NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The interim unaudited consolidated financial statements contained herein should be read in conjunction with the audited consolidated financial statements and accompanying notes to the consolidated financial statements for the fiscal year ended December 31, 2021, included in the Annual Report on Form 10-K of Heartland Financial USA, Inc. ("HTLF") filed with the Securities and Exchange Commission ("SEC") on February 24, 2022. Footnote disclosures to the interim unaudited consolidated financial statements which would substantially duplicate the disclosure contained in the footnotes to the audited consolidated financial statements have been omitted.
The financial information included herein has been prepared in accordance with U.S. generally accepted accounting principles for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X. Such information reflects all adjustments (consisting of normal recurring adjustments), that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of the interim period ended March 31, 2022, are not necessarily indicative of the results expected for the year ending December 31, 2022.
Earnings Per Share
Basic earnings per share is determined using net income available to common stockholders and weighted average common shares outstanding. Diluted earnings per share is computed by dividing net income available to common stockholders by the weighted average common shares and assumed incremental common shares issued. Amounts used in the determination of basic and diluted earnings per share for the three months ended March 31, 2022, and 2021, are shown in the table below, dollars and number of shares in thousands, except per share data:
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| Three Months Ended March 31, |
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| 2022 | | 2021 |
Net income | $ | 43,089 | | | $ | 52,814 | |
Preferred dividends | (2,013) | | | (2,013) | |
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Net income available to stockholders | $ | 41,076 | | | $ | 50,801 | |
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Weighted average common shares outstanding for basic earnings per share | 42,360 | | | 42,174 | |
Assumed incremental common shares issued upon vesting of outstanding restricted stock units | 181 | | | 162 | |
Weighted average common shares for diluted earnings per share | 42,541 | | | 42,336 | |
Earnings per common share — basic | $ | 0.97 | | | $ | 1.20 | |
Earnings per common share — diluted | $ | 0.97 | | | $ | 1.20 | |
Number of antidilutive common stock equivalents excluded from diluted earnings per share computation | — | | | 25 | |
Subsequent Events - HTLF has evaluated subsequent events that may require recognition or disclosure through the filing date of this Quarterly Report on Form 10-Q with the SEC.
Effect of New Financial Accounting Standards
ASU 2018-16
In October 2018, the FASB issued ASU 2018-16, "Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting." In the United States, eligible benchmark interest rates under Topic 815 are interest rates on direct Treasury obligations of the U.S. government, the London Interbank Offered Rate ("LIBOR") swap rate, and the Overnight Index Swap ("OIS") Rate based on the Fed Funds Effective Rate. When the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, in August 2017, it introduced the Securities Industry and Financial Markets Association ("SIFMA") Municipal Swap Rate as the fourth permissible U.S. benchmark rate. ASU 2018-16 adds the OIS rate based on the Secured Overnight Financing Rate ("SOFR") as a U.S. benchmark interest rate to facilitate the LIBOR to SOFR transition and provide sufficient lead time for entities to prepare for changes to interest rate risk hedging strategies for both risk
management and hedge accounting purposes. ASU 2018-16 became effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years and the financial statement impact immediately upon adoption was immaterial. The future financial statement impact will depend on any new contracts entered into using new benchmark rates, as well as any existing contracts that are migrated from LIBOR to new benchmark interest rates. HTLF has a formal working group that is responsible for the planning, assessment and execution of the transition from LIBOR as an interest rate benchmark to term SOFR. Currently, HTLF has adjustable rate loans, several debt obligations and securities and derivative instruments in place that reference LIBOR-based rates. HTLF’s transition plan included the cessation in new contracts of the use of LIBOR as a reference rate at December 31, 2021.
ASU 2020-04
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform," which provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For loan and lease agreements that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate, and the modifications would be considered "minor" with the result that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement, with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for derivative accounting. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-04 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic within the ASC, ASU 2020-04 must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. HTLF anticipates that ASU 2020-04 will simplify any modifications executed between the selected start date and December 31, 2022 that are directly related to LIBOR transition by allowing prospective recognition of the continuation of the contract, rather than extinguishment of the old contract that would result in writing off unamortized fees/costs. Management will continue to actively assess the impacts of ASU 2020-04 and the related opportunities and risks involved in the LIBOR transition.
ASU 2022-02
In March 2022, the FASB issued ASU 2022-02, "Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures." These amendments eliminate the troubled debt restructurings ("TDR") recognition and measurement guidance and, instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, these amendments require that an entity disclose current-period gross charge-offs by year of origination for loans receivable within the scope of Subtopic 326-20. The guidance is effective for entities that have adopted ASU 2016-13 for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. These amendments should be applied prospectively. If an entity elects to early adopt ASU 2022-02 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes the interim period. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. Management is assessing the impact of ASU 2022-02 on its results of operations, financial position and financial statement disclosures.
NOTE 2: SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair values of debt securities available for sale and equity securities with a readily determinable fair value that are carried at fair value as of March 31, 2022, and December 31, 2021, are summarized in the table below, in thousands:
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| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
March 31, 2022 | | | | | | | |
U.S. treasuries | $ | 998 | | | $ | 3 | | | $ | — | | | $ | 1,001 | |
U.S. agencies | 89,827 | | | 24 | | | (3,742) | | | 86,109 | |
Obligations of states and political subdivisions | 1,808,169 | | | 274 | | | (170,526) | | | 1,637,917 | |
Mortgage-backed securities - agency | 2,264,657 | | | 1,510 | | | (138,004) | | | 2,128,163 | |
Mortgage-backed securities - non-agency | 2,071,559 | | | 4,529 | | | (62,152) | | | 2,013,936 | |
Commercial mortgage-backed securities - agency | 127,563 | | | 107 | | | (9,115) | | | 118,555 | |
Commercial mortgage-backed securities - non-agency | 699,703 | | | — | | | (5,740) | | | 693,963 | |
Asset-backed securities | 321,155 | | | 320 | | | (4,055) | | | 317,420 | |
Corporate bonds | 7,723 | | | 33 | | | (108) | | | 7,648 | |
Total debt securities | 7,391,354 | | | 6,800 | | | (393,442) | | | 7,004,712 | |
Equity securities with a readily determinable fair value | 20,531 | | | — | | | — | | | 20,531 | |
Total | $ | 7,411,885 | | | $ | 6,800 | | | $ | (393,442) | | | $ | 7,025,243 | |
December 31, 2021 | | | | | | | |
U.S. treasuries | $ | 997 | | | $ | 11 | | | $ | — | | | $ | 1,008 | |
U.S. agencies | 193,932 | | | 264 | | | (812) | | | 193,384 | |
Obligations of states and political subdivisions | 2,045,386 | | | 56,263 | | | (16,616) | | | 2,085,033 | |
Mortgage-backed securities - agency | 2,388,601 | | | 11,870 | | | (51,182) | | | 2,349,289 | |
Mortgage-backed securities - non-agency | 1,749,838 | | | 4,570 | | | (11,029) | | | 1,743,379 | |
Commercial mortgage-backed securities - agency | 125,397 | | | 1,429 | | | (2,914) | | | 123,912 | |
Commercial mortgage-backed securities - non-agency | 600,253 | | | 998 | | | (363) | | | 600,888 | |
Asset-backed securities | 408,167 | | | 2,803 | | | (1,317) | | | 409,653 | |
Corporate bonds | 2,979 | | | 61 | | | — | | | 3,040 | |
Total debt securities | 7,515,550 | | | 78,269 | | | (84,233) | | | 7,509,586 | |
Equity securities with a readily determinable fair value | 20,788 | | | — | | | — | | | 20,788 | |
Total | $ | 7,536,338 | | | $ | 78,269 | | | $ | (84,233) | | | $ | 7,530,374 | |
The amortized cost, gross unrealized gains and losses and estimated fair values of held to maturity securities as of March 31, 2022, and December 31, 2021, are summarized in the table below, in thousands:
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| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | | Allowance for Credit Losses |
March 31, 2022 | | | | | | | | | |
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Obligations of states and political subdivisions | $ | 81,785 | | | $ | 4,714 | | | $ | (13) | | | $ | 86,486 | | | $ | — | |
Total | $ | 81,785 | | | $ | 4,714 | | | $ | (13) | | | $ | 86,486 | | | $ | — | |
December 31, 2021 | | | | | | | | | |
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Obligations of states and political subdivisions | $ | 84,709 | | | $ | 9,430 | | | $ | — | | | $ | 94,139 | | | $ | — | |
Total | $ | 84,709 | | | $ | 9,430 | | | $ | — | | | $ | 94,139 | | | $ | — | |
As of March 31, 2022, and December 31, 2021, HTLF had $25.4 million and $29.4 million, respectively, of accrued interest receivable, which is included in other assets on the consolidated balance sheets. HTLF does not consider accrued interest receivable in the carrying amount of financial assets held at amortized cost basis or in the allowance for credit losses calculation.
The amortized cost and estimated fair value of investment securities carried at fair value at March 31, 2022, by contractual maturity, are as follows, in thousands. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.
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| March 31, 2022 |
| Amortized Cost | | Estimated Fair Value |
Due in 1 year or less | $ | 1,328 | | | $ | 1,333 | |
Due in 1 to 5 years | 10,563 | | | 10,440 | |
Due in 5 to 10 years | 142,958 | | | 132,583 | |
Due after 10 years | 1,751,868 | | | 1,588,319 | |
Total debt securities | 1,906,717 | | | 1,732,675 | |
Mortgage and asset-backed securities | 5,484,637 | | | 5,272,037 | |
Equity securities with a readily determinable fair value | 20,531 | | | 20,531 | |
Total investment securities | $ | 7,411,885 | | | $ | 7,025,243 | |
The amortized cost and estimated fair value of debt securities held to maturity at March 31, 2022, by contractual maturity, are as follows, in thousands. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.
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| March 31, 2022 |
| Amortized Cost | | Estimated Fair Value |
Due in 1 year or less | $ | 4,095 | | | $ | 4,104 | |
Due in 1 to 5 years | 37,309 | | | 37,998 | |
Due in 5 to 10 years | 34,300 | | | 36,918 | |
Due after 10 years | 6,081 | | | 7,466 | |
Total debt securities | 81,785 | | | 86,486 | |
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As of March 31, 2022, and December 31, 2021, securities with a carrying value of $1.22 billion and $1.66 billion, respectively, were pledged to secure public and trust deposits, short-term borrowings and for other purposes as required or permitted by law.
Gross gains and losses realized related to the sales of securities carried at fair value for the three months ended March 31, 2022 and 2021, are summarized as follows, in thousands:
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Proceeds from sales | | | | | $ | 824,071 | | | $ | 207,067 | |
Gross security gains | | | | | 6,941 | | | 445 | |
Gross security losses | | | | | 4,950 | | | 475 | |
The following table summarizes, in thousands, the amount of unrealized losses, defined as the amount by which cost or amortized cost exceeds fair value, and the related fair value of investments with unrealized losses in the securities portfolio as of March 31, 2022, and December 31, 2021. The investments were segregated into two categories: those that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for
12 months or more. The reference point for determining how long an investment was in an unrealized loss position was March 31, 2021, and December 31, 2020, respectively.
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Debt securities available for sale | Less than 12 months | | 12 months or longer | | Total |
| Fair Value | | Unrealized Losses | | Count | | Fair Value | | Unrealized Losses | | Count | | Fair Value | | Unrealized Losses | | Count |
March 31, 2022 | | | | | | | | | | | | | | | | | |
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U.S. agencies | $ | 66,819 | | | $ | (1,701) | | | 8 | | | $ | 17,475 | | | $ | (2,041) | | | 1 | | | $ | 84,294 | | | $ | (3,742) | | | 9 | |
Obligations of states and political subdivisions | 1,321,666 | | | (124,133) | | | 305 | | | 297,576 | | | (46,393) | | | 69 | | | 1,619,242 | | | (170,526) | | | 374 | |
Mortgage-backed securities - agency | 1,439,275 | | | (82,994) | | | 311 | | | 617,833 | | | (55,010) | | | 40 | | | 2,057,108 | | | (138,004) | | | 351 | |
Mortgage-backed securities - non-agency | 1,288,511 | | | (58,783) | | | 154 | | | 93,072 | | | (3,369) | | | 7 | | | 1,381,583 | | | (62,152) | | | 161 | |
Commercial mortgage-backed securities - agency | 47,449 | | | (2,204) | | | 18 | | | 57,260 | | | (6,911) | | | 7 | | | 104,709 | | | (9,115) | | | 25 | |
Commercial mortgage-backed securities - non-agency | 621,766 | | | (5,526) | | | 61 | | | 14,030 | | | (214) | | | 2 | | | 635,796 | | | (5,740) | | | 63 | |
Asset-backed securities | 98,835 | | | (3,882) | | | 18 | | | 9,299 | | | (173) | | | 4 | | | 108,134 | | | (4,055) | | | 22 | |
Corporate bonds | 5,613 | | | (108) | | | 3 | | | — | | | — | | | — | | | 5,613 | | | (108) | | | 3 | |
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Total temporarily impaired securities | $ | 4,889,934 | | | $ | (279,331) | | | 878 | | | $ | 1,106,545 | | | $ | (114,111) | | | 130 | | | $ | 5,996,479 | | | $ | (393,442) | | | 1,008 | |
December 31, 2021 | | |
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U.S. agencies | $ | 100,839 | | | $ | (812) | | | 2 | | | $ | — | | | $ | — | | | — | | | $ | 100,839 | | | $ | (812) | | | 2 | |
Obligations of states and political subdivisions | 596,866 | | | (10,115) | | | 113 | | | 236,329 | | | (6,501) | | | 49 | | | 833,195 | | | (16,616) | | | 162 | |
Mortgage-backed securities - agency | 1,383,808 | | | (33,291) | | | 83 | | | 474,724 | | | (17,891) | | | 19 | | | 1,858,532 | | | (51,182) | | | 102 | |
Mortgage-backed securities - non-agency | 929,515 | | | (10,870) | | | 27 | | | 23,821 | | | (159) | | | 5 | | | 953,336 | | | (11,029) | | | 32 | |
Commercial mortgage-backed securities - agency | 26,999 | | | (689) | | | 8 | | | 53,025 | | | (2,225) | | | 5 | | | 80,024 | | | (2,914) | | | 13 | |
Commercial mortgage-backed securities - non-agency | 74,450 | | | (145) | | | 3 | | | 14,124 | | | (218) | | | 2 | | | 88,574 | | | (363) | | | 5 | |
Asset-backed securities | 113,945 | | | (1,201) | | | 6 | | | 13,799 | | | (116) | | | 6 | | | 127,744 | | | (1,317) | | | 12 | |
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Total temporarily impaired securities | $ | 3,226,422 | | | $ | (57,123) | | | 242 | | | $ | 815,822 | | | $ | (27,110) | | | 86 | | | $ | 4,042,244 | | | $ | (84,233) | | | 328 | |
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Securities held to maturity | Less than 12 months | | 12 months or longer | | Total |
| Fair Value | | Unrealized Losses | | Count | | Fair Value | | Unrealized Losses | | Count | | Fair Value | | Unrealized Losses | | Count |
March 31, 2022 | | | | | | | | | | | | | | | | | |
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Obligations of states and political subdivisions | $ | 1,590 | | | $ | (13) | | | 2 | | | $ | — | | | $ | — | | | — | | | $ | 1,590 | | | $ | (13) | | | 2 | |
Total temporarily impaired securities | $ | 1,590 | | | (13) | | | 2 | | 2 | $ | — | | | $ | — | | | — | | | $ | 1,590 | | | (13) | | | 2 | |
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HTLF had no securities held to maturity with unrealized losses at December 31, 2021.
HTLF reviews the investment securities portfolio at the security level on a quarterly basis for potential credit losses, which takes into consideration numerous factors, and the relative significance of any single factor can vary by security. Some factors HTLF may consider include changes in security ratings, financial condition of the issuer, as well as security and industry specific economic conditions. In addition, with regard to debt securities, HTLF may also evaluate payment structure, whether there are defaulted payments or expected defaults, prepayment speeds and the value of any underlying collateral. For certain debt securities in unrealized loss positions, HTLF prepares cash flow analyses to compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security.
The unrealized losses on HTLF's mortgage and asset-backed securities are the result of changes in market interest rates or widening of market spreads subsequent to the initial purchase of the securities. The losses are not related to concerns regarding
the underlying credit of the issuers or the underlying collateral. It is expected that the securities will not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates or widening market spreads and not credit quality, and because HTLF has the intent and ability to hold these investments until a market price recovery or to maturity and does not believe it will be required to sell the securities before maturity, no credit losses were recognized on these securities during the three months ended March 31, 2022 and 2021.
The unrealized losses on HTLF's obligations of states and political subdivisions are the result of changes in market interest rates or widening of market spreads subsequent to the initial purchase of the securities. Management monitors the published credit ratings of these securities and the stability of the underlying municipalities. Because the decline in fair value is attributable to changes in interest rates or widening market spreads due to insurance company downgrades and not underlying credit quality, and because HTLF has the intent and ability to hold these investments until a market price recovery or to maturity and does not believe it will be required to sell the securities before maturity, no credit losses were recognized on these securities during the three months ended March 31, 2022 and 2021.
In the first quarter of 2022, HTLF sold two obligations of states and political subdivisions securities from the held to maturity portfolio. Because the underlying credit quality of the individual securities showed significant deterioration, it was unlikely HTLF would recover the remaining basis of the securities prior to maturity and therefore inconsistent with HTLF's original intent upon purchase and classification of these held to maturity securities. The carrying value of these securities was $2.2 million, and the associated gross gains were $100,000.
The credit loss model under ASC 326-30, applicable to held to maturity debt securities, requires the recognition of lifetime expected credit losses through an allowance account at the time when the security is purchased. The following tables present, in thousands, the activity in the allowance for credit losses for securities held to maturity by obligations of states and political subdivisions securities for the three months ended March 31, 2022 and 2021:
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| Three Months Ended March 31, |
| 2022 | | 2021 |
Beginning balance | $ | — | | | $ | 51 | |
Provision (benefit) for credit losses | — | | | (3) | |
Balance at period end | $ | — | | | $ | 48 | |
Based on HTLF's credit loss model applicable to held to maturity debt securities, no allowance for credit losses was required at both March 31, 2022 and December 31, 2021.
The following table summarizes, in thousands, the carrying amount of HTLF's held to maturity debt securities by investment rating as of March 31, 2022 and December 31, 2021, which are updated quarterly and used to monitor the credit quality of the securities:
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| March 31, 2022 | | December 31, 2021 |
Rating | | | |
AAA | $ | 3,294 | | | $ | 3,265 | |
AA, AA+, AA- | 54,944 | | | 61,471 | |
A+, A, A- | 18,626 | | | 15,034 | |
BBB | 4,921 | | | 4,939 | |
Not Rated | — | | | — | |
Total | $ | 81,785 | | | $ | 84,709 | |
Included in other securities were shares of stock in each Federal Home Loan Bank (the "FHLB") of Des Moines, Chicago, Dallas, San Francisco and Topeka at an amortized cost of $23.0 million at March 31, 2022 and $22.6 million at December 31, 2021.
The HTLF banks are required by federal law to maintain FHLB stock as members of the various FHLBs. These equity securities are "restricted" in that they can only be sold back to the respective institutions from which they were acquired or another member institution at par. Therefore, the FHLB stock is less liquid than other marketable equity securities, and the fair value approximates amortized cost. HTLF considers its FHLB stock as a long-term investment that provides access to
competitive products and liquidity. HTLF evaluates impairment in these investments based on the ultimate recoverability of the par value and, at March 31, 2022, and December 31, 2021, did not consider the investments to be impaired.
NOTE 3: LOANS
Loans as of March 31, 2022, and December 31, 2021, were as follows, in thousands: | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Loans receivable held to maturity: | | | |
Commercial and industrial | $ | 2,814,513 | | | $ | 2,645,085 | |
Paycheck Protection Program ("PPP") | 74,065 | | | 199,883 | |
Owner occupied commercial real estate | 2,266,076 | | | 2,240,334 | |
Non-owner occupied commercial real estate | 2,161,761 | | | 2,010,591 | |
Real estate construction | 842,483 | | | 856,119 | |
Agricultural and agricultural real estate | 766,443 | | | 753,753 | |
Residential real estate | 825,242 | | | 829,283 | |
Consumer | 426,802 | | | 419,524 | |
Total loans receivable held to maturity | 10,177,385 | | | 9,954,572 | |
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Allowance for credit losses | (100,522) | | | (110,088) | |
Loans receivable, net | $ | 10,076,863 | | | $ | 9,844,484 | |
As of March 31, 2022, and December 31, 2021, HTLF had $33.0 million and $35.3 million, respectively, of accrued interest receivable, which is included in other assets on the consolidated balance sheets. HTLF does not consider accrued interest receivable in the allowance for credit losses calculation.
The following table shows the balance in the allowance for credit losses at March 31, 2022, and December 31, 2021, and the related loan balances, disaggregated on the basis of measurement methodology, in thousands. If a loan no longer shares similar risk characteristics with other loans in the pool, it is evaluated on an individual basis and is not included in the collective evaluation. Lending relationships with $500,000 or more of total exposure and are on nonaccrual are individually assessed using a collateral dependency calculation. All other loans are collectively evaluated for losses.
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| Allowance For Credit Losses | | Gross Loans Receivable Held to Maturity |
| Individually Evaluated for Credit Losses | | Collectively Evaluated for Credit Losses | | Total | | Loans Individually Evaluated for Credit Losses | | Loans Collectively Evaluated for Credit Losses | | Total |
March 31, 2022 | | | | | | | | | | | |
Commercial and industrial | $ | 2,956 | | | $ | 22,844 | | | $ | 25,800 | | | $ | 13,503 | | | $ | 2,801,010 | | | $ | 2,814,513 | |
PPP | — | | | — | | | — | | | — | | | 74,065 | | | 74,065 | |
Owner occupied commercial real estate | 37 | | | 17,938 | | | 17,975 | | | 9,284 | | | 2,256,792 | | | 2,266,076 | |
Non-owner occupied commercial real estate | 506 | | | 15,507 | | | 16,013 | | | 12,244 | | | 2,149,517 | | | 2,161,761 | |
Real estate construction | 31 | | | 21,366 | | | 21,397 | | | 2,015 | | | 840,468 | | | 842,483 | |
Agricultural and agricultural real estate | 80 | | | 2,587 | | | 2,667 | | | 9,594 | | | 756,849 | | | 766,443 | |
Residential real estate | — | | | 7,875 | | | 7,875 | | | 863 | | | 824,379 | | | 825,242 | |
Consumer | — | | | 8,795 | | | 8,795 | | | — | | | 426,802 | | | 426,802 | |
| | | | | | | | | | | |
Total | $ | 3,610 | | | $ | 96,912 | | | $ | 100,522 | | | $ | 47,503 | | | $ | 10,129,882 | | | $ | 10,177,385 | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance For Credit Losses | | Gross Loans Receivable Held to Maturity |
| Individually Evaluated for Credit Losses | | Collectively Evaluated for Credit Losses | | Total | | Loans Individually Evaluated for Credit Losses | | Loans Collectively Evaluated for Credit Losses | | Total |
December 31, 2021 | | | | | | | | | | | |
Commercial and industrial | $ | 4,562 | | | $ | 23,176 | | | $ | 27,738 | | | $ | 13,551 | | | $ | 2,631,534 | | | $ | 2,645,085 | |
PPP | — | | | — | | | — | | | — | | | 199,883 | | | 199,883 | |
Owner occupied commercial real estate | 105 | | | 19,109 | | | 19,214 | | | 8,552 | | | 2,231,782 | | | 2,240,334 | |
Non-owner occupied commercial real estate | 610 | | | 17,298 | | | 17,908 | | | 12,557 | | | 1,998,034 | | | 2,010,591 | |
Real estate construction | — | | | 22,538 | | | 22,538 | | | — | | | 856,119 | | | 856,119 | |
Agricultural and agricultural real estate | 2,369 | | | 2,844 | | | 5,213 | | | 13,773 | | | 739,980 | | | 753,753 | |
Residential real estate | — | | | 8,427 | | | 8,427 | | | 855 | | | 828,428 | | | 829,283 | |
Consumer | — | | | 9,050 | | | 9,050 | | | — | | | 419,524 | | | 419,524 | |
| | | | | | | | | | | |
Total | $ | 7,646 | | | $ | 102,442 | | | $ | 110,088 | | | $ | 49,288 | | | $ | 9,905,284 | | | $ | 9,954,572 | |
HTLF had $10.1 million of troubled debt restructured loans at March 31, 2022, of which $9.3 million were classified as nonaccrual and $882,000 were accruing according to the restructured terms. HTLF had $10.4 million of troubled debt restructured loans at December 31, 2021, of which $9.5 million were classified as nonaccrual and $817,000 were accruing according to the restructured terms.
HTLF had no troubled debt restructured loans that were modified in the during the three months ended March 31, 2022, and March 31, 2021. The provisions of the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"), which modified troubled debt restructured loan classification, expired on January 1, 2022, and any new troubled debt restructured loan modifications are evaluated in accordance with generally accepted accounting principles.
At March 31, 2022, there were no commitments to extend credit to any of the borrowers with an existing troubled debt restructured loan.
HTLF had no troubled debt restructured loans for which there was a payment default during the three months ended March 31, 2022, and March 31, 2021, that had been modified during the twelve-month period prior to default.
HTLF's internal rating system is a series of grades reflecting management's credit risk assessment, based on its analysis of the borrower's financial condition. The "pass" category consists of all loans that are not in the "nonpass" category and categorized into a range of loan grades that reflect increasing, though still acceptable, risk. Movement of risk through the various grade levels in the pass category is monitored for early identification of credit deterioration.
The "nonpass" category consists of watch, substandard, doubtful and loss rated loans. The "watch" rating is attached to loans where the borrower exhibits negative trends in financial circumstances due to borrower specific or systemic conditions that, if left uncorrected, threaten the borrower's capacity to meet its debt obligations. The borrower is believed to have sufficient financial flexibility to react to and resolve its negative financial situation. These credits are closely monitored for improvement or deterioration.
The "substandard" rating is assigned to loans that are inadequately protected by the current net worth and repaying capacity of the borrower and that may be further at risk due to deterioration in the value of collateral pledged. Well-defined weaknesses jeopardize liquidation of the debt. These loans are still considered collectible; however, a distinct possibility exists that HTLF will sustain some loss if deficiencies are not corrected. Substandard loans may exhibit some or all of the following weaknesses: deteriorating financial trends, lack of earnings, inadequate debt service capacity, excessive debt and/or lack of liquidity.
The "doubtful" rating is assigned to loans where identified weaknesses in the borrowers' ability to repay the loan make collection or liquidation in full, on the basis of existing facts, conditions and values, highly questionable and improbable. These borrowers are usually in default, lack liquidity and capital, as well as resources necessary to remain as an operating entity. Specific pending events, such as capital injections, liquidations or perfection of liens on additional collateral, may strengthen the credit, thus deferring the rating of the loan as "loss" until the exact status of the loan can be determined. The "loss" rating is
assigned to loans considered uncollectible. HTLF had no loans classified as "loss" or "doubtful" as of March 31, 2022, and December 31, 2021.
The following tables show the risk category of loans by loan category and year of origination as of March 31, 2022, and December 31, 2021, in thousands:
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As of March 31, 2022 | Amortized Cost Basis of Term Loans by Year of Origination | | | | |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 and Prior | | Revolving | | Total |
Commercial and industrial | | | | | | | | | | | | | | | |
Pass | $ | 282,325 | | | $ | 563,865 | | | $ | 321,463 | | | $ | 142,201 | | | $ | 82,846 | | | $ | 490,118 | | | $ | 771,746 | | | $ | 2,654,564 | |
Watch | 1,133 | | | 12,201 | | | 10,346 | | | 9,644 | | | 6,049 | | | 3,309 | | | 28,376 | | | 71,058 | |
Substandard | 2,512 | | | 14,886 | | | 5,700 | | | 12,662 | | | 7,939 | | | 16,922 | | | 28,270 | | | 88,891 | |
Commercial and industrial total | $ | 285,970 | | | $ | 590,952 | | | $ | 337,509 | | | $ | 164,507 | | | $ | 96,834 | | | $ | 510,349 | | | $ | 828,392 | | | $ | 2,814,513 | |
PPP | | | | | | | | | | | | | | | |
Pass | $ | — | | | $ | 60,429 | | | $ | 4,463 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 64,892 | |
Watch | — | | | 1,797 | | | 31 | | | — | | | — | | | — | | | — | | | 1,828 | |
Substandard | — | | | 7,326 | | | 19 | | | — | | | — | | | — | | | — | | | 7,345 | |
PPP total | $ | — | | | $ | 69,552 | | | $ | 4,513 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 74,065 | |
Owner occupied commercial real estate | | | | | | | | | | | | | | | |
Pass | $ | 186,033 | | | $ | 896,361 | | | $ | 312,517 | | | $ | 306,341 | | | $ | 148,493 | | | $ | 275,086 | | | $ | 20,300 | | | $ | 2,145,131 | |
Watch | 2,944 | | | 6,266 | | | 17,523 | | | 6,524 | | | 8,556 | | | 10,802 | | | 35 | | | 52,650 | |
Substandard | 3,373 | | | 11,363 | | | 9,387 | | | 12,087 | | | 3,553 | | | 26,782 | | | 1,750 | | | 68,295 | |
Owner occupied commercial real estate total | $ | 192,350 | | | $ | 913,990 | | | $ | 339,427 | | | $ | 324,952 | | | $ | 160,602 | | | $ | 312,670 | | | $ | 22,085 | | | $ | 2,266,076 | |
Non-owner occupied commercial real estate | | | | | | | | | | | | | | | |
Pass | $ | 238,611 | | | $ | 602,044 | | | $ | 257,093 | | | $ | 330,145 | | | $ | 211,111 | | | $ | 286,939 | | | $ | 31,114 | | | $ | 1,957,057 | |
Watch | 206 | | | 2,757 | | | 11,098 | | | 26,639 | | | 20,512 | | | 38,483 | | | — | | | 99,695 | |
Substandard | 2,807 | | | 12,768 | | | 9,148 | | | 20,609 | | | 1,821 | | | 57,856 | | | — | | | 105,009 | |
Non-owner occupied commercial real estate total | $ | 241,624 | | | $ | 617,569 | | | $ | 277,339 | | | $ | 377,393 | | | $ | 233,444 | | | $ | 383,278 | | | $ | 31,114 | | | $ | 2,161,761 | |
Real estate construction | | | | | | | | | | | | | | | |
Pass | $ | 117,525 | | | $ | 378,301 | | | $ | 149,415 | | | $ | 98,294 | | | $ | 14,036 | | | $ | 9,362 | | | $ | 15,009 | | | $ | 781,942 | |
Watch | — | | | 3,058 | | | 1,033 | | | — | | | 44,468 | | | 3,697 | | | 13 | | | 52,269 | |
Substandard | — | | | 2,548 | | | 49 | | | 486 | | | 5,098 | | | 91 | | | — | | | 8,272 | |
Real estate construction total | $ | 117,525 | | | $ | 383,907 | | | $ | 150,497 | | | $ | 98,780 | | | $ | 63,602 | | | $ | 13,150 | | | $ | 15,022 | | | $ | 842,483 | |
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Agricultural and agricultural real estate | | | | | | | | | | | | | | | |
Pass | $ | 72,343 | | | $ | 195,360 | | | $ | 97,315 | | | $ | 45,549 | | | $ | 29,107 | | | $ | 49,812 | | | $ | 215,800 | | | $ | 705,286 | |
Watch | 421 | | | 3,694 | | | 5,630 | | | 2,051 | | | 2,002 | | | 2,739 | | | 3,126 | | | 19,663 | |
Substandard | 880 | | | 7,186 | | | 943 | | | 3,747 | | | 14,517 | | | 8,633 | | | 5,588 | | | 41,494 | |
Agricultural and agricultural real estate total | $ | 73,644 | | | $ | 206,240 | | | $ | 103,888 | | | $ | 51,347 | | | $ | 45,626 | | | $ | 61,184 | | | $ | 224,514 | | | $ | 766,443 | |
Residential real estate | | | | | | | | | | | | | | | |
Pass | $ | 59,105 | | | $ | 303,926 | | | $ | 78,252 | | | $ | 46,766 | | | $ | 44,833 | | | $ | 246,933 | | | $ | 23,456 | | | $ | 803,271 | |
Watch | — | | | 484 | | | 157 | | | 736 | | | 1,435 | | | 6,915 | | | — | | | 9,727 | |
Substandard | 101 | | | 2,036 | | | 385 | | | 42 | | | 1,984 | | | 7,696 | | | — | | | 12,244 | |
Residential real estate total | $ | 59,206 | | | $ | 306,446 | | | $ | 78,794 | | | $ | 47,544 | | | $ | 48,252 | | | $ | 261,544 | | | $ | 23,456 | | | $ | 825,242 | |
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Consumer | | | | | | | | | | | | | | | |
Pass | $ | 17,097 | | | $ | 59,774 | | | $ | 17,754 | | | $ | 11,299 | | | $ | 7,365 | | | $ | 26,551 | | | $ | 279,886 | | | $ | 419,726 | |
Watch | 3 | | | 472 | | | 73 | | | 332 | | | 366 | | | 664 | | | 1,784 | | | 3,694 | |
Substandard | 31 | | | 222 | | | 306 | | | 161 | | | 248 | | | 2,005 | | | 409 | | | 3,382 | |
Consumer total | $ | 17,131 | | | $ | 60,468 | | | $ | 18,133 | | | $ | 11,792 | | | $ | 7,979 | | | $ | 29,220 | | | $ | 282,079 | | | $ | 426,802 | |
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Total Pass | $ | 973,039 | | | $ | 3,060,060 | | | $ | 1,238,272 | | | $ | 980,595 | | | $ | 537,791 | | | $ | 1,384,801 | | | $ | 1,357,311 | | | $ | 9,531,869 | |
Total Watch | 4,707 | | | 30,729 | | | 45,891 | | | 45,926 | | | 83,388 | | | 66,609 | | | 33,334 | | | 310,584 | |
Total Substandard | 9,704 | | | 58,335 | | | 25,937 | | | 49,794 | | | 35,160 | | | 119,985 | | | 36,017 | | | 334,932 | |
Total Loans | $ | 987,450 | | | $ | 3,149,124 | | | $ | 1,310,100 | | | $ | 1,076,315 | | | $ | 656,339 | | | $ | 1,571,395 | | | $ | 1,426,662 | | | $ | 10,177,385 | |
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As of December 31, 2021 | Amortized Cost Basis of Term Loans by Year of Origination | | | | |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 and Prior | | Revolving | | Total |
Commercial and industrial | | | | | | | | | | | | | | | |
Pass | $ | 604,659 | | | $ | 359,533 | | | $ | 203,960 | | | $ | 89,694 | | | $ | 171,709 | | | $ | 330,094 | | | $ | 708,525 | | | $ | 2,468,174 | |
Watch | 10,633 | | | 12,790 | | | 12,550 | | | 8,210 | | | 3,611 | | | 14,976 | | | 24,626 | | | 87,396 | |
Substandard | 19,888 | | | 6,391 | | | 13,050 | | | 8,535 | | | 6,619 | | | 12,052 | | | 22,980 | | | 89,515 | |
Commercial and industrial total | $ | 635,180 | | | $ | 378,714 | | | $ | 229,560 | | | $ | 106,439 | | | $ | 181,939 | | | $ | 357,122 | | | $ | 756,131 | | | $ | 2,645,085 | |
PPP | | | | | | | | | | | | | | | |
Pass | $ | 146,370 | | | $ | 25,707 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 172,077 | |
Watch | 10,726 | | | 127 | | | — | | | — | | | — | | | — | | | — | | | 10,853 | |
Substandard | 16,932 | | | 21 | | | — | | | — | | | — | | | — | | | — | | | 16,953 | |
PPP total | $ | 174,028 | | | $ | 25,855 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 199,883 | |
Owner occupied commercial real estate | | | | | | | | | | | | | | | |
Pass | $ | 940,043 | | | $ | 328,052 | | | $ | 315,497 | | | $ | 180,936 | | | $ | 115,142 | | | $ | 189,647 | | | $ | 34,233 | | | $ | 2,103,550 | |
Watch | 4,676 | | | 13,956 | | | 7,759 | | | 10,501 | | | 15,032 | | | 6,830 | | | 35 | | | 58,789 | |
Substandard | 11,958 | | | 20,769 | | | 13,734 | | | 2,809 | | | 13,912 | | | 13,063 | | | 1,750 | | | 77,995 | |
Owner occupied commercial real estate total | $ | 956,677 | | | $ | 362,777 | | | $ | 336,990 | | | $ | 194,246 | | | $ | 144,086 | | | $ | 209,540 | | | $ | 36,018 | | | $ | 2,240,334 | |
Non-owner occupied commercial real estate | | | | | | | | | | | | | | | |
Pass | $ | 609,968 | | | $ | 263,093 | | | $ | 315,815 | | | $ | 236,823 | | | $ | 152,059 | | | $ | 166,792 | | | $ | 28,728 | | | $ | 1,773,278 | |
Watch | 4,754 | | | 9,109 | | | 35,496 | | | 29,227 | | | 4,865 | | | 35,901 | | | — | | | 119,352 | |
Substandard | 15,722 | | | 10,612 | | | 21,798 | | | 3,599 | | | 14,023 | | | 51,766 | | | 441 | | | 117,961 | |
Non-owner occupied commercial real estate total | $ | 630,444 | | | $ | 282,814 | | | $ | 373,109 | | | $ | 269,649 | | | $ | 170,947 | | | $ | 254,459 | | | $ | 29,169 | | | $ | 2,010,591 | |
Real estate construction | | | | | | | | | | | | | | | |
Pass | $ | 381,283 | | | $ | 206,879 | | | $ | 169,606 | | | $ | 14,197 | | | $ | 7,163 | | | $ | 7,823 | | | $ | 14,507 | | | $ | 801,458 | |
Watch | 2,704 | | | 858 | | | 2,145 | | | 44,846 | | | — | | | — | | | 14 | | | 50,567 | |
Substandard | — | | | 50 | | | 46 | | | 3,944 | | | — | | | 54 | | | — | | | 4,094 | |
Real estate construction total | $ | 383,987 | | | $ | 207,787 | | | $ | 171,797 | | | $ | 62,987 | | | $ | 7,163 | | | $ | 7,877 | | | $ | 14,521 | | | $ | 856,119 | |
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Agricultural and agricultural real estate | | | | | | | | | | | | | | | |
Pass | $ | 217,179 | | | $ | 102,030 | | | $ | 47,927 | | | $ | 32,913 | | | $ | 22,029 | | | $ | 35,548 | | | $ | 220,065 | | | $ | 677,691 | |
Watch | 4,018 | | | 10,390 | | | 4,688 | | | 2,270 | | | 33 | | | 2,038 | | | 2,948 | | | 26,385 | |
Substandard | 9,250 | | | 1,095 | | | 4,910 | | | 15,825 | | | 3,212 | | | 8,859 | | | 6,526 | | | 49,677 | |
Agricultural and agricultural real estate total | $ | 230,447 | | | $ | 113,515 | | | $ | 57,525 | | | $ | 51,008 | | | $ | 25,274 | | | $ | 46,445 | | | $ | 229,539 | | | $ | 753,753 | |
Residential real estate | | | | | | | | | | | | | | | |
Pass | $ | 311,292 | | | $ | 86,355 | | | $ | 50,762 | | | $ | 53,773 | | | $ | 43,619 | | | $ | 230,566 | | | $ | 29,017 | | | $ | 805,384 | |
Watch | 3,928 | | | 1,499 | | | 750 | | | 1,452 | | | 734 | | | 1,977 | | | 1,000 | | | 11,340 | |
Substandard | 2,528 | | | 444 | | | 410 | | | 2,317 | | | 1,139 | | | 5,721 | | | — | | | 12,559 | |
Residential real estate total | $ | 317,748 | | | $ | 88,298 | | | $ | 51,922 | | | $ | 57,542 | | | $ | 45,492 | | | $ | 238,264 | | | $ | 30,017 | | | $ | 829,283 | |
Consumer | | | | | | | | | | | | | | | |
Pass | $ | 69,172 | | | $ | 20,258 | | | $ | 13,051 | | | $ | 9,001 | | | $ | 10,986 | | | $ | 18,202 | | | $ | 271,034 | | | $ | 411,704 | |
Watch | 555 | | | 309 | | | 392 | | | 373 | | | 113 | | | 591 | | | 2,210 | | | 4,543 | |
Substandard | 267 | | | 204 | | | 218 | | | 236 | | | 363 | | | 1,611 | | | 378 | | | 3,277 | |
Consumer total | $ | 69,994 | | | $ | 20,771 | | | $ | 13,661 | | | $ | 9,610 | | | $ | 11,462 | | | $ | 20,404 | | | $ | 273,622 | | | $ | 419,524 | |
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Total Pass | $ | 3,279,966 | | | $ | 1,391,907 | | | $ | 1,116,618 | | | $ | 617,337 | | | $ | 522,707 | | | $ | 978,672 | | | $ | 1,306,109 | | | $ | 9,213,316 | |
Total Watch | 41,994 | | | 49,038 | | | 63,780 | | | 96,879 | | | 24,388 | | | 62,313 | | | 30,833 | | | 369,225 | |
Total Substandard | 76,545 | | | 39,586 | | | 54,166 | | | 37,265 | | | 39,268 | | | 93,126 | | | 32,075 | | | 372,031 | |
Total Loans | $ | 3,398,505 | | | $ | 1,480,531 | | | $ | 1,234,564 | | | $ | 751,481 | | | $ | 586,363 | | | $ | 1,134,111 | | | $ | 1,369,017 | | | $ | 9,954,572 | |
Included in the nonpass loans at March 31, 2022 and December 31, 2021 were $9.2 million and $27.8 million, respectively, of nonpass PPP loans as a result of risk ratings on non-PPP related credits. HTLF's risk rating methodology assigns a risk rating to the whole lending relationship. HTLF has no allowance recorded related to the PPP loans because of the 100% government guarantee.
As of March 31, 2022, HTLF had $980,000 of loans secured by residential real estate property that were in the process of foreclosure.
The following table sets forth information regarding accruing and nonaccrual loans at March 31, 2022, and December 31, 2021, in thousands:
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| Accruing Loans | | | | |
| 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or More Past Due | | Total Past Due | | Current | | Nonaccrual | | Total Loans |
March 31, 2022 | | | | | | | | | | | | | |
Commercial and industrial | $ | 3,786 | | | $ | 225 | | | $ | 246 | | | $ | 4,257 | | | $ | 2,792,688 | | | $ | 17,568 | | | $ | 2,814,513 | |
PPP | — | | | — | | | — | | | — | | | 74,046 | | | 19 | | | 74,065 | |
Owner occupied commercial real estate | 517 | | | 23 | | | — | | | 540 | | | 2,254,044 | | | 11,492 | | | 2,266,076 | |
Non-owner occupied commercial real estate | 1,099 | | | — | | | — | | | 1,099 | | | 2,147,671 | | | 12,991 | | | 2,161,761 | |
Real estate construction | 332 | | | — | | | — | | | 332 | | | 839,754 | | | 2,397 | | | 842,483 | |
Agricultural and agricultural real estate | 2,051 | | | 282 | | | — | | | 2,333 | | | 752,664 | | | 11,446 | | | 766,443 | |
Residential real estate | 991 | | | 139 | | | — | | | 1,130 | | | 817,174 | | | 6,938 | | | 825,242 | |
Consumer | 659 | | | 139 | | | — | | | 798 | | | 424,681 | | | 1,323 | | | 426,802 | |
Total gross loans receivable held to maturity | $ | 9,435 | | | $ | 808 | | | $ | 246 | | | $ | 10,489 | | | $ | 10,102,722 | | | $ | 64,174 | | | $ | 10,177,385 | |
December 31, 2021 | | | | | | | | | | | | | |
Commercial and industrial | $ | 1,024 | | | $ | 183 | | | $ | 541 | | | $ | 1,748 | | | $ | 2,625,109 | | | $ | 18,228 | | | $ | 2,645,085 | |
PPP | — | | | — | | | — | | | — | | | 199,883 | | | — | | | 199,883 | |
Owner occupied commercial real estate | 130 | | | — | | | — | | | 130 | | | 2,229,054 | | | 11,150 | | | 2,240,334 | |
Non-owner occupied commercial real estate | 3,929 | | | — | | | — | | | 3,929 | | | 1,993,346 | | | 13,316 | | | 2,010,591 | |
Real estate construction | 238 | | | 50 | | | — | | | 288 | | | 855,463 | | | 368 | | | 856,119 | |
Agricultural and agricultural real estate | 687 | | | — | | | — | | | 687 | | | 737,380 | | | 15,686 | | | 753,753 | |
Residential real estate | 767 | | | 46 | | | 9 | | | 822 | | | 819,294 | | | 9,167 | | | 829,283 | |
Consumer | 251 | | | 57 | | | — | | | 308 | | | 417,762 | | | 1,454 | | | 419,524 | |
Total gross loans receivable held to maturity | $ | 7,026 | | | $ | 336 | | | $ | 550 | | | $ | 7,912 | | | $ | 9,877,291 | | | $ | 69,369 | | | $ | 9,954,572 | |
Loans delinquent 30 to 89 days as a percent of total loans were 0.10% at March 31, 2022, compared to 0.07% at December 31, 2021. Changes in credit risk are monitored on a continuous basis as part of relationship management, and changes in risk ratings are made when identified. All individually assessed loans are reviewed at least annually.
HTLF recognized $0 of interest income on nonaccrual loans during the three months ended March 31, 2022 and March 31, 2021. As of March 31, 2022, and December 31, 2021, HTLF had $27.9 million and $25.5 million of nonaccrual loans with no related allowance, respectively.
NOTE 4: ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses on loans for the three months ended March 31, 2022, and March 31, 2021, were as follows, in thousands:
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| Commercial and Industrial | | PPP | | Owner Occupied Commercial Real Estate | | Non-Owner Occupied Commercial Real Estate | | Real Estate Construction | | Agricultural and Agricultural Real Estate | | Residential Real Estate | | Consumer | | | | | | Total |
Balance at December 31, 2021 | $ | 27,738 | | | $ | — | | | $ | 19,214 | | | $ | 17,908 | | | $ | 22,538 | | | $ | 5,213 | | | $ | 8,427 | | | $ | 9,050 | | | | | | | $ | 110,088 | |
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Charge-offs | (4,500) | | | — | | | — | | | (129) | | | — | | | (3,104) | | | (88) | | | (5,396) | | | | | | | (13,217) | |
Recoveries | 206 | | | — | | | 40 | | | 33 | | | 7 | | | 453 | | | — | | | 284 | | | | | | | 1,023 | |
Provision (benefit) | 2,356 | | | — | | | (1,279) | | | (1,799) | | | (1,148) | | | 105 | | | (464) | | | 4,857 | | | | | | | 2,628 | |
Balance at March 31, 2022 | $ | 25,800 | | | $ | — | | | $ | 17,975 | | | $ | 16,013 | | | $ | 21,397 | | | $ | 2,667 | | | $ | 7,875 | | | $ | 8,795 | | | | | | | $ | 100,522 | |
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| Commercial and Industrial | | PPP | | Owner Occupied Commercial Real Estate | | Non-Owner Occupied Commercial Real Estate | | Real Estate Construction | | Agricultural and Agricultural Real Estate | | Residential Real Estate | | Consumer | | | | | | Total |
Balance at December 31, 2020 | $ | 38,818 | | | $ | — | | | $ | 20,001 | | | $ | 20,873 | | | $ | 20,080 | | | $ | 7,129 | | | $ | 11,935 | | | $ | 12,770 | | | | | | | $ | 131,606 | |
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Charge-offs | (948) | | | — | | | (41) | | | — | | | — | | | (318) | | | (21) | | | (798) | | | | | | | (2,126) | |
Recoveries | 293 | | | — | | | 53 | | | — | | | 2 | | | 21 | | | 5 | | | 302 | | | | | | | 676 | |
Provision (benefit) | (2,068) | | | — | | | (597) | | | 3,821 | | | (151) | | | 279 | | | (907) | | | (361) | | | | | | | 16 | |
Balance at March 31, 2021 | $ | 36,095 | | | $ | — | | | $ | 19,416 | | | $ | 24,694 | | | $ | 19,931 | | | $ | 7,111 | | | $ | 11,012 | | | $ | 11,913 | | | | | | | $ | 130,172 | |
Management allocates the allowance for credit losses by pools of risk within each loan portfolio. The allocation of the allowance for credit losses by loan portfolio is made for analytical purposes and is not necessarily indicative of the trend of future loan losses in any particular category. The total allowance for credit losses is available to absorb losses from any segment of the loan portfolio.
Changes in the allowance for credit losses on unfunded commitments for the three months ended March 31, 2022 and March 31, 2021, were as follows:
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| For the Three Months Ended March 31, |
| 2022 | | 2021 |
Balance at December 31, | $ | 15,462 | | | $ | 15,280 | |
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Provision (benefit) | 617 | | | (661) | |
Balance at March 31, | $ | 16,079 | | | $ | 14,619 | |
NOTE 5: GOODWILL, CORE DEPOSIT PREMIUM AND OTHER INTANGIBLE ASSETS
HTLF had goodwill of $576.0 million at both March 31, 2022 and December 31, 2021. HTLF conducts its annual internal assessment of the goodwill both at the consolidated level and at its subsidiaries as of September 30. HTLF performed its annual quantitative assessment of goodwill as of September 30, 2021, which was the most recent annual assessment, and there was no goodwill impairment.
HTLF's intangible assets consist of core deposit intangibles, mortgage servicing rights, customer relationship intangibles, and commercial servicing rights. The gross carrying amount of these intangible assets and the associated accumulated amortization at March 31, 2022, and December 31, 2021, are presented in the table below, in thousands:
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| March 31, 2022 | | December 31, 2021 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Amortizing intangible assets: | | | | | | | | | | | |
Core deposit intangibles | $ | 101,185 | | | $ | 70,375 | | | $ | 30,810 | | | $ | 101,185 | | | $ | 68,330 | | | $ | 32,855 | |
Customer relationship intangibles | 1,177 | | | 1,053 | | | 124 | | | 1,177 | | | 1,044 | | | 133 | |
Mortgage servicing rights | 13,227 | | | 5,125 | | | 8,102 | | | 12,790 | | | 6,378 | | | 6,412 | |
Commercial servicing rights | 7,054 | | | 7,054 | | | — | | | 7,054 | | | 6,576 | | | 478 | |
Total | $ | 122,643 | | | $ | 83,607 | | | $ | 39,036 | | | $ | 122,206 | | | $ | 82,328 | | | $ | 39,878 | |
The following table shows the estimated future amortization expense for amortizable intangible assets, in thousands: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Core Deposit Intangibles | | Customer Relationship Intangibles | | Mortgage Servicing Rights | | | | Total |
Nine months ending December 31, 2022 | $ | 5,656 | | | $ | 26 | | | $ | 1,309 | | | | | $ | 6,991 | |
Year ending December 31, | | | | | | | | | |
2023 | 6,739 | | | 33 | | | 1,698 | | | | | 8,470 | |
2024 | 5,591 | | | 33 | | | 1,456 | | | | | 7,080 | |
2025 | 4,700 | | | 32 | | | 1,213 | | | | | 5,945 | |
2026 | 3,533 | | | — | | | 970 | | | | | 4,503 | |
2027 | 2,601 | | | — | | | 728 | | | | | 3,329 | |
Thereafter | 1,990 | | | — | | | 728 | | | | | 2,718 | |
Total | $ | 30,810 | | | $ | 124 | | | $ | 8,102 | | | | | $ | 39,036 | |
Projections of amortization expense for mortgage servicing rights are based on existing asset balances and the existing interest rate environment as of March 31, 2022. HTLF's actual experience may be significantly different depending upon changes in mortgage interest rates and market conditions. Mortgage loans serviced for others at First Bank & Trust were approximately $728.9 million at March 31, 2022, compared to $723.3 million at December 31, 2021. Custodial escrow balances maintained in connection with the mortgage loan servicing portfolio were approximately $8.2 million at March 31, 2022, and $4.5 million at December 31, 2021.
Fees collected for the servicing of mortgage loans for others were $454,000 and $464,000 for the three months ended March 31, 2022 and March 31, 2021, respectively.
The following table summarizes, in thousands, the changes in capitalized mortgage servicing rights for the three months ended March 31, 2022, and March 31, 2021: | | | | | | | | | | | |
| 2022 | | 2021 |
Balance at January 1, | $ | 6,412 | | | $ | 5,189 | |
Originations | 437 | | | 512 | |
Amortization | (405) | | | (400) | |
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Valuation allowance | 1,658 | | | 917 | |
Balance at period end | $ | 8,102 | | | $ | 6,218 | |
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Mortgage servicing rights, net to servicing portfolio | 1.11 | % | | 0.83 | % |
Mortgage rights are initially recorded at fair value in net gains on sale of loans held for sale when they are capitalized through loan sales. Fair value is based on market prices for comparable servicing contracts, when available, or based on a valuation model that calculates the present value of estimated future net servicing income.
Mortgage rights are subsequently measured using the amortization method, which requires the asset to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Servicing rights are evaluated for impairment at each HTLF subsidiary based upon the fair value of the assets as compared to the carrying amount. Impairment is recognized through a valuation allowance for specific tranches to the extent that fair value is less than the carrying amount at each HTLF subsidiary, and a valuation adjustment is recorded into noninterest income.
At March 31, 2022, no valuation allowance was required on the mortgage servicing rights 15-year tranche, and no valuation allowance was required on the mortgage servicing rights 30-year tranche. At December 31, 2021, a $327,000 valuation allowance was required on the mortgage servicing rights 15-year tranche and a $1.3 million valuation allowance was required on the mortgage servicing rights 30-year tranche.
For the three months ended March 31, 2022 and March 31, 2021, a valuation adjustment of $1.7 million and $917,000, respectively, were recorded for the total mortgage servicing rights portfolio.
The following table summarizes, in thousands, the book value, the fair value of each tranche of the mortgage servicing rights and any recorded valuation allowance at March 31, 2022, and December 31, 2021:
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| Book Value 15-Year Tranche | | Fair Value 15-Year Tranche | | Valuation Allowance 15-Year Tranche | | Book Value 30-Year Tranche | | Fair Value 30-Year Tranche | | Valuation Allowance 30-Year Tranche |
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March 31, 2022 | $ | 1,597 | | | $ | 1,696 | | | $ | — | | | $ | 6,505 | | | $ | 6,800 | | | $ | — | |
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December 31, 2021 | 1,607 | | | 1,280 | | | 327 | | | 6,463 | | | 5,132 | | | 1,331 | |
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The fair value of mortgage servicing rights is calculated based upon a discounted cash flow analysis. Cash flow assumptions, including prepayment speeds, servicing costs and escrow earnings of the mortgage servicing rights are considered in the calculation. The following table presents key assumptions used to value the mortgage servicing rights as of March 31, 2022, and December 31, 2021, dollars in thousands:
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| As of |
| March 31, 2022 | | December 31, 2021 |
Weighted average constant prepayment rate | 9.80 | % | | 13.40 | % |
Weighted average discount rate | 9.01 | % | | 9.02 | % |
Fair value of mortgage servicing rights | $ | 8,496 | | | $ | 6,412 | |
The average capitalization rate of mortgage servicing rights for the first three months of 2022 ranged from 83 to 111 basis points compared to a range of 76 to 112 basis points for the first three months of 2021.
NOTE 6: DERIVATIVE FINANCIAL INSTRUMENTS
HTLF uses derivative financial instruments as part of its interest rate risk management strategy. As part of the strategy, HTLF considers the use of interest rate swaps, risk participation agreements, caps, floors, collars, and certain interest rate lock commitments and forward sales of securities related to mortgage banking activities. HTLF's current strategy includes the use of interest rate swaps, interest rate lock commitments and forward sales of mortgage securities. In addition, HTLF is facilitating back-to-back loan swaps to assist customers in managing interest rate risk. HTLF's objectives are to add stability to its net interest margin and to manage its exposure to movements in interest rates. The contract or notional amount of a derivative is used to determine, along with the other terms of the derivative, the amounts to be exchanged between the counterparties. HTLF is exposed to credit risk in the event of nonperformance by counterparties to financial instruments. HTLF minimizes this risk by entering into derivative contracts with counterparties that meet HTLF’s credit standards, and the contracts contain collateral provisions protecting the at-risk party. HTLF has not experienced any losses from nonperformance by these counterparties. HTLF monitors counterparty risk in accordance with the provisions of ASC 815.
In addition, interest rate-related derivative instruments generally contain language outlining collateral pledging requirements for each counterparty. Collateral must be posted when the market value exceeds certain threshold limits which are determined by the credit ratings of each counterparty. HTLF was required to pledge no cash as collateral at both March 31, 2022 and December 31, 2021. At both March 31, 2022 and December 31, 2021, no collateral was required to be pledged by HTLF's counterparties.
HTLF's derivative and hedging instruments are recorded at fair value on the consolidated balance sheets. See Note 7, "Fair Value," for additional fair value information and disclosures.
Cash Flow Hedges
During the third quarter of 2021, the interest rate swap transactions associated with Heartland Financial Statutory VI and VII were terminated, and the debt was converted to variable rate subordinated debentures. In addition, HTLF had two swap transactions associated with an unaffiliated bank, one of which matured in the second quarter, and the other was terminated in the third quarter. The underlying debt with the unaffiliated bank was paid off in the third quarter of 2021. For the next twelve months, HTLF estimates that cash payments and reclassification from accumulated other comprehensive income (loss) to interest expense related to the terminated swaps will total $733,000.
At both March 31, 2022 and December 31, 2021, HTLF had no derivative instruments designated as cash flow hedges.
Fair Value Hedges
HTLF uses interest rate swaps to convert certain long term fixed rate loans to floating rates to hedge interest rate risk exposure. HTLF uses hedge accounting in accordance with ASC 815, with the unrealized gains and losses, representing the change in fair value of the derivative and the change in fair value of the risk being hedged on the related loan, being recorded in the consolidated statements of income. The ineffective portions of the unrealized gains or losses, if any, are recorded in interest income and interest expense in the consolidated statements of income. HTLF uses statistical regression to assess hedge effectiveness, both at the inception of the hedge as well as on a continual basis. The regression analysis involves regressing the periodic change in the fair value of the hedging instrument against the periodic changes in the fair value of the asset being hedged due to changes in the hedge risk.
HTLF was required to pledge $1.7 million and $3.8 million of cash as collateral for these fair value hedges at March 31, 2022, and December 31, 2021, respectively.
The table below identifies the notional amount, fair value and balance sheet category of HTLF's fair value hedges at March 31, 2022, and December 31, 2021, in thousands:
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| Notional Amount | | Fair Value | | Balance Sheet Category |
March 31, 2022 | | | | | |
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Fair value hedges | $ | 2,875 | | | $ | (25) | | | Other liabilities |
December 31, 2021 | | | | | |
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Fair value hedges | $ | 16,755 | | | $ | (1,208) | | | Other liabilities |
The table below identifies the gains and losses recognized on HTLF's fair value hedges for the three months ended March 31, 2022, and March 31, 2021, in thousands:
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 |
Gain recognized in interest income on fair value hedges | | | | | $ | 1,183 | | | $ | 763 | |
Embedded Derivatives
HTLF has fixed rate loans with embedded derivatives. These loans contain terms that affect the cash flows or value of the loan similar to a derivative instrument, and therefore are considered to contain an embedded derivative. The embedded derivatives are bifurcated from the loans because the terms of the derivative instrument are not clearly and closely related to the loans. The embedded derivatives are recorded at fair value on the consolidated balance sheets as a part of other assets, and changes in the fair value are a component of noninterest income. The table below identifies the notional amount, fair value and balance sheet category of the embedded derivatives at March 31, 2022, and December 31, 2021, in thousands:
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| Notional Amount | | Fair Value | | Balance Sheet Category | | | | | | |
March 31, 2022 | | | | | | | | | | | |
Embedded derivatives | $ | 7,397 | | | $ | (92) | | | Other liabilities | | | | | | |
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December 31, 2021 | | | | | | | | | | | |
Embedded derivatives | $ | 7,496 | | | $ | (317) | | | Other liabilities | | | | | | |
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The table below identifies the gains and losses recognized on HTLF's embedded derivatives for the three months ended March 31, 2022, and March 31, 2021, in thousands:
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 |
Gain (loss) recognized in other noninterest income on embedded derivatives | | | | | $ | 225 | | | $ | (129) | |
Back-to-Back Loan Swaps
HTLF has interest rate swap loan relationships with customers to meet their financing needs. Upon entering into these loan swaps, HTLF enters into offsetting positions with counterparties in order to minimize interest rate risk. These back-to-back loan swaps qualify as free standing financial derivatives with the fair values reported in other assets and other liabilities on the consolidated balance sheets. HTLF was required to post $9.9 million of collateral at March 31, 2022 compared to $24.1 million as of December 31, 2021, respectively, as collateral related to these back-to-back swaps. HTLF's counterparties were required to pledge $4.3 million at March 31, 2022 compared to $0 at December 31, 2021. Any gains and losses on these back-to-back swaps are recorded in noninterest income on the consolidated statements of income, and for the three months ended March 31, 2022 and March 31, 2021, no gain or loss was recognized. The table below identifies the balance sheet category and fair values of the derivative instruments designated as loan swaps at March 31, 2022, and December 31, 2021, in thousands:
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| Notional Amount | | Fair Value | | Balance Sheet Category | | Weighted Average Receive Rate | | Weighted Average Pay Rate |
March 31, 2022 | | | | | | | | | |
Customer interest rate swaps | $ | 557,807 | | | $ | 11,565 | | | Other assets | | 4.33 | % | | 2.97 | % |
Customer interest rate swaps | 557,807 | | | 11,565 | | | Other liabilities | | 2.97 | | | 4.33 | |
December 31, 2021 | | | | | | | | | |
Customer interest rate swaps | $ | 463,069 | | | $ | 23,574 | | | Other assets | | 4.44 | % | | 2.35 | % |
Customer interest rate swaps | 463,069 | | | (23,574) | | | Other liabilities | | 2.35 | | | 4.44 | |
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Other Free Standing Derivatives
HTLF has entered into interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans and mortgage backed securities that are considered derivative instruments. HTLF enters into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of future changes in interest rates on the commitments to fund the loans as well as on residential mortgage loans available for sale. The fair value of these commitments is recorded on the consolidated balance sheets, with the changes in fair value recorded in the consolidated statements of income as a component of gains on sale of loans held for sale. These derivative contracts are designated as free standing derivative contracts and are not designated against specific assets and liabilities on the consolidated balance sheets or forecasted transactions and therefore do not qualify for hedge accounting treatment. HTLF was required to pledge no collateral at both March 31, 2022, and December 31, 2021. HTLF's counterparties were required to pledge no collateral at both March 31, 2022 and December 31, 2021, as collateral for these forward commitments.
HTLF acquired undesignated interest rate swaps in 2015. These swaps were entered into primarily for the benefit of customers seeking to manage their interest rate risk and are not designated against specific assets or liabilities on the consolidated balance sheets or forecasted transactions and therefore do not qualify for hedge accounting in accordance with ASC 815. These swaps are carried at fair value on the consolidated balance sheets as a component of other liabilities, with changes in the fair value recorded as a component of other noninterest income.
The table below identifies the balance sheet category and fair values of HTLF's other free standing derivative instruments not designated as hedging instruments at March 31, 2022, and December 31, 2021, in thousands:
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| Balance Sheet Category | | Notional Amount | | Fair Value |
March 31, 2022 | | | | | |
Interest rate lock commitments (mortgage) | Other assets | | $ | 34,751 | | | $ | 696 | |
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Forward commitments | Other assets | | 40,000 | | | 1,008 | |
Forward commitments | Other liabilities | | 7,500 | | | (35) | |
Undesignated interest rate swaps | Other assets | | 7,397 | | | 92 | |
| | | | | |
December 31, 2021 | | | | | |
Interest rate lock commitments (mortgage) | Other assets | | $ | 37,046 | | | $ | 1,306 | |
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Forward commitments | Other assets | | 19,000 | | | 32 | |
Forward commitments | Other liabilities | | 35,500 | | | (95) | |
Undesignated interest rate swaps | Other assets | | 7,496 | | | 317 | |
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HTLF recognizes gains and losses on other free standing derivatives in two separate income statement categories. Interest rate lock commitments and forward commitments are recognized in net gains on sale of loans held for sale and undesignated interest rate swaps are recognized in other noninterest income. The table below identifies the gains and losses recognized in income on HTLF's other free standing derivative instruments not designated as hedging instruments for the three months ended March 31, 2022, and March 31, 2021, in thousands:
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 |
Interest rate lock commitments (mortgage) | | | | | $ | (1,195) | | | $ | (1,485) | |
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Forward commitments | | | | | 1,036 | | | 1,906 | |
Undesignated interest rate swaps | | | | | (225) | | | 129 | |
NOTE 7: FAIR VALUE
HTLF utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities carried at fair value, which include available for sale, trading securities and equity securities with a readily determinable fair value, and derivatives are recorded in the consolidated balance sheets at fair value on a recurring basis. Additionally, from time to time, HTLF may be required to record at fair value other assets on a nonrecurring basis such as loans held for sale, loans held to maturity and certain other assets including, but not limited to, mortgage servicing rights, commercial servicing rights and other real estate owned. These nonrecurring fair value adjustments typically involve application of the lower of cost or fair value accounting or write-downs of individual assets.
Fair Value Hierarchy
Under ASC 820, assets and liabilities are grouped at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1 — Valuation is based upon quoted prices for identical instruments in active markets.
Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, or similar instruments in markets that are not active, and model-based valuation techniques for all significant assumptions are observable in the market.
Level 3 — Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
The following is a description of valuation methodologies used for assets and liabilities recorded at fair value on a recurring or non-recurring basis.
Securities Available for Sale and Held to Maturity
Securities available for sale are recorded at fair value on a recurring basis. Securities held to maturity are generally recorded at cost. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security's credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, as well as U.S. Treasury securities. Level 2 securities include U.S. government and agency securities, mortgage and asset-backed securities and private collateralized mortgage obligations, municipal bonds and corporate debt securities. On a quarterly basis, a secondary independent pricing service is used for the securities portfolio to validate the pricing from HTLF's primary pricing service.
Equity Securities with a Readily Determinable Fair Value
Equity securities with a readily determinable fair value generally include Community Reinvestment Act mutual funds and are classified as Level 2 due to the infrequent trading of these securities. The fair value is based on the price per share.
Loans Held for Sale
Loans held for sale are carried at the lower of cost or fair value on an aggregate basis. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, HTLF classifies loans held for sale subjected to nonrecurring fair value adjustments as Level 2.
Loans Held to Maturity
HTLF does not record loans held to maturity at fair value on a recurring basis. However, from time to time, certain loans are considered collateral dependent and an allowance for credit losses is established. The fair value of individually assessed loans is measured using the fair value of the collateral. In accordance with ASC 820, individually assessed loans measured at fair value are classified as nonrecurring Level 3 in the fair value hierarchy.
Premises, Furniture and Equipment Held for Sale
HTLF values premises, furniture and equipment held for sale based on third-party appraisals less estimated disposal costs. HTLF considers third party appraisals, as well as independent fair value assessments from realtors or persons involved in selling bank premises, furniture and equipment, in determining the fair value of particular properties. Accordingly, the valuation of premises, furniture and equipment held for sale is subject to significant external and internal judgment. HTLF periodically reviews premises, furniture and equipment held for sale to determine if the fair value of the property, less disposal costs, has declined below its recorded book value and records any adjustments accordingly. Premises, furniture and equipment held for sale are classified as nonrecurring Level 3 in the fair value hierarchy.
Mortgage Servicing Rights
Mortgage servicing rights assets represent the value associated with servicing residential real estate loans that have been sold to outside investors with servicing retained. The fair value for servicing assets is determined through discounted cash flow analysis and utilizes discount rates, prepayment speeds and delinquency rate assumptions as inputs. All of the assumptions in the discounted cash flow analysis require a significant degree of management estimation and judgment. Mortgage servicing rights are subject to impairment testing. The carrying values of these rights are reviewed quarterly for impairment based upon the calculation of fair value as performed by an outside third party. For purposes of measuring impairment, the rights are stratified into certain risk characteristics including note type and note term. If the valuation model reflects a fair value less than the carrying value, mortgage servicing rights are adjusted to fair value through a valuation allowance. HTLF classifies mortgage servicing rights as nonrecurring with Level 3 measurement inputs.
Derivative Financial Instruments
HTLF's current interest rate risk strategy includes interest rate swaps. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. To comply with the provisions of ASC 820, HTLF incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective
counterparty's nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, HTLF has considered the impact of netting any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Although HTLF has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of March 31, 2022, and December 31, 2021, HTLF has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, HTLF has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
Interest rate lock commitments
HTLF uses an internal valuation model that relies on internally developed inputs to estimate the fair value of its interest rate lock commitments which is based on unobservable inputs that reflect management's assumptions and specific information about each borrower. Interest rate lock commitments are classified in Level 3 of the fair value hierarchy.
Forward commitments
The fair value of forward commitments are estimated using an internal valuation model, which includes current trade pricing for similar financial instruments in active markets that HTLF has the ability to access and are classified in Level 2 of the fair value hierarchy.
Other Real Estate Owned
Other real estate owned ("OREO") represents property acquired through foreclosures and settlements of loans. Property acquired is carried at the fair value of the property at the time of acquisition (representing the property's cost basis), plus any acquisition costs, or the estimated fair value of the property, less disposal costs. HTLF considers third party appraisals, as well as independent fair value assessments from realtors or persons involved in selling OREO, in determining the fair value of particular properties. Accordingly, the valuation of OREO is subject to significant external and internal judgment. HTLF periodically reviews OREO to determine if the fair value of the property, less disposal costs, has declined below its recorded book value and records any adjustments accordingly. OREO is classified as nonrecurring Level 3 of the fair value hierarchy.
The table below presents HTLF's assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2022, and December 31, 2021, in thousands, aggregated by the level in the fair value hierarchy within which those measurements fall:
| | | | | | | | | | | | | | | | | | | | | | | |
| Total Fair Value | | Level 1 | | Level 2 | | Level 3 |
March 31, 2022 | | | | | | | |
Assets | | | | | | | |
| | | | | | | |
Securities available for sale | | | | | | | |
U.S. treasuries | $ | 1,001 | | | $ | 1,001 | | | $ | — | | | $ | — | |
U.S. agencies | 86,109 | | | — | | | 86,109 | | | — | |
Obligations of states and political subdivisions | 1,637,917 | | | — | | | 1,637,917 | | | — | |
Mortgage-backed securities - agency | 2,128,163 | | | — | | | 2,128,163 | | | — | |
Mortgage-backed securities - non-agency | 2,013,936 | | | — | | | 2,013,936 | | | — | |
Commercial mortgage-backed securities - agency | 118,555 | | | — | | | 118,555 | | | — | |
Commercial mortgage-backed securities - non-agency | 693,963 | | | — | | | 693,963 | | | — | |
Asset-backed securities | 317,420 | | | — | | | 317,420 | | | — | |
Corporate bonds | 7,648 | | | — | | | 7,648 | | | — | |
Equity securities with a readily determinable fair value | 20,531 | | | — | | | 20,531 | | | — | |
Derivative financial instruments(1) | 11,657 | | | — | | | 11,657 | | | — | |
Interest rate lock commitments | 696 | | | — | | | — | | | 696 | |
Forward commitments | 1,008 | | | — | | | 1,008 | | | — | |
Total assets at fair value | $ | 7,038,604 | | | $ | 1,001 | | | $ | 7,036,907 | | | $ | 696 | |
Liabilities | | | | | | | |
Derivative financial instruments(2) | $ | 11,682 | | | $ | — | | | $ | 11,682 | | | $ | — | |
Forward commitments | 35 | | | — | | | 35 | | | — | |
| | | | | | | |
Total liabilities at fair value | $ | 11,717 | | | $ | — | | | $ | 11,717 | | | $ | — | |
December 31, 2021 |
Assets | | | | | | | |
| | | | | | | |
Securities available for sale | | | | | | | |
U.S. treasuries | $ | 1,008 | | | $ | 1,008 | | | $ | — | | | $ | — | |
U.S. agencies | 193,384 | | | — | | | 193,384 | | | — | |
Obligations of states and political subdivisions | 2,085,033 | | | — | | | 2,085,033 | | | — | |
Mortgage-backed securities - agency | 2,349,289 | | | — | | | 2,349,289 | | | — | |
Mortgage-backed securities - non-agency | 1,743,379 | | | — | | | 1,743,379 | | | — | |
Commercial mortgage-backed securities - agency | 123,912 | | | — | | | 123,912 | | | — | |
Commercial mortgage-backed securities - non-agency | 600,888 | | | — | | | 600,888 | | | — | |
Asset-backed securities | 409,653 | | | — | | | 409,653 | | | — | |
Corporate bonds | 3,040 | | | — | | | 3,040 | | | — | |
Equity securities with a readily determinable fair value | 20,788 | | | — | | | 20,788 | | | — | |
Derivative financial instruments(1) | 23,891 | | | — | | | 23,891 | | | — | |
Interest rate lock commitments | 1,306 | | | — | | | — | | | 1,306 | |
Forward commitments | 32 | | | — | | | 32 | | | — | |
Total assets at fair value | $ | 7,555,603 | | | $ | 1,008 | | | $ | 7,553,289 | | | $ | 1,306 | |
Liabilities | | | | | | | |
Derivative financial instruments(2) | $ | 25,099 | | | $ | — | | | $ | 25,099 | | | $ | — | |
Forward commitments | 95 | | | — | | | 95 | | | — | |
| | | | | | | |
Total liabilities at fair value | $ | 25,194 | | | $ | — | | | $ | 25,194 | | | $ | — | |
| | | | | | | |
(1) Includes back-to-back loan swaps and free standing derivative instruments. |
(2) Includes embedded derivatives, fair value hedges, and back-to-back loan swaps. |
The tables below present HTLF's assets that are measured at fair value on a nonrecurring basis, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at March 31, 2022 |
| Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Year-to- Date (Gains) Losses |
Collateral dependent individually assessed loans: | | | | | | | | | |
Commercial and industrial | $ | 10,547 | | | $ | — | | | $ | — | | | $ | 10,547 | | | $ | 4,186 | |
Owner occupied commercial real estate | 9,247 | | | — | | | — | | | 9,247 | | | 129 | |
Non-owner occupied commercial real estate | 11,738 | | | — | | | — | | | 11,738 | | | — | |
Real estate construction | 1,984 | | | — | | | — | | | 1,984 | | | — | |
Agricultural and agricultural real estate | 9,514 | | | — | | | — | | | 9,514 | | | 3,104 | |
Residential real estate | 863 | | | — | | | — | | | 863 | | | — | |
| | | | | | | | | |
Total collateral dependent individually assessed loans | $ | 43,893 | | | $ | — | | | $ | — | | | $ | 43,893 | | | $ | 7,419 | |
Loans held for sale | $ | 22,685 | | | $ | — | | | $ | 22,685 | | | $ | — | | | $ | (228) | |
Other real estate owned | 1,422 | | | — | | | — | | | 1,422 | | | 5 | |
Premises, furniture and equipment held for sale | 14,073 | | | — | | | — | | | 14,073 | | | 128 | |
Servicing rights | 8,102 | | | — | | | — | | | 8,102 | | | (1,658) | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at December 31, 2021 |
| Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Year-to- Date (Gains) Losses |
Collateral dependent individually assessed loans: | | | | | | | | | |
Commercial and industrial | $ | 8,989 | | | $ | — | | | $ | — | | | $ | 8,989 | | | $ | 275 | |
Owner occupied commercial real estate | 8,447 | | | — | | | — | | | 8,447 | | | — | |
Non-owner occupied commercial real estate | 11,946 | | | — | | | — | | | 11,946 | | | 1,637 | |
| | | | | | | | | |
Agricultural and agricultural real estate | 11,404 | | | — | | | — | | | 11,404 | | | 372 | |
Residential real estate | 855 | | | — | | | — | | | 855 | | | — | |
| | | | | | | | | |
Total collateral dependent individually assessed loans | $ | 41,641 | | | $ | — | | | $ | — | | | $ | 41,641 | | | $ | 2,284 | |
Loans held for sale | $ | 21,640 | | | $ | — | | | $ | 21,640 | | | $ | — | | | $ | (813) | |
| | | | | | | | | |
Other real estate owned | 1,927 | | | — | | | — | | | 1,927 | | | 686 | |
Premises, furniture and equipment held for sale | 10,828 | | | — | | | — | | | 10,828 | | | 241 | |
Servicing rights | 6,890 | | | — | | | — | | | 6,890 | | | (1,088) | |
The following tables present additional quantitative information about assets measured at fair value on a recurring and nonrecurring basis and for which HTLF has utilized Level 3 inputs to determine fair value, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value at 3/31/2022 | | Valuation Technique | | Unobservable Input | | Range (Weighted Average) |
Interest rate lock commitments | $ | 696 | | | Discounted cash flows | | Closing ratio | | 0-99% (88%)(1) |
Other real estate owned | 1,422 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-10%(3) |
Servicing rights | 8,102 | | | Discounted cash flows | | Discount rate | | 9 - 11% (9.01%)(4) |
| | | | | Constant prepayment rate | | 9.8 - 20.0% (9.08%)(4) |
Premises, furniture and equipment held for sale | 14,073 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-10%(3) |
Collateral dependent individually assessed loans: | | | | | | | |
Commercial | 10,547 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-6%(3) |
Owner occupied commercial real estate | 9,247 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | | Appraisal discount | | 0-7%(3) |
Non-owner occupied commercial real estate | 11,738 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | | Appraisal discount | | 0-10%(3) |
Real estate construction | 1,984 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-10%(3) |
Agricultural and agricultural real estate | 9,514 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-9%(3) |
Residential real estate | 863 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-7%(3) |
| | | | | | | |
| | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
(1) The significant unobservable input used in the fair value measurement is the closing ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. The closing ratio calculation takes into consideration historical data and loan-level data. |
(2) Third party appraisals are obtained and updated at least annually to establish the value of the underlying asset, but the disclosure of the unobservable inputs used by the appraisers would not be meaningful because the range will vary widely from appraisal to appraisal. |
(3) Discounts applied to the appraised values primarily include estimated sales costs, but also consider the age of the appraisal, changes in local market conditions and changes in the current condition of the collateral. |
(4) The significant unobservable input used in the fair value measurement are the value indices, which are weighted-average spreads to LIBOR based on maturity groups. |
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value at 12/31/2021 | | Valuation Technique | | Unobservable Input | | Range (Weighted Average) |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Interest rate lock commitments | $ | 1,306 | | | Discounted cash flows | | Closing ratio | | 0-99% (88%)(1) |
Other real estate owned | 1,927 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-10%(3) |
| | | | | | | |
Servicing rights | 6,890 | | | Discounted cash flows | | Discount rate | | 9 - 11% (9.02%)(4) |
| | | | | Constant prepayment rate | | 13.1 - 18.6% (13.4%)(4) |
Premises, furniture and equipment held for sale | 10,828 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-10%(3) |
| | | | | | | |
| | | | | | | |
| | | | | | |
Collateral dependent individually assessed loans: | | | | | | | |
Commercial and industrial | 8,989 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | | Appraisal discount | | 0-6%(3) |
Owner occupied commercial real estate | 8,447 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-7%(3) |
Non-owner occupied commercial real estate | 11,946 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-10%(3) |
| | | | | | | |
| | | | | | | |
Agricultural and agricultural real estate | 11,404 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-7%(3) |
Residential real estate | 855 | | | Modified appraised value | | Third party appraisal | | (2) |
| | | | Appraisal discount | | 0-7%(3) |
| | | | | | | |
| | | | | | |
| | | | | | | |
| | | | | | | |
(1) The significant unobservable input used in the fair value measurement is the closing ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. The closing ratio calculation takes into consideration historical data and loan-level data. |
(2) Third party appraisals are obtained and updated at least annually to establish the value of the underlying asset, but the disclosure of the unobservable inputs used by the appraisers would not be meaningful because the range will vary widely from appraisal to appraisal. |
(3) Discounts applied to the appraised values primarily include estimated sales costs, but also consider the age of the appraisal, changes in local market conditions and changes in the current condition of the collateral. |
(4) The significant unobservable input used in the discounted cash flow analysis are the discount rate and constant prepayment rate. |
The changes in fair value of the interest rate lock commitments, which are Level 3 financial instruments measured on a recurring basis, are summarized in the following table, in thousands:
| | | | | | | | | | | |
| For the Three Months Ended March 31, 2022 | | For the Year Ended December 31, 2021 |
Balance at January 1, | $ | 1,306 | | | $ | 1,827 | |
| | | |
Total net gains included in earnings | (1,196) | | | (2,345) | |
Issuances | 1,774 | | | 15,403 | |
Settlements | (1,188) | | | (13,579) | |
Balance at period end | $ | 696 | | | $ | 1,306 | |
Gains included in gains (losses) on sale of loans held for sale attributable to interest rate lock commitments held at March 31, 2022, and December 31, 2021, were $696,000 and $1.3 million, respectively.
The table below is a summary of the estimated fair value of HTLF's financial instruments (as defined by ASC 825) as of March 31, 2022, and December 31, 2021, in thousands. The carrying amounts in the following tables are recorded in the consolidated balance sheets under the indicated captions. In accordance with ASC 825, the assets and liabilities that are not financial instruments are not included in the disclosure, including the value of the commercial and mortgage servicing rights, premises, furniture and equipment, premises, furniture and equipment held for sale, OREO, goodwill, and other intangibles and other liabilities.
HTLF does not believe that the estimated information presented herein is representative of the earnings power or value of HTLF. The following analysis, which is inherently limited in depicting fair value, also does not consider any value associated with either existing customer relationships or the ability of HTLF to create value through loan origination, deposit gathering or fee generating activities. Many of the estimates presented herein are based upon the use of highly subjective information and assumptions and, accordingly, the results may not be precise. Management believes that fair value estimates may not be comparable between financial institutions due to the wide range of permitted valuation techniques and numerous estimates which must be made. Furthermore, because the disclosed fair value amounts were estimated as of the balance sheet date, the amounts actually realized or paid upon maturity or settlement of the various financial instruments could be significantly different.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements at March 31, 2022 |
| Carrying Amount | | Estimated Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Financial assets: | | | | | | | | | |
Cash and cash equivalents | $ | 604,902 | | | $ | 604,902 | | | $ | 604,902 | | | $ | — | | | $ | — | |
Time deposits in other financial institutions | 2,894 | | | 2,894 | | | 2,894 | | | — | | | — | |
Securities: | | | | | | | | | |
| | | | | | | | | |
Carried at fair value | 7,025,243 | | | 7,025,243 | | | 1,001 | | | 7,024,242 | | | — | |
Held to maturity | 81,785 | | | 86,486 | | | — | | | 86,486 | | | — | |
Other investments | 82,751 | | | 82,751 | | | — | | | 82,751 | | | — | |
Loans held for sale | 22,685 | | | 22,685 | | | — | | | 22,685 | | | — | |
Loans, net: | | | | | | | | | |
Commercial and industrial | 2,788,713 | | | 2,760,104 | | | — | | | 2,749,557 | | | 10,547 | |
PPP | 74,065 | | | 74,065 | | | — | | | 74,065 | | | — | |
Owner occupied commercial real estate | 2,248,101 | | | 2,236,484 | | | — | | | 2,227,237 | | | 9,247 | |
Non-owner occupied commercial real estate | 2,145,748 | | | 2,138,428 | | | — | | | 2,126,690 | | | 11,738 | |
Real estate construction | 821,086 | | | 829,465 | | | — | | | 827,481 | | | 1,984 | |
Agricultural and agricultural real estate | 763,776 | | | 756,586 | | | — | | | 747,072 | | | 9,514 | |
Residential real estate | 817,367 | | | 817,762 | | | — | | | 816,899 | | | 863 | |
Consumer | 418,007 | | | 421,081 | | | — | | | 421,081 | | | — | |
Total Loans, net | 10,076,863 | | | 10,033,975 | | | — | | | 9,990,082 | | | 43,893 | |
Cash surrender value on life insurance | 192,267 | | | 192,267 | | | — | | | 192,267 | | | — | |
Derivative financial instruments(1) | 11,657 | | | 11,657 | | | — | | | 11,657 | | | — | |
Interest rate lock commitments | 696 | | | 696 | | | — | | | — | | | 696 | |
Forward commitments | 1,008 | | | 1,008 | | | — | | | 1,008 | | | — | |
Financial liabilities: | | | | | | | | | |
Deposits | | | | | | | | | |
Demand deposits | 6,376,249 | | | 6,376,249 | | | — | | | 6,376,249 | | | — | |
Savings deposits | 9,236,427 | | | 9,236,427 | | | — | | | 9,236,427 | | | — | |
Time deposits | 1,054,008 | | | 1,054,008 | | | — | | | 1,054,008 | | | — | |
| | | | | | | | | |
Short term borrowings | 107,372 | | | 107,372 | | | — | | | 107,372 | | | — | |
Other borrowings | 372,290 | | | 373,288 | | | — | | | 373,288 | | | — | |
Derivative financial instruments(2) | 11,682 | | | 11,682 | | | — | | | 11,682 | | | — | |
Forward commitments | 35 | | | 35 | | | — | | | 35 | | | — | |
|
(1) Includes embedded derivatives, back-to-back loan swaps and fair value hedges. |
(2) Includes cash flow hedges, fair value hedges, back-to-back loan swaps and free standing derivative instruments. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements at December 31, 2021 |
| Carrying Amount | | Estimated Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Financial assets: | | | | | | | | | |
Cash and cash equivalents | $ | 435,599 | | | $ | 435,599 | | | $ | 435,599 | | | $ | — | | | $ | — | |
Time deposits in other financial institutions | 2,894 | | | 2,894 | | | 2,894 | | | — | | | — | |
Securities: | | | | | | | | | |
| | | | | | | | | |
Carried at fair value | 7,530,374 | | | 7,530,374 | | | 1,008 | | | 7,529,366 | | | — | |
Held to maturity | 84,709 | | | 94,139 | | | — | | | 94,139 | | | — | |
Other investments | 82,567 | | | 82,567 | | | — | | | 82,567 | | | — | |
Loans held for sale | 21,640 | | | 21,640 | | | — | | | 21,640 | | | — | |
Loans, net: | | | | | | | | | |
Commercial and industrial | 2,617,347 | | | 2,603,001 | | | — | | | 2,594,012 | | | 8,989 | |
PPP | 199,883 | | | 199,883 | | | — | | | 199,883 | | | — | |
Owner occupied commercial real estate | 2,221,120 | | | 2,222,030 | | | — | | | 2,213,583 | | | 8,447 | |
Non-owner occupied commercial real estate | 1,992,683 | | | 1,998,161 | | | — | | | 1,986,215 | | | 11,946 | |
Real estate construction | 833,581 | | | 844,578 | | | — | | | 844,578 | | | — | |
Agricultural and agricultural real estate | 748,540 | | | 749,238 | | | — | | | 737,834 | | | 11,404 | |
Residential real estate | 820,856 | | | 819,178 | | | — | | | 818,323 | | | 855 | |
Consumer | 410,474 | | | 415,487 | | | — | | | 415,487 | | | — | |
Total Loans, net | 9,844,484 | | | 9,851,556 | | | — | | | 9,809,915 | | | 41,641 | |
Cash surrender value on life insurance | 191,722 | | | 191,722 | | | — | | | 191,722 | | | — | |
Derivative financial instruments(1) | 23,891 | | | 23,891 | | | — | | | 23,891 | | | — | |
Interest rate lock commitments | 1,306 | | | 1,306 | | | — | | | — | | | 1,306 | |
Forward commitments | 32 | | | 32 | | | — | | | 32 | | | — | |
Financial liabilities: | | | | | | | | | |
Deposits | | | | | | | | | |
Demand deposits | 6,495,326 | | | 6,495,326 | | | — | | | 6,495,326 | | | — | |
Savings deposits | 8,897,909 | | | 8,897,909 | | | — | | | 8,897,909 | | | — | |
Time deposits | 1,024,020 | | | 1,024,020 | | | — | | | 1,024,020 | | | — | |
| | | | | | | | | |
Short term borrowings | 131,597 | | | 131,597 | | | — | | | 131,597 | | | — | |
Other borrowings | 372,072 | | | 373,194 | | | — | | | 373,194 | | | — | |
Derivative financial instruments(1) | 25,099 | | | 25,099 | | | — | | | 25,099 | | | — | |
Forward commitments | 95 | | | 95 | | | — | | | 95 | | | — | |
|
(1) Includes back-to-back loan swaps and free standing derivative instruments. |
(2) Includes embedded derivatives, fair value hedges, and back-to-back loan swaps. |
Cash and Cash Equivalents — The carrying amount is a reasonable estimate of fair value due to the short-term nature of these instruments.
Time Deposits in Other Financial Institutions — The carrying amount is a reasonable estimate of fair value due to the short-term nature of these instruments.
Securities — For equity securities with a readily determinable fair value and debt securities either held to maturity, available for sale or trading, fair value equals quoted market price if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. For Level 3 securities, HTLF utilizes independent pricing provided by third party vendors or brokers.
Other Investments — Fair value measurement of other investments, which consists primarily of FHLB stock, are based on their redeemable value, which is at cost due to the restrictions placed on their transferability. The market for these securities is restricted to the issuer of the stock and subject to impairment evaluation.
Loans — The fair value of loans is determined using an exit price methodology. The exit price estimation of fair value is based on the present value of the expected cash flows. The projected cash flows are based on the contractual terms of the loans, adjusted for prepayments and a discount rate based on the relative risk of the cash flows. Other considerations include the loan type, remaining life of the loan and credit risk.
The fair value of individually assessed or impaired loans is measured using the fair value of the underlying collateral. The fair value of loans held for sale is estimated using quoted market prices.
Cash surrender value on life insurance — Life insurance policies are held on certain officers. The carrying value of these policies approximates fair value as it is based on the cash surrender value adjusted for other charges or amounts due that are probable at settlement. As such, HTLF classifies the estimated fair value of the cash surrender value on life insurance as Level 2.
Derivative Financial Instruments — The fair value of all derivatives is estimated based on the amount that HTLF would pay or would be paid to terminate the contract or agreement, using current rates and prices, and, when appropriate, the current creditworthiness of the counter-party.
Interest Rate Lock Commitments — The fair value of interest rate lock commitments is estimated using an internal valuation model, which includes grouping the interest rate lock commitments by interest rate and terms, applying an estimated closing ratio based on historical experience, and then multiplying by quoted investor prices determined to be reasonably applicable to the loan commitment groups based on interest rate, terms, and rate lock expiration dates of the loan commitment group.
Forward Commitments — The fair value of these instruments is estimated using an internal valuation model, which includes current trade pricing for similar financial instruments.
Deposits — The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. If the fair value of the fixed maturity certificates of deposit is calculated at less than the carrying amount, the carrying value of these deposits is reported as the fair value.
Short-term and Other Borrowings — Rates currently available to HTLF for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.
Commitments to Extend Credit, Unused Lines of Credit and Standby Letters of Credit — Based upon management's analysis of the off balance sheet financial instruments, there are no significant unrealized gains or losses associated with these financial instruments based upon review of the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties.
NOTE 8: STOCK COMPENSATION
HTLF may grant, through its Compensation, Nominating and Corporate Governance Committee (the "Compensation Committee"), non-qualified and incentive stock options, stock appreciation rights, stock awards, restricted stock, restricted stock units and cash incentive awards, under its 2020 Long-Term Incentive Plan (the "Plan"). The Plan has 1,460,000 shares of common stock authorized for issuance. As of March 31, 2022, 1,014,149 shares of common stock were available for issuance under future awards that may be granted under the Plan to employees and directors of, and service providers to, HTLF or its subsidiaries.
ASC Topic 718, "Compensation-Stock Compensation," requires the measurement of the cost of employee services received in exchange for an award of equity instruments based upon the fair value of the award on the grant date. The cost of the award is based upon its fair value estimated on the date of grant and recognized in the consolidated statements of income over the vesting period of the award. The fair market value of restricted stock and restricted stock units is based on the fair value of the underlying shares of common stock on the date of grant. Forfeitures are accounted for as they occur.
HTLF's income tax expense included $172,000 of tax benefit during the three months ended March 31, 2022 and a tax benefit of $153,000 during the three months ended March 31, 2021, related to the exercise, vesting and forfeiture of equity-based awards.
Restricted Stock Units
The Plan permits the Compensation Committee to grant restricted stock units ("RSUs"). The time-based RSUs are generally granted in March of each year and represent the right, without payment, to receive shares of HTLF common stock on a specified date in the future. Generally, the time-based RSUs vest over three years in equal installments in March of each of the three years following the year of the grant.
The Compensation Committee has also granted three-year performance-based RSUs, generally in March of each year. These performance-based RSUs will be earned based on satisfaction of performance targets for the three-year performance period as defined in the RSU agreement. These performance-based RSUs or a portion thereof may vest after measurement of performance in relation to the performance targets.
The time-based RSUs may also vest upon death or disability, upon a change in control or upon a "qualified retirement" (as defined in the RSU agreement), and the three-year performance-based RSUs may also vest to the extent that they are earned upon death, disability, upon a change in control or upon a "qualified retirement" (as defined in the RSU agreement).
All of HTLF's RSUs will be settled in common stock upon vesting and are not entitled to dividends until vested.
A summary of the RSUs outstanding as of March 31, 2022, and March 31, 2021, and changes during the three months ended March 31, 2022 and 2021, follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| Shares | | Weighted-Average Grant Date Fair Value | | Shares | | Weighted-Average Grant Date Fair Value |
Outstanding at January 1, | 389,885 | | | $ | 44.19 | | | 348,275 | | | $ | 38.22 | |
Granted | 178,611 | | | 50.20 | | | 170,317 | | | 52.08 | |
Vested | (125,343) | | | 43.85 | | | (106,255) | | | 44.14 | |
Forfeited | (12,656) | | | 45.70 | | | (4,215) | | | 50.59 | |
Outstanding at March 31, | 430,497 | | | $ | 46.74 | | | 408,122 | | | $ | 42.11 | |
Total compensation costs recorded for RSUs were $2.7 million and $2.8 million for the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, there were $13.1 million of total unrecognized compensation costs related to the Plan for RSUs that are expected to be recognized through 2025.