NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ONE
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - Heartland Financial USA, Inc. ("HTLF") is a bank holding company with locations in Iowa, Illinois, Wisconsin, New Mexico, Arizona, Colorado, Montana, Minnesota, Kansas, Missouri, Texas and California. The principal services of HTLF, which are provided through HTLF Bank, are FDIC-insured deposit accounts and related services, and loans to businesses and consumers. The loans consist primarily of commercial and industrial, owner-occupied commercial real estate, non-owner occupied commercial real estate, real estate construction, agricultural and agricultural real estate, residential real estate and consumer loans.
Principles of Presentation - The consolidated financial statements include the accounts of HTLF and its subsidiaries: HTLF Bank; DB&T Community Development Corp.; Heartland Community Development, Inc.; Heartland Financial USA, Inc. Insurance Services; Heartland Financial Statutory Trust IV; Heartland Financial Statutory Trust V; Heartland Financial Statutory Trust VI; Heartland Financial Statutory Trust VII; Morrill Statutory Trust I; Morrill Statutory Trust II; Sheboygan Statutory Trust I, CBNM Capital Trust I, Citywide Capital Trust III, Citywide Capital Trust IV, Citywide Capital Trust V, OCGI Statutory Trust III, OCGI Capital Trust IV, BVBC Capital Trust II, and BVBC Capital Trust III. All HTLF’s subsidiaries are wholly-owned as of December 31, 2023.
As of December 31, 2023, HTLF Bank and its respective bank brands listed below operated as divisions of HTLF Bank:
•Arizona Bank & Trust
•Bank of Blue Valley
•Citywide Banks
•Dubuque Bank & Trust
•First Bank & Trust
•Illinois Bank & Trust
•Minnesota Bank & Trust
•New Mexico Bank & Trust
•Premier Valley Bank
•Rocky Mountain Bank
•Wisconsin Bank & Trust
During the first quarter of 2023, HTLF reclassified swap and loan syndication income (collectively, "capital markets fees") to capital markets fees from other noninterest income on the consolidated statements of income, and all prior periods have been adjusted.
During the second quarter of 2023, HTLF reclassified Federal Deposit Insurance Corporation ("FDIC") insurance premiums to FDIC insurance assessments from professional fees on the consolidated statements of income, and all prior periods have been adjusted.
In the second quarter of 2023, HTLF amended and restated its Certificate of Incorporation and filed Certificates of Elimination with the state of Delaware with respect to Series A, B, C, and D preferred stock issuances, which returned these previously designated shares to authorized but unissued. The following shows the details of Series A, B, C and D preferred stock at December 31, 2022:
•Series A Junior Participating preferred stock-par value $1 per share; authorized 16,000 shares; none issued or outstanding at December 31, 2022
•Series B Fixed Rate Cumulative Perpetual Preferred Stock-par value $1 per share; 81,698 shares authorized at December 31, 2022; none issued or outstanding at December 31, 2022
•Series C Senior Non-Cumulative Perpetual Preferred Stock-par value $1 per share; 81,698 shares authorized at December 31, 2022; none issued or outstanding at December 31, 2022
•Series D Senior Non-Cumulative Perpetual Convertible Preferred Stock-par value $1 per share; 3,000 shares authorized at December 31, 2022; none issued or outstanding at December 31, 2022
After the cancellation of Series A, B, C and D preferred shares, total undesignated preferred shares authorized increased to 188,500 from 6,104 at December 31, 2022, of which none were issued or outstanding at both December 31, 2023 and December 31, 2022.
The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and prevailing practices within the banking industry. In preparing such financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheets and revenues and expenses for the years then ended. Actual results could differ significantly from those estimates. A material estimate that is particularly susceptible to significant change relates to the determination of the allowance for credit losses.
Business Combinations - HTLF applies the acquisition method of accounting in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 805, Business Combinations. Under the acquisition method, HTLF recognizes assets acquired, including identified intangible assets, and the liabilities assumed in acquisitions at fair value as of the acquisition date, with the acquisition-related transaction costs expensed in the period incurred. Determining the fair value of assets acquired and liabilities assumed often involves estimates based on third-party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques that may include estimates of attrition, inflation, asset growth rates, discount rates, multiples of earnings or other relevant factors. In addition, the determination of the useful lives over which an intangible asset will be amortized is subjective.
Cash and Cash Equivalents - For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest bearing deposits held at the Federal Reserve Bank, federal funds sold to other banks and other short-term investments. Generally, federal funds are purchased and sold for one-day periods.
Trading Securities - Trading securities represent those securities HTLF intends to actively trade and are stated at fair value with changes in fair value reflected in noninterest income. HTLF had no trading securities at both December 31, 2023 and 2022.
Available for Sale ("AFS") Debt Securities and Equity Securities - Available for sale securities consist of those securities not classified as held to maturity or trading, which management intends to hold for indefinite periods of time or that may be sold in response to changes in interest rates, prepayments or other similar factors. Available for sale securities are stated at fair value with any unrealized gain or loss, net of applicable income tax, reported as a separate component of stockholders’ equity. Security premiums and discounts are amortized/accreted using the interest method over the period from the purchase date to the expected maturity or call date of the related security.
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, the financial condition of the issuer, as well as security and industry-specific economic conditions. In addition, regarding 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.
Realized securities gains or losses on securities sales (using a specific identification method) are included in securities gains, net in the consolidated statements of income.
Equity securities include Community Reinvestment Act funds with readily determinable fair values and are carried at fair value. Certain equity securities do not have readily determinable fair values, such as Federal Reserve Bank stock and Federal Home Loan Bank stock, which are held for debt and regulatory purposes and are carried at cost minus impairment, if any, plus or minus changes resulting from observable price changes for the identical or similar investment of the same issuer. HTLF did not record any impairment or other adjustments to the carrying amount of these investments during the years ended December 31, 2023, and December 31, 2022.
Allowance for Credit Losses on AFS Debt Securities - 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 decline in fair value of an AFS debt security due to credit loss results in recording an allowance for credit losses to the extent the fair value is less than the amortized cost basis. Declines in fair value that have not been recorded through an allowance for credit losses, such as declines due to changes in market interest rates, are recorded through other comprehensive income, net of applicable taxes. Although these evaluations involve judgment, an unrealized loss in the fair value of a debt security is generally considered to not be related to credit when the fair value of the security is below the carrying value primarily due to changes in risk-free interest rates, there has not been significant deterioration in the financial condition of the issuer, and HTLF does not intend to sell nor does it believe it will be required to sell the security before the recovery of its cost basis. HTLF had no allowance for credit losses on AFS debt securities recorded at December 31, 2023, and December 31, 2022.
Securities Held to Maturity - Securities which HTLF has the ability and positive intent to hold to maturity are classified as held to maturity. Such securities are stated at amortized cost, adjusted for premiums and discounts that are amortized/accreted using the interest method over the period from the purchase date to the expected maturity or call date of the related security.
Allowance for Credit Losses on Held to Maturity Debt Securities - HTLF measures expected credit losses on held to maturity debt securities on a collective basis based on security type. The estimate of expected credit losses considers historical credit information that is adjusted for current conditions and supportable forecasts. HTLF's held to maturity debt securities consist primarily of investment grade obligations of states and political subdivisions. The forecast and forecast period used in the calculation of the allowance for credit losses for loans is used in calculating the allowance for credit losses on held to maturity debt securities. HTLF had no allowance for credit losses on held to maturity debt securities recorded at both December 31, 2023, and December 31, 2022.
Loans Held to Maturity - Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost, which is the principal amount outstanding, net of cumulative charge-offs, unamortized net deferred loan origination fees and costs and unamortized premiums or discounts on purchased loans. HTLF has a loan policy which establishes the credit risk appetite, lending standards and underwriting criteria designed so that HTLF may extend credit in a prudent and sound manner. The HTLF loan policy is reviewed and approved on a regular basis. A reporting system supplements the review process by providing management and the board with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming loans and potential problem loans.
HTLF originates commercial and industrial loans and owner occupied commercial real estate loans for a wide variety of business purposes, including lines of credit for capital and operating purposes and term loans for real estate and equipment purchases. Non-owner occupied commercial real estate loans provide financing for various non-owner occupied or income producing properties. Real estate construction loans are generally short-term or interim loans that provide financing for acquiring or developing commercial income properties, multi-family projects or single-family residential homes. Agricultural and agricultural real estate loans provide financing for capital improvements and farm operations, as well as livestock and machinery purchases. Residential real estate loans are originated for the purchase or refinancing of single-family residential properties. Consumer loans include loans for motor vehicles, home improvement, home equity and personal lines of credit.
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. HTLF’s policy is to discontinue the accrual of interest income on any loan when, in the opinion of management, there is a reasonable doubt as to the timely collection of the interest and principal, normally when a loan is 90 days past due. When interest accruals are deemed uncollectible, interest credited to income in the current year is reversed and interest accrued in prior years is charged to the allowance for credit losses. A loan can be restored to accrual status if the borrower has resumed paying the full amount of the scheduled contractual interest and principal payments on the loan, and (1) all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within a reasonable period of time, and (2) there is a sustained period of repayment performance (generally a minimum of six months) by the borrower in accordance with the scheduled contractual terms.
Allowance for Credit Losses for Loans - The allowance for credit losses is a valuation account that is deducted from the loans held to maturity amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged-off against the allowance when management believes the loan balance is deemed to be uncollectible. Provisions for credit losses for loans and recoveries on loans previously charged-off by HTLF are added back to the allowance.
HTLF's allowance model is designed to consider the current contractual term of the loan, defined as starting as of the most recent renewal date and ending at maturity date.
Management's estimation of expected credit losses is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts, including expected defaults and prepayments. Historical loss experience is generally the starting point for estimating expected credit losses. Adjustments are made to historical loss experience to reflect differences in asset-specific risk characteristics, such as underwriting standards, portfolio mix or asset terms and differences in economic conditions, both current conditions and reasonable and supportable forecasts. If HTLF is not able to make or obtain reasonable and supportable forecasts for the entire life of the financial asset, it is required to estimate expected credit losses for the remaining life using an approach that reverts to historical credit loss information. The components of the allowance for credit losses are described more specifically below.
Quantitative Factors
The quantitative component of the allowance for credit losses is measured using historical loss experience using a look back period, currently over the most recent 16 years, on a pool basis for loans with similar risk characteristics. HTLF utilizes third-party software to calculate the expected credit losses using two separate methodologies. For certain commercial and agricultural loans, the expected credit losses are calculated through a transition matrix model derived probability of default and loss given default methodology. The transition matrix model determines the life of loan probability of default using the historical transitions of loans between risk ratings and through default. The probability of default and loss given default methodology has been developed using HTLF’s historical loss experience over the look back period. For smaller commercial and agricultural loans, residential real estate loans and consumer loans, a lifetime average historical loss rate is established for each pool of loans based upon an average loss rate calculated using HTLF historical loss experience over the look back period.
The risks in the commercial and industrial loan portfolio include the unpredictability of the cash flow of the borrowers and the variability in the value of the collateral securing the loans. Owner occupied commercial real estate loans depend upon the cash flow of the borrowers and the collateral value of the real estate. Non-owner occupied commercial real estate loans typically depend, in large part, on sufficient income from the properties securing the loans to cover the operating expenses and debt service. Real estate construction loans involve additional risks because funds are advanced based upon estimates of costs and the estimated value of the completed project. Additionally, real estate construction loans have a greater risk of default in a weaker economy because the source of repayment relies on the successful and timely completion of the project. Agricultural and agricultural real estate loans depend upon the profitable operation or management of the farm property securing the loan. Loans secured by farm equipment, livestock or crops may not provide an adequate source of repayment because of damage or depreciation. Residential real estate loans depend upon the borrower's ability to repay the loan and the underlying collateral value. Consumer loans depend upon the borrower's personal financial circumstances and continued financial stability.
If a loan no longer shares similar risk characteristics with other loans in the pool, 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 on nonaccrual status are individually assessed using a collateral dependency calculation. A loan is collateral-dependent when the debtor is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. The impairment will be recognized by creating a specific reserve against the loan with a corresponding charge to provision expense. In most cases, the specific reserve will be charged off in the same quarter the loss is probable. In some cases, when HTLF believes certain loans do not share the same risk characteristics with other loans in the pool, the standard allows for these loans to be individually assessed. All individually assessed loan calculations are completed at least semi-annually.
Qualitative Factors
HTLF's allowance methodology also has a qualitative component, the purpose of which is to provide management with a means to take into consideration changes in current conditions that could potentially have an effect on the level of recognized loan losses, that otherwise fail to show up in the quantitative analysis performed in determining its base loan loss rates.
HTLF utilizes the following qualitative factors:
•changes in lending policies and procedures
•changes in the nature of loans
•experience and ability of management
•changes in the credit quality of the loan portfolio
•risk in acquired portfolios
•concentrations of credit
The qualitative factors for changes in lending policies and procedures, management and acquired portfolios are weighted as one factor. The other qualitative factors noted above are equally weighted as individual factors.
The qualitative adjustments are based on the comparison of the current condition to the average condition over the look back period. The adjustment amount can be either positive or negative depending on whether the current condition is better or worse than the historical average. HTLF incorporates the adjustments for changes in current conditions using an overlay approach. The adjustments are applied as a percentage adjustment in addition to the calculated historical loss rates of each pool. These adjustments reflect the extent to which HTLF expects current conditions to differ from the conditions that existed for the period over which historical information was evaluated. HTLF utilizes an anchoring approach to determine the minimum and maximum amount of qualitative allowance for credit losses, which is determined by comparing the highest and lowest historical rate to the current quantitative allowance rate to calculate the rate for the adjustment.
Economic Forecasting
The allowance for credit losses estimate incorporates a reasonable and supportable forecast of various macro-economic indices over the remaining life of HTLF’s assets. HTLF utilizes an overlay approach for its economic forecasting component, similar to the method utilized for the qualitative factors. The length of the reasonable and supportable forecast period is a judgmental determination based on the level to which the entity can support its forecast of economic conditions that drive its estimate of expected loss. HTLF compares forecasted macro-economic indices, such as unemployment and gross domestic product, to the economic conditions that existed over HTLF's look back period.
HTLF uses Moody's baseline economic forecast scenario, which is updated quarterly in HTLF's methodology, and considers other Moody's forecast scenarios to support the economic forecast component of the allowance for credit losses. The economic forecast reverts to the historical mean immediately at the end of the reasonable and supportable forecast period. HTLF utilized a one-year reasonable and supportable forecast period for the calculation of the December 31, 2023, and December 31, 2022, allowance for credit losses.
It is expected that actual economic conditions will, in many cases, differ from forecasts because the ultimate outcomes during the forecast period may be affected by events that were unforeseen, such as economic disruption and fiscal or monetary policy actions, which are exacerbated by longer forecasting periods. This uncertainty would be relevant to the entity’s confidence level as to the outcomes being forecasted. That is, an entity is likely less confident in the ultimate outcome of events that will occur at the end of the forecast period as compared to the beginning. As a result, actual future economic conditions may not be an effective indicator of the quality of management’s forecasting process, including the length of the forecast period.
Financial Difficulty Modifications - Any loans that are modified are reviewed by HTLF to identify if a financial difficulty modification has occurred, which is when HTLF modifies a loan related to a borrower experiencing financial difficulties. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status. The modification of the terms of such loans includes one or a combination of the following: a reduction of the stated interest rate of the loan, an extension of the maturity date, a permanent reduction of the recorded investment of the loan, or an other-than-insignificant payment delay. The adoption of ASU 2022-02 on January 1, 2023 eliminated the recognition and measurement of TDRs and enhanced disclosures for modifications to loans related to borrowers experiencing financial difficulties. See Note Four to the consolidated financial statements for additional detail regarding the adoption of ASU 2022-02.
Loans Held for Sale - Loans held for sale are stated at the lower of cost or fair value on an aggregate basis. Gains or losses on sales are recorded in noninterest income. Direct loan origination costs and fees are deferred at origination of the loan. These deferred costs and fees are recognized in noninterest income as part of the gain or loss on sales of loans upon sale of the loan.
At December 31, 2023 and 2022, loans held for sale primarily consisted of 1-4 family residential mortgages.
Allowance for Credit Losses on Unfunded Loan Commitments - HTLF estimates expected credit losses over the contractual term of the loan for the unfunded portion of the loan commitment that is not unconditionally cancellable by HTLF using the same collective allowance methodology for credit losses for loans described above. Management uses an estimated average utilization rate to determine the exposure at default. The allowance for unfunded commitments is recorded in the Accrued Expenses and Other Liabilities section of the consolidated balance sheets.
Mortgage Servicing and Transfers of Financial Assets - Prior to dissolving its mortgage operations in 2023, HTLF regularly sold residential mortgage loans to others, primarily government sponsored entities, on a non-recourse basis. Sold loans are not included in the accompanying consolidated balance sheets. HTLF generally retained the right to service the sold loans for a fee prior to the sale of its mortgage servicing rights portfolio in the first quarter of 2023. First Bank & Trust, a division of HTLF Bank, serviced mortgage loans primarily for government sponsored entities with aggregate unpaid principal balance of $0 and $725.9 million, at December 31, 2023 and 2022, respectively.
Premises, Furniture and Equipment, net - Premises, furniture and equipment are stated at cost less accumulated depreciation. The provision for depreciation of premises, furniture and equipment is determined by straight-line and accelerated methods over the estimated useful lives of 18 to 39 years for buildings, 15 years for land improvements and 3 to 7 years for furniture and equipment.
Premises, Furniture and Equipment Held for Sale - Premises, furniture and equipment are stated at the estimated fair value less disposal costs. Subsequent write-downs and gains or losses on the sales are recorded to gain (loss) on sales/valuation of assets, net.
Other Real Estate - Other real estate represents property acquired through foreclosures and settlements of loans. Property acquired is recorded at the estimated fair value of the property less disposal costs. The excess of carrying value over fair value less disposal costs is charged against the allowance for credit losses. Subsequent write downs estimated on the basis of later valuations and gains or losses on sales are charged to gain (loss) on sales/valuation of assets, net. Expenses incurred in maintaining such properties are charged to other real estate and loan collection expenses.
Goodwill - Goodwill represents the excess of the purchase price of acquired subsidiaries’ net assets over their fair value at the purchase date. HTLF assesses goodwill for impairment annually, and more frequently if events occur which may indicate possible impairment, and assesses goodwill at the reporting unit level, also giving consideration to overall enterprise value as part of that assessment.
In evaluating goodwill for impairment, HTLF first assesses qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount. If HTLF concludes that it is more likely than not that the fair value of a reporting unit is more than its carrying value, then no further testing of goodwill assigned to the reporting unit is required. However, if HTLF concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then HTLF performs a quantitative goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment to recognize, if any. In addition, the income tax effects of tax-deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. A goodwill impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized cannot exceed the total amount of goodwill allocated to that reporting unit.
Core Deposit Intangibles and Customer Relationship Intangibles, Net - Core deposit intangibles are amortized over 8 to 18 years on an accelerated basis. Customer relationship intangibles were amortized over 22 years on an accelerated basis. Annually, HTLF reviews these intangible assets for events or circumstances that may indicate a change in the recoverability of the underlying basis.
Servicing Rights, Net - Mortgage and commercial servicing rights associated with loans originated and sold, where servicing is retained, are initially capitalized at fair value and recorded on the consolidated statements of income as a component of gains on sale of loans held for sale. The values of these capitalized servicing rights are amortized as an offset to the loan servicing income earned in relation to the servicing revenue expected to be earned.
First Bank & Trust, a division of HTLF Bank, sold its mortgage servicing portfolio in the first quarter of 2023, and the value of the mortgage servicing rights was derecognized on the consolidated balance sheet. In prior periods, the carrying values of these rights were reviewed quarterly for impairment based on the calculation of their fair value as performed by an outside third-party. For purposes of measuring impairment, the rights were stratified into certain risk characteristics including loan type and loan term. At December 31, 2022, no valuation allowance was required on HTLF's mortgage servicing rights with an original term of 15 years, and no valuation allowance was required on HTLF's mortgage servicing rights with an original term of 30 years.
Cash Surrender Value on Life Insurance - HTLF and its subsidiaries have purchased life insurance policies on the lives of certain officers. The one-time premiums paid for the policies, which coincide with the initial cash surrender value, are recorded as an asset. Increases or decreases in the cash surrender value, other than proceeds from death benefits, are recorded as noninterest income in income on bank owned life insurance. Proceeds from death benefits first reduce the cash surrender value attributable to the individual policy and then any additional proceeds are recorded in other noninterest income.
Income Taxes - HTLF and its subsidiaries file a consolidated federal income tax return and separate or combined income or franchise tax returns as required by the various states. HTLF recognizes certain income and expenses in different time periods for financial reporting and income tax purposes. The provision for deferred income taxes is based on an asset and liability
approach and represents the change in deferred income tax accounts during the year, including the effect of enacted tax rate changes. A valuation allowance is provided to reduce deferred tax assets if their expected realization is deemed not to be more likely than not.
A tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. HTLF recognizes interest and penalties related to income tax matters in income tax expense.
Derivative Financial Instruments - HTLF uses derivative financial instruments as part of its interest rate risk management, which includes interest rate swaps, certain interest rate lock commitments and forward sales of securities related to mortgage banking activities. FASB ASC Topic 815 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by ASC 815, HTLF records all derivatives on the consolidated balance sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives used to manage the exposure to changes in the fair value of a recognized asset or liability on the consolidated balance sheets are fair value hedges. To qualify for hedge accounting, HTLF must comply with the detailed rules and documentation requirements at the inception of the hedge, and hedge effectiveness is assessed at inception and periodically throughout the life of each hedging relationship. Hedge ineffectiveness, if any, is measured periodically throughout the life of the hedging relationship.
For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (loss) and subsequently reclassified to interest income or expense when the hedged transaction affects earnings, while the ineffective portion of changes in the fair value of the derivative, if any, is recognized immediately in other noninterest income. HTLF assesses the effectiveness of each hedging relationship by comparing the cumulative changes in cash flows of the derivative hedging instrument with the cumulative changes in cash flows of the designated hedged item or transaction. No component of the change in the fair value of the hedging instrument is excluded from the assessment of hedge effectiveness. In the first quarter of 2023 HTLF terminated its cash flow hedges. It was determined that the forecasted transactions remain probable, so the unrealized gains at termination were kept in accumulated comprehensive income and are being amortized into income over the remaining life of the forecasted transaction.
HTLF had multiple fair value hedging relationships at December 31, 2023. HTLF uses hedge accounting in accordance with ASC 815. For hedges where the fair value change in the loan portfolio is being hedged, 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 are being recorded in the consolidated statements of income. The ineffective portions of the unrealized gains or losses, if any, are recorded in interest income in the consolidated statements of income. For hedges where the fair value change in the investment portfolio are being hedged, the change in the fair value of the derivative and the change in the fair value of the risk being hedged on the related investments is being recorded in interest income on the consolidated statements of income. The ineffective portions of the unrealized gains or losses, if any, are recorded in interest income 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 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 also has loan interest rate swap relationships with customers to assist them in managing their interest rate risk. Upon entering into these loan swaps HTLF enters into offsetting positions with counterparties in order to minimize interest rate risk to HTLF. 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. Any gains and losses on these back-to-back swaps are recorded in noninterest income on the consolidated statements of income.
HTLF does not use derivatives for speculative purposes. Derivatives not designated as hedges are not speculative and are used to manage HTLF’s exposure to interest rate movements and other identified risks, but do not meet the strict hedge accounting requirements of ASC 815.
Mortgage Derivatives - HTLF uses interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans and mortgage-backed securities. These commitments are considered derivative instruments. 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. As of December 31, 2023, HTLF was winding out of this activity due to dissolving its mortgage operations.
Fair Value Measurements - Fair value represents the estimated price at which an orderly transaction to sell an asset or transfer a liability would take place between market participants at the measurement date under current market conditions (i.e., an exit price concept). Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using discounted cash flow or other valuation techniques. Inputs into the valuation methods are subjective in nature, involve uncertainties, and require judgment and therefore cannot be determined with precision. Accordingly, the derived fair value estimates presented herein are not necessarily indicative of the amounts HTLF could realize in a current market exchange. Assets and liabilities are categorized into three levels based on the markets in which the assets and liabilities are traded, and the reliability of the assumptions used to determine the fair value. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy in which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. HTLF's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Below is a brief description of each fair value level:
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 which 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.
Segment Reporting - Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker ("CODM"), which is the Chief Executive Officer of HTLF, in deciding how to allocate resources and assess the financial and operating performance of HTLF. HTLF’s operating segments provide, and primarily derive revenue, through full service commercial and consumer banking. HTLF has determined that the economic characteristics, operating models, performance metrics, suite of products and services, customer base, and regulatory requirements are similar for its operating segments and has therefore aggregated them into one reportable segment.
Treasury Stock - Treasury stock is accounted for by the cost method, whereby shares of common stock reacquired are recorded at their purchase price. When treasury stock is reissued, any difference between the sales proceeds, or fair value when issued for business combinations, and the cost is recognized as a charge or credit to capital surplus. HTLF had no treasury stock at December 31, 2023 and December 31, 2022.
Trust Department Assets - Property held for customers in fiduciary or agency capacities is not included in the accompanying consolidated balance sheets because such items are not assets of HTLF Bank.
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 years ended December 31, 2023, 2022 and 2021, are shown in the table below, dollars and number of shares in thousands, except per share data:
| | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 |
Net income attributable to HTLF | $ | 79,920 | | | $ | 212,180 | | | $ | 219,923 | |
Preferred dividends | (8,050) | | | (8,050) | | | (8,050) | |
| | | | | |
Net income available to common stockholders | $ | 71,870 | | | $ | 204,130 | | | $ | 211,873 | |
Weighted average common shares outstanding for basic earnings per share | 42,701 | | | 42,496 | | | 42,260 | |
Assumed incremental common shares issued upon vesting of restricted stock units | 91 | | | 135 | | | 151 | |
Weighted average common shares for diluted earnings per share | 42,792 | | | 42,631 | | | 42,411 | |
Earnings per common share — basic | $ | 1.68 | | | $ | 4.80 | | | $ | 5.01 | |
Earnings per common share — diluted | $ | 1.68 | | | $ | 4.79 | | | $ | 5.00 | |
Number of antidilutive stock units excluded from diluted earnings per share computation | 112 | | | 5 | | | 1 | |
Number of antidilutive stock options excluded from diluted earnings per share computation | 60 | | | 5 | | | — | |
Subsequent Events - HTLF has evaluated subsequent events that may require recognition or disclosure through the filing date of this Annual Report on Form 10-K with the SEC.
Subsequent to December 31, 2023, in February of 2024, HTLF announced that HTLF Bank had signed definitive agreements to sell its nine Rocky Mountain Bank division branches to two purchasers. The agreements include the sale of approximately $588.9 million of deposits, $365.9 million of loans and $13.6 million of premises, furniture and equipment. The transaction is expected to close in the latter half of 2024.
Effect of New Financial Accounting Standards
ASU 2022-01
In March 2022, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2022-01, "Derivatives and Hedging (Topic 815): Fair Value Hedging-Portfolio Layer Method," which expands the current last-of-layer method by allowing multiple hedged layers to be designated for a single closed portfolio of financial assets or one or more beneficial interests secured by a portfolio of financial instruments. HTLF adopted this ASU on January 1, 2023, and these amendments were applied prospectively.
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. HTLF adopted this ASU on January 1, 2023, as required, and the adoption did not have a material impact on its results of operations, financial position or liquidity.
ASU 2023-02
In March 2023, the FASB issued ASU 2023-02 "Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of the Emerging Task Force)." ASU 2023-02 expands the permitted use of the proportional amortization method, which is currently only available to low-income housing tax credit investments, to other tax equity investments if certain conditions are met. Under the proportional
amortization method, the initial cost of an investment is amortized in proportion to the income tax benefits received and both the amortization of the investment and the income tax benefits received are recognized as a component of income tax expense. The amendments in this update are effective for fiscal years beginning after December 15, 2023, and must be applied on either a modified retrospective or a retrospective basis. The adoption of this amendment is not expected to have a material impact on the results of operations or financial position.
ASU 2023-06
In October 2023, the FASB issued ASU 2023-06, "Disclosure Improvements: Codification Amendments in Response to the SEC's Disclosure Update and Simplification Initiative." The amendments in this Update modify the disclosure or presentation requirements of a variety of Topics in the Codification. Certain of the amendments represent clarifications to, or technical corrections of, the current requirements. Each amendment in the ASU will only become effective if the SEC removes the related disclosure or presentation requirement from its existing regulations by June 30, 2027. The amendments in this ASU are not expected to have a material impact on the results of operations or financial position.
TWO
CASH AND DUE FROM BANKS
HTLF Bank is required to maintain certain average cash reserve balances as a non-member bank of the Federal Reserve System. On March 15, 2020, the Federal Reserve temporarily suspended the reserve requirement due to the COVID-19 pandemic, and as a result, there was no reserve requirement at both December 31, 2023, and December 31, 2022.
THREE
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 as of December 31, 2023, and December 31, 2022, are summarized in the table below, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
December 31, 2023 | | | | | | | |
U.S. treasuries | $ | 32,459 | | | $ | — | | | $ | (341) | | | $ | 32,118 | |
U.S. agencies | 14,724 | | | — | | | (194) | | | 14,530 | |
Obligations of states and political subdivisions | 839,754 | | | 25 | | | (98,534) | | | 741,245 | |
Mortgage-backed securities - agency | 1,620,409 | | | 13 | | | (226,793) | | | 1,393,629 | |
Mortgage-backed securities - non-agency | 1,616,414 | | | 363 | | | (87,649) | | | 1,529,128 | |
Commercial mortgage-backed securities - agency | 76,076 | | | — | | | (11,288) | | | 64,788 | |
Commercial mortgage-backed securities - non-agency | 526,974 | | | — | | | (12,116) | | | 514,858 | |
Asset-backed securities | 232,140 | | | — | | | (14,770) | | | 217,370 | |
Corporate bonds | 120,338 | | | — | | | (2,169) | | | 118,169 | |
Total debt securities | 5,079,288 | | | 401 | | | (453,854) | | | 4,625,835 | |
Equity securities with a readily determinable fair value | 21,056 | | | — | | | — | | | 21,056 | |
Total | $ | 5,100,344 | | | $ | 401 | | | $ | (453,854) | | | $ | 4,646,891 | |
December 31, 2022 | | | | | | | |
U.S. treasuries | $ | 32,369 | | | $ | 8 | | | $ | (678) | | | $ | 31,699 | |
U.S. agencies | 49,437 | | | — | | | (6,302) | | | 43,135 | |
Obligations of states and political subdivisions | 1,049,578 | | | 14 | | | (170,155) | | | 879,437 | |
Mortgage-backed securities - agency | 2,042,092 | | | 56 | | | (270,043) | | | 1,772,105 | |
Mortgage-backed securities - non-agency | 2,327,308 | | | 1,417 | | | (146,849) | | | 2,181,876 | |
Commercial mortgage-backed securities - agency | 100,518 | | | — | | | (15,395) | | | 85,123 | |
Commercial mortgage-backed securities - non-agency | 679,511 | | | — | | | (20,052) | | | 659,459 | |
Asset-backed securities | 428,397 | | | — | | | (12,343) | | | 416,054 | |
Corporate bonds | 59,205 | | | — | | | (1,263) | | | 57,942 | |
Total debt securities | 6,768,415 | | | 1,495 | | | (643,080) | | | 6,126,830 | |
Equity securities | 20,314 | | | — | | | — | | | 20,314 | |
Total | $ | 6,788,729 | | | $ | 1,495 | | | $ | (643,080) | | | $ | 6,147,144 | |
The amortized cost, gross unrealized gains and losses and estimated fair values of held to maturity securities as of December 31, 2023, and December 31, 2022, are summarized in the table below, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | | Allowance for Credit Losses |
December 31, 2023 | | | | | | | | | |
| | | | | | | | | |
Obligations of states and political subdivisions | $ | 838,241 | | | $ | 3,622 | | | $ | (25,464) | | | $ | 816,399 | | | $ | — | |
Total | $ | 838,241 | | | $ | 3,622 | | | $ | (25,464) | | | $ | 816,399 | | | $ | — | |
December 31, 2022 | | | | | | | | | |
| | | | | | | | | |
Obligations of states and political subdivisions | $ | 829,403 | | | $ | 3,096 | | | $ | (55,942) | | | $ | 776,557 | | | $ | — | |
Total | $ | 829,403 | | | $ | 3,096 | | | $ | (55,942) | | | $ | 776,557 | | | $ | — | |
During the third quarter of 2022, HTLF transferred taxable municipal bonds with an amortized cost basis of $934.5 million and fair value of $748.3 million from available for sale to held to maturity. On the date of the transfer, accumulated other comprehensive income (loss) included $186.3 million of net unrealized losses, after tax, attributable to these securities, and the net unrealized losses will be amortized into interest income over the remaining life of the transferred securities. The bonds were transferred at fair value at the date of transfer.
As of December 31, 2023, HTLF had $28.0 million compared to $33.0 million at December 31, 2022, 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 December 31, 2023, by contractual maturity are as follows, in thousands. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.
| | | | | | | | | | | |
| December 31, 2023 |
| Amortized Cost | | Estimated Fair Value |
Due in 1 year or less | $ | 25,138 | | | $ | 24,897 | |
Due in 1 to 5 years | 62,537 | | | 61,413 | |
Due in 5 to 10 years | 20,231 | | | 18,036 | |
Due after 10 years | 899,369 | | | 801,716 | |
Total debt securities | 1,007,275 | | | 906,062 | |
Mortgage and asset-backed securities | 4,072,013 | | | 3,719,773 | |
Equity securities with a readily determinable fair value | 21,056 | | | 21,056 | |
Total investment securities | $ | 5,100,344 | | | $ | 4,646,891 | |
The amortized cost and estimated fair value of debt securities held to maturity at December 31, 2023, by contractual maturity are as follows, in thousands. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.
| | | | | | | | | | | |
| December 31, 2023 |
| Amortized Cost | | Estimated Fair Value |
Due in 1 year or less | $ | 8,116 | | | $ | 8,126 | |
Due in 1 to 5 years | 88,728 | | | 88,646 | |
Due in 5 to 10 years | 158,686 | | | 158,430 | |
Due after 10 years | 582,711 | | | 561,197 | |
| | | |
| | | |
Total investment securities | $ | 838,241 | | | $ | 816,399 | |
As of December 31, 2023, securities with a carrying value of $2.63 billion compared to $1.49 billion at December 31, 2022, were pledged to secure public and trust deposits, short-term borrowings and for other purposes as required and permitted by law.
Gross gains and losses realized related to sales of securities carried at fair value for the years ended December 31, 2023, 2022 and 2021 are summarized as follows, in thousands:
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2023 | | 2022 | | 2021 |
Proceeds from sales | $ | 1,196,586 | | | $ | 1,048,525 | | | $ | 1,475,598 | |
Gross security gains | 589 | | | 7,299 | | | 11,892 | |
Gross security losses | 141,966 | | | 9,191 | | | 5,982 | |
The following tables summarize, 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 HTLF's securities portfolio as of December 31, 2023, and December 31, 2022. The investments were segregated into two categories: those that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months. The reference point for determining how long an investment was in an unrealized loss position was December 31, 2023, and December 31, 2022, respectively. For securities transferred to held to maturity during the third quarter of 2022, the reference point was the date of transfer.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 |
December 31, 2023 | | | | | | | | | | | | | | | | | |
U.S. treasuries | $ | 2,985 | | | $ | (12) | | | 1 | | | $ | 26,138 | | | $ | (329) | | | 3 | | | $ | 29,123 | | | $ | (341) | | | 4 | |
U.S. agencies | $ | — | | | $ | — | | | — | | | $ | 14,530 | | | $ | (194) | | | 4 | | | $ | 14,530 | | | $ | (194) | | | 4 | |
Obligations of states and political subdivisions | 1,440 | | | (65) | | | 1 | | | 736,653 | | | (98,469) | | | 150 | | | 738,093 | | | (98,534) | | | 151 | |
Mortgage-backed securities - agency | 194 | | | (2) | | | 2 | | | 1,392,769 | | | (226,791) | | | 166 | | | 1,392,963 | | | (226,793) | | | 168 | |
Mortgage-backed securities - non-agency | 415,934 | | | (24,568) | | | 12 | | | 902,291 | | | (63,081) | | | 35 | | | 1,318,225 | | | (87,649) | | | 47 | |
Commercial mortgage-backed securities - agency | — | | | — | | | — | | | 64,788 | | | (11,288) | | | 17 | | | 64,788 | | | (11,288) | | | 17 | |
Commercial mortgage-backed securities - non-agency | — | | | — | | | — | | | 507,044 | | | (12,116) | | | 16 | | | 507,044 | | | (12,116) | | | 16 | |
Asset-backed securities | 148,063 | | | (9,723) | | | 4 | | | 69,307 | | | (5,047) | | | 7 | | | 217,370 | | | (14,770) | | | 11 | |
Corporate bonds | 61,031 | | | (111) | | | 1 | | | 57,138 | | | (2,058) | | | 8 | | | 118,169 | | | (2,169) | | | 9 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total temporarily impaired securities | $ | 629,647 | | | $ | (34,481) | | | 21 | | | $ | 3,770,658 | | | $ | (419,373) | | | 406 | | | $ | 4,400,305 | | | $ | (453,854) | | | 427 | |
December 31, 2022 | | |
U.S. treasuries | $ | 28,699 | | | $ | (678) | | | 4 | | | $ | — | | | $ | — | | | — | | | $ | 28,699 | | | $ | (678) | | | 4 | |
U.S. agencies | $ | 16,487 | | | $ | (222) | | | 5 | | | $ | 26,648 | | | $ | (6,080) | | | 2 | | | $ | 43,135 | | | $ | (6,302) | | | 7 | |
Obligations of states and political subdivisions | 288,457 | | | (28,378) | | | 69 | | | 589,641 | | | (141,777) | | | 113 | | | 878,098 | | | (170,155) | | | 182 | |
Mortgage-backed securities - agency | 241,288 | | | (21,420) | | | 99 | | | 1,528,951 | | | (248,623) | | | 126 | | | 1,770,239 | | | (270,043) | | | 225 | |
Mortgage-backed securities - non-agency | 950,054 | | | (70,213) | | | 25 | | | 693,531 | | | (76,636) | | | 25 | | | 1,643,585 | | | (146,849) | | | 50 | |
Commercial mortgage-backed securities - agency | 27,732 | | | (2,291) | | | 12 | | | 57,392 | | | (13,104) | | | 7 | | | 85,124 | | | (15,395) | | | 19 | |
Commercial mortgage-backed securities - non-agency | 530,541 | | | (16,830) | | | 15 | | | 84,619 | | | (3,222) | | | 4 | | | 615,160 | | | (20,052) | | | 19 | |
Asset-backed securities | 118,613 | | | (6,107) | | | 7 | | | 56,621 | | | (6,236) | | | 6 | | | 175,234 | | | (12,343) | | | 13 | |
Corporate bonds | 57,544 | | | (1,257) | | | 7 | | | 398 | | | (6) | | | 1 | | | 57,942 | | | (1,263) | | | 8 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total temporarily impaired securities | $ | 2,259,415 | | | $ | (147,396) | | | 243 | | | $ | 3,037,801 | | | $ | (495,684) | | | 284 | | | $ | 5,297,216 | | | $ | (643,080) | | | 527 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 |
December 31, 2023 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Obligations of states and political subdivisions | $ | 145,471 | | | $ | (3,706) | | | 23 | | | $ | 569,691 | | | $ | (21,758) | | | 126 | | | $ | 715,162 | | | $ | (25,464) | | | 149 | |
Total temporarily impaired securities | $ | 145,471 | | | $ | (3,706) | | | 23 | | $ | 569,691 | | | $ | (21,758) | | | 126 | | $ | 715,162 | | | $ | (25,464) | | | 149 | |
December 31, 2022 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Obligations of states and political subdivisions | $ | 697,424 | | | $ | (55,942) | | | 155 | | | $ | — | | | $ | — | | | — | | | $ | 697,424 | | | $ | (55,942) | | | 155 | |
Total temporarily impaired securities | $ | 697,424 | | | $ | (55,942) | | | 155 | | $ | — | | | $ | — | | | | | $ | 697,424 | | | $ | (55,942) | | | 155 | |
| | |
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, the financial condition of the issuer, as well as security and industry specific economic conditions. In addition, regarding 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 after 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 years ended December 31, 2023 and December 31, 2022.
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 after 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 years ended December 31, 2023 and December 31, 2022.
In the first quarter of 2022, HTLF sold two obligations of states and political subdivisions securities from the held to maturity portfolio. Because the evaluation of the underlying credit quality of the individual securities indicated 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 following table summarizes, in thousands, the carrying amount of HTLF's held to maturity debt securities by investment rating as of December 31, 2023 and December 31, 2022, which are updated quarterly and used to monitor the credit quality of the securities:
| | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
Rating | | | |
AAA | $ | 88,550 | | | $ | 79,598 | |
AA, AA+, AA- | 583,816 | | | 588,354 | |
A+, A, A- | 139,658 | | | 136,624 | |
BBB | 20,133 | | | 20,623 | |
Not Rated | 6,084 | | | 4,204 | |
Total | $ | 838,241 | | | $ | 829,403 | |
Included in other securities were shares of stock in each Federal Home Loan Bank (the "FHLB") of Des Moines, Dallas and Topeka at an amortized cost of $25.8 million at December 31, 2023 and $12.3 million at December 31, 2022.
HTLF Bank is required to maintain FHLB stock as a member of the FHLB. These equity securities are "restricted" in that they can only be sold back to the respective institutions or another member institution at par. Therefore, they are less liquid than other marketable equity securities and their 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 December 31, 2023, did not consider the investments to be other than temporarily impaired.
FOUR
LOANS
Loans as of December 31, 2023, and December 31, 2022, were as follows, in thousands:
| | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
Loans receivable held to maturity: | | | |
Commercial and industrial | $ | 3,652,047 | | | $ | 3,464,414 | |
Paycheck Protection Program ("PPP") | 2,777 | | | 11,025 | |
Owner occupied commercial real estate | 2,638,175 | | | 2,265,307 | |
Non-owner occupied commercial real estate | 2,553,711 | | | 2,330,940 | |
Real estate construction | 1,011,716 | | | 1,076,082 | |
Agricultural and agricultural real estate | 919,184 | | | 920,510 | |
Residential real estate | 797,829 | | | 853,361 | |
Consumer | 493,206 | | | 506,713 | |
| | | |
| | | |
Total loans receivable held to maturity | 12,068,645 | | | 11,428,352 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Allowance for credit losses | (122,566) | | | (109,483) | |
Loans receivable, net | $ | 11,946,079 | | | $ | 11,318,869 | |
As of December 31, 2023, HTLF had $65.4 million compared to $49.1 million as of December 31, 2022, 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 December 31, 2023, and December 31, 2022, and the related loan balances, disaggregated on the basis of measurement methodology, in thousands. If a loan no longer shares similar risk characteristics with other loans in the pool, it is evaluated on an individual basis and is not included in the collective evaluation. Lending relationships with $500,000 or more of total exposure and are on nonaccrual are individually assessed using a collateral dependency calculation. All other loans are collectively evaluated for losses.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance For Credit Losses | | Gross Loans Receivable Held to Maturity |
| Individually Evaluated for Credit Losses | | Collectively Evaluated for Credit Losses | | Total | | Loans Individually Evaluated for Credit Losses | | Loans Collectively Evaluated for Credit Losses | | Total |
December 31, 2023 | | | | | | | | | | | |
Commercial and industrial | $ | 18,425 | | | $ | 22,254 | | | $ | 40,679 | | | $ | 41,847 | | | $ | 3,610,200 | | | $ | 3,652,047 | |
PPP | — | | | — | | | — | | | — | | | 2,777 | | | 2,777 | |
Owner occupied commercial real estate | — | | | 17,156 | | | 17,156 | | | 30,400 | | | 2,607,775 | | | 2,638,175 | |
Non-owner occupied commercial real estate | — | | | 17,249 | | | 17,249 | | | — | | | 2,553,711 | | | 2,553,711 | |
Real estate construction | 56 | | | 28,717 | | | 28,773 | | | 697 | | | 1,011,019 | | | 1,011,716 | |
Agricultural and agricultural real estate | 1,932 | | | 2,360 | | | 4,292 | | | 6,700 | | | 912,484 | | | 919,184 | |
Residential real estate | — | | | 5,845 | | | 5,845 | | | 741 | | | 797,088 | | | 797,829 | |
Consumer | — | | | 8,572 | | | 8,572 | | | — | | | 493,206 | | | 493,206 | |
| | | | | | | | | | | |
Total | $ | 20,413 | | | $ | 102,153 | | | $ | 122,566 | | | $ | 80,385 | | | $ | 11,988,260 | | | $ | 12,068,645 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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, 2022 | | | | | | | | | | | |
Commercial and industrial | $ | 6,670 | | | $ | 22,401 | | | $ | 29,071 | | | $ | 18,712 | | | $ | 3,445,702 | | | $ | 3,464,414 | |
PPP | — | | | — | | | — | | | — | | | 11,025 | | | 11,025 | |
Owner occupied commercial real estate | 376 | | | 13,572 | | | 13,948 | | | 7,932 | | | 2,257,375 | | | 2,265,307 | |
Non-owner occupied commercial real estate | — | | | 16,539 | | | 16,539 | | | 11,371 | | | 2,319,569 | | | 2,330,940 | |
Real estate construction | — | | | 29,998 | | | 29,998 | | | 1,518 | | | 1,074,564 | | | 1,076,082 | |
Agricultural and agricultural real estate | 63 | | | 2,571 | | | 2,634 | | | 3,851 | | | 916,659 | | | 920,510 | |
Residential real estate | — | | | 7,711 | | | 7,711 | | | 1,607 | | | 851,754 | | | 853,361 | |
Consumer | — | | | 9,582 | | | 9,582 | | | — | | | 506,713 | | | 506,713 | |
| | | | | | | | | | | |
Total | $ | 7,109 | | | $ | 102,374 | | | $ | 109,483 | | | $ | 44,991 | | | $ | 11,383,361 | | | $ | 11,428,352 | |
The following tables show the amortized cost basis as of December 31, 2023, of the loans modified during the year ended December 31, 2023, to borrowers experiencing financial difficulty by loan category and type of concession granted, dollars in thousands.
| | | | | | | | | | | | | | | | | | | | | | | |
For the Year Ended December 31, 2023 | Loan Modifications Made to Borrowers Experiencing Financial Difficulty |
| Term Extension | | Term Extension and Interest Only Payments |
| Amortized Cost Basis | | % of Loan Category | | Amortized Cost Basis | | % of Loan Category |
Commercial and industrial | $ | 4,088 | | | 0.11 | % | | $ | — | | | — | % |
PPP | — | | | — | | | — | | | — | |
Owner occupied commercial real estate | — | | | — | | | 5,043 | | | 0.19 | |
Non-owner occupied commercial real estate | — | | | — | | | — | | | — | |
Real estate construction | — | | | — | | | — | | | — | |
Agricultural and agricultural real estate | 1,936 | | | 0.21 | | | — | | | — | |
Residential real estate | 741 | | | 0.09 | | | — | | | — | |
Consumer | — | | | — | | | — | | | — | |
Total | $ | 6,765 | | | 0.06 | % | | $ | 5,043 | | | 0.04 | % |
The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulty in the year ended December 31, 2023.
| | | | | | | | | | | | | | |
Loan Type | | Weighted Average Term Extension (months) | | Weighted Average Term Extension and Interest Only Payments (months) |
Commercial and industrial | | 7 | | 0 |
| | | | |
Owner occupied commercial real estate | | 0 | | 12 |
| | | | |
Real estate construction | | 0 | | 0 |
Agricultural and agricultural real estate | | 7 | | 0 |
Residential real estate | | 12 | | 0 |
| | | | |
At December 31, 2023, there was $43,000 in unfunded commitments to extend credit to the borrowers experiencing financial difficulty.
HTLF had no loans to borrowers experiencing financial difficulty that had a payment default during the year ended December 31, 2023, that had been modified in the twelve-month period prior to the default.
HTLF closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table shows the performance of loans that have been modified in the year ended December 31, 2023, dollars in thousands.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Accruing Loans | | | | |
| 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or More Past Due | | | | Total Past Due | | Current | | Nonaccrual | | |
December 31, 2023 | | | | | | | | | | | | | | | |
Commercial and industrial | $ | — | | | $ | — | | | $ | — | | | | | $ | — | | | $ | 3,986 | | | $ | 102 | | | |
PPP | — | | | — | | | — | | | | | — | | | — | | | — | | | |
Owner occupied commercial real estate | — | | | — | | | — | | | | | — | | | 5,043 | | | — | | | |
Non-owner occupied commercial real estate | — | | | — | | | — | | | | | — | | | — | | | — | | | |
Real estate construction | — | | | — | | | — | | | | | — | | | — | | | — | | | |
Agricultural and agricultural real estate | — | | | — | | | — | | | | | — | | | 1,936 | | | — | | | |
Residential real estate | — | | | — | | | — | | | | | — | | | — | | | 741 | | | |
Consumer | — | | | — | | | — | | | | | — | | | — | | | — | | | |
Total | $ | — | | | $ | — | | | $ | — | | | | | $ | — | | | $ | 10,965 | | | $ | 843 | | | |
HTLF's internal rating system is a series of grades reflecting management's risk assessment, based on its analysis of the borrower's financial condition. The "pass" category consists of all loans that are not in the "nonpass" category and categorized into a range of loan grades that reflect increasing, though still acceptable risk. Movement of risk through the various grade levels in the pass category is monitored for early identification of credit deterioration.
The "nonpass" category consists of watch, substandard, doubtful and loss loans. The "watch" rating is attached to loans where the borrower exhibits negative trends in financial circumstances due to borrower specific or systemic conditions that, if left uncorrected, threaten the borrower's capacity to meet its debt obligations. The borrower is believed to have sufficient financial flexibility to react to and resolve its negative financial situation. These credits are closely monitored for improvement or deterioration.
The "substandard" rating is assigned to loans that are inadequately protected by the current net worth and repaying capacity of the borrower and that may be further at risk due to deterioration in the value of collateral pledged. Well-defined weaknesses jeopardize liquidation of the debt. These loans are still considered collectible; however, a distinct possibility exists that HTLF will sustain some loss if deficiencies are not corrected. Substandard loans may exhibit some or all 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, based on 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. As of December 31, 2023, and December 31, 2022, HTLF had no loans classified as doubtful and no loans classified as loss.
The following tables show the risk category of loans by loan category and year of origination as of December 31, 2023 and December 31, 2022, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2023 | Amortized Cost Basis of Term Loans by Year of Origination | | |
| 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 and Prior | | Revolving | | Total |
Commercial and industrial | | | | | | | | | | | | | | | |
Pass | $ | 608,030 | | | $ | 779,218 | | | $ | 333,900 | | | $ | 187,406 | | | $ | 78,455 | | | $ | 327,775 | | | $ | 1,159,397 | | | $ | 3,474,181 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2023 | Amortized Cost Basis of Term Loans by Year of Origination | | |
| 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 and Prior | | Revolving | | Total |
Watch | 20,694 | | | 19,788 | | | 257 | | | 3,631 | | | 2,398 | | | 2,953 | | | 28,749 | | | 78,470 | |
Substandard | 20,171 | | | 12,658 | | | 2,636 | | | 5,447 | | | 18,535 | | | 7,489 | | | 32,460 | | | 99,396 | |
Commercial and industrial total | $ | 648,895 | | | $ | 811,664 | | | $ | 336,793 | | | $ | 196,484 | | | $ | 99,388 | | | $ | 338,217 | | | $ | 1,220,606 | | | $ | 3,652,047 | |
Commercial and industrial charge-offs | 245 | | 794 | | 680 | | 1,425 | | 563 | | 1,949 | | 2,966 | | 8,622 |
| | | | | | | | | | | | | | | |
PPP | | | | | | | | | | | | | | | |
Pass | $ | — | | | $ | — | | | $ | 2,591 | | | $ | 50 | | | $ | — | | | $ | — | | | $ | — | | | $ | 2,641 | |
Watch | — | | | — | | | 89 | | | — | | | — | | | — | | | — | | | 89 | |
Substandard | — | | | — | | | 47 | | | — | | | — | | | — | | | — | | | 47 | |
PPP total | $ | — | | | $ | — | | | $ | 2,727 | | | $ | 50 | | | $ | — | | | $ | — | | | $ | — | | | $ | 2,777 | |
PPP charge-offs | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | |
Owner occupied commercial real estate | | | | | | | | | | | | | | | |
Pass | $ | 443,683 | | | $ | 547,898 | | | $ | 799,978 | | | $ | 225,257 | | | $ | 225,405 | | | $ | 224,608 | | | $ | 41,072 | | | $ | 2,507,901 | |
Watch | 8,052 | | | 25,947 | | | 13,114 | | | 2,662 | | | 8,115 | | | 7,553 | | | — | | | 65,443 | |
Substandard | 31,904 | | | 10,489 | | | 2,268 | | | 11,609 | | | 6,390 | | | 2,171 | | | — | | | 64,831 | |
Owner occupied commercial real estate total | $ | 483,639 | | | $ | 584,334 | | | $ | 815,360 | | | $ | 239,528 | | | $ | 239,910 | | | $ | 234,332 | | | $ | 41,072 | | | $ | 2,638,175 | |
Owner occupied commercial real estate charge-offs | — | | | 802 | | | — | | | 5 | | | — | | | 63 | | | — | | | 870 | |
| | | | | | | | | | | | | | | |
Non-owner occupied commercial real estate | | | | | | | | | | | | | | | |
Pass | $ | 480,683 | | | $ | 656,824 | | | $ | 423,420 | | | $ | 203,330 | | | $ | 262,541 | | | $ | 251,499 | | | $ | 26,978 | | | $ | 2,305,275 | |
Watch | 71,400 | | | 34,651 | | | 8,237 | | | 3,834 | | | 27,345 | | | 57,083 | | | — | | | 202,550 | |
Substandard | 5,043 | | | 952 | | | 1,391 | | | — | | | 4,238 | | | 34,262 | | | — | | | 45,886 | |
Non-owner occupied commercial real estate total | $ | 557,126 | | | $ | 692,427 | | | $ | 433,048 | | | $ | 207,164 | | | $ | 294,124 | | | $ | 342,844 | | | $ | 26,978 | | | $ | 2,553,711 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2023 | Amortized Cost Basis of Term Loans by Year of Origination | | |
| 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 and Prior | | Revolving | | Total |
Non-owner occupied commercial real estate charge-offs | — | | | 52 | | | — | | | 29 | | | 399 | | | 147 | | | — | | | 627 | |
| | | | | | | | | | | | | | | |
Real estate construction | | | | | | | | | | | | | | | |
Pass | $ | 283,519 | | | $ | 468,646 | | | $ | 176,604 | | | $ | 9,889 | | | $ | 11,048 | | | $ | 3,405 | | | $ | 6,486 | | | $ | 959,597 | |
Watch | 629 | | | 33,220 | | | 9,418 | | | 72 | | | — | | | 65 | | | — | | | 43,404 |
Substandard | — | | | 8,522 | | | — | | | 107 | | | — | | | — | | | 86 | | | 8,715 |
Real estate construction total | $ | 284,148 | | | $ | 510,388 | | | $ | 186,022 | | | $ | 10,068 | | | $ | 11,048 | | | $ | 3,470 | | | $ | 6,572 | | | $ | 1,011,716 | |
Real estate construction charge-offs | 284 | | | — | | | — | | | 32 | | | — | | | — | | | — | | | 316 | |
| | | | | | | | | | | | | | | |
Agricultural and agricultural real estate | | | | | | | | | | | | | | | |
Pass | $ | 152,665 | | | $ | 208,375 | | | $ | 114,798 | | | $ | 67,006 | | | $ | 28,247 | | | $ | 43,663 | | | $ | 260,941 | | | $ | 875,695 | |
Watch | 2,245 | | | 16,257 | | | 293 | | | 622 | | | 70 | | | 349 | | | 427 | | | 20,263 | |
Substandard | 12 | | | 7,616 | | | 1,649 | | | 4 | | | 855 | | | 12,591 | | | 499 | | | 23,226 | |
Agricultural and agricultural real estate total | $ | 154,922 | | | $ | 232,248 | | | $ | 116,740 | | | $ | 67,632 | | | $ | 29,172 | | | $ | 56,603 | | | $ | 261,867 | | | $ | 919,184 | |
Agricultural and agricultural real estate charge-offs | — | | | — | | | — | | | 9 | | | — | | | 1 | | | 5,309 | | | 5,319 | |
| | | | | | | | | | | | | | | |
Residential real estate | | | | | | | | | | | | | | | |
Pass | $ | 71,470 | | | $ | 177,564 | | | $ | 241,362 | | | $ | 73,029 | | | $ | 42,526 | | | $ | 155,899 | | | $ | 19,534 | | | $ | 781,384 | |
Watch | 171 | | | 973 | | | 945 | | | 659 | | | 158 | | | 4,845 | | | — | | | 7,751 |
Substandard | 741 | | | 150 | | | 3,400 | | | 464 | | | 290 | | | 3,649 | | | — | | | 8,694 |
Residential real estate total | $ | 72,382 | | | $ | 178,687 | | | $ | 245,707 | | | $ | 74,152 | | | $ | 42,974 | | | $ | 164,393 | | | $ | 19,534 | | | $ | 797,829 | |
Residential real estate charge-offs | — | | | 59 | | | 124 | | | — | | | — | | | — | | | — | | | 183 | |
| | | | | | | | | | | | | | | |
Consumer | | | | | | | | | | | | | | | |
Pass | $ | 45,595 | | | $ | 62,900 | | | $ | 35,459 | | | $ | 7,731 | | | $ | 3,663 | | | $ | 6,109 | | | $ | 324,218 | | | $ | 485,675 | |
Watch | 730 | | | 84 | | | 694 | | | 21 | | | 41 | | | 644 | | | 2,060 | | | 4,274 |
Substandard | 80 | | | 308 | | | 401 | | | 75 | | | 159 | | | 1,769 | | | 465 | | | 3,257 |
Consumer total | $ | 46,405 | | | $ | 63,292 | | | $ | 36,554 | | | $ | 7,827 | | | $ | 3,863 | | | $ | 8,522 | | | $ | 326,743 | | | $ | 493,206 | |
Consumer charge-offs | 2 | | 246 | | 154 | | 27 | | 19 | | 112 | | 3,117 | | 3,677 |
| | | | | | | | | | | | | | | |
Total pass | $ | 2,085,645 | | | $ | 2,901,425 | | | $ | 2,128,112 | | | $ | 773,698 | | | $ | 651,885 | | | $ | 1,012,958 | | | $ | 1,838,626 | | | $ | 11,392,349 | |
Total watch | 103,921 | | | 130,920 | | | 33,047 | | | 11,501 | | | 38,127 | | | 73,492 | | | 31,236 | | | 422,244 |
Total substandard | 57,951 | | | 40,695 | | | 11,792 | | | 17,706 | | | 30,467 | | | 61,931 | | | 33,510 | | | 254,052 |
Total loans | $ | 2,247,517 | | | $ | 3,073,040 | | | $ | 2,172,951 | | | $ | 802,905 | | | $ | 720,479 | | | $ | 1,148,381 | | | $ | 1,903,372 | | | $ | 12,068,645 | |
| | | | | | | | | | | | | | | |
Total Charge-offs | $ | 531 | | | $ | 1,953 | | | $ | 958 | | | $ | 1,527 | | | $ | 981 | | | $ | 2,272 | | | $ | 11,392 | | | $ | 19,614 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2022 | Amortized Cost Basis of Term Loans by Year of Origination | | |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 and Prior | | Revolving | | Total |
Commercial and industrial | | | | | | | | | | | | | | | |
Pass | $ | 967,103 | | | $ | 442,001 | | | $ | 260,021 | | | $ | 101,998 | | | $ | 57,776 | | | $ | 421,312 | | | $ | 1,064,333 | | | $ | 3,314,544 | |
Watch | 12,638 | | | 1,370 | | | 685 | | | 5,487 | | | 2,882 | | | 3,315 | | | 21,984 | | | 48,361 | |
Substandard | 6,691 | | | 14,366 | | | 9,369 | | | 22,171 | | | 5,546 | | | 6,758 | | | 36,608 | | | 101,509 | |
Commercial and industrial total | $ | 986,432 | | | $ | 457,737 | | | $ | 270,075 | | | $ | 129,656 | | | $ | 66,204 | | | $ | 431,385 | | | $ | 1,122,925 | | | $ | 3,464,414 | |
PPP | | | | | | | | | | | | | | | |
Pass | $ | — | | | $ | 7,807 | | | $ | 526 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 8,333 | |
Watch | — | | | 7 | | | — | | | — | | | — | | | — | | | — | | | 7 | |
Substandard | — | | | 2,685 | | | — | | | — | | | — | | | — | | | — | | | 2,685 | |
PPP total | $ | — | | | $ | 10,499 | | | $ | 526 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 11,025 | |
Owner occupied commercial real estate | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2022 | Amortized Cost Basis of Term Loans by Year of Origination | | |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 and Prior | | Revolving | | Total |
Pass | $ | 511,547 | | | $ | 781,946 | | | $ | 255,476 | | | $ | 266,228 | | | $ | 103,943 | | | $ | 179,503 | | | $ | 34,117 | | | $ | 2,132,760 | |
Watch | 22,079 | | | 3,410 | | | 12,346 | | | 8,520 | | | 3,645 | | | 11,899 | | | — | | | 61,899 | |
Substandard | 2,971 | | | 23,802 | | | 26,490 | | | 6,358 | | | 2,574 | | | 7,353 | | | 1,100 | | | 70,648 | |
Owner occupied commercial real estate total | $ | 536,597 | | | $ | 809,158 | | | $ | 294,312 | | | $ | 281,106 | | | $ | 110,162 | | | $ | 198,755 | | | $ | 35,217 | | | $ | 2,265,307 | |
Non-owner occupied commercial real estate | | | | | | | | | | | | | | | |
Pass | $ | 756,059 | | | $ | 515,075 | | | $ | 227,383 | | | $ | 261,964 | | | $ | 127,400 | | | $ | 210,289 | | | $ | 70,398 | | | $ | 2,168,568 | |
Watch | 8,131 | | | 792 | | | 2,849 | | | 38,218 | | | 38,510 | | | 16,180 | | | 547 | | | 105,227 | |
Substandard | 202 | | | 6,784 | | | 1,838 | | | 16,019 | | | 22,332 | | | 9,970 | | | — | | | 57,145 | |
Non-owner occupied commercial real estate total | $ | 764,392 | | | $ | 522,651 | | | $ | 232,070 | | | $ | 316,201 | | | $ | 188,242 | | | $ | 236,439 | | | $ | 70,945 | | | $ | 2,330,940 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Real estate construction | | | | | | | | | | | | | | | |
Pass | $ | 597,370 | | | $ | 328,391 | | | $ | 88,660 | | | $ | 21,221 | | | $ | 2,568 | | | $ | 6,274 | | | $ | 8,252 | | | $ | 1,052,736 | |
Watch | 665 | | | 16,218 | | | 1,257 | | | — | | | — | | | 122 | | | — | | | 18,262 |
Substandard | 2,587 | | | 356 | | | 173 | | | 446 | | | 1,478 | | | 44 | | | — | | | 5,084 |
Real estate construction total | $ | 600,622 | | | $ | 344,965 | | | $ | 90,090 | | | $ | 21,667 | | | $ | 4,046 | | | $ | 6,440 | | | $ | 8,252 | | | $ | 1,076,082 | |
Agricultural and agricultural real estate | | | | | | | | | | | | | | | |
Pass | $ | 324,791 | | | $ | 140,252 | | | $ | 79,307 | | | $ | 34,447 | | | $ | 22,600 | | | $ | 38,672 | | | $ | 239,686 | | | $ | 879,755 | |
Watch | 3,795 | | | 515 | | | 3,865 | | | 641 | | | 444 | | | 672 | | | 902 | | | 10,834 | |
Substandard | 8,674 | | | 3,224 | | | 204 | | | 1,859 | | | 12,323 | | | 2,682 | | | 955 | | | 29,921 | |
Agricultural and agricultural real estate total | $ | 337,260 | | | $ | 143,991 | | | $ | 83,376 | | | $ | 36,947 | | | $ | 35,367 | | | $ | 42,026 | | | $ | 241,543 | | | $ | 920,510 | |
Residential real estate | | | | | | | | | | | | | | | |
Pass | $ | 189,133 | | | $ | 268,561 | | | $ | 64,627 | | | $ | 39,468 | | | $ | 34,863 | | | $ | 217,489 | | | $ | 23,331 | | | $ | 837,472 | |
Watch | 706 | | | 1,095 | | | 88 | | | 957 | | | 2,296 | | | 2,237 | | | 399 | | | 7,778 |
Substandard | 28 | | | 1,273 | | | 1,024 | | | 99 | | | 792 | | | 4,895 | | | — | | | 8,111 |
Residential real estate total | $ | 189,867 | | | $ | 270,929 | | | $ | 65,739 | | | $ | 40,524 | | | $ | 37,951 | | | $ | 224,621 | | | $ | 23,730 | | | $ | 853,361 | |
Consumer | | | | | | | | | | | | | | | |
Pass | $ | 80,592 | | | $ | 47,787 | | | $ | 11,722 | | | $ | 6,022 | | | $ | 4,840 | | | $ | 24,655 | | | $ | 325,247 | | | $ | 500,865 | |
Watch | 20 | | | 191 | | | 35 | | | 119 | | | 74 | | | 1,584 | | | 953 | | | 2,976 |
Substandard | 188 | | | 331 | | | 242 | | | 303 | | | 75 | | | 1,539 | | | 194 | | | 2,872 |
Consumer total | $ | 80,800 | | | $ | 48,309 | | | $ | 11,999 | | | $ | 6,444 | | | $ | 4,989 | | | $ | 27,778 | | | $ | 326,394 | | | $ | 506,713 | |
| | | | | | | | | | | | | | | |
Total pass | $ | 3,426,595 | | | $ | 2,531,820 | | | $ | 987,722 | | | $ | 731,348 | | | $ | 353,990 | | | $ | 1,098,194 | | | $ | 1,765,364 | | | $ | 10,895,033 | |
Total watch | 48,034 | | | 23,598 | | | 21,125 | | | 53,942 | | | 47,851 | | | 36,009 | | | 24,785 | | | 255,344 |
Total substandard | 21,341 | | | 52,821 | | | 39,340 | | | 47,255 | | | 45,120 | | | 33,241 | | | 38,857 | | | 277,975 |
Total loans | $ | 3,495,970 | | | $ | 2,608,239 | | | $ | 1,048,187 | | | $ | 832,545 | | | $ | 446,961 | | | $ | 1,167,444 | | | $ | 1,829,006 | | | $ | 11,428,352 | |
Included in HTLF's nonpass loans at December 31, 2023 were $136,000 compared to $2.7 million at December 31, 2022, 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% SBA guarantee.
As of December 31, 2023, HTLF had $127,000 of loans secured by residential real estate property that were in the process of foreclosure.
The following table sets forth information regarding HTLF's accruing and nonaccrual loans at December 31, 2023, and December 31, 2022, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Accruing Loans | | | | |
| 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or More Past Due | | Total Past Due | | Current | | Nonaccrual | | Total Loans |
December 31, 2023 | | | | | | | | | | | | | |
Commercial and industrial | $ | 1,738 | | | $ | 126 | | | $ | 2,203 | | | $ | 4,067 | | | $ | 3,601,165 | | | $ | 46,815 | | | $ | 3,652,047 | |
PPP | 94 | | | 53 | | | — | | | 147 | | | 2,630 | | | — | | | 2,777 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
Owner occupied commercial real estate | 205 | | | 2,664 | | | 74 | | | 2,943 | | | 2,603,640 | | | 31,592 | | | 2,638,175 | |
Non-owner occupied commercial real estate | 875 | | | — | | | — | | | 875 | | | 2,552,469 | | | 367 | | | 2,553,711 | |
Real estate construction | 332 | | | — | | | — | | | 332 | | | 1,010,601 | | | 783 | | | 1,011,716 | |
Agricultural and agricultural real estate | 121 | | | — | | | 12 | | | 133 | | | 909,841 | | | 9,210 | | | 919,184 | |
Residential real estate | 2,082 | | | 273 | | | 21 | | | 2,376 | | | 790,367 | | | 5,086 | | | 797,829 | |
Consumer | 2,257 | | | 150 | | | 197 | | | 2,604 | | | 489,029 | | | 1,573 | | | 493,206 | |
| | | | | | | | | | | | | |
Total loans receivable held to maturity | $ | 7,704 | | | $ | 3,266 | | | $ | 2,507 | | | $ | 13,477 | | | $ | 11,959,742 | | | $ | 95,426 | | | $ | 12,068,645 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
December 31, 2022 | | | | | | | | | | | | | |
Commercial and industrial | $ | 1,099 | | | $ | 356 | | | $ | 131 | | | $ | 1,586 | | | $ | 3,440,062 | | | $ | 22,766 | | | $ | 3,464,414 | |
PPP | — | | | — | | | — | | | — | | | 11,006 | | | 19 | | | 11,025 | |
Owner occupied commercial real estate | 12 | | | 127 | | | — | | | 139 | | | 2,256,365 | | | 8,803 | | | 2,265,307 | |
Non-owner occupied commercial real estate | — | | | — | | | — | | | — | | | 2,319,282 | | | 11,658 | | | 2,330,940 | |
Real estate construction | 16 | | | 28 | | | — | | | 44 | | | 1,073,687 | | | 2,351 | | | 1,076,082 | |
Agricultural and agricultural real estate | 48 | | | — | | | 142 | | | 190 | | | 914,088 | | | 6,232 | | | 920,510 | |
Residential real estate | 1,206 | | | 152 | | | — | | | 1,358 | | | 846,739 | | | 5,264 | | | 853,361 | |
Consumer | 1,526 | | | 196 | | | — | | | 1,722 | | | 503,853 | | | 1,138 | | | 506,713 | |
| | | | | | | | | | | | | |
Total loans receivable held to maturity | $ | 3,907 | | | $ | 859 | | | $ | 273 | | | $ | 5,039 | | | $ | 11,365,082 | | | $ | 58,231 | | | $ | 11,428,352 | |
Loans delinquent 30 to 89 days as a percent of total loans were 0.09% at December 31, 2023, compared to 0.04% at December 31, 2022. Changes in credit risk are monitored on a continuous basis and changes in risk ratings are made when identified. All individually assessed loans are reviewed at least semi-annually.
HTLF recognized $0 of interest income on nonaccrual loans during the years ended December 31, 2023 and December 31, 2022. As of December 31, 2023, HTLF had $52.5 million compared to $26.7 million at December 31, 2022, of nonaccrual loans with no related allowance.
FIVE
ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses for loans for the years ended December 31, 2023, 2022, and 2021 were as follows, in thousands:
| | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 |
Balance at beginning of year | $ | 109,483 | | | $ | 110,088 | | | $ | 131,606 | |
| | | | | |
| | | | | |
| | | | | |
Provision (benefit) for credit losses | 25,435 | | | 10,636 | | | (17,706) | |
Recoveries on loans previously charged-off | 7,262 | | | 7,055 | | | 4,931 | |
Charge-offs on loans | (19,614) | | | (18,296) | | | (8,743) | |
Balance at end of year | $ | 122,566 | | | $ | 109,483 | | | $ | 110,088 | |
Changes in the allowance for credit losses for loans by loan category for the years ended December 31, 2023, and December 31, 2022, were as follows, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at 12/31/2022 | | | | | | | | Charge-offs | | Recoveries | | Provision (Benefit) | | Balance at 12/31/2023 |
Commercial and industrial | $ | 29,071 | | | | | | | | | $ | (8,622) | | | $ | 5,069 | | | $ | 15,161 | | | $ | 40,679 | |
| | | | | | | | | | | | | | | |
Owner occupied commercial real estate | 13,948 | | | | | | | | | (870) | | | 113 | | | 3,965 | | | 17,156 | |
Non-owner occupied commercial real estate | 16,539 | | | | | | | | | (627) | | | 268 | | | 1,069 | | | 17,249 | |
Real estate construction | 29,998 | | | | | | | | | (316) | | | 26 | | | (935) | | | 28,773 | |
Agricultural and agricultural real estate | 2,634 | | | | | | | | | (5,319) | | | 11 | | | 6,966 | | | 4,292 | |
Residential real estate | 7,711 | | | | | | | | | (183) | | | 19 | | | (1,702) | | | 5,845 | |
Consumer | 9,582 | | | | | | | | | (3,677) | | | 1,756 | | | 911 | | | 8,572 | |
Total | $ | 109,483 | | | | | | | | | $ | (19,614) | | | $ | 7,262 | | | $ | 25,435 | | | $ | 122,566 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at 12/31/2021 | | | | | | | | Charge-offs | | Recoveries | | Provision (Benefit) | | Balance at 12/31/2022 |
Commercial and industrial | $ | 27,738 | | | | | | | | | $ | (6,964) | | | $ | 4,951 | | | $ | 3,346 | | | $ | 29,071 | |
| | | | | | | | | | | | | | | |
Owner occupied commercial real estate | 19,214 | | | | | | | | | (129) | | | 112 | | | (5,249) | | | 13,948 | |
Non-owner occupied commercial real estate | 17,908 | | | | | | | | | (193) | | | 60 | | | (1,236) | | | 16,539 | |
Real estate construction | 22,538 | | | | | | | | | (35) | | | 13 | | | 7,482 | | | 29,998 | |
Agricultural and agricultural real estate | 5,213 | | | | | | | | | (3,217) | | | 653 | | | (15) | | | 2,634 | |
Residential real estate | 8,427 | | | | | | | | | (307) | | | — | | | (409) | | | 7,711 | |
Consumer | 9,050 | | | | | | | | | (7,451) | | | 1,266 | | | 6,717 | | | 9,582 | |
Total | $ | 110,088 | | | | | | | | | $ | (18,296) | | | $ | 7,055 | | | $ | 10,636 | | | $ | 109,483 | |
Changes in the allowance for credit losses on unfunded commitments for the years ended December 31, 2023 and December 31, 2022, were as follows:
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2023 | | 2022 |
Beginning balance | $ | 20,196 | | | $ | 15,462 | |
| | | |
| | | |
Provision | (3,728) | | | 4,734 | |
Ending balance | $ | 16,468 | | | $ | 20,196 | |
Management allocates the allowance for credit losses by pools of risk within each loan portfolio. The total allowance for credit losses is available to absorb losses from any segment of the loan portfolio.
SIX
PREMISES, FURNITURE AND EQUIPMENT
Premises, furniture and equipment, excluding those held for sale, as of December 31, 2023, and December 31, 2022, were as follows, in thousands:
| | | | | | | | | | | |
| 2023 | | 2022 |
Land and land improvements | $ | 53,434 | | | $ | 56,599 | |
Buildings and building improvements | 168,244 | | | 172,585 | |
Furniture and equipment | 56,378 | | | 66,685 | |
Total | 278,056 | | | 295,869 | |
Less accumulated depreciation | (101,055) | | | (105,390) | |
Premises, furniture and equipment, net | $ | 177,001 | | | $ | 190,479 | |
Depreciation expense on premises, furniture and equipment was $11.7 million, $13.2 million and $13.5 million for 2023, 2022 and 2021, respectively. Depreciation expense on buildings and building improvements of $6.0 million, $6.3 million and $6.9 million for the years ended December 31, 2023, 2022, and 2021, respectively, is recorded in occupancy expense on the
consolidated statements of income. Depreciation expense on furniture and equipment of $5.7 million, $6.9 million and $6.6 million for the years ended December 31, 2023, 2022, and 2021, respectively, is recorded in furniture and equipment expense on the consolidated statements of income.
SEVEN
GOODWILL, CORE DEPOSIT INTANGIBLES AND OTHER INTANGIBLE ASSETS
HTLF had goodwill of $576.0 million at both December 31, 2023, and December 31, 2022. HTLF conducts its annual internal assessment of the goodwill both at the consolidated level and at the reporting unit level as of September 30. However, due the sustained decline in HTLF's stock price, which management considered a triggering event, HTLF performed an interim quantitative goodwill assessment during the second quarter of 2023, and there was no goodwill impairment identified. HTLF also conducted its annual internal assessment of the goodwill at HTLF or HTLF's reporting units as of September 30. There was no goodwill impairment as of the most recent assessment.
The gross carrying amount of other intangible assets, which consisted of core deposit intangibles and mortgage servicing rights, and the associated accumulated amortization at December 31, 2023, and December 31, 2022, are presented in the table below, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Amortizing intangible assets: | | | | | | | | | | | |
Core deposit intangibles | $ | 101,185 | | | $ | 82,770 | | | $ | 18,415 | | | $ | 101,185 | | | $ | 76,031 | | | $ | 25,154 | |
| | | | | | | | | | | |
Mortgage servicing rights | — | | | — | | | — | | | 13,700 | | | 5,860 | | | 7,840 | |
| | | | | | | | | | | |
Total | $ | 101,185 | | | $ | 82,770 | | | $ | 18,415 | | | $ | 114,885 | | | $ | 81,891 | | | $ | 32,994 | |
The following table shows the estimated future amortization expense for amortizable intangible assets, in thousands:
| | | | | | | | | | | | | |
| Core Deposit Intangibles | | | | | | | | |
Year ending December 31, | | | | | | | | | |
2024 | $ | 5,591 | | | | | | | | | |
2025 | 4,700 | | | | | | | | | |
2026 | 3,533 | | | | | | | | | |
2027 | 2,601 | | | | | | | | | |
2028 | 1,287 | | | | | | | | | |
Thereafter | 703 | | | | | | | | | |
Total | $ | 18,415 | | | | | | | | | |
On March 31, 2023, First Bank & Trust, a division of HTLF Bank, sold its mortgage servicing rights portfolio, which contained loans with an unpaid principal balance of $698.5 million, to two unrelated third parties. The transaction qualified as a sale, and $7.7 million of mortgage servicing rights was derecognized on the consolidated balance sheet as of March 31, 2023. Cash of approximately $6.7 million was received on March 31, 2023, and an estimated loss of $203,000 was recorded. A receivable of approximately $580,000 was recorded in other assets on the consolidated balance sheet as of March 31, 2023, due to the timing of the servicing transfer per the terms of the sale agreement. First Bank & Trust provided interim servicing of the loans until the transfer date, which was May 1, 2023.
The following table summarizes, in thousands, the changes in capitalized mortgage servicing rights for the twelve months ended December 31, 2023, and December 31, 2022:
| | | | | | | | | | | |
| 2023 | | 2022 |
Balance at January 1, | $ | 7,840 | | | $ | 6,412 | |
Originations | 24 | | | 1,425 | |
Amortization | (210) | | | (1,139) | |
Sale of mortgage servicing rights | (7,654) | | | (516) | |
| | | |
Valuation adjustment | — | | | 1,658 | |
Balance at December 31, | $ | — | | | $ | 7,840 | |
Fair value of mortgage servicing rights | $ | — | | | $ | 7,840 | |
| | | |
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 December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Book Value 15-Year Tranche | | Fair Value 15-Year Tranche | | Valuation Allowance 15-Year Tranche | | Book Value 30-Year Tranche | | Fair Value 30-Year Tranche | | Valuation Allowance 30-Year Tranche |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
December 31, 2022 | $ | 1,388 | | | $ | 1,388 | | | $ | — | | | $ | 6,452 | | | $ | 6,452 | | | $ | — | |
EIGHT
DEPOSITS
At December 31, 2023, the scheduled maturities of time certificates of deposit were as follows, in thousands: | | | | | |
2024 | $ | 2,726,098 | |
2025 | 126,415 | |
2026 | 18,949 | |
2027 | 18,703 | |
2028 | 4,697 | |
Thereafter | 951 | |
Total | $ | 2,895,813 | |
The aggregate amount of time certificates of deposit in denominations of $250,000 or more as of December 31, 2023, and December 31, 2022 were $1.80 billion and $1.28 billion, respectively.
Interest expense on deposits for the years ended December 31, 2023, 2022, and 2021, was as follows, in thousands:
| | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 |
Savings and money market accounts | $ | 182,179 | | | $ | 46,623 | | | $ | 9,063 | |
| | | | | |
Time deposits | 137,509 | | | 10,257 | | | 5,734 | |
Interest expense on deposits | $ | 319,688 | | | $ | 56,880 | | | $ | 14,797 | |
NINE
BORROWINGS
Borrowings as of December 31, 2023, and 2022, were as follows, in thousands:
| | | | | | | | | | | |
| 2023 | | 2022 |
Retail repurchase agreements | $ | 42,447 | | | $ | 95,303 | |
| | | |
Advances from the FHLB | 521,186 | | | 50,000 | |
Advances from the federal discount window | — | | | 224,000 | |
Other borrowings | 58,622 | | | 6,814 | |
Total | $ | 622,255 | | | $ | 376,117 | |
HTLF Bank is a member of the FHLB of Topeka. At December 31, 2023, none of HTLF's FHLB advances had call features. The advances from the FHLB are collateralized by HTLF Bank's investments in FHLB stock of $25.8 million and $10.9 million at December 31, 2023 and 2022, respectively. In addition, the FHLB advances are collateralized with pledges of one- to four-family residential mortgages, commercial and agricultural mortgages and securities totaling $2.07 billion at December 31, 2023, and $4.00 billion at December 31, 2022. At December 31, 2023, HTLF Bank had $629.9 million of remaining FHLB borrowing capacity.
HTLF renewed its revolving credit line agreement with an unaffiliated bank on June 14, 2022, which provides $100.0 million of borrowing capacity. This revolving credit line agreement is included in borrowings, and the primary purpose of this credit line agreement is to provide liquidity to HTLF. HTLF had no advances on this line during 2023 and 2022, and there was no outstanding balance at both December 31, 2023, and December 31, 2022. The credit agreement contains specific financial covenants which HTLF complied with as of December 31, 2023 with the exception of the return on average assets covenant for which HTLF obtained a waiver through February 22, 2024. The revolving credit line agreement expires on June 14, 2024, at which time any outstanding balance is due.
All retail repurchase agreements as of December 31, 2023, and 2022, were due within twelve months.
Average and maximum balances and rates on aggregate borrowings outstanding during the years ended December 31, 2023, December 31, 2022, and December 31, 2021, were as follows, in thousands:
| | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 |
Maximum month-end balance | $ | 622,255 | | | $ | 376,117 | | | $ | 299,457 | |
Average month-end balance | 227,993 | | | 191,306 | | | 173,556 | |
Weighted average interest rate for the year | 5.04 | % | | 1.61 | % | | 0.26 | % |
Weighted average interest rate at year-end | 5.28 | % | | 4.07 | % | | 0.19 | % |
HTLF Bank has availability to borrow funds under the Discount Window Program and the Bank Term Funding Program based upon pledged securities with an outstanding balance of $2.63 billion, which provided total borrowing capacity of $1.92 billion, of which $1.92 billion was available at December 31, 2023. There was no outstanding balance at December 31, 2023 and $224.0 million outstanding balance at December 31, 2022.
TEN
TERM DEBT
Term debt outstanding at December 31, 2023 and 2022, are shown in the table below, net of unamortized discount and issuance costs, in thousands:
| | | | | | | | | | | |
| 2023 | | 2022 |
Advances from the FHLB; weighted average interest rate was 3.03% at December 31, 2022 | $ | — | | | $ | 740 | |
| | | |
Trust preferred securities | 149,288 | | | 148,284 | |
| | | |
| | | |
Contracts payable for purchase of real estate and other assets | 80 | | | 82 | |
Subordinated notes | 223,028 | | | 222,647 | |
| | | |
Total | $ | 372,396 | | | $ | 371,753 | |
At December 31, 2023, HTLF had fifteen wholly-owned trust subsidiaries that were formed to issue trust preferred securities, which includes trust subsidiaries acquired in acquisitions since 2013. The proceeds from the offerings were used to purchase junior subordinated debentures from HTLF and were in turn used by HTLF or entities acquired by HTLF for general corporate purposes. HTLF has the option to shorten the maturity date to a date not earlier than the callable date. HTLF may not shorten the maturity date without prior approval of the Board of Governors of the Federal Reserve System, if required. Early redemption is permitted under certain circumstances, such as changes in tax or regulatory capital rules. In connection with these offerings of trust preferred securities, the balance of deferred issuance costs included in term debt was $0 and $40,000 as of December 31, 2023 and December 31, 2022, respectively. The majority of the interest payments are due quarterly.
A schedule of HTLF’s trust preferred offerings outstanding, as of December 31, 2023, were as follows, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amount Issued | | Interest Rate | | Interest Rate as of 12/31/23 | | Maturity Date | | Callable Date |
| | | | | | | | | |
Heartland Financial Statutory Trust IV | $ | 10,310 | | | 2.75% over SOFR | | 8.39% | | 03/17/2034 | | 03/17/2024 |
Heartland Financial Statutory Trust V | 20,619 | | | 1.33% over SOFR | | 6.99 | | 04/07/2036 | | 04/07/2024 |
Heartland Financial Statutory Trust VI | 20,619 | | | 1.48% over SOFR | | 7.13 | | 09/15/2037 | | 03/15/2024 |
Heartland Financial Statutory Trust VII | 18,042 | | | 1.48% over SOFR | | 7.12 | | 09/01/2037 | | 03/01/2024 |
Morrill Statutory Trust I | 9,464 | | | 3.25% over SOFR | | 8.87 | | 12/26/2032 | | 03/26/2024 |
Morrill Statutory Trust II | 9,198 | | | 2.85% over SOFR | | 8.49 | | 12/17/2033 | | 03/17/2024 |
Sheboygan Statutory Trust I | 6,878 | | | 2.95% over SOFR | | 8.59 | | 09/17/2033 | | 03/17/2024 |
CBNM Capital Trust I | 4,608 | | | 3.25% over SOFR | | 8.90 | | 12/15/2034 | | 03/15/2024 |
Citywide Capital Trust III | 6,661 | | | 2.80% over SOFR | | 8.45 | | 12/19/2033 | | 04/23/2024 |
Citywide Capital Trust IV | 4,526 | | | 2.20% over SOFR | | 7.84 | | 09/30/2034 | | 05/23/2024 |
Citywide Capital Trust V | 12,649 | | | 1.54% over SOFR | | 7.19 | | 07/25/2036 | | 03/15/2024 |
OCGI Statutory Trust III | 3,028 | | | 3.65% over SOFR | | 9.31 | | 09/30/2032 | | 03/30/2024 |
OCGI Capital Trust IV | 5,567 | | | 2.50% over SOFR | | 8.15 | | 12/15/2034 | | 03/15/2024 |
BVBC Capital Trust II | 7,359 | | | 3.25% over SOFR | | 8.89 | | 04/24/2033 | | 04/24/2024 |
BVBC Capital Trust III | 9,760 | | | 1.60% over SOFR | | 7.19 | | 09/30/2035 | | 03/30/2024 |
| | | | | | | | | |
| | | | | | | | | |
Total trust preferred offerings | $ | 149,288 | | | | | | | | | |
|
|
|
|
|
|
|
On September 8, 2021, HTLF issued $150.0 million of Fixed-to-Floating Rate Subordinated Notes due 2031 (the "2021 subordinated notes"), which were issued at par with an underwriting discount of $1.9 million. The 2021 subordinated notes have a fixed interest rate of 2.75% until September 15, 2026, at which time the interest rate will be reset quarterly to a benchmark interest rate, which is expected to be three-month term SOFR plus a spread of 210 basis points. Interest is payable quarterly. The 2021 subordinated notes mature on September 15, 2031, and become redeemable at HTLF's option on September 15, 2026. In connection with the sale of the notes, the balance of deferred issuance costs included in term debt was $392,000 at December 31, 2023, and $443,000 at December 31,2022. These deferred costs are amortized on a straight-line basis over the life of the notes.
On December 17, 2014, HTLF issued $75.0 million of subordinated notes with a maturity date of December 30, 2024. The notes were issued at par with an underwriting discount of $1.1 million. The interest rate on the notes is fixed at 5.75% per annum, payable semi-annually. In connection with the sale of the notes, the balance of deferred issuance costs included in term debt was $38,000 at December 31, 2023, and $76,000 at December 31, 2022. These deferred costs are amortized on a straight-line basis over the life of the notes.
For regulatory purposes, $148.2 million of the total $223.0 million of subordinated notes qualified as Tier 2 capital as of December 31, 2023.
Future payments, net of unamortized discount and issuance costs, at December 31, 2023, for term debt at their maturity date follow in the table below, in thousands.
| | | | | |
2024 | $ | 74,937 | |
2025 | — | |
2026 | — | |
2027 | — | |
2028 | — | |
Thereafter | 297,459 | |
Total | $ | 372,396 | |
ELEVEN
DERIVATIVE FINANCIAL INSTRUMENTS
HTLF considers and uses derivative financial instruments as part of its interest rate risk management strategy, which may include interest rate swaps, fair value hedges, 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. In addition, HTLF facilitates back-to-back loan swaps to assist customers in managing their interest rate risk while executing offsetting interest rate swaps with dealer counterparties.
HTLF's objectives are to add stability to its net interest margin and to manage its exposure to movements in interest rates. The contract or notional amount of a derivative is used to determine, along with the other terms of the derivative, the amounts to be exchanged between the counterparties. HTLF is exposed to credit risk in the event of nonperformance by counterparties to financial instruments. HTLF minimizes this risk by entering into derivative contracts with counterparties that meet HTLF’s credit standards, and the contracts contain collateral provisions protecting the at-risk party. HTLF has not experienced any losses from nonperformance by these counterparties. HTLF monitors counterparty risk in accordance with the provisions of ASC 815. HTLF was required to post $27.7 million of collateral at December 31, 2023, compared to $793,000 as of December 31, 2022, related to derivative financial instruments. HTLF's counterparties were required to pledge $44.8 million at December 31, 2023, compared to $45.1 million at December 31, 2022. HTLF records interest rate derivatives subject to master netting agreements at their gross value and does not offset derivative assets and liabilities on the consolidated balance sheets.
HTLF's derivative and hedging instruments are recorded at fair value on the consolidated balance sheets. See Note Eighteen, "Fair Value," for additional fair value information and disclosures.
Cash Flow Hedges
In 2021, two interest rate swap transactions were terminated, and the debt was converted to variable rate subordinated debentures. For the next twelve months, HTLF estimates cash payments and reclassification from accumulated other comprehensive income (loss) to interest expense related to the terminated swaps will total $227,000.
In the first quarter of 2023, HTLF terminated its interest rate swap agreement, which effectively converted $500.0 million of variable rate loans to fixed rate loans. For the next twelve months, HTLF estimates cash payments and reclassification from accumulated other comprehensive income (loss) to interest expense will total $985,000.
HTLF had no derivative instruments designated as cash flow hedges at December 31, 2023. The table below identifies the balance sheet category and fair value of HTLF's derivative instrument designated as a cash flow hedge at December 31, 2022, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| Notional Amount | | Fair Value | | Balance Sheet Category | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
December 31, 2022 | | | | | | | | | | | |
Interest rate swap | 500,000 | | | 13 | | | Other Assets | | | | | | |
The table below identifies the gains recognized on HTLF's derivative instrument designated as a cash flow hedge for the year ended December 31, 2023, and December 31, 2022, in thousands:
| | | | | | | | | | | | | | | | | | | | | |
| | | |
| Recognized in OCI | | Reclassified from AOCI into Income | | |
| Amount of Gain (Loss) | | Category | | Amount of Gain (Loss) | | | | |
For the Year Ended December 31, 2023 | | | | | | | | | |
Interest rate swap | $ | 1,952 | | | Interest income | | $ | (575) | | | | | |
For the Year Ended December 31, 2022 | | | | | | | | | |
Interest rate swap | $ | 13 | | | Interest income | | $ | 487 | | | | | |
| | | | | | | | | |
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 also uses interest rate swaps to mitigate the risk of changes in the fair market value of certain municipal and mortgage-backed securities. The changes in the fair values of derivatives that have been designated and qualify for fair value hedge accounting are recorded in the same line item in the consolidated statements of income as the changes in the fair value of the hedged items attributable to the risk being hedged.
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.
During 2023, HTLF entered into interest rate swaps designated as fair value hedges with initial notional amounts totaling $838.1 million primarily designed to provide protection for unrealized securities losses against the impact of higher mid-to-long term interest rates. HTLF also executed interest rate swaps designated as a fair value hedges with total original notional amounts of $2.5 billion to convert certain long-term fixed rate loans to floating rates to hedge interest rate risk exposure using the portfolio layer method, which allows HTLF to designate as the hedged item a stated amount of the assets that are not expected to be affected by prepayments, defaults and other factors that would affect the timing and amount of cash flow.
The table below identifies the fair value of the interest rate swaps designated as fair value hedges and the balance sheet category of the interest rate swaps at December 31, 2023, and December 31, 2022, in thousands:
| | | | | | | | | | | | | |
| Fair Value | | | | Balance Sheet Category |
December 31, 2023 | | | | | |
| | | | | |
Interest rate swaps-loans receivable held to maturity | $ | 5,027 | | | | | Other assets |
Interest rate swaps-securities carried at fair value | 23,182 | | | | | Other assets |
Interest rate swaps-loans receivable held to maturity | 27,554 | | | | | Other liabilities |
December 31, 2022 | | | | | |
| | | | | |
Interest rate swaps-loans receivable held to maturity | $ | 54 | | | | | Other assets |
The table below identifies the carrying amount of the hedged assets and cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged assets that are designated as a fair value hedge accounting relationship at December 31, 2023, and December 31, 2022, in thousands:
| | | | | | | | | | | | | | | | | | | |
| Location in the consolidated balance sheet | | Carrying Amount of the Hedged Assets | | Cumulative Amount of Fair Value Hedging Adjustment Included in Carrying Amount of Hedged Assets | | |
December 31, 2023 | | | | | | | |
| | | | | | | |
Interest rate swap | Loans receivable held to maturity | | $ | 2,525,261 | | | $ | 24,652 | | | |
Interest rate swap | Securities carried at fair value | | 786,716 | | (20,979) | | | |
December 31, 2022 | | | | | | | |
| | | | | | | |
Interest rate swap | Loans receivable held to maturity | | $ | 1,185 | | | $ | (54) | | | |
The table below identifies the net impact to interest income recognized on HTLF's fair value hedges specific to the fair value remeasurements and the income statement classification where it is recorded in comparison to the total amount of interest income presented on the consolidated statements of income for the year ended December 31, 2023, and December 31, 2022, in thousands:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 |
Gain (loss) recognized in interest income and fees on loans | $ | (386) | | | $ | 46 | |
Total amount of interest and fees on loans | 697,997 | | 477,970 | |
Gain (loss) recognized in interest income on securities-taxable | 66 | | | — | |
Total amount of interest on securities-taxable | 223,521 | | 169,544 | |
The table below identifies the effect of fair value hedge accounting on the consolidated statements of income, in thousands:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 |
Hedged item (loans receivable held to maturity) | $ | 24,318 | | | $ | (113) | |
Hedged item (securities carried at fair value) | (20,913) | | | — | |
Derivatives designated as hedging instruments on loans receivable held to maturity | (24,704) | | | 159 | |
Derivatives designated as hedging instruments on securities carried at fair value | 20,979 | | | — | |
Embedded Derivatives
HTLF has fixed rate loans with embedded derivatives. The loans contain terms that affect the cash flows or value of the loan similar to a derivative instrument, and therefore are considered to contain an embedded derivative. The embedded derivatives are bifurcated from the loans because the terms of the derivative instrument are not clearly and closely related to the loans. The embedded derivatives are recorded at fair value on the consolidated balance sheets as a part of other assets, and changes in the fair value are a component of noninterest income. The table below identifies the notional amount, fair value and balance sheet category of HTLF's embedded derivatives as of December 31, 2023, and December 31, 2022, in thousands:
| | | | | | | | | | | | | | | | | |
| Notional Amount | | Fair Value | | Balance Sheet Category |
December 31, 2023 | | | | | |
Embedded derivatives | $ | 2,391 | | | $ | 61 | | | Other Assets |
| | | | | |
December 31, 2022 | | | | | |
Embedded derivatives | $ | 6,028 | | | $ | 135 | | | Other Assets |
| | | | | |
The table below identifies the gains and losses recognized on HTLF's embedded derivatives for the years ended December 31, 2023 and December 31, 2022, in thousands:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 |
Gain (loss) recognized in other noninterest income on embedded derivatives | $ | (74) | | | $ | 452 | |
Back-to-Back Loan Swaps
HTLF has loan interest rate swap relationships with customers to assist them in managing their interest rate risk. Upon entering into these loan swaps, HTLF enters into offsetting positions with counterparties in order to minimize interest rate risk to HTLF. 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. Any gains and losses on these back-to-back swaps are recorded in noninterest income on the consolidated statements of income, and for the years ended December 31, 2023, and December 31, 2022, no gains or losses were recognized. HTLF recognized $7.7 million in fee income for the year ended December 31, 2023, compared to $6.6 million for the year ended December 31, 2022.
The table below identifies the balance sheet category and fair values of HTLF's derivative instruments designated as loan swaps at December 31, 2023 and 2022, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Notional Amount | | Fair Value | | Balance Sheet Category | | Weighted Average Receive Rate | | Weighted Average Pay Rate |
December 31, 2023 | | | | | | | | | |
Customer interest rate swaps | $ | 1,672,729 | | | $ | 56,634 | | | Other Assets | | 4.12 | % | | 4.96 | % |
Customer interest rate swaps | 1,672,729 | | | (56,634) | | | Other Liabilities | | 4.96 | % | | 4.12 | % |
December 31, 2022 | | | | | | | | | |
Customer interest rate swaps | $ | 819,662 | | | $ | 46,091 | | | Other Assets | | 4.23 | % | | 6.76 | % |
Customer interest rate swaps | 819,662 | | | (46,091) | | | Other Liabilities | | 6.76 | % | | 4.23 | % |
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 $0 at both December 31, 2023, and December 31, 2022, as collateral for these forward commitments. HTLF's counterparties were required to pledge no cash as collateral at both December 31, 2023, and December 31, 2022, as collateral for these forward commitments.
HTLF acquired undesignated interest rate swaps in 2015. These swaps were entered into primarily for the benefit of customers seeking to manage their interest rate risk and are not designated against specific assets or liabilities on the consolidated balance sheet or forecasted transactions and therefore do not qualify for hedge accounting in accordance with ASC 815. These swaps are carried at fair value on the consolidated balance sheets as a component of other liabilities, with changes in the fair value recorded as a component of other noninterest income.
The table below identifies the balance sheet category and fair values of HTLF's other free standing derivative instruments not designated as hedging instruments at December 31, 2023, and December 31, 2022, in thousands:
| | | | | | | | | | | | | | | | | |
| Notional Amount | | Fair Value | | Balance Sheet Category |
December 31, 2023 | | | | | |
Interest rate lock commitments (mortgage) | $ | — | | | $ | — | | | Other Assets |
| | | | | |
Forward commitments | — | | | — | | | Other Assets |
Forward commitments | — | | | — | | | Other Liabilities |
Undesignated interest rate swaps | 2,391 | | | (61) | | | Other Liabilities |
| | | | | |
December 31, 2022 | | | | | |
Interest rate lock commitments (mortgage) | $ | 9,340 | | | $ | 174 | | | Other Assets |
Forward commitments | 6,400 | | | 47 | | | Other Assets |
Forward commitments | 5,750 | | | (99) | | | Other Liabilities |
| | | | | |
Undesignated interest rate swaps | 6,028 | | | (135) | | | Other Liabilities |
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 years ended December 31, 2023, and December 31, 2022, in thousands:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 |
Interest rate lock commitments (mortgage) | $ | (291) | | | $ | (1,828) | |
Forward commitments | 52 | | | 11 | |
Undesignated interest rate swaps | 74 | | | (452) | |
TWELVE
INCOME TAXES
The current income tax provision reflects the tax consequences of revenue and expenses currently taxable or deductible on various income tax returns for the year reported. The deferred income tax provision generally reflects the net change in deferred income tax assets and liabilities during the year, excluding any deferred income tax assets and liabilities of acquired businesses. The components of the provision for income taxes for the years ended December 31, 2023, 2022, and 2021 were as follows, in thousands:
| | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 |
Current: | | | | | |
Federal | $ | 18,844 | | | $ | 45,911 | | | $ | 32,440 | |
State | 7,209 | | | 13,549 | | | 11,352 | |
Total current expense | $ | 26,053 | | | $ | 59,460 | | | $ | 43,792 | |
Deferred: | | | | | |
Federal | $ | (7,442) | | | $ | (3,637) | | | $ | 8,938 | |
State | (1,754) | | | (250) | | | 2,605 | |
Total deferred expense (benefit) | (9,196) | | | (3,887) | | | 11,543 | |
Total income tax expense | $ | 16,857 | | | $ | 55,573 | | | $ | 55,335 | |
Temporary differences between the amounts reported in the financial statements and the tax basis of assets and liabilities result in deferred taxes. Deferred tax assets and liabilities at December 31, 2023 and 2022, were as follows, in thousands:
| | | | | | | | | | | |
| 2023 | | 2022 |
Deferred tax assets: | | | |
Net unrealized loss on securities carried at fair value reflected in stockholders' equity | $ | 107,669 | | | $ | 159,763 | |
Net unrealized loss on derivatives reflected in stockholders’ equity | (382) | | | 210 | |
Net unrealized loss on securities transferred from carried at fair value to held to maturity reflected in stockholders' equity | 42,541 | | | 45,174 | |
Allowance for credit losses | 34,527 | | | 28,732 | |
Deferred compensation | 13,055 | | | 12,861 | |
| | | |
Net operating loss carryforwards | 14,789 | | | 21,844 | |
| | | |
| | | |
Lease liability | 7,241 | | | 7,731 | |
Investments in partnerships | 2,042 | | | 2,843 | |
| | | |
| | | |
Other | 7,971 | | | 5,476 | |
Total deferred tax assets | 229,453 | | | 284,634 | |
Valuation allowance for deferred tax assets | (13,000) | | | (19,001) | |
Total deferred tax assets after valuation allowance | $ | 216,453 | | | $ | 265,633 | |
| | | | | | | | | | | |
Deferred tax liabilities: | | | |
| | | |
| | | |
| | | |
Premises, furniture and equipment | $ | 8,245 | | | $ | 9,227 | |
| | | |
| | | |
Purchase accounting | 10,070 | | | 7,954 | |
| | | |
| | | |
Lease right-of-use asset | 6,391 | | | 7,182 | |
Deferred loan costs | 6,031 | | | 6,078 | |
Other | 912 | | | 3,846 | |
Total deferred tax liabilities | 31,649 | | | 34,287 | |
Net deferred tax assets | $ | 184,804 | | | $ | 231,346 | |
As a result of acquisitions, HTLF had net operating loss carryforwards for federal income tax purposes of approximately $14.0 million at December 31, 2023, and $17.2 million at December 31, 2022. The associated deferred tax asset was $2.9 million at December 31, 2023, and $3.6 million at December 31, 2022. These net carryforwards expire during the period from December 31, 2025, through December 31, 2035, and are subject to an annual limitation of approximately $3.1 million. Net operating loss carryforwards for state income tax purposes were approximately $191.9 million at December 31, 2023, and $203.4 million at December 31, 2022. The associated deferred tax asset, net of federal tax, was $9.9 million at December 31, 2023, and $16.3 million at December 31, 2022. These carryforwards have begun to expire and will continue to do so until December 31, 2031.
A valuation allowance against the deferred tax asset due to the uncertainty surrounding the utilization of these state net operating loss carryforwards was $9.4 million at December 31, 2023, and $15.5 million at December 31, 2022. During both 2023 and 2022, HTLF had book write-downs on investments that, for tax purposes, would generate capital losses upon disposal. Due to the uncertainty of HTLF's ability to utilize the potential capital losses, a valuation allowance for these potential losses totaled $1.7 million at December 31, 2023, and $1.5 million at December 31, 2022. HTLF released valuation allowances of $0 and $165,000 in 2023 and 2022, respectively, on deferred tax assets for capital losses it expects to realize on the disposal of partnership investments.
Realization of the deferred tax asset over time is dependent upon the existence of taxable income in carryback periods or the ability to generate sufficient taxable income in future periods. In determining that realization of the deferred tax asset was more likely than not, HTLF considered a number of factors, including its taxable income during carryback periods, its recent earnings history, its expectations for earnings in the future and, where applicable, the expiration dates associated with its tax carryforwards.
The actual income tax expense from continuing operations differs from the expected amounts for the years ended December 31, 2023, 2022, and 2021, (computed by applying the U.S. federal corporate tax rate of 21% for 2023, 2022, and 2021 income before income taxes) are as follows, in thousands:
| | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 |
Computed "expected" tax on net income | $ | 20,323 | | | $ | 56,228 | | | $ | 57,804 | |
Increase (decrease) resulting from: | | | | | |
Tax-exempt interest benefit | (2,624) | | | (5,804) | | | (5,504) | |
State income taxes, net of federal tax benefit | 4,310 | | | 10,523 | | | 11,026 | |
| | | | | |
Tax credits | (6,966) | | | (6,613) | | | (7,613) | |
Partnership investments | 1,105 | | | (351) | | | 572 | |
| | | | | |
Valuation allowance | 214 | | | 13 | | | (440) | |
Excess tax expense/(benefit) on stock compensation | 107 | | | (113) | | | (270) | |
| | | | | |
Other | 388 | | | 1,690 | | | (240) | |
Income taxes | $ | 16,857 | | | $ | 55,573 | | | $ | 55,335 | |
Effective tax rates | 17.4 | % | | 20.8 | % | | 20.1 | % |
HTLF's income taxes included solar energy tax credits totaling $4.2 million, $4.2 million, and $6.1 million during 2023, 2022 and 2021, respectively. Federal historic rehabilitation tax credits included in HTLF's income taxes totaled $1.1 million, $1.0 million, and $720,000 in 2023, 2022, and 2021, respectively. Additionally, investments in certain low-income housing partnerships totaled $9.3 million at December 31, 2023, $10.4 million at December 31, 2022, and $5.1 million at December 31, 2021. These investments generated federal low-income housing tax credits of $1.2 million during 2023, $1.1 million at December 31, 2022, and $538,000 at December 31, 2021. These investments are expected to generate federal low-income housing tax credits of approximately $1.0 million for 2024, $790,000 for 2025, $740,000 for 2026 and $705,000 for 2027. Additionally, HTLF had new markets tax credits of $360,000 and $300,000 in 2023 and 2022, respectively.
On December 31, 2023, the amount of unrecognized tax benefits was $709,000, including $129,000 of accrued interest and penalties. On December 31, 2022, the amount of unrecognized tax benefits was $719,000, including $91,000 of accrued interest and penalties. If recognized, the entire amount of the unrecognized tax benefits would affect the effective tax rate.
The tax years ended December 31, 2020, and later remain subject to examination by the Internal Revenue Service. For state purposes, the tax years ended December 31, 2018, and later remain open for examination. HTLF does not anticipate any significant increase or decrease in unrecognized tax benefits during the next twelve months.
THIRTEEN
EMPLOYEE BENEFIT PLANS
HTLF sponsors a defined contribution retirement plan covering substantially all employees. The plan includes matching contributions and non-elective contributions. Matching contributions and non-elective contributions are limited to a maximum amount of the participant's wages as defined by federal law.
HTLF's subsidiaries made matching contributions of up to 5% of participants' wages in 2023 and 3% of participants' wages in 2022 and 2021. Costs charged to operating expenses with respect to the matching contributions were $7.9 million, $5.3 million, and $5.1 million for 2023, 2022 and 2021, respectively.
Non-elective contributions to this plan are subject to approval by the HTLF Board of Directors. The HTLF subsidiaries fund and record as an expense all approved contributions. Costs of these contributions, charged to operating expenses, were $3.1 million, $5.8 million, and $5.1 million for 2023, 2022 and 2021, respectively.
In addition, HTLF has a non-qualified defined contribution plan that allows eligible employees to make voluntary contributions into a deferred compensation plan. Any non-elective contributions to this plan are subject to approval by the HTLF Board of Directors. For the years ended December 31, 2023, 2022 and 2021, the employer contributions to the non-qualified defined contribution plan were $235,000, $222,500 and $237,200, respectively, and are included in the matching contributions and non-elective contributions amounts noted above.
FOURTEEN
COMMITMENTS AND CONTINGENT LIABILITIES
HTLF utilizes a variety of financial instruments in the normal course of business to meet the financial needs of customers and to manage its exposure to fluctuations in interest rates. These financial instruments include lending related and other commitments as indicated below as well as derivative instruments shown in Note Eleven, "Derivative Financial Instruments." HTLF Bank makes various commitments and incurs certain contingent liabilities that are not presented in the accompanying consolidated financial statements. The commitments and contingent liabilities include various guarantees, commitments to extend credit and standby letters of credit.
Commitments to extend credit are agreements to lend to a customer if there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. HTLF Bank evaluates the creditworthiness of customers to which they extend a credit commitment on a case-by-case basis and may require collateral to secure any credit extended. The amount of collateral obtained is based upon management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties. Standby letters of credit and financial guarantees are conditional commitments issued by HTLF Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. At December 31, 2023, and at December 31, 2022, commitments to extend credit aggregated $4.62 billion and $4.73 billion, respectively, and standby letters of credit aggregated $56.4 million and $55.1 million, respectively.
Previously, HTLF entered into commitments to sell mortgage loans to reduce interest rate risk on certain mortgage loans held for sale and loan commitments, which were recorded in the consolidated balance sheets at their fair values. HTLF does not anticipate any material loss as a result of the commitments and contingent liabilities. Residential mortgage loans sold to others were predominantly conventional residential first lien mortgages originated under HTLF's usual underwriting procedures and were most often sold on a nonrecourse basis. HTLF's agreements to sell residential mortgage loans in the normal course of business, primarily to GSE's, which usually required certain representations and warranties on the underlying loans sold, related to credit information, loan documentation, collateral, and insurability, which if subsequently are untrue or breached, could require HTLF to repurchase certain loans affected. HTLF had no repurchase obligation at both December 31, 2023 and December 31, 2022. HTLF had no new requests for repurchases during 2023 and 2022.
There are certain legal proceedings pending against HTLF and its subsidiaries at December 31, 2023, that are ordinary routine litigation incidental to business. While the ultimate outcome of current legal proceedings cannot be predicted with certainty, it is the opinion of management that the resolution of these legal actions should not have a material effect on HTLF's consolidated financial position or results of operation.
FIFTEEN
STOCK-BASED COMPENSATION
HTLF may grant, through its Compensation and Human Capital 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") which authorized 1,460,000 of common stock available for issuance. At December 31, 2023, 744,310 shares of common stock were reserved for future issuance under 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 $123,000 of expense and $131,000 of benefit for the years ended December 31, 2023, and December 31, 2022, respectively, related to the 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 represent the right, without payment, to receive shares of HTLF common stock at 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 granted three-year performance-based RSUs. These performance-based RSUs will be earned based upon satisfaction of performance targets for the three-year performance period, which is 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 vest to the extent that they are earned upon death or disability or upon a "qualified retirement" (as defined in the RSU agreement) after measurement of performance.
All of HTLF's RSUs will be settled in common stock upon vesting. Most RSUs granted after March 2023 accrue dividends, which are paid without interest only upon vesting. Dividend equivalents with respect to RSUs forfeited are also forfeited. RSUs granted prior to 2023 are not entitled to dividend equivalents.
A summary of the status of RSUs as of December 31, 2023, 2022 and 2021, and changes during the years ended December 31, 2023, 2022, and 2021, follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 |
| Shares | | Weighted-Average Grant Date Fair Value | | Shares | | Weighted-Average Grant Date Fair Value | | Shares | | Weighted-Average Grant Date Fair Value |
Outstanding at January 1 | 424,086 | | | $ | 46.15 | | | 389,885 | | | $ | 44.19 | | | 348,275 | | | $ | 38.22 | |
Granted | 278,999 | | | 44.94 | | | 242,718 | | | 48.38 | | | 216,560 | | | 51.44 | |
Vested | (183,511) | | | 41.39 | | | (159,880) | | | 44.96 | | | (149,350) | | | 40.83 | |
Forfeited | (53,469) | | | 46.84 | | | (48,637) | | | 45.49 | | | (25,600) | | | 40.96 | |
Outstanding at December 31 | 466,105 | | | $ | 47.22 | | | 424,086 | | | $ | 46.15 | | | 389,885 | | | $ | 44.19 | |
Total compensation costs recorded for RSUs were $9.0 million, $7.8 million and $8.5 million, for 2023, 2022 and 2021, respectively. As of December 31, 2023, there were $8.8 million of total unrecognized compensation costs related to the Plan for RSUs which are expected to be recognized through 2026.
Stock Options
The plan provides the Compensation Committee the authority to grant stock options. During the year ended December 31, 2023, 0 options were granted. There were 64,518 options granted in the year ended December 31, 2022, and no options granted in the year ended December 31, 2021. Options granted generally vest over the first four years in equal installments on the anniversary date of the grant. The exercise price of the stock options granted is established by the Compensation Committee, but the exercise price may not be less than the fair market value of the shares on the date the options are granted.
The stock options may also vest upon death or disability, upon a change in control or upon a "qualified retirement" as defined in the stock option agreement.
A summary of the status of the stock options as of December 31, 2023, 2022, and 2021, and changes during the years ended December 31, 2023, 2022, and 2021 follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 |
| Shares | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price |
Outstanding at January 1, | 64,518 | | | $ | 48.79 | | | — | | | $ | — | | | — | | | $ | — | |
Granted | — | | | — | | | 64,518 | | | 48.79 | | | — | | | — | |
Exercised | — | | | — | | | — | | | — | | | — | | | — | |
Forfeited | (6,452) | | | — | | | — | | | — | | | — | | | — | |
Outstanding at December 31 | 58,066 | | | 48.79 | | | 64,518 | | | 48.79 | | | — | | | — | |
Options exercisable at December 31, | — | | | $ | — | | | — | | | $ | — | | | — | | | $ | — | |
At December 31, 2023, the vested options have a weighted average remaining contractual life of 8.92 years. The intrinsic value for the vested options as of December 31, 2023, was $0. The intrinsic value for the total of all options exercised during year ended December 31, 2023, was $0. The total fair value of shares under stock options that vested during the year ended December 31, 2023, was $0. Total compensation costs recorded for stock options were $221,000, $167,000, and $0 for 2023, 2022, and 2021, respectively. As of December 31, 2023, there was $490,000 of total unrecognized compensation costs related to the Plan for options that are expected to be recognized through 2026.
Employee Stock Purchase Plan
HTLF maintains an employee stock purchase plan (the "ESPP"), which was adopted in May 2016 and replaced the 2006 ESPP, that permits all eligible employees to purchase shares of HTLF common stock at a discounted price as determined by the Compensation Committee. Under ASC Topic 718, compensation expense related to the ESPP of $192,000 was recorded in 2023, $214,000 was recorded in 2022, and $228,000 was recorded in 2021.
A maximum of 500,000 shares is available for purchase under the ESPP, and as of December 31, 2023, 171,537 shares remain available for purchase. Beginning with the 2020 plan year, the Compensation Committee authorized HTLF to make ESPP purchases semi-annually, and the purchases are to be made as soon as practicable on or after June 30 and December 31. For employee deferrals made in the 2023 plan year, shares purchased in 2023 totaled 60,583. For employee deferrals made in the 2022 plan year, shares purchased in 2022 totaled 49,169. For employee deferrals made in the 2021 plan year, shares purchased in 2021 totaled 46,899.
SIXTEEN
CAPITAL ISSUANCES
Common Stock
For a description of the issuance of shares of HTLF common stock in connection with the 2020 Long-Term Incentive Plan and the 2016 ESPP, see Note Fifteen, "Stock-Based Compensation."
Shelf Registration
HTLF filed a universal shelf registration with the SEC to register debt or equity securities on August 8, 2022, that expires on August 8, 2025. This registration statement, which was effective immediately, provides HTLF the ability to raise capital, subject to market conditions and SEC rules and limitations, if HTLF's board of directors decides to do so. This registration statement permits HTLF, from time to time, in one or more public offerings, to offer debt securities, subordinated notes, common stock, preferred stock, depositary shares, warrants, rights, units or any combination of these securities. The amount of securities that may have been offered was not specified in the registration statement, and the terms of any future offerings were to be established at the time of the offering.
SEVENTEEN
REGULATORY CAPITAL REQUIREMENTS AND RESTRICTIONS ON SUBSIDIARY DIVIDENDS
HTLF Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that,
if undertaken, could have a direct material effect on HTLF Bank's financial statements. The regulations prescribe specific capital adequacy guidelines that involve quantitative measures of a bank’s assets, liabilities and certain off balance sheet items as calculated under regulatory accounting practices. Capital classification is also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require HTLF Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined).
The requirements to be categorized as well-capitalized under the Tier 1 leverage capital ratio is 4% for all banks. The minimum requirement to be well-capitalized for the Tier 1 risk-based capital ratio is 8%. The total risk-based capital ratio minimum requirement to be well-capitalized remained is 10%. Management believes, as of December 31, 2023 and 2022, that HTLF Bank met all capital adequacy requirements to which it was subject.
As of December 31, 2023 and 2022, the FDIC categorized HTLF Bank, and all HTLF member banks prior to charter consolidation, as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Banks must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 common equity and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since December 31, 2023, that management believes have changed each institution’s category.
HTLF Bank's, and all HTLF member banks prior to charter consolidation, actual capital amounts and ratios are also presented in the tables below, in thousands: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Actual | | For Capital Adequacy Purposes | | To Be Well Capitalized Under Prompt Corrective Action Provisions |
| Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
As of December 31, 2023 | | | | | | | | | | | |
Total Capital (to Risk-Weighted Assets) | | | | | | | | | | | |
Consolidated | $ | 2,237,035 | | | 14.53 | % | | $ | 1,231,972 | | | 8.00 | % | | $ | 1,539,965 | | | 10.00 | % |
HTLF Bank | 1,969,006 | | | 12.85 | | | 1,225,669 | | | 8.00 | | | 1,532,087 | | | 10.00 | |
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Tier 1 Capital (to Risk-Weighted Assets) | | | | | | | | | | | |
Consolidated | $ | 1,800,542 | | | 11.69 | % | | $ | 923,979 | | | 6.00 | % | | $ | 923,979 | | | 6.00 | % |
HTLF Bank | 1,829,972 | | | 11.94 | | | 919,252 | | | 6.00 | | | 1,225,669 | | | 8.00 | |
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Common Equity Tier 1 (to Risk-Weighted Assets) | | | | | | | | | | | |
Consolidated | $ | 1,689,837 | | | 10.97 | % | | $ | 692,984 | | | 4.50 | % | | N/A | | |
HTLF Bank | 1,829,972 | | | 11.94 | | | 689,439 | | | 4.50 | | | $ | 995,856 | | | 6.50 | % |
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Tier 1 Capital (to Average Assets) | | | | | | | | | | | |
Consolidated | $ | 1,800,542 | | | 9.44 | % | | $ | 763,309 | | | 4.00 | % | | N/A | | |
HTLF Bank | 1,829,972 | | | 9.26 | | | 790,709 | | | 4.00 | | | $ | 988,386 | | | 5.00 | % |
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| Actual | | For Capital Adequacy Purposes | | To Be Well Capitalized Under Prompt Corrective Action Provisions |
| Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
As of December 31, 2022 | | | | | | | | | | | |
Total Capital (to Risk-Weighted Assets) | | | | | | | | | | | |
Consolidated | $ | 2,204,829 | | | 14.76 | % | | $ | 1,194,970 | | | 8.00 | % | | N/A | | |
HTLF Bank | 824,069 | | | 11.72 | | | 562,497 | | | 8.00 | | | $ | 703,122 | | | 10.00 | % |
Dubuque Bank and Trust Company | 184,096 | | | 13.01 | | | 113,197 | | | 8.00 | | | 141,497 | | | 10.00 | |
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Wisconsin Bank & Trust | 128,490 | | | 13.12 | | | 78,336 | | | 8.00 | | | 97,920 | | | 10.00 | |
New Mexico Bank & Trust | 238,190 | | | 13.23 | | | 144,059 | | | 8.00 | | | 180,073 | | | 10.00 | |
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Rocky Mountain Bank | 69,792 | | | 12.84 | | | 43,489 | | | 8.00 | | | 54,361 | | | 10.00 | |
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Bank of Blue Valley | 162,131 | | | 16.07 | | | 80,689 | | | 8.00 | | | 100,861 | | | 10.00 | |
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First Bank & Trust | 288,518 | | | 13.51 | | | 170,835 | | | 8.00 | | | 213,543 | | | 10.00 | |
Tier 1 Capital (to Risk-Weighted Assets) | | | | | | | | | | | |
Consolidated | $ | 1,763,990 | | | 11.81 | % | | $ | 896,228 | | | 6.00 | % | | N/A | | |
HTLF Bank | 762,103 | | | 10.84 | | | 421,873 | | | 6.00 | | | $ | 562,497 | | | 8.00 | % |
Dubuque Bank and Trust Company | 174,684 | | | 12.35 | | | 84,898 | | | 6.00 | | | 113,197 | | | 8.00 | |
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Wisconsin Bank & Trust | 119,231 | | | 12.18 | | | 58,752 | | | 6.00 | | | 78,336 | | | 8.00 | |
New Mexico Bank & Trust | 223,602 | | | 12.42 | | | 108,044 | | | 6.00 | | | 144,059 | | | 8.00 | |
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Rocky Mountain Bank | 63,814 | | | 11.74 | | | 32,617 | | | 6.00 | | | 43,489 | | | 8.00 | |
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Bank of Blue Valley | 155,002 | | | 15.37 | | | 60,516 | | | 6.00 | | | 80,689 | | | 8.00 | |
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First Bank & Trust | 267,169 | | | 12.51 | | | 128,126 | | | 6.00 | | | 170,835 | | | 8.00 | |
Common Equity Tier 1 (to Risk Weighted Assets) | | | | | | | | | | | |
Consolidated | $ | 1,653,285 | | | 11.07 | % | | $ | 672,171 | | | 4.50 | % | | N/A | | |
HTLF Bank | 762,103 | | | 10.84 | | | 316,405 | | | 4.50 | | | $ | 457,029 | | | 6.50 | % |
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Dubuque Bank and Trust Company | 174,684 | | | 12.35 | | | 63,674 | | | 4.50 | | | 91,973 | | | 6.50 | |
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Wisconsin Bank & Trust | 119,231 | | | 12.18 | | | 44,064 | | | 4.50 | | | 63,648 | | | 6.50 | |
New Mexico Bank & Trust | 223,602 | | | 12.42 | | | 81,033 | | | 4.50 | | | 117,048 | | | 6.50 | |
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Rocky Mountain Bank | 63,814 | | | 11.74 | | | 24,463 | | | 4.50 | | | 35,335 | | | 6.50 | |
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Bank of Blue Valley | 155,002 | | | 15.37 | | | 45,387 | | | 4.50 | | | 65,560 | | | 6.50 | |
First Bank & Trust | 267,169 | | | 12.51 | | | 96,094 | | | 4.50 | | | 138,803 | | | 6.50 | |
Tier 1 Capital (to Average Assets) | | | | | | | | | | | |
Consolidated | $ | 1,763,990 | | | 9.13 | % | | $ | 772,911 | | | 4.00 | % | | N/A | | |
HTLF Bank | 762,103 | | | 8.64 | | | 352,914 | | | 4.00 | | | $ | 441,143 | | | 5.00 | % |
Dubuque Bank and Trust Company | 174,684 | | | 8.08 | | | 86,473 | | | 4.00 | | | 108,091 | | | 5.00 | |
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Wisconsin Bank & Trust | 119,231 | | | 9.22 | | | 51,753 | | | 4.00 | | | 64,691 | | | 5.00 | |
New Mexico Bank & Trust | 223,602 | | | 8.12 | | | 110,214 | | | 4.00 | | | 137,767 | | | 5.00 | |
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Rocky Mountain Bank | 63,814 | | | 8.49 | | | 30,064 | | | 4.00 | | | 37,580 | | | 5.00 | |
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Bank of Blue Valley | 155,002 | | | 10.75 | | | 57,676 | | | 4.00 | | | 72,095 | | | 5.00 | |
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First Bank & Trust | 267,169 | | | 9.29 | | | 115,026 | | | 4.00 | | | 143,782 | | | 5.00 | |
The ability of HTLF to pay dividends to its stockholders is dependent upon dividends paid by its subsidiaries. HTLF Bank is subject to certain statutory and regulatory restrictions on the amount it may pay in dividends. To maintain acceptable capital ratios for the HTLF Bank, certain portions of their retained earnings are not available for the payment of dividends. Retained earnings that could be available for the payment of dividends to HTLF totaled approximately $743.3 million as of December 31, 2023, under the most restrictive minimum capital requirements. Retained earnings that could be available for the payment of dividends to HTLF totaled approximately $436.9 million as of December 31, 2023, under the capital requirements to remain well capitalized.
EIGHTEEN
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 and other real estate owned. These nonrecurring fair value adjustments typically involve application of 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 which all significant assumptions are observable in the market.
Level 3 — Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques. The following is a description of valuation methodologies used for assets and liabilities recorded at fair value on a recurring or non-recurring basis.
Assets
Securities Available for Sale and Held to Maturity
Securities available for sale are recorded at fair value on a recurring basis. Securities held to maturity are generally recorded at cost. 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, equity securities 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 measured at fair value and 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 these assumptions 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 value less than the carrying value, mortgage servicing rights are adjusted to fair value through a valuation allowance. HTLF classifies mortgage servicing rights as nonrecurring with Level 3 measurement inputs.
On March 31, 2023, HTLF sold its mortgage servicing rights portfolio. The transaction qualified as a sale, and $7.7 million of mortgage servicing rights were derecognized on the consolidated balance sheet as of March 31, 2023. The book value and fair value were both $0 as of March 31, 2023.
Derivative Financial Instruments
HTLF's current interest rate risk strategy includes cash flow hedges and 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 December 31, 2023, and December 31, 2022, HTLF has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, HTLF has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
Interest Rate Lock Commitments
HTLF uses an internal valuation model that relies on internally developed inputs to estimate the fair value of its interest rate lock commitments which is based on unobservable inputs that reflect management's assumptions and specific information about each borrower. Interest rate lock commitments are classified in Level 3 of the fair value hierarchy.
Forward Commitments
The fair value of forward commitments is 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 tables below present HTLF's assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2023, and December 31, 2022, in thousands, aggregated by the level in the fair value hierarchy within which those measurements fall:
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| Total Fair Value | | Level 1 | | Level 2 | | Level 3 |
December 31, 2023 | | | | | | | |
Assets | | | | | | | |
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Securities available for sale | | | | | | | |
U.S. treasuries | $ | 32,118 | | | $ | 32,118 | | | $ | — | | | $ | — | |
U.S. agencies | 14,530 | | | — | | | 14,530 | | | — | |
Obligations of states and political subdivisions | 741,245 | | | — | | | 741,245 | | | — | |
Mortgage-backed securities - agency | 1,393,629 | | | — | | | 1,393,629 | | | — | |
Mortgage-backed securities - non-agency | 1,529,128 | | | — | | | 1,529,128 | | | — | |
Commercial mortgage-backed securities - agency | 64,788 | | | — | | | 64,788 | | | — | |
Commercial mortgage-backed securities - non-agency | 514,858 | | | — | | | 514,858 | | | — | |
Asset-backed securities | 217,370 | | | — | | | 217,370 | | | — | |
Corporate bonds | 118,169 | | | — | | | 118,169 | | | — | |
Equity securities with a readily determinable fair value | 21,056 | | | — | | | 21,056 | | | — | |
Derivative financial instruments(1) | 84,904 | | | — | | | 84,904 | | | — | |
Interest rate lock commitments | — | | | — | | | — | | | — | |
Forward commitments | — | | | — | | | — | | | — | |
Total assets at fair value | $ | 4,731,795 | | | $ | 32,118 | | | $ | 4,699,677 | | | $ | — | |
Liabilities | | | | | | | |
Derivative financial instruments(2) | $ | 84,249 | | | $ | — | | | $ | 84,249 | | | $ | — | |
Forward commitments | — | | | — | | | — | | | — | |
Total liabilities at fair value | $ | 84,249 | | | $ | — | | | $ | 84,249 | | | $ | — | |
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(1) Includes interest rate swaps, fair value hedges, embedded derivatives, and back-to-back loan swaps. |
(2) Includes fair value hedges, back-to-back loan swaps and free-standing derivatives. |
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| Total Fair Value | | Level 1 | | Level 2 | | Level 3 |
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December 31, 2022 | | | | | | | |
Assets | | | | | | | |
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Securities available for sale | | | | | | | |
U.S. treasuries | $ | 31,699 | | | $ | 31,699 | | | $ | — | | | $ | — | |
U.S. agencies | 43,135 | | | — | | | 43,135 | | | — | |
Obligations of states and political subdivisions | 879,437 | | | — | | | 879,437 | | | — | |
Mortgage-backed securities - agency | 1,772,105 | | | — | | | 1,772,105 | | | — | |
Mortgage-backed securities - non-agency | 2,181,876 | | | — | | | 2,181,876 | | | — | |
Commercial mortgage-backed securities - agency | 85,123 | | | — | | | 85,123 | | | — | |
Commercial mortgage-backed securities - non-agency | 659,459 | | | — | | | 659,459 | | | — | |
Asset-backed securities | 416,054 | | | — | | | 416,054 | | | — | |
Corporate bonds | 57,942 | | | — | | | 57,942 | | | — | |
Equity securities | 20,314 | | | — | | | 20,314 | | | — | |
Derivative financial instruments(1) | 46,293 | | | — | | | 46,293 | | | — | |
Interest rate lock commitments | 174 | | | — | | | — | | | 174 | |
Forward commitments | 47 | | | — | | | 47 | | | — | |
Total assets at fair value | $ | 6,193,658 | | | $ | 31,699 | | | $ | 6,161,785 | | | $ | 174 | |
Liabilities | | | | | | | |
Derivative financial instruments(2) | $ | 46,226 | | | $ | — | | | $ | 46,226 | | | $ | — | |
Forward commitments | 99 | | | — | | | 99 | | | — | |
Total liabilities at fair value | $ | 46,325 | | | $ | — | | | $ | 46,325 | | | $ | — | |
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(1) Includes embedded derivatives, back-to-back loan swaps and cash flow hedges. |
(2) Includes cash flow hedges, fair value hedges, back-to-back loan swaps and free-standing derivative instruments. |
The tables below present HTLF's assets that are measured at fair value on a nonrecurring basis, in thousands: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at December 31, 2023 |
| Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | (Gains)/Losses |
Collateral dependent individually assessed loans: | | | | | | | | | |
Commercial and industrial | $ | 23,422 | | | $ | — | | | $ | — | | | $ | 23,422 | | | $ | 554 | |
Owner occupied commercial real estate | 30,400 | | | — | | | — | | | 30,400 | | | — | |
Non-owner occupied commercial real estate | — | | | — | | | — | | | — | | | — | |
Real estate construction | 642 | | | — | | | — | | | 642 | | | — | |
Agricultural and agricultural real estate | 4,768 | | | — | | | — | | | 4,768 | | | 5,309 | |
Residential real estate | 741 | | | — | | | — | | | 741 | | | — | |
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Total collateral dependent individually assessed loans | $ | 59,973 | | | $ | — | | | $ | — | | | $ | 59,973 | | | $ | 5,863 | |
Loans held for sale | $ | 5,071 | | | $ | — | | | $ | 5,071 | | | $ | — | | | $ | — | |
Other real estate owned | 12,548 | | | — | | | — | | | 12,548 | | | 2,967 | |
Premises, furniture and equipment held for sale | 4,069 | | | — | | | — | | | 4,069 | | | 2,786 | |
Servicing rights | — | | | — | | | — | | | — | | | — | |
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| Fair Value Measurements at December 31, 2022 |
| Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | (Gains)/Losses |
Collateral dependent individually assessed loans: | | | | | | | | | |
Commercial and industrial | $ | 12,042 | | | $ | — | | | $ | — | | | $ | 12,042 | | | $ | 4,186 | |
Owner occupied commercial real estate | 7,556 | | | — | | | — | | | 7,556 | | | — | |
Non-owner occupied commercial real estate | 11,371 | | | — | | | — | | | 11,371 | | | — | |
Real estate construction | 1,518 | | | — | | | — | | | 1,518 | | | — | |
Agricultural and agricultural real estate | 3,788 | | | — | | | — | | | 3,788 | | | — | |
Residential real estate | 1,607 | | | — | | | — | | | 1,607 | | | — | |
| | | | | | | | | |
Total collateral dependent impaired loans | $ | 37,882 | | | $ | — | | | $ | — | | | $ | 37,882 | | | $ | 4,186 | |
Loans held for sale | $ | 5,277 | | | $ | — | | | $ | 5,277 | | | $ | — | | | $ | (116) | |
Other real estate owned | 8,401 | | | — | | | — | | | 8,401 | | | 180 | |
Premises, furniture and equipment held for sale | 6,851 | | | — | | | — | | | 6,851 | | | 1,562 | |
Servicing rights | 7,840 | | | — | | | — | | | 7,840 | | | 516 | |
| | | | | | | | | |
The following tables present additional quantitative information about assets measured at fair value on a recurring and nonrecurring basis and for which HTLF has utilized Level 3 inputs to determine fair value, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value at 12/31/23 | | Valuation Technique | | Unobservable Input | | Range (Weighted Average) |
Premises, furniture and equipment held for sale | $ | 4,069 | | | Modified appraised value | | Third-party appraisal | | (1) |
| | | | Appraisal discount | | 0-10%(2) |
Other real estate owned | 12,548 | | | Modified appraised value | | Third-party appraisal | | (1) |
| | | | Appraisal discounts | | 0-10%(2) |
Collateral dependent individually assessed loans: | | | | | | | |
Commercial and industrial | 23,422 | | | Modified appraised value | | Third-party appraisal | | (1) |
| | | | Appraisal discount | | 0-12%(2) |
Owner occupied commercial real estate | 30,400 | | | Modified appraised value | | Third-party appraisal | | (1) |
| | | | Appraisal discount | | 0-20%(2) |
Non-owner occupied commercial real estate | — | | | Modified appraised value | | Third-party appraisal | | (1) |
| | | | Appraisal discount | | 0-10%(2) |
Real estate construction | 642 | | | Modified appraised value | | Third-party appraisal | | (1) |
| | | | | Appraisal discount | | 0-10%(2) |
Agricultural and agricultural real estate | 4,768 | | | Modified appraised value | | Third-party appraisal | | (1) |
| | | | Appraisal discount | | 0%-10%(2) |
Residential real estate | 741 | | | Modified appraised value | | Third-party appraisal | | (1) |
| | | | | Appraisal discount | | 0-10%(2) |
| | | | | | | |
| | | | | | |
| | | | | | | |
| | | | | | | |
(1) Third-party appraisals are obtained and updated at least annually to establish the value of the underlying asset, but the disclosure of the unobservable inputs used by the appraisers would not be meaningful because the range will vary widely from appraisal to appraisal. |
(2) Discounts applied to the appraised values primarily include estimated sales costs, but also consider the age of the appraisal, changes in local market conditions and changes in the current condition of the collateral. |
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value at 12/31/22 | | Valuation Technique | | Unobservable Input | | Range (Weighted Average) |
| | | | | | | |
| | | | | | |
| | | | | | | |
| | | | | | |
Interest rate lock commitments | $ | 174 | | | Discounted cash flows | | Closing ratio | | 0 - 99% (88%)(1) |
| | | | | | |
Premises, furniture and equipment held for sale | 6,851 | | | Modified appraised value | | Third-party appraisal | | (2) |
| | | | Appraisal discount | | 0-10%(3) |
Other real estate owned | 8,401 | | | Modified appraised value | | Third-party appraisal | | (2) |
| | | | | Appraisal discounts | | 0-10%(3) |
Servicing rights | 7,840 | | | Discounted cash flows | | Discount rate | | 9.98 - 11.72% (10.02%)(4) |
| | | | Constant prepayment rate | | 7.8 - 14.2% (7.9%)(4) |
Collateral dependent individually assessed loans: | | | | | | | |
Commercial and industrial | 12,042 | | | Modified appraised value | | Third-party appraisal | | (2) |
| | | | Appraisal discount | | 0-10%(3) |
Owner occupied commercial real estate | 7,556 | | | Modified appraised value | | Third-party appraisal | | (2) |
| | | | Appraisal discounts | | 0-10%(3) |
Non-owner occupied commercial real estate | 11,371 | | | Modified appraised value | | Third-party appraisal | | (2) |
| | | | Appraisal discounts | | 0-10%(3) |
Real estate construction | 1,518 | | | Modified appraised value | | Third-party appraisal | | (2) |
| | | | | Appraisal discount | | 0-10%(3) |
Agricultural and agricultural real estate | 3,788 | | | Modified appraised value | | Third-party appraisal | | (2) |
| | | | Appraisal discount | | 0-15%(3) |
Residential real estate | 1,607 | | | Modified appraised value | | Third-party appraisal | | (2) |
| | | | | Appraisal discount | | 0-10%(3) |
| | | | | | | |
| | | | | | |
| | | | | | | |
| | | | | | | |
(1) The significant unobservable input used in the fair value measurement is the closing ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. The closing ratio calculation takes into consideration historical data and loan-level data. |
(2) Third-party appraisals are obtained and updated at least annually to establish the value of the underlying asset, but the disclosure of the unobservable inputs used by the appraisers would not be meaningful because the range will vary widely from appraisal to appraisal. |
(3) Discounts applied to the appraised values primarily include estimated sales costs, but also consider the age of the appraisal, changes in local market conditions and changes in the current condition of the collateral. |
(4) The significant unobservable inputs 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 and are measured on a recurring basis, are summarized in the following table, in thousands:
| | | | | | | | | | | |
| For the Years Ended |
| December 31, 2023 | | December 31, 2022 |
Balance at January 1, | $ | 174 | | | $ | 1,306 | |
| | | |
Total gains (losses), net, included in earnings | (290) | | | (1,828) | |
Issuances | 1,864 | | | 3,683 | |
Settlements | (1,748) | | | (2,987) | |
Balance at period end | $ | — | | | $ | 174 | |
Gains included in net gains on sale of loans held for sale attributable to interest rate lock commitments held at December 31, 2023, and December 31, 2022, were $0 and $174,000, respectively.
The table below is a summary of the estimated fair value of HTLF's financial instruments (as defined by ASC 825) as of December 31, 2023, and December 31, 2022, in thousands. The carrying amounts in the following table 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, other intangibles and other liabilities.
HTLF does not believe that the estimated information presented below 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, obtaining deposits or fee generating activities. Many of the estimates presented below 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 December 31, 2023 |
| Carrying Amount | | Estimated Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Financial assets: | | | | | | | | | |
Cash and cash equivalents | $ | 323,013 | | | $ | 323,013 | | | $ | 323,013 | | | $ | — | | | $ | — | |
Time deposits in other financial institutions | 1,240 | | | 1,240 | | | 1,240 | | | — | | | — | |
Securities: | | | | | | | | | |
| | | | | | | | | |
Carried at fair value | 4,646,891 | | | 4,646,891 | | | 32,118 | | | 4,614,773 | | | — | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Held to maturity | 838,241 | | | 816,399 | | | — | | | 816,399 | | | — | |
Other investments | 91,277 | | | 91,277 | | | — | | | 91,277 | | | — | |
| | | | | | | | | |
Loans held for sale | 5,071 | | | 5,071 | | | — | | | 5,071 | | | — | |
Loans, net: | | | | | | | | | |
Commercial | 3,611,368 | | | 3,396,628 | | | — | | | 3,373,206 | | | 23,422 | |
PPP | 2,777 | | | 2,777 | | | — | | | 2,777 | | | — | |
Owner occupied commercial real estate | 2,621,019 | | | 2,444,540 | | | — | | | 2,414,140 | | | 30,400 | |
Non-owner occupied commercial real estate | 2,536,462 | | | 2,393,931 | | | — | | | 2,393,931 | | | — | |
Real estate construction | 982,943 | | | 979,105 | | | — | | | 978,463 | | | 642 | |
Agricultural and agricultural real estate | 914,892 | | | 839,572 | | | — | | | 834,804 | | | 4,768 | |
Residential real estate | 791,984 | | | 687,428 | | | — | | | 686,687 | | | 741 | |
Consumer | 484,634 | | | 465,686 | | | — | | | 465,686 | | | — | |
Total Loans, net | 11,946,079 | | | 11,209,667 | | | — | | | 11,149,694 | | | 59,973 | |
| | | | | | | | | |
Cash surrender value on life insurance | 197,085 | | | 197,085 | | | — | | | 197,085 | | | — | |
Derivative financial instruments(1) | 84,904 | | | 84,904 | | | — | | | 84,904 | | | — | |
Financial liabilities: | | | | | | | | | |
Deposits | | | | | | | | | |
Demand deposits | $ | 4,500,304 | | | $ | 4,500,304 | | | $ | — | | | $ | 4,500,304 | | | $ | — | |
Savings deposits | 8,805,597 | | | 8,805,597 | | | — | | | 8,805,597 | | | — | |
Time deposits | 2,895,813 | | | 2,895,813 | | | — | | | 2,895,813 | | | — | |
Borrowings | 622,255 | | | 622,255 | | | — | | | 622,255 | | | — | |
Term debt | 372,396 | | | 374,017 | | | — | | | 374,017 | | | — | |
Derivative financial instruments(2) | 84,249 | | | 84,249 | | | — | | | 84,249 | | | — | |
|
(1) Includes interest rate swaps, fair value hedges, embedded derivatives, and back-to-back loan swaps. |
(2) Includes fair value hedges, back-to-back loan swaps and undesignated interest rate swaps. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements at December 31, 2022 | | |
| Carrying Amount | | Estimated Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | | | |
Financial assets: | | | | | | | | | | | | | |
Cash and cash equivalents | $ | 363,087 | | | $ | 363,087 | | | $ | 363,087 | | | $ | — | | | $ | — | | | | | |
Time deposits in other financial institutions | 1,740 | | | 1,740 | | | 1,740 | | | — | | | — | | | | | |
Securities: | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Carried at fair value | 6,147,144 | | | 6,147,144 | | | 31,699 | | | 6,115,445 | | | — | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Held to maturity | 829,403 | | | 776,557 | | | — | | | 776,557 | | | — | | | | | |
Other investments | 74,567 | | | 74,567 | | | — | | | 74,567 | | | — | | | | | |
| | | | | | | | | | | | | |
Loans held for sale | 5,277 | | | 5,277 | | | — | | | 5,277 | | | — | | | | | |
Loans, net: | | | | | | | | | | | | | |
Commercial and industrial | 3,435,343 | | | 3,270,127 | | | — | | | 3,258,085 | | | 12,042 | | | | | |
PPP | 11,025 | | | 11,025 | | | — | | | 11,025 | | | — | | | | | |
Owner occupied commercial real estate | 2,251,359 | | | 2,084,665 | | | — | | | 2,077,109 | | | 7,556 | | | | | |
Non-owner occupied commercial real estate | 2,314,401 | | | 2,184,796 | | | — | | | 2,173,425 | | | 11,371 | | | | | |
Real estate construction | 1,046,084 | | | 1,039,244 | | | — | | | 1,037,726 | | | 1,518 | | | | | |
Agricultural and agricultural real estate | 917,876 | | | 842,637 | | | — | | | 838,849 | | | 3,788 | | | | | |
Residential real estate | 845,650 | | | 741,325 | | | — | | | 739,718 | | | 1,607 | | | | | |
Consumer | 497,131 | | | 480,018 | | | — | | | 480,018 | | | — | | | | | |
Total Loans, net | 11,318,869 | | | 10,653,837 | | | — | | | 10,615,955 | | | 37,882 | | | | | |
Financial assets | | | | | | | | | | | | | |
Cash surrender value on life insurance | $ | 193,403 | | | $ | 193,403 | | | $ | — | | | $ | 193,403 | | | $ | — | | | | | |
Derivative financial instruments(1) | 46,293 | | | 46,293 | | | — | | | 46,293 | | | — | | | | | |
Interest rate lock commitments | 174 | | | 174 | | | — | | | — | | | 174 | | | | | |
Forward commitments | 47 | | | 47 | | | — | | | 47 | | | — | | | | | |
Financial liabilities: | | | | | | | | | | | | | |
Deposits | | | | | | | | | | | | | |
Demand deposits | 5,701,340 | | | 5,701,340 | | | — | | | 5,701,340 | | | — | | | | | |
Savings deposits | 9,994,391 | | | 9,994,391 | | | — | | | 9,994,391 | | | — | | | | | |
Time deposits | 1,817,278 | | | 1,817,278 | | | — | | | 1,817,278 | | | — | | | | | |
| | | | | | | | | | | | | |
Borrowings | 376,117 | | | 376,117 | | | — | | | 376,117 | | | — | | | | | |
Term debt | 371,753 | | | 372,473 | | | — | | | 372,473 | | | — | | | | | |
Derivative financial instruments(2) | 46,226 | | | 46,226 | | | — | | | 46,226 | | | — | | | | | |
Forward commitments | 99 | | | 99 | | | — | | | 99 | | | — | | | | | |
| | | | |
(1) Includes interest rate swaps, fair value hedges, embedded derivatives and back-to-back loan swaps. | | | | |
(2) Includes fair value hedges, back-to-back loan swaps and undesignated interest rate swaps. | | | | |
Cash and Cash Equivalents — The carrying amount is a reasonable estimate of fair value due to the short-term nature of these instruments.
Time Deposits in Other Financial Institutions — The carrying amount is a reasonable estimate of the 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. The market for these securities is restricted to the issuer of the stock and subject to impairment evaluation.
Loans — The fair value of loans were 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, the 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 or sales contracts.
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 when appropriate, the current creditworthiness of the counterparty.
Interest Rate Lock Commitments — The fair value of interest rate lock commitments is estimated using an internal valuation model, which includes grouping the interest rate lock commitments by interest rate and terms, applying an estimated closing ratio based on historical experience, and then multiplying by quoted investor prices determined to be reasonably applicable to the loan commitment groups based on interest rate, terms, and rate lock expiration dates of the loan commitment group.
Forward Commitments — The fair value of these instruments is estimated using an internal valuation model, which includes current trade pricing for similar financial instruments.
Deposits — The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. If the fair value of the fixed maturity certificates of deposit is calculated at less than the carrying amount, the carrying value of these deposits is reported as the fair value.
Borrowings and Term Debt — 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.
NINETEEN
REVENUE
ASC 606, Revenue from Contracts with Customers, requires revenue to be recognized at an amount that reflects the consideration to which HTLF expects to be entitled in exchange for transferring goods or services to a customer. ASC 606 applies to all contracts with customers to provide goods or services in the ordinary course of business, except for contracts that are specifically excluded from its scope. The majority of HTLF's revenue streams including interest income, loan servicing income, net securities gain and losses, net unrealized gains and losses on equity securities, net gains on sale of loans held for sale, valuation adjustment on servicing rights, income from bank owned life insurance and other noninterest income are outside the scope of ASC 606. Revenue streams including service charges and fees, interchange fees on credit and debit cards, trust fees and brokerage and insurance commissions are within the scope of ASC 606.
Service Charges and Fees
Service charges and fees consist of revenue generated from deposit account related service charges and fees, overdraft fees, customer service fees and other service charges, credit card fee income, debit card income and other service charges and fees.
Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders and other deposit account related fees. HTLF's performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees, including overdraft fees, are largely transaction based, and therefore, the performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.
Customer service fees and other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. HTLF's performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.
Credit card fee income and debit card income are comprised of interchange fees, ATM fees, and merchant services income. Credit card fee income and debit card income are earned whenever HTLF Bank's debit and credit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Bank cardholder uses an ATM that is not owned by one of HTLF's Banks or a non-bank cardholder uses HTLF-owned ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees.
Trust Fees
Trust fees are primarily comprised of fees earned from the management and administration of trusts and other customer assets. HTLF's performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the average daily market value or month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days before or after month end through a direct charge to customers’ accounts. HTLF does not earn performance-based incentives. Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. HTLF's performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered.
Brokerage and Insurance Commissions
Brokerage commission primarily consists of commissions related to broker-dealer contracts. The contracts are between the customer and the broker-dealer, and HTLF satisfies its performance obligation and earns commission when the transactions are completed. The recognition of revenue is based on a defined fee schedule and does not require significant judgment. Payment is received shortly after services are rendered. Insurance commissions are related to commissions received directly from the insurance carrier. HTLF acts as an insurance agent between the customer and the insurance carrier. HTLF's performance obligations and associated fee and commission income are defined with each insurance product with the insurance company. When insurance payments are received from customers, a portion of the payment is recognized as commission revenue.
The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the year ended December 31, 2023, 2022, and 2021, in thousands:
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2023 | | 2022 | | 2021 |
In-scope of Topic 606 | | | | | |
Service charges and fees | | | | | |
Service charges and fees on deposit accounts | $ | 21,037 | | | $ | 18,625 | | | $ | 16,414 | |
Overdraft fees | 11,878 | | | 12,136 | | | 11,005 | |
Customer service and other service fees | 358 | | | 375 | | | 220 | |
Credit card fee income | 31,102 | | | 27,560 | | | 21,623 | |
Debit card income | 9,649 | | | 9,335 | | | 10,441 | |
| | | | | |
Total service charges and fees | 74,024 | | | 68,031 | | | 59,703 | |
Trust fees | 20,715 | | | 22,570 | | | 24,417 | |
Brokerage and insurance commissions | 2,794 | | | 2,986 | | | 3,546 | |
Total noninterest income in-scope of Topic 606 | $ | 97,533 | | | $ | 93,587 | | | $ | 87,666 | |
| | | | | |
Out-of-scope of Topic 606 | | | | | |
Loan servicing income | $ | 1,561 | | | $ | 2,741 | | | $ | 3,276 | |
Capital markets fees | 10,007 | | | 11,543 | | | 1,324 | |
Securities gains (losses), net | (141,539) | | | (425) | | | 5,910 | |
Unrealized gain (loss) on equity securities, net | 240 | | | (622) | | | 58 | |
Net gains on sale of loans held for sale | 3,880 | | | 9,032 | | | 20,605 | |
Valuation adjustment on servicing rights | — | | | 1,658 | | | 1,088 | |
Income on bank owned life insurance | 3,771 | | | 2,341 | | | 3,762 | |
Other noninterest income | 3,621 | | | 8,409 | | | 5,246 | |
Total noninterest income out-of-scope of Topic 606 | (118,459) | | | 34,677 | | | 41,269 | |
Total noninterest income | $ | (20,926) | | | $ | 128,264 | | | $ | 128,935 | |
Contract Balances
HTLF does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of December 31, 2023, 2022, and 2021, HTLF did not have any significant contract balances or capitalized contract acquisition costs.
TWENTY
PARENT COMPANY ONLY FINANCIAL INFORMATION
Condensed financial information for Heartland Financial USA, Inc. is as follows: | | | | | | | | | | | |
BALANCE SHEETS (Dollars in thousands) |
| December 31, |
| 2023 | | 2022 |
Assets: | | | |
Cash and interest-bearing deposits | $ | 288,203 | | | $ | 307,026 | |
| | | |
| | | |
| | | |
Investment in subsidiaries | 1,971,014 | | | 1,747,188 | |
Other assets | 72,501 | | | 94,953 | |
| | | |
Total assets | $ | 2,331,718 | | | $ | 2,149,167 | |
Liabilities and Stockholders’ equity: | | | |
| | | |
Borrowings | $ | 372,316 | | | $ | 370,930 | |
Accrued expenses and other liabilities | 26,285 | | | 43,182 | |
Total liabilities | 398,601 | | | 414,112 | |
Stockholders’ equity: | | | |
Preferred stock | 110,705 | | | 110,705 | |
Common stock | 42,688 | | | 42,467 | |
Capital surplus | 1,090,740 | | | 1,080,964 | |
Retained earnings | 1,141,501 | | | 1,120,925 | |
Accumulated other comprehensive loss | (452,517) | | | (620,006) | |
| | | |
Total stockholders’ equity | 1,933,117 | | | 1,735,055 | |
Total liabilities and stockholders’ equity | $ | 2,331,718 | | | $ | 2,149,167 | |
| | | | | | | | | | | | | | | | | |
INCOME STATEMENTS (Dollars in thousands) |
| For the Years Ended December 31, |
| 2023 | | 2022 | | 2021 |
Operating revenues: | | | | | |
Dividends from subsidiaries | $ | 50,000 | | | $ | 142,500 | | | $ | 163,500 | |
| | | | | |
| | | | | |
Other | 1,486 | | | 1,200 | | | 1,885 | |
Total operating revenues | 51,486 | | | 143,700 | | | 165,385 | |
Operating expenses: | | | | | |
Interest | 22,637 | | | 16,886 | | | 12,851 | |
Salaries and employee benefits | 4,610 | | | 7,225 | | | 7,509 | |
Professional fees | 8,807 | | | 11,594 | | | 5,161 | |
Other operating expenses | 9,287 | | | 10,474 | | | 10,984 | |
Total operating expenses | 45,341 | | | 46,179 | | | 36,505 | |
Equity in undistributed earnings | 57,799 | | | 98,983 | | | 75,368 | |
Income before income tax benefit | 63,944 | | | 196,504 | | | 204,248 | |
Income tax benefit | 15,976 | | | 15,676 | | | 15,675 | |
Net income | 79,920 | | | 212,180 | | | 219,923 | |
Preferred dividends | (8,050) | | | (8,050) | | | (8,050) | |
| | | | | |
Net income available to common stockholders | $ | 71,870 | | | $ | 204,130 | | | $ | 211,873 | |
| | | | | | | | | | | | | | | | | |
STATEMENTS OF CASH FLOWS (Dollars in thousands) |
| For the Years Ended December 31, |
| 2023 | | 2022 | | 2021 |
Cash flows from operating activities: | | | | | |
Net income | $ | 79,920 | | | $ | 212,180 | | | $ | 219,923 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Undistributed earnings of subsidiaries | (57,799) | | | (98,983) | | | (75,368) | |
| | | | | |
| | | | | |
Increase (decrease) in accrued expenses and other liabilities | (17,090) | | | (8,946) | | | 8,723 | |
Increase (decrease) in other assets | 23,335 | | | (13,933) | | | (13,069) | |
| | | | | |
Excess tax (expense) benefit from stock-based compensation | (123) | | | 131 | | | 312 | |
Other, net | 11,537 | | | 9,958 | | | 12,632 | |
Net cash provided by operating activities | 39,780 | | | 100,407 | | | 153,153 | |
Cash flows from investing activities: | | | | | |
Capital contributions to subsidiaries | — | | | — | | | (34,000) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Net cash used by investing activities | — | | | — | | | (34,000) | |
Cash flows from financing activities: | | | | | |
| | | | | |
Proceeds from borrowings | — | | | — | | | 147,614 | |
| | | | | |
Repayments of borrowings | — | | | — | | | (44,417) | |
| | | | | |
| | | | | |
| | | | | |
Cash dividends paid | (59,151) | | | (54,249) | | | (48,559) | |
| | | | | |
| | | | | |
Proceeds from issuance of common stock | 548 | | | 1,038 | | | 1,311 | |
Net cash provided by (used in) by financing activities | (58,603) | | — | | (53,211) | | — | | 55,949 | |
Net increase (decrease) in cash and cash equivalents | (18,823) | | | 47,196 | | | 175,102 | |
Cash and cash equivalents at beginning of year | 307,026 | | | 259,830 | | | 84,728 | |
Cash and cash equivalents at end of year | $ | 288,203 | | | $ | 307,026 | | | $ | 259,830 | |
Supplemental disclosure: | | | | | |
| | | | | |
Dividends declared, not paid | 2,013 | | | 2,013 | | | 2,013 | |
| | | | | |
Net assets from dissolved subsidiary | 883 | | | — | | | — | |
TWENTY-ONE
LEASES
HTLF, as lessee, leases certain assets for use in its operations. Leased assets primarily include real estate property for retail branches, ATM locations and operations centers with terms extending through 2031. All HTLF's leases are classified as operating leases. HTLF excludes leases with an original term of twelve months or less and equipment leases (deemed immaterial) on the consolidated balance sheets. HTLF leases some of its facilities to third parties and receives rental income from such lease agreements which is not significant.
The table below presents HTLF's right-of-use ("ROU") assets and lease liabilities as of December 31, 2023 and December 31, 2022, in thousands:
| | | | | | | | | | | | | | | | | |
| | | As of December 31, |
| Classification | | 2023 | | 2022 |
Operating lease right-of-use assets | Other assets | | $ | 25,859 | | | $ | 29,429 | |
Operating lease liabilities | Accrued expenses and other liabilities | | $ | 29,333 | | | $ | 31,681 | |
The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. HTLF’s lease agreements often include one or more options to renew at HTLF’s discretion. If at lease inception, HTLF considers the exercising of a renewal option to be reasonably certain, HTLF will include the extended term in the calculation of the ROU asset and lease liability. HTLF utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. The variable lease cost primarily represents variable payments such as common area maintenance and utilities.
The table below presents the lease costs and supplemental information as of December 31, 2023, 2022, and 2021, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Income Statement Category | | As of December 31, |
Lease Cost | | | 2023 | | 2022 | | 2021 |
Operating lease cost | | Occupancy expense | | $ | 7,768 | | | $ | 7,256 | | | $ | 8,013 | |
Variable lease cost | | Occupancy expense | | 11 | | | 16 | | | 47 | |
| | | | | | | | |
Total lease cost | | | | $ | 7,779 | | | $ | 7,272 | | | $ | 8,060 | |
Supplemental Information | | | | | | | | |
Noncash reduction of ROU assets | | Occupancy expense | | $ | 1,164 | | | $ | 32 | | | $ | 1,244 | |
Noncash reduction lease liabilities | | Occupancy expense | | — | | | 10 | | | — | |
| | | | | | | | |
Supplemental balance sheet information | | | | As of December 31, 2023 |
Weighted-average remaining operating lease term (in years) | | 5.53 |
Weighted-average discount rate for operating leases | | 3.08 | % |
Included in the noncash reduction of ROU assets in 2023 and 2022 are expenses related to lease modifications and ROU acceleration related to lease abandonments.
HTLF recorded $63,000 of impairment on one lease in 2023, which was recorded in gain (loss) on sales/valuations of assets, net. HTLF recorded $360,000 of impairment on two leases in 2022, and no impairment on leases in 2021.
A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities as of December 31, 2023 is as follows, in thousands: | | | | | |
Year ending December 31, | |
2024 | $ | 6,386 | |
2025 | 6,221 | |
2026 | 5,535 | |
2027 | 4,581 | |
2028 | 3,997 | |
Thereafter | 5,219 | |
Total lease payments | $ | 31,939 | |
Less interest | (2,606) | |
Present value of lease liabilities | $ | 29,333 | |
TWENTY-TWO
SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED) | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands, except per share data) |
| As of and for the Quarter Ended |
2023 | December 31 | | September 30 | | June 30 | | March 31 |
Net interest income | $ | 156,137 | | | $ | 145,756 | | | $ | 147,132 | | | $ | 152,212 | |
Provision for credit losses | 11,738 | | | 1,516 | | | 5,379 | | | 3,074 | |
Net interest income after provision for credit losses | 144,399 | | | 144,240 | | | 141,753 | | | 149,138 | |
Noninterest income | (111,801) | | | 28,383 | | | 32,493 | | | 29,999 | |
Noninterest expense | 130,285 | | | 111,053 | | | 109,446 | | | 111,043 | |
Income taxes | (27,324) | | | 13,479 | | | 15,384 | | | 15,318 | |
Net income (loss) | (70,363) | | | 48,091 | | | 49,416 | | | 52,776 | |
| | | | | | | |
| | | | | | | |
Preferred dividends | (2,012) | | | (2,013) | | | (2,012) | | | (2,013) | |
| | | | | | | |
Net income (loss) available to common stockholders | $ | (72,375) | | | $ | 46,078 | | | $ | 47,404 | | | $ | 50,763 | |
| | | | | | | |
Per share: | | | | | | | |
Earnings (loss) per share-basic | $ | (1.69) | | | $ | 1.08 | | | $ | 1.11 | | | $ | 1.19 | |
Earnings (loss) per share-diluted | (1.69) | | | 1.08 | | | 1.11 | | | 1.19 | |
Cash dividends declared on common stock | 0.30 | | | 0.30 | | | 0.30 | | | 0.30 | |
Book value per common share | 42.69 | | | 40.20 | | | 41.00 | | | 40.38 | |
Weighted average common shares outstanding | 42,770,347 | | | 42,760,406 | | | 42,695,522 | | | 42,614,806 | |
Weighted average diluted common shares outstanding | 42,838,405 | | | 42,812,563 | | | 42,757,603 | | | 42,742,878 | |
| | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands, except per share data) |
| As of and for the Quarter Ended |
2022 | December 31 | | September 30 | | June 30 | | March 31 |
Net interest income | $ | 165,220 | | | $ | 155,876 | | | $ | 142,461 | | | $ | 134,679 | |
Provision for credit losses | 3,387 | | | 5,492 | | | 3,246 | | | 3,245 | |
Net interest income after provision for credit losses | 161,833 | | | 150,384 | | | 139,215 | | | 131,434 | |
Noninterest income | 29,975 | | | 29,181 | | | 34,539 | | | 34,569 | |
Noninterest expense | 117,218 | | | 108,883 | | | 106,479 | | | 110,797 | |
Income taxes | 13,936 | | | 14,118 | | | 15,402 | | | 12,117 | |
Net income | 60,654 | | | 56,564 | | | 51,873 | | | 43,089 | |
| | | | | | | |
| | | | | | | |
Preferred dividends | (2,012) | | | (2,013) | | | (2,012) | | | (2,013) | |
| | | | | | | |
Net income available to common stockholders | $ | 58,642 | | | $ | 54,551 | | | $ | 49,861 | | | $ | 41,076 | |
| | | | | | | |
Per share: | | | | | | | |
Earnings per share-basic | $ | 1.38 | | | $ | 1.28 | | | $ | 1.17 | | | $ | 0.97 | |
Earnings per share-diluted | 1.37 | | | 1.28 | | | 1.17 | | | 0.97 | |
Cash dividends declared on common stock | 0.28 | | | 0.27 | | | 0.27 | | | 0.27 | |
Book value per common share | 38.25 | | | 36.41 | | | 39.19 | | | 42.98 | |
Weighted average common shares outstanding | 42,578,977 | | | 42,574,557 | | | 42,474,835 | | | 42,359,582 | |
Weighted average diluted common shares outstanding | 42,699,752 | | | 42,643,940 | | | 42,565,391 | | | 42,540,953 | |

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