)
|
Non-owner occupied commercial real estate
|
1,305
|
|
|
Modified appraised value
|
|
Third party appraisal
|
|
(2)
|
|
|
|
|
|
Appraisal discount
|
|
0-14%(3)
|
Real estate construction
|
—
|
|
|
Modified appraised value
|
|
Third party appraisal
|
|
(2)
|
|
|
|
|
|
Appraisal discount
|
|
0-14%(3)
|
Agricultural and agricultural real estate
|
12,623
|
|
|
Modified appraised value
|
|
Third party appraisal
|
|
(2)
|
|
|
|
|
|
Appraisal discount
|
|
0-15%(3)
|
Residential real estate
|
3,088
|
|
|
Modified appraised value
|
|
Third party appraisal
|
|
(2)
|
|
|
|
|
|
Appraisal discount
|
|
0-25%(3)
|
Consumer
|
988
|
|
|
Modified appraised value
|
|
Third party valuation
|
|
(2)
|
|
|
|
|
|
Valuation discount
|
|
0-10%(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) The significant unobservable input used in the fair value measurement is the closing ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. The closing ratio calculation takes into consideration historical data and loan-level data.
|
|
|
|
|
|
|
|
(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.
|
|
|
|
|
|
|
|
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 Six Months Ended
June 30, 2020
|
|
For the Year Ended
December 31, 2019
|
Balance at January 1,
|
$
|
681
|
|
|
$
|
725
|
|
|
|
|
|
Total gains (losses) included in earnings
|
2,994
|
|
|
18
|
|
Issuances
|
5,734
|
|
|
10,702
|
|
Settlements
|
(6,756)
|
|
|
(10,764)
|
|
Balance at period end
|
$
|
2,653
|
|
|
$
|
681
|
|
Gains included in gains (losses) on sale of loans held for sale attributable to interest rate lock commitments held at June 30, 2020, and December 31, 2019, were $2.7 million and $681,000, respectively.
The table below is a summary of the estimated fair value of Heartland's financial instruments (as defined by ASC 825) as of June 30, 2020, and December 31, 2019, in thousands. The carrying amounts in the following tables are recorded in the consolidated balance sheets under the indicated captions. In accordance with ASC 825, the assets and liabilities that are not financial instruments are not included in the disclosure, including the value of the commercial and mortgage servicing rights,
premises, furniture and equipment, premises, furniture and equipment held for sale, OREO, goodwill, and other intangibles and other liabilities.
Heartland does not believe that the estimated information presented herein is representative of the earnings power or value of Heartland. The following analysis, which is inherently limited in depicting fair value, also does not consider any value associated with either existing customer relationships or the ability of Heartland to create value through loan origination, deposit gathering or fee generating activities. Many of the estimates presented herein are based upon the use of highly subjective information and assumptions and, accordingly, the results may not be precise. Management believes that fair value estimates may not be comparable between financial institutions due to the wide range of permitted valuation techniques and numerous estimates which must be made. Furthermore, because the disclosed fair value amounts were estimated as of the balance sheet date, the amounts actually realized or paid upon maturity or settlement of the various financial instruments could be significantly different.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
June 30, 2020
|
|
|
|
|
|
Carrying
Amount
|
|
Estimated
Fair
Value
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
453,578
|
|
|
$
|
453,578
|
|
|
$
|
453,578
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Time deposits in other financial institutions
|
3,128
|
|
|
3,128
|
|
|
3,128
|
|
|
—
|
|
|
—
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carried at fair value
|
4,126,351
|
|
|
4,126,351
|
|
|
4,547
|
|
|
4,121,804
|
|
|
—
|
|
Held to maturity
|
90,579
|
|
|
101,557
|
|
|
—
|
|
|
101,557
|
|
|
—
|
|
Other investments
|
35,902
|
|
|
35,902
|
|
|
—
|
|
|
35,902
|
|
|
—
|
|
Loans held for sale
|
54,382
|
|
|
54,382
|
|
|
—
|
|
|
54,382
|
|
|
—
|
|
Loans, net:
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
2,331,869
|
|
|
2,307,865
|
|
|
—
|
|
|
2,300,193
|
|
|
7,672
|
|
PPP
|
1,124,430
|
|
|
1,124,430
|
|
|
—
|
|
|
1,124,430
|
|
|
—
|
|
Owner occupied commercial real estate
|
1,409,869
|
|
|
1,400,849
|
|
|
—
|
|
|
1,396,867
|
|
|
3,982
|
|
Non-owner occupied commercial real estate
|
1,533,461
|
|
|
1,524,064
|
|
|
—
|
|
|
1,522,920
|
|
|
1,144
|
|
Real estate construction
|
1,087,176
|
|
|
1,101,835
|
|
|
—
|
|
|
1,101,703
|
|
|
132
|
|
Agricultural and agricultural real estate
|
515,072
|
|
|
496,297
|
|
|
—
|
|
|
484,939
|
|
|
11,358
|
|
Residential real estate
|
726,458
|
|
|
726,139
|
|
|
—
|
|
|
725,576
|
|
|
563
|
|
Consumer
|
398,558
|
|
|
397,445
|
|
|
—
|
|
|
397,283
|
|
|
162
|
|
Total Loans, net
|
9,126,893
|
|
|
9,078,924
|
|
|
—
|
|
|
9,053,911
|
|
|
25,013
|
|
Cash surrender value on life insurance
|
172,813
|
|
|
172,813
|
|
|
—
|
|
|
172,813
|
|
|
—
|
|
Derivative financial instruments(1)
|
52,618
|
|
|
52,618
|
|
|
—
|
|
|
52,618
|
|
|
—
|
|
Interest rate lock commitments
|
2,653
|
|
|
2,653
|
|
|
—
|
|
|
—
|
|
|
2,653
|
|
Forward commitments
|
30
|
|
|
30
|
|
|
—
|
|
|
30
|
|
|
—
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
4,831,151
|
|
|
4,831,151
|
|
|
—
|
|
|
4,831,151
|
|
|
—
|
|
Savings deposits
|
6,810,296
|
|
|
6,810,296
|
|
|
—
|
|
|
6,810,296
|
|
|
—
|
|
Time deposits
|
1,067,252
|
|
|
1,067,453
|
|
|
—
|
|
|
1,067,453
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Short term borrowings
|
88,631
|
|
|
88,631
|
|
|
—
|
|
|
88,631
|
|
|
—
|
|
Other borrowings
|
306,459
|
|
|
308,561
|
|
|
—
|
|
|
308,561
|
|
|
—
|
|
Derivative financial instruments(2)
|
62,189
|
|
|
62,189
|
|
|
—
|
|
|
62,189
|
|
|
—
|
|
Forward commitments
|
281
|
|
|
281
|
|
|
—
|
|
|
281
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes embedded derivatives and back-to-back loan swaps.
|
|
|
|
|
|
|
|
|
|
(2) Includes embedded derivatives, back-to-back loan swaps, fair value hedges, free standing derivative instruments and cash flow hedges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
December 31, 2019
|
|
|
|
|
|
Carrying
Amount
|
|
Estimated
Fair
Value
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
378,734
|
|
|
$
|
378,734
|
|
|
$
|
378,734
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Time deposits in other financial institutions
|
3,564
|
|
|
3,564
|
|
|
3,564
|
|
|
—
|
|
|
—
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carried at fair value
|
3,312,796
|
|
|
3,312,796
|
|
|
8,503
|
|
|
3,304,293
|
|
|
—
|
|
Held to maturity
|
91,324
|
|
|
100,484
|
|
|
—
|
|
|
100,484
|
|
|
—
|
|
Other investments
|
31,321
|
|
|
31,321
|
|
|
—
|
|
|
31,321
|
|
|
—
|
|
Loans held for sale
|
26,748
|
|
|
26,748
|
|
|
—
|
|
|
26,748
|
|
|
—
|
|
Loans, net:
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
2,530,809
|
|
|
2,621,253
|
|
|
—
|
|
|
2,606,080
|
|
|
15,173
|
|
Owner occupied commercial real estate
|
1,472,704
|
|
|
1,409,388
|
|
|
—
|
|
|
1,408,036
|
|
|
1,352
|
|
Non-owner occupied commercial real estate
|
1,495,877
|
|
|
1,397,527
|
|
|
—
|
|
|
1,396,222
|
|
|
1,305
|
|
Real estate construction
|
1,027,081
|
|
|
924,041
|
|
|
—
|
|
|
924,041
|
|
|
—
|
|
Agricultural and agricultural real estate
|
565,837
|
|
|
576,821
|
|
|
—
|
|
|
564,198
|
|
|
12,623
|
|
Residential real estate
|
832,277
|
|
|
841,453
|
|
|
—
|
|
|
838,365
|
|
|
3,088
|
|
Consumer
|
443,332
|
|
|
470,927
|
|
|
—
|
|
|
469,939
|
|
|
988
|
|
Total Loans, net
|
8,297,522
|
|
|
8,243,343
|
|
|
—
|
|
|
8,206,879
|
|
|
36,464
|
|
Cash surrender value on life insurance
|
171,625
|
|
|
171,625
|
|
|
—
|
|
|
171,625
|
|
|
—
|
|
Derivative financial instruments(1)
|
17,527
|
|
|
17,527
|
|
|
—
|
|
|
17,527
|
|
|
—
|
|
Interest rate lock commitments
|
681
|
|
|
681
|
|
|
—
|
|
|
—
|
|
|
681
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
3,543,863
|
|
|
3,543,863
|
|
|
—
|
|
|
3,543,863
|
|
|
—
|
|
Savings deposits
|
6,307,425
|
|
|
6,307,425
|
|
|
—
|
|
|
6,307,425
|
|
|
—
|
|
Time deposits
|
1,193,043
|
|
|
1,193,043
|
|
|
—
|
|
|
1,193,043
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Short term borrowings
|
182,626
|
|
|
182,626
|
|
|
—
|
|
|
182,626
|
|
|
—
|
|
Other borrowings
|
275,773
|
|
|
278,169
|
|
|
—
|
|
|
278,169
|
|
|
—
|
|
Derivative financial instruments(1)
|
21,462
|
|
|
21,462
|
|
|
—
|
|
|
21,462
|
|
|
—
|
|
Forward commitments
|
113
|
|
|
113
|
|
|
—
|
|
|
113
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes embedded derivatives, back-to-back loan swaps, fair value hedges, free standing derivative instruments and cash flow hedges.
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents — The carrying amount is a reasonable estimate of fair value due to the short-term nature of these instruments.
Time Deposits in Other Financial Institutions — The carrying amount is a reasonable estimate of fair value due to the short-term nature of these instruments.
Securities — For equity securities with a readily determinable fair value and debt securities either held to maturity, available for sale or trading, fair value equals quoted market price if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. For Level 3 securities, Heartland utilizes independent pricing provided by third party vendors or brokers.
Other Investments — Fair value measurement of other investments, which consists primarily of FHLB stock, are based on their redeemable value, which is at cost due to the restrictions placed on their transferability. The market for these securities is restricted to the issuer of the stock and subject to impairment evaluation.
Loans — The fair value of loans is determined using an exit price methodology. The exit price estimation of fair value is based on the present value of the expected cash flows. The projected cash flows are based on the contractual terms of the loans, adjusted for prepayments and a discount rate based on the relative risk of the cash flows. Other considerations include the loan type, remaining life of the loan and credit risk.
The fair value of impaired loans is measured using the fair value of the underlying collateral. The fair value of loans held for sale is estimated using quoted market prices.
Cash surrender value on life insurance — Life insurance policies are held on certain officers. The carrying value of these policies approximates fair value as it is based on the cash surrender value adjusted for other charges or amounts due that are probable at settlement. As such, Heartland classifies the estimated fair value of the cash surrender value on life insurance as Level 2.
Derivative Financial Instruments — The fair value of all derivatives is estimated based on the amount that Heartland would pay or would be paid to terminate the contract or agreement, using current rates and prices, and, when appropriate, the current creditworthiness of the counter-party.
Interest Rate Lock Commitments — The fair value of interest rate lock commitments is estimated using an internal valuation model, which includes grouping the interest rate lock commitments by interest rate and terms, applying an estimated closing ratio based on historical experience, and then multiplying by quoted investor prices determined to be reasonably applicable to the loan commitment groups based on interest rate, terms, and rate lock expiration dates of the loan commitment group.
Forward Commitments — The fair value of these instruments is estimated using an internal valuation model, which includes current trade pricing for similar financial instruments.
Deposits — The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. If the fair value of the fixed maturity certificates of deposit is calculated at less than the carrying amount, the carrying value of these deposits is reported as the fair value.
Short-term and Other Borrowings — Rates currently available to Heartland for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.
Commitments to Extend Credit, Unused Lines of Credit and Standby Letters of Credit — Based upon management's analysis of the off balance sheet financial instruments, there are no significant unrealized gains or losses associated with these financial instruments based upon review of the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties.
NOTE 9: REVENUE
Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers, requires revenue to be recognized at an amount that reflects the consideration to which Heartland expects to be entitled in exchange for transferring goods or services to a customer. ASC 606 applies to all contracts with customers to provide goods or services in the ordinary course of business, except for contracts that are specifically excluded from its scope. The majority of Heartland's revenue streams including interest income, loan servicing income, net securities gain, net unrealized gains and losses on equity securities, net gains on sale of loans held for sale, valuation adjustment on servicing rights, income from bank owned life insurance and other noninterest income are outside the scope of ASC 606. Revenue streams including service charges and fees, interchange fees on credit and debit cards, trust fees and brokerage and insurance commissions are within the scope of ASC 606.
Service Charges and Fees
Service charges and fees consist of revenue generated from deposit account related service charges and fees, overdraft fees, customer service fees and other service charges, credit card fee income, debit card income and other service charges and fees.
Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders and other deposit account related fees. Heartland's performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees, including overdraft fees, are largely transactional based, and therefore, the performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.
Customer service fees and other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. Heartland's performance obligation for fees, exchange, and other service charges are largely
satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.
Credit card fee income and debit card income are comprised of interchange fees, ATM fees, and merchant services income. Credit card fee income and debit card income are earned whenever the banks' debit and credit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a bank cardholder uses an ATM that is not owned by one of Heartland's banks or a non-bank cardholder uses Heartland-owned ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees.
Trust Fees
Trust fees are primarily comprised of fees earned from the management and administration of trusts and other customer assets. Heartland's performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the average daily market value or month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days before or after month end through a direct charge to customers’ accounts. Heartland does not earn performance-based incentives. Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. Heartland's performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered.
Brokerage and Insurance Commissions
Brokerage commission primarily consist of commissions related to broker-dealer contracts. The contracts are between the customer and the broker-dealer, and Heartland satisfies its performance obligation and earns commission when the transactions are completed. The recognition of revenue is based on a defined fee schedule and does not require significant judgment. Payment is received shortly after services are rendered. Insurance commissions are related to commissions received directly from the insurance carrier. Heartland acts as an insurance agent between the customer and the insurance carrier. Heartland's performance obligations and associated fee and commission income are defined with each insurance product with the insurance company. When insurance payments are received from customers, a portion of the payment is recognized as commission revenue.
The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and six months ended June 30, 2020, and 2019, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
In-scope of Topic 606
|
|
|
|
|
|
|
|
Service charges and fees
|
|
|
|
|
|
|
|
Service charges and fees on deposit accounts
|
$
|
3,476
|
|
|
$
|
3,186
|
|
|
$
|
6,913
|
|
|
$
|
6,163
|
|
Overdraft fees
|
1,634
|
|
|
2,876
|
|
|
4,443
|
|
|
5,619
|
|
Customer service and other service fees
|
35
|
|
|
84
|
|
|
94
|
|
|
166
|
|
Credit card fee income
|
4,067
|
|
|
4,270
|
|
|
7,967
|
|
|
7,619
|
|
Debit card income
|
1,760
|
|
|
4,213
|
|
|
3,576
|
|
|
7,856
|
|
|
|
|
|
|
|
|
|
Total service charges and fees
|
10,972
|
|
|
14,629
|
|
|
22,993
|
|
|
27,423
|
|
Trust fees
|
4,977
|
|
|
4,825
|
|
|
9,999
|
|
|
9,299
|
|
Brokerage and insurance commissions
|
595
|
|
|
1,028
|
|
|
1,328
|
|
|
1,762
|
|
Total noninterest income in-scope of Topic 606
|
16,544
|
|
|
20,482
|
|
|
34,320
|
|
|
38,484
|
|
|
|
|
|
|
|
|
|
Out-of-scope of Topic 606
|
|
|
|
|
|
|
|
Loan servicing income
|
$
|
379
|
|
|
$
|
1,338
|
|
|
$
|
1,342
|
|
|
$
|
3,067
|
|
Securities gains, net
|
2,006
|
|
|
3,580
|
|
|
3,664
|
|
|
5,155
|
|
Unrealized gain on equity securities, net
|
680
|
|
|
112
|
|
|
449
|
|
|
370
|
|
Net gains on sale of loans held for sale
|
7,857
|
|
|
4,343
|
|
|
12,517
|
|
|
7,519
|
|
Valuation adjustment on servicing rights
|
9
|
|
|
(364)
|
|
|
(1,556)
|
|
|
(953)
|
|
Income on bank owned life insurance
|
1,167
|
|
|
888
|
|
|
1,665
|
|
|
1,787
|
|
Other noninterest income
|
1,995
|
|
|
1,682
|
|
|
4,053
|
|
|
3,349
|
|
Total noninterest income out-of-scope of Topic 606
|
14,093
|
|
|
11,579
|
|
|
22,134
|
|
|
20,294
|
|
Total noninterest income
|
$
|
30,637
|
|
|
$
|
32,061
|
|
|
$
|
56,454
|
|
|
$
|
58,778
|
|
Contract Balances
A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. Heartland's noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after Heartland satisfies its performance obligation and revenue is recognized. Heartland does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of June 30, 2020, and December 31, 2019, Heartland did not have any significant contract balances.
Contract Acquisition Costs
In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). Heartland utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, Heartland did not capitalize any contract acquisition costs.
NOTE 10: STOCK COMPENSATION
Heartland may grant, through its Nominating and Compensation Committee (the "Compensation Committee"), non-qualified and incentive stock options, stock appreciation rights, stock awards, restricted stock, restricted stock units and cash incentive
awards, under its 2020 Long-Term Incentive Plan (the "Plan"). The Plan was approved by stockholders in May 2020 and replaces the 2012 Long-Term Incentive Plan. The Plan increases the number of shares of common stock authorized for issuance to 1,460,000 and makes certain other changes to the Plan. As of June 30, 2020, 1,429,562 shares of common stock were available for issuance under future awards that may be granted under the Plan to employees and directors of, and service providers to, Heartland or its subsidiaries.
ASC Topic 718, "Compensation-Stock Compensation," requires the measurement of the cost of employee services received in exchange for an award of equity instruments based upon the fair value of the award on the grant date. The cost of the award is based upon its fair value estimated on the date of grant and recognized in the consolidated statements of income over the vesting period of the award. The fair market value of restricted stock and restricted stock units is based on the fair value of the underlying shares of common stock on the date of grant. Forfeitures are accounted for as they occur.
Heartland's income tax expense included $91,000 of tax expense during the six months ended June 30, 2020 and a tax benefit of $272,000 during the six months ended June 30, 2019, related to the exercise, vesting and forfeiture of equity-based awards.
Restricted Stock Units
The Plan permits the Compensation Committee to grant restricted stock units ("RSUs"). In the first quarter of 2020, the Compensation Committee granted time-based RSUs with respect to 114,944 shares of common stock, and in the first quarter of 2019, the Compensation Committee granted time-based RSUs with respect to 90,073 shares of common stock to selected officers and employees. The time-based RSUs represent the right, without payment, to receive shares of Heartland common stock on a specified date in the future. The time-based RSUs granted in 2020 and 2019 vest over three years in equal installments on March 6 of each of the three years following the year of the grant. The time-based RSUs may also vest upon death or disability, upon a change in control or upon a "qualified retirement" (as defined in the RSU agreement). The retiree is required to sign a non-solicitation agreement as a condition to vesting.
The Compensation Committee also granted three-year performance-based RSUs with respect to 50,787 shares and 34,848 shares of common stock in the first quarter of 2020 and 2019 respectively. These performance-based RSUs will be earned based on satisfaction of performance targets for the three-year performance period ended December 31, 2022, and December 31, 2021, respectively. These performance-based RSUs or a portion thereof may vest in 2022 and 2021, respectively, after measurement of performance in relation to the performance targets.
The three-year performance-based RSUs vest to the extent that they are earned upon death or disability or upon a "qualified retirement." Upon a change in control, performance-based RSUs shall become vested at 100% of target if the RSU obligations are not assumed by the successor company. If the successor company does assume the RSU obligations, the 2019 and 2018 performance-based RSUs will vest at 100% of target upon a "Termination of Service" within the period beginning six months prior to a change in control and ending twenty-four months after a change in control.
All of Heartland's RSUs will be settled in common stock upon vesting and are not entitled to dividends until vested.
The Compensation Committee may grant RSUs under the Plan to directors as part of their compensation, to new management level employees at commencement of employment, and to other employees and service providers as incentives. During the six months ended June 30, 2020, and June 30, 2019, 46,613 and 32,662 time-based RSUs, respectively, were granted to directors and new employees.
A summary of the RSUs outstanding as of June 30, 2020, and 2019, and changes during the six months ended June 30, 2020 and 2019, follows:
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2020
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2019
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Shares
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Weighted-Average Grant Date
Fair Value
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Shares
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Weighted-Average Grant Date
Fair Value
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Outstanding at January 1,
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254,383
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$
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46.76
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266,995
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$
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43.89
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Granted
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212,344
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32.00
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157,583
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45.00
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Vested
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(118,686)
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44.52
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(139,623)
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38.82
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Forfeited
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(14,648)
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47.00
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(18,015)
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49.31
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Outstanding at June 30,
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333,393
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$
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38.55
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266,940
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$
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46.97
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Total compensation costs recorded for RSUs were $3.4 million and $3.6 million for the six-month periods ended June 30, 2020 and 2019. As of June 30, 2020, there were $7.9 million of total unrecognized compensation costs related to the Plan for RSUs that are expected to be recognized through 2022.
NOTE 11: LEASES
A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration.
Lessee Accounting
Substantially all of the leases in which Heartland is the lessee are comprised of real estate property for branches, ATM locations, and office space with terms extending through 2031. All of Heartland's leases are classified as operating leases, and therefore, were previously not recognized on the consolidated balance sheet. With the adoption of ASU 2016-02 "Leases" (Topic 842), operating lease agreements are required to be recognized on the consolidated balance sheet as a right-of-use ("ROU") asset and a corresponding lease liability.
Heartland elected not to include short-term leases (i.e., leases with initial terms of twelve months or less), or equipment leases (deemed immaterial) on the consolidated balance sheet. The table below presents Heartland's ROU assets and lease liabilities as of June 30, 2020 and December 31, 2019, in thousands:
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Classification
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June 30, 2020
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December 31, 2019
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Operating lease right-of-use assets
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Other assets
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$
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21,474
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$
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23,200
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Operating lease liabilities
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Accrued expenses and other liabilities
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$
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22,740
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$
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24,617
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The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. Heartland’s lease agreements often include one or more options to renew at Heartland’s discretion. If at lease inception, Heartland considers the exercising of a renewal option to be reasonably certain, Heartland will include the extended term in the calculation of the ROU asset and lease liability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, Heartland utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. The variable lease cost primarily represents variable payments such as common area maintenance and utilities. The table below presents the lease costs and supplemental information as of June 30, 2020 and 2019, in thousands:
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Three Months Ended
June 30,
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Six Months Ended
June 30,
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Income Statement Category
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2020
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2019
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2020
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2019
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Lease Cost
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Operating lease cost
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Occupancy expense
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$
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1,311
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$
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1,462
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$
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2,639
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$
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2,867
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Variable lease cost
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Occupancy expense
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16
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32
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32
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67
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Total lease cost
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$
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1,327
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$
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1,494
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$
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2,671
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$
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2,934
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Supplemental Information
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Noncash reduction of ROU assets arising from lease modifications and terminations
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Occupancy expense
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$
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17
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$
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2,464
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$
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375
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$
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2,464
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Noncash reduction of lease liabilities arising from lease modifications and terminations
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Occupancy expense
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—
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2,487
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386
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2,487
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Supplemental balance sheet information
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As of June 30, 2020
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Weighted-average remaining operating lease term (in years)
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6.53
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Weighted-average discount rate for operating leases
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3.00
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%
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A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities as of June 30, 2020 are as follows, in thousands:
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Six months ending December 31, 2020
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$
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2,829
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Year ending December 31,
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2021
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5,384
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2022
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4,157
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2023
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2,819
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2024
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2,106
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Thereafter
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7,793
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Total lease payments
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25,088
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Less interest
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(2,348)
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Present value of lease liabilities
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$
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22,740
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