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| Non-GAAP Reconciliations (Dollars in thousands, except per share data) | | | For the Three Months
Ended March 31, |
| | | | | 2023 | | 2022 |
| Reconciliation of Annualized Return on Average Tangible Common Equity (non-GAAP) | | | | | | | |
| Net income available to common stockholders (GAAP) | | | | | $ | 50,763 | | | $ | 41,076 | |
Plus core deposit and customer relationship intangibles amortization, net of tax(1) | | | | | 1,413 | | | 1,623 | |
| Net income available to common stockholders excluding intangible amortization (non-GAAP) | | | | | $ | 52,176 | | | $ | 42,699 | |
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| Average common equity (GAAP) | | | | | $ | 1,655,860 | | | $ | 2,003,424 | |
| Less average goodwill | | | | | 576,005 | | | 576,005 | |
| Less average core deposit and customer relationship intangibles, net | | | | | 24,238 | | | 31,931 | |
| Average tangible common equity (non-GAAP) | | | | | $ | 1,055,617 | | | $ | 1,395,488 | |
| Annualized return on average common equity (GAAP) | | | | | 12.43 | % | | 8.32 | % |
| Annualized return on average tangible common equity (non-GAAP) | | | | | 20.05 | % | | 12.41 | % |
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| Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP) | | | | | | | |
| Net interest income (GAAP) | | | | | $ | 152,212 | | | $ | 134,679 | |
Plus tax-equivalent adjustment(1) | | | | | 2,209 | | | 2,119 | |
| Net interest income, fully tax-equivalent (non-GAAP) | | | | | $ | 154,421 | | | $ | 136,798 | |
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| Average earning assets | | | | | $ | 18,392,649 | | | $ | 17,757,067 | |
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| Annualized net interest margin (GAAP) | | | | | 3.36 | % | | 3.08 | % |
| Annualized net interest margin, fully tax-equivalent (non-GAAP) | | | | | 3.40 | | | 3.12 | |
| Net purchase accounting discount accretion on loans included in annualized net interest margin | | | | | 0.02 | | | 0.05 | |
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| Reconciliation of Adjusted Efficiency Ratio (non-GAAP) | | | | | | | |
| Net interest income (GAAP) | | | | | $ | 152,212 | | | $ | 134,679 | |
Tax-equivalent adjustment(1) | | | | | 2,209 | | | 2,119 | |
| Fully tax-equivalent net interest income | | | | | 154,421 | | | 136,798 | |
| Noninterest income (GAAP) | | | | | 29,999 | | | 34,569 | |
| Securities (gains)/losses, net | | | | | 1,104 | | | (2,872) | |
| Unrealized (gain)/loss on equity securities, net | | | | | (193) | | | 283 | |
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| Valuation adjustment on servicing rights | | | | | — | | | (1,658) | |
| Adjusted revenue (non-GAAP) | | | | | $ | 185,331 | | | $ | 167,120 | |
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| Total noninterest expenses (GAAP) | | | | | $ | 111,043 | | | $ | 110,797 | |
| Less: | | | | | | | |
| Core deposit and customer relationship intangibles amortization | | | | | 1,788 | | | 2,054 | |
| Partnership investment in tax credit projects | | | | | 538 | | | 77 | |
| (Gain)/loss on sales/valuation of assets, net | | | | | 1,115 | | | 46 | |
| Acquisition, integration and restructuring costs | | | | | 1,673 | | | 576 | |
| Core expenses (non-GAAP) | | | | | $ | 105,929 | | | $ | 108,044 | |
| Efficiency ratio (GAAP) | | | | | 60.94 | % | | 65.46 | % |
| Adjusted efficiency ratio, fully tax-equivalent (non-GAAP) | | | | | 57.16 | % | | 64.65 | % |
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| (1) Computed on a tax-equivalent basis using an effective tax rate of 21%. |
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| Non-GAAP Reconciliations (Dollars in thousands, except per share data) | | | For the Three Months
Ended March 31, |
| | | | | 2023 | | 2022 |
| Reconciliation of Annualized Ratio of Core Expenses to Average Assets (non-GAAP) | | | | | | | |
| Total noninterest expenses (GAAP) | | | | | $ | 111,043 | | | $ | 110,797 | |
| Core expenses (non-GAAP) | | | | | 105,929 | | | 108,044 | |
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| Average assets | | | | | $ | 20,118,005 | | | $ | 19,228,872 | |
| Total noninterest expenses to average assets (GAAP) | | | | | 2.24 | % | | 2.34 | % |
| Core expenses to average assets (non-GAAP) | | | | | 2.14 | % | | 2.28 | % |
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| Acquisition, integration and restructuring costs | | | | | | | |
| Salaries and employee benefits | | | | | $ | 74 | | | $ | 340 | |
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| Professional fees | | | | | 934 | | | 236 | |
| Advertising | | | | | 122 | | | — | |
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| Other noninterest expenses | | | | | 543 | | | — | |
| Total acquisition, integration and restructuring costs | | | | | $ | 1,673 | | | $ | 576 | |
After tax impact on diluted earnings per common share(1) | | | | | $ | 0.03 | | | $ | 0.01 | |
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| (1) Computed on a tax-equivalent basis using an effective tax rate of 21%. |
Non-GAAP Financial Measures
This Quarterly Report on Form 10-Q contains references to financial measures which are not defined by generally accepted accounting principles ("GAAP"). Management believes the non-GAAP measures are helpful for investors to analyze and evaluate HTLF's financial condition and operating results. However, these non-GAAP measures have inherent limitations and should not be considered a substitute for operating results determined in accordance with GAAP. Additionally, because non-GAAP measures are not standardized, it may not be possible to compare the non-GAAP measures presented in this section with other companies' non-GAAP measures. Reconciliations of each non-GAAP measure to the most directly comparable GAAP measure may be found in the financial tables above.
The non-GAAP measures presented in this Quarterly Report on Form 10-Q, management's reason for including each measure and the method of calculating each measure are presented below:
•Annualized net interest margin, fully tax-equivalent, adjusts net interest income for the tax-favored status of certain loans and securities. Management believes this measure enhances the comparability of net interest income arising from taxable and tax-exempt sources.
•Adjusted efficiency ratio, fully tax equivalent, expresses noninterest expenses as a percentage of fully tax-equivalent net interest income and noninterest income. This adjusted efficiency ratio is presented on a tax-equivalent basis which adjusts net interest income and noninterest expenses for the tax favored status of certain loans, securities, and tax credit projects. Management believes the presentation of this non-GAAP measure provides supplemental useful information for proper understanding of the financial results as it enhances the comparability of income and expenses arising from taxable and nontaxable sources and excludes specific items as noted in the reconciliation contained in this Quarterly Report on Form 10-Q.
•Net interest income, fully tax equivalent, is net income adjusted for the tax-favored status of certain loans and securities. Management believes this measure enhances the comparability of net interest income arising from taxable and tax-exempt sources.
•Tangible book value per common share is total common equity less goodwill and core deposit and customer relationship intangibles, net, divided by common shares outstanding, net of treasury. This measure is included as it is considered to be a critical metric to analyze and evaluate use of equity, financial condition and capital strength.
•Tangible common equity ratio is total common equity less goodwill and core deposit and customer relationship intangibles, net, divided by total assets less goodwill and core deposit and customer relationship intangibles, net. This measure is included as it is considered to be a critical metric to analyze and evaluate financial condition and capital strength.
•Adjusted tangible common equity ratio is total common equity less goodwill, core deposit and customer relationship intangibles, net, and accumulated other comprehensive loss divided by total assets less goodwill and core deposit and customer relationship intangibles, net. This measure is included as it is considered to be a critical metric to analyze and evaluate financial condition and capital strength excluding the variability of accumulated other comprehensive income (loss).
•Annualized return on average tangible common equity is net income excluding intangible amortization calculated as (1) net income excluding tax-effected core deposit and customer relationship intangibles amortization, divided by (2) average common equity less goodwill and core deposit and customer relationship intangibles, net. This measure is included as it is considered to be a critical metric to analyze and evaluate use of equity, financial condition and capital strength.
•Annualized ratio of core expenses to average assets adjusts noninterest expenses to exclude specific items noted in the reconciliation. Management includes this measure as it is considered to be a critical metric to analyze and evaluate controllable expenses related to primary business operations.
RESULTS OF OPERATIONS
Net Interest Margin and Net Interest Income
HTLF's management seeks to optimize net interest income and net interest margin through the growth of earning assets and management of asset and liability positions because they are key indicators of HTLF's profitability.
Net interest income is the difference between interest income on earning assets and interest expense paid on interest bearing liabilities. As such, net interest income is affected by changes in volumes and yields on earning assets and the volume and rates paid on interest bearing liabilities. Net interest margin is the ratio of net interest income to average earning assets.
For the Quarters ended March 31, 2023 and 2022
Net interest margin, expressed as a percentage of average earning assets, was 3.36% (3.40% on a fully tax-equivalent basis, non-GAAP) during the first quarter of 2023 compared to 3.08% (3.12% on a fully tax-equivalent basis, non-GAAP) during the first quarter of 2022. For the quarters ended March 31, 2023 and 2022, net interest margin included 2 basis points and 5 basis points, respectively, of net purchase accounting discount amortization. HTLF's net interest margin may be impacted in future periods as a result of market pressures to increase deposit pricing and the strategic decision to increase wholesale deposits to maintain strong liquidity during the current banking disruptions.
Total interest income and average earning asset changes for the first quarter of 2023 compared to the first quarter of 2022 were:
•Total interest income was $217.0 million compared to $141.3 million, which was an increase of $75.7 million or 54% and primarily attributable to an increase in average earning assets and higher yields.
•Total interest income on a tax-equivalent basis (non-GAAP) was $219.2 million, which was an increase of $75.8 million or 53% from $143.4 million.
•Average earning assets increased $635.6 million or 4% to $18.39 billion compared to $17.76 billion.
•The average rate on earning assets increased 156 basis points to 4.83% compared to 3.27%, which was primarily due to recent interest rate increases.
Total interest expense and average interest bearing liability changes for the first quarter of 2023 compared to the first quarter of 2022 were:
•Total interest expense was $64.8 million, an increase of $58.2 million from $6.6 million, which was attributable to an increase in the average interest rate paid and an increase in average interest bearing liabilities.
•The average interest rate paid on interest bearing liabilities increased 183 basis points to 2.09% compared to 0.26%.
•Average interest bearing deposits increased $2.03 billion or 20% to $11.99 billion from $9.96 billion, including an increase of $1.04 billion in wholesale deposits.
•The average interest rate paid on interest bearing deposits increased 180 basis points to 1.92% compared to 0.12%.
•Average borrowings increased $102.9 million or 21% to $594.7 million from $491.8 million, and the average interest rate paid on borrowings was 5.37% compared to 2.97%.
Net interest income changes for the first quarter of 2023 compared to the first quarter of 2022 were:
•Net interest income totaled $152.2 million compared to $134.7 million, which was an increase of $17.5 million or 13%.
•Net interest income on a tax-equivalent basis (non-GAAP) totaled $154.4 million compared to $136.8 million, which was an increase of $17.6 million or 13%.
See "Analysis of Average Balances, Tax-Equivalent Yields and Rates" for additional information relating to net interest income on a fully tax-equivalent basis, which is not defined by GAAP.
HTLF attempts to manage its balance sheet to minimize the effect that a change in interest rates has on its net interest income. Management continues to work toward improving both its earning assets and funding mix through targeted organic growth
strategies, which management believes will result in additional net interest income. HTLF models and reviews simulations using various improving and deteriorating interest rate scenarios to assist in monitoring its exposure to interest rate risk. Based on these simulations, it is management's opinion that HTLF maintains a well-balanced and manageable interest rate posture. Item 3 of Part I of this Quarterly Report on Form 10-Q contains additional information about the results of the most recent net interest income simulations. Note 6 to the consolidated financial statements included in this Quarterly Report on Form 10-Q contains a detailed discussion of the derivative instruments utilized to manage its interest rate risk.
The following tables set forth certain information relating to average consolidated balance sheets and reflect the yield on average earning assets and the cost of average interest bearing liabilities for the periods indicated, in thousands. Such yields and costs are calculated by dividing income or expense by the average balance of assets or liabilities. Average balances are derived from daily balances, and nonaccrual loans and loans held for sale are included in each respective loan category. Assets that receive favorable tax treatment are evaluated on a tax-equivalent basis assuming a federal income tax rate of 21%. Tax-favored assets generally have lower contractual pre-tax yields than fully taxable assets. A tax-equivalent yield is calculated by adding the tax savings to the interest earned on tax favored assets and dividing this amount by the average balance of the tax favorable assets.
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ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES (1) |
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| For the Quarter Ended |
| March 31, 2023 | | December 31, 2022 | | March 31, 2022 |
| Average
Balance | | Interest | | Rate | | Average
Balance | | Interest | | Rate | | Average
Balance | | Interest | | Rate |
| Earning Assets | | | | | | | | | | | | | | | | | |
| Securities: | | | | | | | | | | | | | | | | | |
| Taxable | $ | 6,096,888 | | | $ | 55,976 | | | 3.72 | % | | $ | 6,122,313 | | | $ | 53,178 | | | 3.45 | % | | $ | 6,501,664 | | | $ | 32,620 | | | 2.03 | % |
Nontaxable(1) | 922,676 | | | 7,630 | | | 3.35 | | | 890,368 | | | 7,762 | | | 3.46 | | | 1,106,951 | | | 7,851 | | | 2.88 | |
| Total securities | 7,019,564 | | | 63,606 | | | 3.67 | | | 7,012,681 | | | 60,940 | | | 3.45 | | | 7,608,615 | | | 40,471 | | | 2.16 | |
| Interest on deposits with other banks and short-term investments | 105,400 | | | 1,131 | | | 4.35 | | | 151,405 | | | 1,410 | | | 3.69 | | | 216,451 | | | 71 | | | 0.13 | |
| Federal funds sold | — | | | — | | | — | | | 739 | | | 11 | | | 5.91 | | | 11 | | | — | | | — | |
Loans:(2) | | | | | | | | | | | | | | | | | |
Commercial and industrial(1) | 3,459,317 | | | 49,907 | | | 5.85 | | | 3,346,843 | | | 45,290 | | | 5.37 | | | 2,744,336 | | | 27,053 | | | 4.00 | |
| PPP loans | 9,970 | | | 26 | | | 1.06 | | | 12,252 | | | 397 | | | 12.86 | | | 132,050 | | | 4,323 | | | 13.28 | |
| Owner occupied commercial real estate | 2,289,002 | | | 26,769 | | | 4.74 | | | 2,277,055 | | | 26,194 | | | 4.56 | | | 2,243,522 | | | 21,278 | | | 3.85 | |
| Non-owner occupied commercial real estate | 2,331,318 | | | 30,749 | | | 5.35 | | | 2,286,298 | | | 29,273 | | | 5.08 | | | 2,060,548 | | | 21,163 | | | 4.17 | |
| Real estate construction | 1,099,026 | | | 18,131 | | | 6.69 | | | 1,050,802 | | | 16,585 | | | 6.26 | | | 847,250 | | | 9,276 | | | 4.44 | |
| Agricultural and agricultural real estate | 835,648 | | | 11,353 | | | 5.51 | | | 785,647 | | | 10,159 | | | 5.13 | | | 745,348 | | | 7,006 | | | 3.81 | |
| Residential mortgage | 852,561 | | | 9,273 | | | 4.41 | | | 858,767 | | | 9,168 | | | 4.24 | | | 843,881 | | | 8,085 | | | 3.89 | |
| Consumer | 501,236 | | | 8,242 | | | 6.67 | | | 499,849 | | | 7,426 | | | 5.89 | | | 426,659 | | | 4,655 | | | 4.42 | |
| Less: allowance for credit losses-loans | (110,393) | | | — | | | — | | | (106,500) | | | — | | | — | | | (111,604) | | | — | | | — | |
| Net loans | 11,267,685 | | | 154,450 | | | 5.56 | | | 11,011,013 | | | 144,492 | | | 5.21 | | | 9,931,990 | | | 102,839 | | | 4.20 | |
| Total earning assets | 18,392,649 | | | 219,187 | | | 4.83 | % | | 18,175,838 | | | 206,853 | | | 4.52 | % | | 17,757,067 | | | 143,381 | | | 3.27 | % |
| Nonearning Assets | 1,725,356 | | | | | | | 1,738,011 | | | | | | | 1,472,805 | | | | | |
| Total Assets | $ | 20,118,005 | | | | | | | $ | 19,913,849 | | | | | | | $ | 19,229,872 | | | | | |
| Interest Bearing Liabilities | | | | | | | | | | | | | | | | | |
| Savings | $ | 9,730,494 | | | $ | 37,893 | | | 1.58 | % | | $ | 9,987,692 | | | $ | 25,950 | | | 1.03 | % | | $ | 8,889,950 | | | $ | 2,394 | | | 0.11 | % |
| Time deposits | 2,257,047 | | | 19,005 | | | 3.41 | | | 1,322,094 | | | 6,265 | | | 1.88 | | | 1,071,675 | | | 583 | | | 0.22 | |
| Short-term borrowings | 222,772 | | | 2,422 | | | 4.41 | | | 298,804 | | | 2,223 | | | 2.95 | | | 119,588 | | | 46 | | | 0.16 | |
| Other borrowings | 371,921 | | | 5,446 | | | 5.94 | | | 371,442 | | | 5,043 | | | 5.39 | | | 372,187 | | | 3,560 | | | 3.88 | |
| Total interest bearing liabilities | 12,582,234 | | | 64,766 | | | 2.09 | % | | 11,980,032 | | | 39,481 | | | 1.31 | % | | 10,453,400 | | | 6,583 | | | 0.26 | % |
| Noninterest Bearing Liabilities | | | | | | | | | | | | | | | | | |
| Noninterest bearing deposits | 5,518,326 | | | | | | | 6,009,432 | | | | | | | 6,497,753 | | | | | |
| Accrued interest and other liabilities | 250,880 | | | | | | | 264,941 | | | | | | | 164,590 | | | | | |
| Total noninterest bearing liabilities | 5,769,206 | | | | | | | 6,274,373 | | | | | | | 6,662,343 | | | | | |
| Equity | 1,766,565 | | | | | | | 1,659,444 | | | | | | | 2,114,129 | | | | | |
| Total Liabilities and Equity | $ | 20,118,005 | | | | | | | $ | 19,913,849 | | | | | | | $ | 19,229,872 | | | | | |
Net interest income, fully tax-equivalent (non-GAAP)(1)(3) | | | $ | 154,421 | | | | | | | $ | 167,372 | | | | | | | $ | 136,798 | | | |
Net interest spread(1) | | | | | 2.74 | % | | | | | | 3.21 | % | | | | | | 3.01 | % |
Net interest income, fully tax-equivalent to total earning assets (non-GAAP)(1)(3) | | | | | 3.40 | % | | | | | | 3.65 | % | | | | | | 3.12 | % |
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| (1) Computed on a tax-equivalent basis using an effective tax rate of 21%. |
| (2) Nonaccrual loans and loans held for sale are included in the average loans outstanding. |
| (3) Refer to "Non-GAAP Financial Measures" for additional information on the usage and presentation of these non-GAAP measures, and refer to the financial tables under "Financial Highlights" for the reconciliations to the most directly comparable GAAP measures. |
The following table presents the dollar amount of changes in interest income and interest expense for the major components of interest earning assets and interest bearing liabilities, in thousands. It quantifies the changes in interest income and interest expense related to changes in the average outstanding balances (volume) and those changes caused by fluctuating interest rates. For each category of interest earning assets and interest bearing liabilities, information is provided on changes attributable to (i) changes in volume, calculated by multiplying the difference between the average balance for the current period and the average balance for the prior period by the rate for the prior period, and (ii) changes in rate, calculated by multiplying the difference between the rate for the current period and the rate for the prior period by the average balance for the prior period. The unallocated change has been allocated pro rata to volume and rate variances.
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| Three Months Ended |
| March 31, 2023 Compared to March 31, 2022
Change Due to | | March 31, 2023 Compared to December 31, 2022
Changes Due to | | March 31, 2022 Compared to March 31, 2021
Change Due to |
| Volume | | Rate | | Net | | Volume | | Rate | | Net | | Volume | | Rate | | Net |
| Earnings Assets/Interest Income | | | | | | | | | | | | | | | | | |
| Investment securities: | | | | | | | | | | | | | | | | | |
| Taxable | $ | (13,693) | | | $ | 37,049 | | | $ | 23,356 | | | $ | (1,529) | | | $ | 4,327 | | | $ | 2,798 | | | $ | 12,144 | | | $ | (9,967) | | | $ | 2,177 | |
Nontaxable(1) | (5,403) | | | 5,182 | | | $ | (221) | | | 946 | | | (1,078) | | | $ | (132) | | | 5,403 | | | (3,252) | | | 2,151 | |
| Interest bearing deposits | (274) | | | 1,334 | | | $ | 1,060 | | | (1,431) | | | 1,152 | | | $ | (279) | | | 4 | | | 1 | | | 5 | |
| Federal funds sold | — | | | — | | | $ | — | | | (6) | | | (5) | | | $ | (11) | | | — | | | (1) | | | (1) | |
Loans(1)(2) | 15,144 | | | 36,467 | | | $ | 51,611 | | | 2,548 | | | 7,410 | | | $ | 9,958 | | | 8,488 | | | (18,652) | | | (10,164) | |
| Total earning assets | (4,226) | | | 80,032 | | | 75,806 | | | 528 | | | 11,806 | | | 12,334 | | | 26,039 | | | (31,871) | | | (5,832) | |
| Liabilities/Interest Expense | | | | | | | | | | | | | | | | | |
| Interest bearing deposits: | | | | | | | | | | | | | | | | | |
| Savings | 248 | | | 35,251 | | | $ | 35,499 | | | (4,506) | | | 16,449 | | | $ | 11,943 | | | 1,049 | | | (1,085) | | | (36) | |
| Time deposits | 1,307 | | | 17,115 | | | $ | 18,422 | | | 5,913 | | | 6,827 | | | $ | 12,740 | | | (230) | | | (1,152) | | | (1,382) | |
| Short-term borrowings | 73 | | | 2,303 | | | $ | 2,376 | | | (2,894) | | | 3,093 | | | $ | 199 | | | (59) | | | (47) | | | (106) | |
| Other borrowings | (18) | | | 1,904 | | | $ | 1,886 | | | 5 | | | 398 | | | $ | 403 | | | (1,611) | | | 1,871 | | | 260 | |
| Total interest bearing liabilities | 1,610 | | | 56,573 | | | 58,183 | | | (1,482) | | | 26,767 | | | 25,285 | | | (851) | | | (413) | | | (1,264) | |
| Net interest income | $ | (5,836) | | | $ | 23,459 | | | $ | 17,623 | | | $ | 2,010 | | | $ | (14,961) | | | $ | (12,951) | | | $ | 26,890 | | | $ | (31,458) | | | $ | (4,568) | |
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| (1) Computed on a tax-equivalent basis using an effective tax rate of 21%. |
| (2) Nonaccrual loans and loans held for sale are included in average loans outstanding. |
Provision For Credit Losses
The allowance for credit losses is established through provision expense to provide, in management's opinion, an appropriate allowance for credit losses. The following table shows the components of provision for credit losses for the three months ended March 31, 2023 and 2022, in thousands:
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| | | Three Months Ended
March 31, |
| | | | | 2023 | | 2022 |
| Provision expense for credit losses-loans | | | | | $ | 2,184 | | | $ | 2,628 | |
| Provision expense for credit losses-unfunded commitments | | | | | 890 | | | 617 | |
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| Total provision expense | | | | | $ | 3,074 | | | $ | 3,245 | |
The provision expense for credit losses for loans was $2.2 million for the first quarter of 2023, which was a decrease of $444,000 or 17% from provision expense of $2.6 million recorded in the first quarter of 2022. The provision expense for the first quarter of 2023 compared to the first quarter of 2022 was impacted by several factors, including:
•Provision expense for individually assessed loans totaled $2.5 million in the first quarter of 2023,
•Provision expense for the first quarter of 2022 was negatively impacted by two charge-offs totaling $9.2 million related to two lending relationships with collateral deficiencies due to customer fraud,
•Net recoveries of $1.0 million compared to net charge-offs of $12.2 million, and
•Use of a macroeconomic outlook which anticipated a moderate recession developing withing the next twelve months compared to an improved macroeconomic outlook.
The size of the loan portfolio, the level of organic loan growth including government guaranteed loans, changes in credit quality and the variability that can occur in the factors, including the impact of economic conditions, are all considered when determining the appropriateness of the allowance for credit losses and will contribute to the variability in the provision for credit losses from quarter to quarter. For additional details on the specific factors considered in establishing the allowance for credit losses, refer to the discussion of critical accounting estimates set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations contained in HTLF's Annual Report on Form 10-K for the year ended December
31, 2022, "Allowance For Credit Losses" and "Provision for Credit Losses" in Item 2 of this Quarterly Report on Form 10-Q and Note 4, "Allowance for Credit Losses," to the consolidated financial statements included herein.
Management believes the allowance for credit losses as of March 31, 2023, was at a level commensurate with the overall risk exposure of the loan portfolio. However, deterioration in economic conditions, including a recession, could cause certain borrowers to experience difficulty and impede their ability to meet debt service. Due to the uncertainty of future economic conditions, including ongoing concerns regarding higher interest rates, supply chain challenges, workforce shortages and wage pressures, the provision for credit losses could be volatile in future quarters.
Noninterest Income
The tables below show noninterest income for the three months ended March 31, 2023 and 2022, in thousands:
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| Three Months Ended
March 31, | | |
| 2023 | | 2022 | | Change | | % Change |
| Service charges and fees | $ | 17,136 | | | $ | 15,251 | | | $ | 1,885 | | | 12 | % |
| Loan servicing income | 714 | | | 286 | | | 428 | | | 150 | |
| Trust fees | 5,657 | | | 6,079 | | | (422) | | | (7) | |
| Brokerage and insurance commissions | 696 | | | 869 | | | (173) | | | (20) | |
| Capital markets fees | 2,449 | | | 3,039 | | | (590) | | | (19) | |
| Securities (losses)/gains, net | (1,104) | | | 2,872 | | | (3,976) | | | (138) | |
| Unrealized gain/(loss) on equity securities, net | 193 | | | (283) | | | 476 | | | 168 | |
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| Net gains on sale of loans held for sale | 1,831 | | | 3,411 | | | (1,580) | | | (46) | |
| Valuation adjustment on servicing rights | — | | | 1,658 | | | (1,658) | | | (100) | |
| Income on bank owned life insurance | 964 | | | 524 | | | 440 | | | 84 | |
| Other noninterest income | 1,463 | | | 863 | | | 600 | | | 70 | |
| Total noninterest income | $ | 29,999 | | | $ | 34,569 | | | $ | (4,570) | | | (13) | % |
Total noninterest income was $30.0 million during the first three months of 2023 compared to $34.6 million during the first three months of 2022, a decrease of $4.6 million or 13%. Notable changes in noninterest income categories for the three months ended March 31, 2023 and 2022 are as follows:
Service Charges and Fees
The following tables summarize the changes in service charges and fees for the three months ended March 31, 2023 and 2022, in thousands:
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| Three Months Ended
March 31, | | | | |
| 2023 | | 2022 | | Change | | % Change |
| Service charges and fees on deposit accounts | $ | 4,911 | | | $ | 4,395 | | | $ | 516 | | | 12 | % |
| Overdraft fees | 2,969 | | | 2,825 | | | 144 | | | 5 | |
| Customer service and other service fees | 93 | | | 81 | | | 12 | | | 15 | |
| Credit card fee income | 7,003 | | | 5,649 | | | 1,354 | | | 24 | |
| Debit card income | 2,160 | | | 2,301 | | | (141) | | | (6) | |
| Total service charges and fees | $ | 17,136 | | | $ | 15,251 | | | $ | 1,885 | | | 12 | % |
The increase in service charges and fees on deposit accounts was primarily attributable to a larger customer base. The increase in credit card fee income was primarily the result of a larger commercial credit card customer base and increased utilization.
Management is monitoring and assessing industry changes related to the consumer overdraft fees, and any future changes could negatively impact overdraft fee income.
Loan Servicing Income
Loan servicing income includes the fees collected for the servicing of commercial, agricultural, and mortgage loans, which are dependent upon the aggregate outstanding balances of these loans, rather than quarterly production and sale of these loans. The
following tables show the changes in loan servicing income for the three months ended March 31, 2023, and 2022, in thousands:
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| Three Months Ended
March 31, | | | | |
| 2023 | | 2022 | | Change | | % Change |
Commercial and agricultural loan servicing fees(1) | $ | 473 | | | $ | 237 | | | $ | 236 | | | 100 | % |
| Residential mortgage servicing fees | 451 | | | 454 | | | (3) | | | (1) | |
| Mortgage servicing rights amortization | (210) | | | (405) | | | 195 | | | 48 | |
| Total loan servicing income | $ | 714 | | | $ | 286 | | | $ | 428 | | | 150 | % |
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| (1) Includes servicing fees for commercial, commercial real estate, agricultural and agricultural real estate loans. |
Securities Losses/Gains, Net
For the first quarter of 2023, net security losses totaled $1.1 million compared to net gains of $2.9 million for the first quarter of 2022, a decrease of $4.0 million.
Net Gains on Sale of Loans Held for Sale
For the first quarter of 2023, net gains on sale of loans held for sale totaled $1.8 million, which was a decrease of $1.6 million or 46% from $3.4 million in the same quarter of 2022. Loans sold to investors in the first quarter of 2023 totaled $38.1 million compared to $98.3 million during the first quarter of 2022, which was a decrease of $60.2 million or 61%. The decrease was primarily attributable to a reduction in residential mortgage activity due to recent increases in residential mortgage loan interest rates.
Valuation Adjustment on Servicing Rights
The valuation adjustment on servicing rights was $0 for the first quarter of 2023 compared to $1.7 million for the first quarter of 2022. HTLF sold its mortgage servicing rights portfolio in the first quarter of 2023. HTLF recovered its valuation allowance in the first quarter of 2022 due to recent increases in residential mortgage loan interest rates.
Noninterest Expenses
The tables below show noninterest expenses for the three months ended March 31, 2023, and 2022, in thousands:
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| Three Months Ended
March 31, | | |
| | 2023 | | 2022 | | Change | | % Change |
| Salaries and employee benefits | $ | 62,149 | | | $ | 66,174 | | | $ | (4,025) | | | (6) | % |
| Occupancy | 7,209 | | | 7,362 | | | (153) | | | (2) | |
| Furniture and equipment | 2,915 | | | 3,519 | | | (604) | | | (17) | |
| Professional fees | 16,076 | | | 15,156 | | | 920 | | | 6 | |
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| Advertising | 1,985 | | | 1,555 | | | 430 | | | 28 | |
| Core deposit and customer relationship intangibles amortization | 1,788 | | | 2,054 | | | (266) | | | (13) | |
| Other real estate and loan collection expenses | 155 | | | 195 | | | (40) | | | (21) | |
| Loss on sales/valuations of assets, net | 1,115 | | | 46 | | | 1,069 | | | 2,324 | |
| Acquisition, integration and restructuring costs | 1,673 | | | 576 | | | 1,097 | | | 190 | |
| Partnership investment in tax credit projects | 538 | | | 77 | | | 461 | | | 599 | |
| Other noninterest expenses | 15,440 | | | 14,083 | | | 1,357 | | | 10 | |
| Total noninterest expenses | $ | 111,043 | | | $ | 110,797 | | | $ | 246 | | | — | % |
For the first three months of 2023, noninterest expenses totaled $111.0 million compared to $110.8 million during the first three months of 2022, an increase of $246,000 or less than 1%.
Notable changes in noninterest expense categories for the three months ended March 31, 2023 and 2022 are as follows:
Salaries and employee benefits
Salaries and employee benefits totaled $62.1 million for the first quarter of 2023 compared to $66.2 million for the first quarter of 2022, which was a decrease of $4.0 million or 6%. The decrease was primarily attributable to a reduction of full-time
equivalent employees and lower incentive compensation expense. Full-time equivalent employees totaled 1,991 compared to 2,208, which was a decrease of 217 or 10%.
Occupancy
Occupancy expense totaled $7.2 million for the first quarter of 2023, which was a decrease of $153,000 or 2% from $7.4 million for the first quarter of 2022.
Furniture and Equipment
Furniture and equipment expense totaled $2.9 million for the first quarter of 2023, which was a decrease of $604,000 or 17% from $3.5 million for the first quarter of 2022.
The decreases in occupancy expense and furniture and equipment expense are primarily attributable to the decreased number of branch locations as a result of HTLF's branch optimization strategy. At March 31, 2023, HTLF had 119 branches compared to 130 at March 31, 2022.
Professional Fees
Professional fees totaled $16.1 million for the first quarter of 2023 compared to $15.2 million for the first quarter of 2022, which was an increase of $920,000 or 6%. FDIC insurance assessments totaled $3.3 million compared to $1.6 million, an increase of $1.7 million due to assessment rate changes that were effective with the first quarter 2023 assessment.
Loss on sales/valuations of assets, net
Net losses on sales/valuations of assets were $1.1 million for the first quarter of 2023 compared to $46,000 for the first quarter of 2022. HTLF recorded $813,000 of losses on fixed assets associated with branch optimization activities and a loss of $193,000 associated with the sale of the mortgage servicing rights portfolio in the first quarter of 2023.
Acquisition, integration and restructuring costs
Acquisition, integration and restructuring costs totaled $1.7 million in the first quarter of 2023 compared to $576,000 in the first quarter of 2022, an increase of $1.1 million due to the progression of the charter consolidation project which will continue through the end of 2023.
Efficiency Ratio
One of HTLF's strategic priorities is to improve its adjusted efficiency ratio, on a fully tax-equivalent basis (non-GAAP), with the goal of maintaining it at or below 57%. During the first quarter of 2023, the efficiency ratio was 60.94% (57.16% on an adjusted fully tax-equivalent basis, non-GAAP) compared to 65.46% (64.65% on an adjusted fully tax-equivalent basis, non-GAAP) for the first quarter of 2022.
HTLF continues to pursue strategies to improve operational efficiency, which include the following initiatives:
Consolidation of its bank charters
Charter consolidation is designed to eliminate redundancies and improve HTLF’s operating efficiency and capacity to support ongoing product and service enhancements and current and future growth. Through the end of the first quarter of 2023, six charters have been consolidated into HTLF Bank, and subsequent to March 31, 2023, one additional charter was consolidated. The consolidated charters are now operating as divisions of HTLF Bank. The remaining charters are expected to be consolidated throughout the remainder of 2023.
Consolidation restructuring costs are projected to be $19-20 million with approximately $8-$9 million of expenses remaining to be incurred in 2023. Total costs incurred since the project started in the fourth quarter of 2021 through March 31, 2023, were $11.0 million, of which $1.7 million was incurred in the first quarter of 2023. HTLF has realized some operating efficiencies and financial benefits with the completed charter consolidations. The resulting efficiencies and expansion in capacity are projected to generate benefits of approximately $20 million annually when the project is completed with core operating expenses expected to decline to 2.10% or less of average assets.
Branch optimization strategy
HTLF continues to review its branch network and physical facilities as part of its branch optimization strategy and anticipates closing 2-3 branches in 2023, which may result in write-downs of fixed assets in future periods.
Income Taxes
The effective tax rate was 22.50% for the first quarter of 2023 compared to 21.95% for the first quarter of 2022. The following items impacted the first quarter 2023 and 2022 tax calculations:
•Solar energy tax credits of $310,000 compared to $0.
•Federal low-income housing tax credits of $311,000 compared to $135,000.
•New markets tax credits of $90,000 compared to $75,000.
•Historic rehabilitation tax credits of $258,000 compared to $63,000.
•Tax-exempt interest income as a percentage of pre-tax income of 12.20% compared to 14.44%.
•Tax benefit of $46,000 compared to $172,000 resulting from the vesting of restricted stock units.
•Tax expense of $929,000 compared to $58,000 resulting from the disallowed interest expense related to tax-exempt loans and securities, aligning with increases in total interest expense.
FINANCIAL CONDITION
Total assets were $20.18 billion at March 31, 2023, a decrease of $61.7 million or less than 1% from $20.24 billion at December 31, 2022. Securities represented 35% of total assets at both March 31, 2023, and December 31, 2022.
LENDING ACTIVITIES
Total loans held to maturity were $11.50 billion at March 31, 2023, and $11.43 billion at December 31, 2022, an increase of $67.0 million or 1%.
The following table shows the changes in loan balances by loan category since December 31, 2022, in thousands:
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| March 31, 2023 | | December 31, 2022 | | Change | | % Change |
| Commercial and industrial | $ | 3,498,345 | | | $ | 3,464,414 | | | $ | 33,931 | | | 1 | % |
| Paycheck Protection Program ("PPP") | 8,258 | | 11,025 | | (2,767) | | | (25) | |
| Owner occupied commercial real estate | 2,312,538 | | 2,265,307 | | 47,231 | | | 2 | |
| Non-owner occupied commercial real estate | 2,421,341 | | 2,330,940 | | 90,401 | | | 4 | |
| Real estate construction | 1,102,186 | | 1,076,082 | | 26,104 | | | 2 | |
| Agricultural and agricultural real estate | 810,183 | | 920,510 | | (110,327) | | | (12) | |
| Residential mortgage | 841,084 | | 853,361 | | (12,277) | | | (1) | |
| Consumer | 501,418 | | 506,713 | | (5,295) | | | (1) | |
| Total loans held to maturity | $ | 11,495,353 | | | $ | 11,428,352 | | | $ | 67,001 | | | 1 | % |
The loan growth in the first three months of 2023 was primarily in commercial, commercial real estate and real estate construction, which was attributable to an emphasis on organic loan growth, expansion of specific commercial and agribusiness lending teams and further market penetration in various HTLF growth markets.
Notable changes in the loan portfolio include:
•Commercial and industrial loans increased $33.9 million or 1% to $3.50 billion at March 31, 2023, compared to $3.46 billion at December 31, 2022.
•Owner occupied commercial real estate loans increased $47.2 million or 2% to $2.31 billion at March 31, 2023, compared to $2.27 billion at December 31, 2022.
•Non-owner occupied commercial real estate loans increased $90.4 million or 4% to $2.42 billion at March 31, 2023, compared to $2.33 billion at December 31, 2022.
•Real estate construction loans increased $26.1 million or 2% to $1.10 billion at March 31, 2023, compared to $1.08 billion at December 31, 2022.
•Agricultural and agricultural real estate loans decreased $110.3 million or 12% to $810.2 million at March 31, 2023 compared to $920.5 million at December 31, 2022, which was attributable to paydowns of credit lines and delayed utilization primarily due to weather concerns in the California markets.
The table below presents the composition of the loan portfolio as of March 31, 2023, and December 31, 2022, in thousands:
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| March 31, 2023 | | December 31, 2022 |
| | Amount | | Percent | | Amount | | Percent |
| Loans receivable held to maturity: | | | | | | | |
| Commercial and industrial | $ | 3,498,345 | | | 30.43 | % | | $ | 3,464,414 | | | 30.31 | % |
| PPP | 8,258 | | 0.07 | | | 11,025 | | 0.10 | |
| Owner occupied commercial real estate | 2,312,538 | | 20.12 | | | 2,265,307 | | 19.82 | |
| Non-owner occupied commercial real estate | 2,421,341 | | 21.06 | | | 2,330,940 | | 20.40 | |
| Real estate construction | 1,102,186 | | 9.59 | | | 1,076,082 | | 9.42 | |
| Agricultural and agricultural real estate | 810,183 | | | 7.05 | | | 920,510 | | | 8.05 | |
| Residential mortgage | 841,084 | | | 7.32 | | | 853,361 | | | 7.47 | |
| Consumer | 501,418 | | | 4.36 | | | 506,713 | | | 4.43 | |
| Gross loans receivable held to maturity | 11,495,353 | | | 100.00 | % | | 11,428,352 | | | 100.00 | % |
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| Allowance for credit losses-loans | (112,707) | | | | | (109,483) | | | |
| Loans receivable, net | $ | 11,382,646 | | | | | $ | 11,318,869 | | | |
ALLOWANCE FOR CREDIT LOSSES
The process utilized by HTLF to determine the appropriateness of the allowance for credit losses is considered a critical accounting practice. The allowance for credit losses represents management's estimate of lifetime losses in the existing loan portfolio. For additional details on the specific factors considered in determining the allowance for credit losses, refer to the critical accounting estimates section of HTLF's Annual Report on Form 10-K for the year ended December 31, 2022.
Total Allowance for Lending Related Credit Losses
The total allowance for lending related credit losses was $133.8 million at March 31, 2023, which was 1.16% of loans, compared to $129.7 million or 1.13% of loans at December 31, 2022. The following table shows, in thousands, the components of the allowance for lending related credit losses as of March 31, 2023, and December 31, 2022:
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| March 31, 2023 | | December 31, 2022 | |
| Amount | | % of Allowance | | Amount | | % of Allowance | |
| Quantitative | $ | 86,462 | | | 64.62 | % | | $ | 84,409 | | | 65.09 | % | |
| Qualitative/Economic Forecast | 47,331 | | | 35.38 | | | 45,270 | | | 34.91 | | |
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| Total | $ | 133,793 | | | 100.00 | % | | $ | 129,679 | | | 100.00 | % | |
Quantitative Allowance
The quantitative allowance increased $2.1 million or 2% to $86.5 million or 65% of the total allowance for lending related credit losses at March 31, 2023, compared to $84.4 million or 65% of the total allowance at December 31, 2022. Specific reserves for individually assessed loans totaled $9.6 million at March 31, 2023, an increase of $2.5 million or 35% from $7.1 million at December 31, 2022.
Qualitative Allowance/Economic Forecast
The qualitative allowance totaled $47.3 million or 35% of the total allowance for lending related credit losses at March 31, 2023, compared to $45.3 million or 35% at December 31, 2022.
HTLF has access to various third-party economic forecast scenarios provided by Moody's, which are updated quarterly in HTLF's methodology. HTLF continued to use a one year reasonable and supportable forecast period. At March 31, 2023, Moody's March 14, 2023, baseline forecast scenario was utilized, and management considered other downturn forecast scenarios, which anticipated a moderate recession developing withing the next twelve months, in addition to the baseline forecast to support the macroeconomic outlook used in the allowance for credit losses calculation.
Allowance for Credit Losses-Loans
The tables below present the changes in the allowance for credit losses for loans during the three months ended March 31, 2023 and 2022, in thousands:
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| Three Months Ended
March 31, |
| 2023 | | 2022 |
| Balance at beginning of period | $ | 109,483 | | | $ | 110,088 | |
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| Provision for credit losses | 2,184 | | | 2,628 | |
| Recoveries on loans previously charged off | 3,191 | | | 1,023 | |
| Charge-offs on loans | (2,151) | | | (13,217) | |
| Balance at end of period | $ | 112,707 | | | $ | 100,522 | |
| Allowance for credit losses for loans as a percent of loans | 0.98 | % | | 0.99 | % |
| Annualized ratio of net charge offs/(recoveries) to average loans | (0.04) | % | | 0.49 | % |
The allowance for credit losses for loans totaled $112.7 million at March 31, 2023, compared to $109.5 million at December 31, 2022, and $100.5 million at March 31, 2022. The allowance for credit losses for loans at March 31, 2023, was 0.98% of loans compared to 0.96% of loans at December 31, 2022. The following items impacted the allowance for credit losses for loans for the three months ended March 31, 2023:
•Provision expense for individually assessed loans totaled $2.5 million in the first quarter of 2023.
•Net recoveries for the first three months of 2023 totaled $1.0 million compared to net charge-offs of $12.2 million for the first three months of 2022, which was a decrease of $13.2 million. Included in net charge-offs for the first three months of 2022 were two charge-offs due to customer fraud totaling $9.2 million related to two lending relationships which had collateral deficiencies.
•Nonpass loans increased $13.5 million or 3% to $546.8 million at March 31, 2023, from $533.3 million at December 31, 2022.
The following tables show, in thousands, the changes in the allowance for unfunded commitments for the three months ended March 31, 2023 and 2022:
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| Three Months Ended
March 31, |
| 2023 | | 2022 |
| Balance at beginning of period | $ | 20,196 | | | $ | 15,462 | |
| Impact of ASU 2016-13 adoption on January 1, 2020 | — | | | — | |
| Adjusted balance at January 1, 2020 | 20,196 | | | 15,462 | |
| Provision for credit losses | 890 | | | 617 | |
| Balance at end of period | $ | 21,086 | | | $ | 16,079 | |
The allowance for unfunded commitments totaled $21.1 million as of March 31, 2023, compared to $20.2 million as of December 31, 2022, and $16.1 million as of March 31, 2022. Unfunded commitments increased $138.2 million or 3% to $4.87 billion at March 31, 2023, compared to $4.73 billion at December 31, 2022.
CREDIT QUALITY AND NONPERFORMING ASSETS
The internal rating system for the credit quality of its loans is a series of grades reflecting management's risk assessment, based on its analysis of the borrower's financial condition. The "pass" category consists of all loans that are not in the "nonpass" category and categorized into a range of loan grades that reflect increasing, though still acceptable, risk. Movement of risk through the various grade levels in the pass category is monitored for early identification of credit deterioration. For more information on this internal rating system, see Note 3, "Loans" of the consolidated financial statements in this Quarterly Report on Form 10-Q.
The nonpass loans totaled $546.8 million or 4.8% of total loans as of March 31, 2023, compared to $533.3 million or 4.7% of total loans as of December 31, 2022. As of March 31, 2023, the nonpass loans consisted of approximately 49% watch loans and 51% substandard loans compared to approximately 48% watch loans and 52% substandard loans as of December 31, 2022. The percent of nonpass loans on nonaccrual status as of March 31, 2023, was 11%.
Included in the nonpass loans at March 31, 2023, were $1.4 million of nonpass PPP loans as a result of risk ratings on non-PPP related credits. HTLF's risk rating methodology assigns a risk rating to the whole lending relationship. No allowance was
recorded related to the PPP loans because of the 100% government guarantee through the United States Small Business Administration ("SBA").
The table below presents the amounts of nonperforming loans and other nonperforming assets on the dates indicated, in thousands:
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| March 31, | | December 31, |
| | 2023 | | 2022 | | 2022 | | 2021 |
| Nonaccrual loans | $ | 58,066 | | | $ | 64,174 | | | $ | 58,231 | | | $ | 69,369 | |
| Loans contractually past due 90 days or more | 174 | | | 246 | | | 273 | | | 550 | |
| Total nonperforming loans | 58,240 | | | 64,420 | | | 58,504 | | | 69,919 | |
| Other real estate | 7,438 | | | 1,422 | | | 8,401 | | | 1,927 | |
| Other repossessed assets | 24 | | | 34 | | | 26 | | | 43 | |
| Total nonperforming assets | $ | 65,702 | | | $ | 65,876 | | | $ | 66,931 | | | $ | 71,889 | |
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| Nonperforming loans to total loans | 0.51 | % | | 0.63 | % | | 0.51 | % | | 0.70 | % |
| Nonperforming assets to total loans plus repossessed property | 0.57 | | | 0.65 | | | 0.59 | | | 0.72 | |
| Nonperforming assets to total assets | 0.33 | | | 0.34 | | | 0.33 | | | 0.37 | |
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The schedules below summarize the changes in nonperforming assets during the three months ended March 31, 2023, in thousands:
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| Nonperforming
Loans | | Other
Real Estate
Owned | | Other
Repossessed
Assets | | Total
Nonperforming
Assets |
| December 31, 2022 | $ | 58,504 | | | $ | 8,401 | | | $ | 26 | | | $ | 66,931 | |
| Loan foreclosures | (219) | | | 211 | | | 8 | | | — | |
| Net loan recoveries | 1,040 | | | — | | | — | | | 1,040 | |
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| New nonperforming loans | 4,626 | | | — | | | — | | | 4,626 | |
Reduction of nonperforming loans(1) | (5,711) | | | — | | | — | | | (5,711) | |
| OREO/Repossessed assets sales proceeds | — | | | (1,132) | | | (4) | | | (1,136) | |
| OREO/Repossessed assets writedowns, net | — | | | (42) | | | (6) | | | (48) | |
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| March 31, 2023 | $ | 58,240 | | | $ | 7,438 | | | $ | 24 | | | $ | 65,702 | |
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| (1) Includes principal reductions and transfers to performing status. |
Total nonperforming assets decreased $1.2 million or 2% to $65.7 million or 0.33% of total assets at March 31, 2023, compared to $66.9 million or 0.33% of total assets at December 31, 2022. Nonperforming loans were $58.2 million at March 31, 2023, compared to $58.5 million at December 31, 2022, which represented 0.51% of total loans at both March 31, 2023, and December 31, 2022. At March 31, 2023, approximately $40.0 million or 69% of HTLF's nonperforming loans had individual loan balances exceeding $1.0 million and represented loans to fifteen borrowers. The portion of the nonperforming nonresidential real estate loans covered by government guarantees totaled $9.0 million and $12.5 million at March 31, 2023, and December 31, 2022, respectively.
SECURITIES
The composition of the securities portfolio is managed to ensure liquidity needs are met while maximizing the return on the portfolio within the established HTLF risk appetite parameters and in consideration of the impact it has on HTLF's asset/liability position. Securities represented 35% of total assets at both March 31, 2023, and December 31, 2022. Total securities carried at fair value as of March 31, 2023, were $6.10 billion, a decrease of $50.5 million or 1% from $6.15 billion at December 31, 2022.
As of March 31, 2023, and December 31, 2022, securities with a carrying value of $2.96 billion and $1.49 billion, respectively, were pledged to secure public and trust deposits, short-term borrowings and for other purposes as required or permitted by law. HTLF pledged additional securities totaling $1.48 billion to increase borrowing capacity with various short-term borrowing programs. As of March 31, 2023, approximately $3.83 billion of securities remained available to pledge.
The table below presents the composition of the securities portfolio, including securities carried at fair value, held to maturity securities, net of allowance for credit losses, and other, by major category, as of March 31, 2023, and December 31, 2022, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 | |
| | Amount | | Percent | | Amount | | Percent | |
| U.S. treasuries | $ | 31,932 | | | 0.46 | % | | $ | 31,699 | | | 0.45 | % | |
| U.S. agencies | 43,584 | | | 0.62 | | | 43,135 | | | 0.61 | | |
| Obligations of states and political subdivisions | 1,720,020 | | | 24.57 | | | 1,708,840 | | | 24.24 | | |
| Mortgage-backed securities - agency | 1,757,469 | | | 25.10 | | | 1,772,105 | | | 25.13 | | |
| Mortgage-backed securities - non-agency | 2,117,882 | | | 30.25 | | | 2,181,876 | | | 30.94 | | |
| Commercial mortgage-backed securities - agency | 86,022 | | | 1.23 | | | 85,123 | | | 1.21 | | |
| Commercial mortgage-backed securities - non-agency | 657,874 | | | 9.40 | | | 659,459 | | | 9.35 | | |
| Asset-backed securities | 435,523 | | | 6.22 | | | 416,054 | | | 5.90 | | |
| Corporate bonds | 57,845 | | | 0.83 | | | 57,942 | | | 0.82 | | |
| | | | | | | | |
| Equity securities with a readily determinable fair value | 20,604 | | | 0.29 | | | 20,314 | | | 0.29 | | |
| Other securities | 72,364 | | | 1.03 | | | 74,567 | | | 1.06 | | |
| Total securities | $ | 7,001,119 | | | 100.00 | % | | $ | 7,051,114 | | | 100.00 | % | |
HTLF's securities portfolio had an expected modified duration of 6.19 years as of both March 31, 2023, and December 31, 2022.
At March 31, 2023, HTLF had $72.4 million of other securities, including capital stock in each Federal Home Loan Bank ("FHLB") of which each of its Banks is a member. All these securities were classified as other securities held at cost.
DEPOSITS
Total deposits were $17.68 billion as of March 31, 2023, compared to $17.51 billion at December 31, 2022, an increase of $168.3 million or 1%. As of March 31, 2023, 35% of HTLF's deposits were uninsured and uncollateralized.
HTLF maintains a granular and diverse deposit base. As of March 31, 2023, no Bank Market represented more than 12% of total customers deposits, and no major industry represented more than 10% of total customer deposits.
The following table shows the changes in deposit balances by deposit type since year-end 2022, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 | | Change | | % Change |
| Demand-customer | $ | 5,119,554 | | | $ | 5,701,340 | | | $ | (581,786) | | | (10) | % |
| Savings-customer | 8,647,396 | | | 8,903,747 | | | (256,351) | | | (3) | |
| Savings-wholesale | 609,213 | | | 1,090,644 | | | (481,431) | | | (44) | |
| Total savings | 9,256,609 | | | 9,994,391 | | | (737,782) | | | (7) | |
| Time-customer | 1,071,476 | | | 851,539 | | | 219,937 | | | 26 | |
| Time-wholesale | 2,233,707 | | | 965,739 | | | 1,267,968 | | | 131 | |
| Total time | 3,305,183 | | | 1,817,278 | | | 1,487,905 | | | 82 | |
| Total deposits | $ | 17,681,346 | | | $ | 17,513,009 | | | $ | 168,337 | | | 1 | % |
| | | | | | | |
| Total customer deposits | $ | 14,838,426 | | | $ | 15,456,626 | | | $ | (618,200) | | | (4) | % |
| Total wholesale deposits | 2,842,920 | | | 2,056,383 | | | 786,537 | | | 38 | % |
| Total deposits | $ | 17,681,346 | | | $ | 17,513,009 | | | $ | 168,337 | | | |
At March 31, 2023, HTLF had $2.84 billion of wholesale deposits, of which $609.2 million were included in savings deposits and $2.23 billion were included in time deposits. HTLF had $1.09 billion of wholesale savings deposits and $965.7 million of wholesale time deposits at December 31, 2022.
The table below presents the composition of deposits by category as of March 31, 2023, and December 31, 2022, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Amount | | Percent | | Amount | | Percent |
| Demand-customer | $ | 5,119,554 | | | 28.95 | % | | $ | 5,701,340 | | | 32.55 | % |
| Savings-customer | 8,647,396 | | | 48.91 | | | 8,903,747 | | | 50.85 | |
| Savings-wholesale | 609,213 | | | 3.45 | | | 1,090,644 | | | 6.23 | |
| Time-customer | 1,071,476 | | | 6.06 | | | 851,539 | | | 4.86 | |
| Time-wholesale | 2,233,707 | | | 12.63 | | | 965,739 | | | 5.51 | |
| Total | $ | 17,681,346 | | | 100.00 | % | | $ | 17,513,009 | | | 100.00 | % |
SHORT-TERM BORROWINGS
Short-term borrowings, which HTLF defines as borrowings with an original maturity of one year or less, were as follows as of March 31, 2023, and December 31, 2022, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 | | Change | | % Change |
| Securities sold under agreement to repurchase | $ | 81,641 | | | $ | 95,303 | | | $ | (13,662) | | | (14) | % |
| | | | | | | |
| Advances from the FHLB | 1,000 | | | 50,000 | | | (49,000) | | | (98) | |
| Advances from the federal discount window | — | | | 224,000 | | | (224,000) | | | (100) | |
| Other short-term borrowings | 9,696 | | | 6,814 | | | 2,882 | | | 42 | |
| Total | $ | 92,337 | | | $ | 376,117 | | | $ | (283,780) | | | (75) | % |
Short-term borrowings generally include federal funds purchased, securities sold under agreements to repurchase, short-term FHLB advances and discount window borrowings from the Federal Reserve Bank. These funding alternatives are utilized in varying degrees depending on their pricing and availability. All Banks own FHLB stock in one of the Chicago, Dallas, Des Moines or Topeka FHLBs, enabling them to borrow funds from their respective FHLB for short-term or long-term purposes under a variety of programs. Short-term borrowings totaled $92.3 million at March 31, 2023, compared to $376.1 million at December 31, 2022, a decrease of $283.8 million or 75%.
The Banks pledged securities that provided borrowing capacity totaling $476.9 million as of March 31, 2023, to the BTFP, which is a Federal Reserve Bank program created in the first quarter of 2023 to assist banks in meeting all the needs of depositors. There were no advances from the BTFP during the first quarter of 2023.
The Banks provide retail repurchase agreements to their customers as a cash management tool, which sweep excess funds from demand deposit accounts into these agreements. Although the aggregate balance of these retail repurchase agreements is subject to variation, the account relationships represented by these balances are principally local. The balances of retail repurchase agreements were $81.6 million at March 31, 2023, compared to $95.3 million at December 31, 2022, a decrease of $13.7 million or 14%.
HTLF renewed its revolving credit line agreement with an unaffiliated bank on June 14, 2022. This revolving credit line agreement, which has $100.0 million of borrowing capacity, is included in short-term borrowings, and the primary purpose of this credit line agreement is to provide liquidity. No advances occurred on this line during the first three months of 2023, and the outstanding balance was $0 at both March 31, 2023, and December 31, 2022.
OTHER BORROWINGS
The outstanding balances of other borrowings, which HTLF defines as borrowings with an original maturity date of more than one year, are shown in the table below, net of discount and issuance costs amortization as of March 31, 2023, and December 31, 2022, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 | | Change | | % Change |
| Advances from the FHLB | $ | 710 | | | $ | 740 | | | $ | (30) | | | (4) | % |
| | | | | | | |
| Trust preferred securities | 148,565 | | | 148,284 | | | 281 | | | — | |
| | | | | | | |
| | | | | | | |
| Contracts payable | 80 | | | 82 | | | (2) | | | (2) | |
| Subordinated notes | 222,742 | | | 222,647 | | | 95 | | | — | |
| | | | | | | |
| Total | $ | 372,097 | | | $ | 371,753 | | | $ | 344 | | | — | % |
A schedule of HTLF's trust preferred securities outstanding excluding deferred issuance costs as of March 31, 2023, is as follows, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amount
Issued | | Issuance
Date | | Interest
Rate | | Interest Rate as of 3/31/2023(1) | | | Maturity
Date | | Callable
Date |
| Heartland Financial Statutory Trust IV | $ | 10,310 | | | 03/17/2004 | | 2.75% over LIBOR | | 7.66% | | | 03/17/2034 | | 06/17/2023 |
| Heartland Financial Statutory Trust V | 20,619 | | | 01/27/2006 | | 1.33% over LIBOR | | 6.16 | | | 04/07/2036 | | 07/07/2023 |
| Heartland Financial Statutory Trust VI | 20,619 | | | 06/21/2007 | | 1.48% over LIBOR | | 6.35 | | | 09/15/2037 | | 06/15/2023 |
| Heartland Financial Statutory Trust VII | 18,042 | | | 06/26/2007 | | 1.48% over LIBOR | | 6.44 | | | 09/01/2037 | | 06/01/2023 |
| Morrill Statutory Trust I | 9,393 | | | 12/19/2002 | | 3.25% over LIBOR | | 8.38 | | | 12/26/2032 | | 06/26/2023 |
| Morrill Statutory Trust II | 9,115 | | | 12/17/2003 | | 2.85% over LIBOR | | 7.76 | | | 12/17/2033 | | 06/17/2023 |
| Sheboygan Statutory Trust I | 6,812 | | | 09/17/2003 | | 2.95% over LIBOR | | 7.86 | | | 09/17/2033 | | 06/17/2023 |
| CBNM Capital Trust I | 4,570 | | | 09/10/2004 | | 3.25% over LIBOR | | 8.12 | | | 12/15/2034 | | 06/15/2023 |
| Citywide Capital Trust III | 6,619 | | | 12/19/2003 | | 2.80% over LIBOR | | 7.60 | | | 12/19/2033 | | 07/23/2023 |
| Citywide Capital Trust IV | 4,483 | | | 09/30/2004 | | 2.20% over LIBOR | | 7.12 | | | 09/30/2034 | | 05/23/2023 |
| Citywide Capital Trust V | 12,480 | | | 05/31/2006 | | 1.54% over LIBOR | | 6.41 | | | 07/25/2036 | | 06/15/2023 |
| OCGI Statutory Trust III | 3,022 | | | 06/27/2002 | | 3.65% over LIBOR | | 8.91 | | | 09/30/2032 | | 06/30/2023 |
| OCGI Capital Trust IV | 5,525 | | | 09/23/2004 | | 2.50% over LIBOR | | 7.37 | | | 12/15/2034 | | 06/15/2023 |
| BVBC Capital Trust II | 7,329 | | | 04/10/2003 | | 3.25% over LIBOR | | 8.06 | | | 04/24/2033 | | 07/24/2023 |
| BVBC Capital Trust III | 9,627 | | | 07/29/2005 | | 1.60% over LIBOR | | 6.76 | | | 09/30/2035 | | 06/30/2023 |
| Total trust preferred costs | 148,565 | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
(1) Effective weighted average interest rate as of March 31, 2023, was 7.60%. |
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CAPITAL REQUIREMENTS
The Federal Reserve Board, which supervises bank holding companies, has adopted capital adequacy guidelines that are used to assess the adequacy of capital of a bank holding company. Under Basel III, HTLF must hold a conservation buffer above the adequately capitalized risk-based capital ratios; however, the transition provisions related to the conservation buffer have been extended indefinitely.
The most recent notification from the FDIC categorized HTLF and each of its Banks as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the categorization of any of these entities.
HTLF's capital ratios are calculated in accordance with Federal Reserve Board instructions and are required regulatory financial measures. The following table illustrates the capital ratios and the Federal Reserve Board's current capital adequacy guidelines for the dates indicated, in thousands. The table also indicates the fully-phased in capital conservation buffer, but the requirements to comply have been extended indefinitely.
| | | | | | | | | | | | | | | | | | | | | | | |
| Total
Capital
(to Risk-
Weighted
Assets) | | Tier 1
Capital
(to Risk-
Weighted
Assets) | | Common Equity
Tier 1
(to Risk-
Weighted
Assets) | | Tier 1
Capital
(to Average Assets) |
| March 31, 2023 | 14.98 | % | | 12.02 | % | | 11.28 | % | | 9.25 | % |
| Minimum capital requirement | 8.00 | | | 6.00 | | | 4.50 | | | 4.00 | |
| Well capitalized requirement | 10.00 | | | 8.00 | | | 6.50 | | | 5.00 | |
| Minimum capital requirement, including fully-phased in capital conservation buffer | 10.50 | | | 8.50 | | | 7.00 | | | N/A |
| Risk-weighted assets | $ | 15,035,898 | | | $ | 15,035,898 | | | $ | 15,035,898 | | | N/A |
| Average assets | N/A | | N/A | | N/A | | $ | 19,528,724 | |
| | | | | | | |
| December 31, 2022 | 14.76 | % | | 11.81 | % | | 11.07 | % | | 9.13 | % |
| Minimum capital requirement | 8.00 | | | 6.00 | | | 4.50 | | | 4.00 | |
| Well capitalized requirement | 10.00 | | | 8.00 | | | 6.50 | | | 5.00 | |
| Minimum capital requirement, including fully-phased in capital conservation buffer | 10.50 | | | 8.50 | | | 7.00 | | | N/A |
| Risk-weighted assets | $ | 14,937,128 | | | $ | 14,937,128 | | | $ | 14,937,128 | | | N/A |
| Average assets | N/A | | N/A | | N/A | | $ | 19,322,778 | |
Retained earnings that could be available for the payment of dividends to HTLF from its banks totaled approximately $756.5 million and $702.2 million at March 31, 2023, and December 31, 2022, respectively, under the most restrictive minimum capital requirements. Retained earnings that could be available for the payment of dividends to HTLF from its banks totaled approximately $456.3 million and $403.9 million at March 31, 2023, and December 31, 2022, respectively, under the capital requirements to remain well capitalized. These dividends are the principal source of funds to pay dividends on HTLF's common and preferred stock and to pay interest and principal on its debt.
As of March 31, 2023, management believes regulatory capital ratio buffers would withstand any changes in regulatory rules that require the inclusion of unrealized losses in the total investment portfolio and remain well capitalized.
On June 26, 2020, HTLF issued and sold 4.6 million depositary shares, each representing a 1/400th interest in a share of 7.00% Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, Series E. The depositary shares are listed on The Nasdaq Global Select Market under the symbol "HTLFP." If declared, dividends are paid quarterly in arrears at a rate of 7.00% per annum beginning on October 15, 2020. For the dividend period beginning on the first reset date of July 15, 2025, and for dividend periods beginning every fifth anniversary thereafter, each a reset date, the rate per annum will be reset based on a recent five-year treasury rate plus 6.675%. The earliest redemption date for the preferred shares is July 15, 2025. Dividends payable on common shares are subject to quarterly dividends payable on these outstanding preferred shares at the applicable dividend rate.
On August 8, 2022, HTLF filed a universal shelf registration statement with the SEC to register debt or equity securities. This shelf registration statement, which was effective immediately, provides HTLF with the ability to raise capital, subject to market conditions and SEC rules and limitations, if the board of directors decides to do so. This registration statement permits HTLF, from time to time, in one or more public offerings, to offer debt securities, subordinated notes, common stock, preferred stock, depositary shares, warrants, rights or units of any combination of these securities. The amount of securities that may be offered was not specified in the registration statement, and the terms of any future offerings are to be established at the time of the offering. The registration statement expires on August 8, 2025.
COMMITMENTS AND CONTRACTUAL OBLIGATIONS
Commitments and Contractual Obligations
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Banks evaluate the creditworthiness of customers to which they extend a credit commitment on a case-by-case basis and may require collateral to secure any credit extended. The amount of collateral obtained is based upon management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties. Standby letters of credit and
financial guarantees are conditional commitments issued by the Banks to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. At March 31, 2023, and December 31, 2022, commitments to extend credit aggregated $4.87 billion and $4.73 billion, respectively. Standby letters of credit aggregated $55.6 million at March 31, 2023, and $55.1 million at December 31, 2022.
At March 31, 2023, and December 31, 2022, HTLF's banks had $614.3 million and $682.9 million, respectively, of standby letters of credit with the respective FHLB to secure public funds and municipal deposits.
Contractual obligations and other commitments were disclosed in HTLF's Annual Report on Form 10-K for the year ended December 31, 2022. There have been no other material changes to HTLF's contractual obligations and other commitments since the Annual Report on Form 10-K was filed.
There are certain legal proceedings pending against HTLF and its subsidiaries at March 31, 2023, that are ordinary routine litigation incidental to business.
HTLF continues to explore opportunities to expand the size of its banking footprint by opportunistically augmenting organic growth by identifying acquisition targets that complement or supplement its current banking strategy. This includes transactions that increase penetration in existing geographic Bank Markets and expansion into adjacent markets, as well as acquisitions of fee income businesses that complement and build on existing businesses or further meet the needs of customers. Future expenditures relating to expansion efforts, in addition to those identified above, cannot be estimated at this time.
Derivative Financial Instruments
HTLF enters into mortgage banking derivatives, which are classified as free standing derivatives. These derivatives include interest rate lock commitments provided to customers to fund certain mortgage loans to be sold into the secondary market and forward commitments for the future delivery of these loans. HTLF enters into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of future interest rate changes on the commitments to fund these loans and on the residential mortgage loans held as available for sale. See Note 6 to the consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information on derivative financial instruments.
LIQUIDITY
Liquidity refers to the ability to maintain a cash flow that is adequate to meet maturing obligations and existing commitments, to withstand fluctuations in deposit levels, to fund operations and to provide for customers’ credit needs. The liquidity of HTLF principally depends on cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings and its ability to borrow funds in the money or capital markets.
At March 31, 2023, HTLF had $362.1 million of cash and cash equivalents, time deposits in other financial institutions of $1.7 million and securities carried at fair value of $6.10 billion. Management expects the securities portfolio to produce cash flows of approximately $1.3 billion over the next twelve months.
Management of investing and financing activities, and market conditions, determine the level and the stability of net interest cash flows. Management attempts to mitigate the impact of changes in market interest rates to the extent possible, so that balance sheet growth is the principal determinant of growth in net interest cash flows.
The Banks' FHLB memberships give them the ability to borrow funds for short-term and long-term purposes under a variety of programs. Short-term borrowing balances are dependent on commercial cash management and smaller correspondent bank relationships and, as a result, will normally fluctuate. Management believes these balances, on average, to be stable sources of funds. In the event of short-term liquidity needs, HTLF's banks may purchase federal funds from each other or from correspondent banks and may also borrow from the Federal Reserve Bank, including the BTFP.
Additional funding is provided by long-term debt and short-term borrowings. As of March 31, 2023, HTLF had $372.1 million of long-term debt outstanding, and it is an important funding source because of its multi-year borrowing structure.
During the first quarter of 2023, HTLF shifted out of overnight borrowings and into brokered CDs, which allowed for more immediate funding availability through various sources. HTLF pledged additional securities totaling $1.48 billion to increase borrowing capacity, and as of March 31, 2023, pledged securities totaled $2.96 billion. As of March 31, 2023, approximately $3.83 billion of securities remained available to pledge.
The following table shows the source of funding, balance outstanding and available borrowing capacity as of March 31, 2023, dollars in thousands:
| | | | | | | | | | | | | | |
| | As of March 31, 2023 |
| Source | | Outstanding | | Available |
| Federal Reserve Discount Window | | $ | — | | | $ | 1,604,904 | |
| Bank Term Funding Program | | — | | | 476,925 | |
| Federal Home Loan Bank | | 1,711 | | | 679,588 | |
| Federal Funds | | — | | | 247,500 | |
| Wholesale deposits/brokered CDs | | 2,842,920 | | | 1,689,420 | |
| Total | | $ | 2,844,631 | | | $ | 4,698,337 | |
HTLF is focused on loan growth and strives to fund loan growth with the least expensive source of deposits, sales of securities or borrowings. Management believes it is unlikely HTLF would be required to sell securities at a loss for such funding needs. The securities portfolio is expected to produce cash flows of approximately $1.3 billion over the next twelve months, which could be used to fund loan growth. Additionally, growing deposits will continue to be a focus. During the first quarter of 2023, HTLF initiated a deposit campaign that resulted in over 8,000 new consumer deposit accounts. HTLF offers the ICS and CDARS products accessed through the Intrafi network of financial institutions, which helps to reduce the amount of pledged securities.
On a consolidated basis, HTLF maintains a large balance of short-term securities that, when combined with cash from operations, management believes are adequate to meet its funding obligations.
At the parent company level, routine funding requirements consist primarily of dividends paid to stockholders, debt service on revolving credit arrangements and trust preferred securities issuances, repayment requirements under other debt obligations and payments for acquisitions. The parent company obtains the funding to meet these obligations from dividends paid by its Banks and the issuance of debt and equity securities.
At March 31, 2023, the parent company had cash of $284.4 million. Additionally, HTLF has a revolving credit agreement with an unaffiliated bank, which was renewed most recently on June 14, 2022. The revolving credit agreement has $100.0 million of maximum borrowing capacity, of which none was outstanding at March 31, 2023. This credit agreement contains specific financial covenants, all of which HTLF complied with as of March 31, 2023.
The ability of HTLF to pay dividends to its stockholders is dependent upon dividends paid to HTLF by its Banks. The Banks are subject to statutory and regulatory restrictions on the amount they may pay in dividends. To maintain acceptable capital ratios at HTLF's Banks, certain portions of their retained earnings are not available for the payment of dividends.
HTLF has filed a universal shelf registration statement with the SEC that provides HTLF the ability to raise both debt and capital, subject to SEC rules and limitations, if HTLF's board of directors decides to do so. This registration statement expires in August 2025.
Management believes that cash on hand, cash flows from operations and cash availability under existing borrower programs and facilities will be sufficient to meet any recurring and additional operating cash needs in 2023.