Company Quick10K Filing
Quick10K
Heartland Financial
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$44.82 35 $1,550
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-05-13 Regulation FD, Exhibits
8-K 2019-05-10 Regulation FD, Exhibits
8-K 2019-05-06 Officers, Exhibits
8-K 2019-04-29 Earnings, Exhibits
8-K 2019-04-29 Other Events
8-K 2019-04-23 Regulation FD, Exhibits
8-K 2019-01-28 Earnings, Exhibits
8-K 2019-01-28 Earnings, Exhibits
8-K 2019-01-23 Regulation FD, Exhibits
8-K 2019-01-16 Enter Agreement, Regulation FD, Exhibits
8-K 2018-12-11 Officers, Exhibits
8-K 2018-12-11 Regulation FD, Exhibits
8-K 2018-10-29 Earnings, Exhibits
8-K 2018-10-16 Regulation FD, Exhibits
8-K 2018-07-26 Officers, Exhibits
8-K 2018-07-23 Earnings, Exhibits
8-K 2018-07-23 Regulation FD, Exhibits
8-K 2018-06-27 Regulation FD, Exhibits
8-K 2018-05-18 M&A, Regulation FD, Exhibits
8-K 2018-05-16 Shareholder Vote
8-K 2018-04-30 Earnings, Exhibits
8-K 2018-04-27 Regulation FD, Exhibits
8-K 2018-02-23 Regulation FD, Exhibits
8-K 2018-01-29 Earnings, Exhibits
8-K 2018-01-18 Regulation FD, Exhibits
CSCO Cisco Systems 232,960
GME GameStop 871
CLLS Cellectis 805
BRG Bluerock Residential Growth REIT 251
SMMT Summit Therapeutics 57
GRMC Goldrich Mining 0
LRDC Laredo Oil 0
SMRN Smartag International 0
TXSO Texas South Energy 0
EHIC EHI Car Services 0
HTLF 2019-03-31
Part I
Item 1. Financial Statements
Note 1: Basis of Presentation
Note 2: Acquisitions
Note 3: Securities
Note 4: Loans
Note 5: Allowance for Loan Losses
Note 6: Goodwill, Core Deposit Premium and Other Intangible Assets
Note 7: Derivative Financial Instruments
Note 8: Fair Value
Note 9: Revenue
Note 10: Stock Compensation
Note 11: Leases
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 ex-31103312019.htm
EX-31.2 ex-31203312019.htm
EX-32.1 ex-32103312019.htm
EX-32.2 ex-32203312019.htm

Heartland Financial Earnings 2019-03-31

HTLF 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 htlfq12019form10-q.htm 10-Q HTLF 2019 Q1 FORM 10-Q Document


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended March 31, 2019
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For transition period from __________ to __________

Commission File Number: 001-15393

HEARTLAND FINANCIAL USA, INC.
(Exact name of Registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation or organization)

42-1405748
(I.R.S. employer identification number)

1398 Central Avenue, Dubuque, Iowa  52001
(Address of principal executive offices)(Zip Code)

(563) 589-2100
(Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x No o
     Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated Filer ¨
Non-accelerated filer ¨
 
Smaller reporting company ¨
Emerging growth company ¨
 
 
    
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No x

Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $1.00 per share
HTLF
Nasdaq Stock Market
    
Indicate the number of shares outstanding of each of the classes of Registrant's common stock as of the latest practicable date:  As of May 6, 2019, the Registrant had outstanding 34,604,462 shares of common stock, $1.00 par value per share.





HEARTLAND FINANCIAL USA, INC.
Form 10-Q Quarterly Report
Table of Contents







PART I

ITEM 1. FINANCIAL STATEMENTS
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
 
 
 
 
March 31, 2019 (Unaudited)
 
December 31, 2018
ASSETS
 
 
 
Cash and due from banks
$
174,198

 
$
223,135

Interest bearing deposits with other banks and other short-term investments
318,303

 
50,495

Cash and cash equivalents
492,501

 
273,630

Time deposits in other financial institutions
4,675

 
4,672

Securities:
 
 

Carried at fair value (cost of $2,415,641 at March 31, 2019, and $2,492,620 at December 31, 2018)
2,400,460

 
2,450,709

Held to maturity, at cost (fair value of $95,240 at March 31, 2019, and $245,341 at December 31, 2018)
88,089

 
236,283

Other investments, at cost
27,506

 
28,396

Loans held for sale
69,716

 
119,801

Loans receivable:
 
 

Held to maturity
7,331,544

 
7,407,697

Allowance for loan and lease losses
(62,639
)
 
(61,963
)
Loans receivable, net
7,268,905

 
7,345,734

Premises, furniture and equipment, net
183,185

 
187,418

Premises, furniture and equipment held for sale
7,030

 
7,258

Other real estate, net
5,391

 
6,153

Goodwill
391,668

 
391,668

Core deposit intangibles and customer relationship intangibles, net
44,637

 
47,479

Servicing rights, net
28,968

 
31,072

Cash surrender value on life insurance
163,764

 
162,892

Other assets
136,000

 
114,841

TOTAL ASSETS
$
11,312,495

 
$
11,408,006

LIABILITIES AND EQUITY
 
 
 
LIABILITIES:
 
 
 
Deposits:
 
 
 
Demand
$
3,118,909

 
$
3,264,737

Savings
5,145,929

 
5,107,962

Time
1,088,104

 
1,023,730

Total deposits
9,352,942

 
9,396,429

Deposits held for sale
118,564

 
106,409

Short-term borrowings
104,314

 
227,010

Other borrowings
268,312

 
274,905

Accrued expenses and other liabilities
96,261

 
78,078

TOTAL LIABILITIES
9,940,393

 
10,082,831

STOCKHOLDERS' EQUITY:
 
 
 
Preferred stock (par value $1 per share; authorized 17,604 shares; none issued or outstanding at both March 31, 2019, and December 31, 2018)

 

Series A Junior Participating preferred stock (par value $1 per share; authorized 16,000 shares; none issued or outstanding at both March 31, 2019, and December 31, 2018)

 

Series C Senior Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares authorized at both March 31, 2019, and December 31, 2018, none issued or outstanding at both March 31, 2019, and December 31, 2018)

 

Series D Senior Non-Cumulative Perpetual Convertible Preferred Stock (par value $1 per share; 3,000 shares authorized at both March 31, 2019, and December 31, 2018; none issued or outstanding at both March 31, 2019, and December 31, 2018)

 

Common stock (par value $1 per share; 40,000,000 shares authorized at both March 31, 2019, and December 31, 2018; issued 34,603,611 shares at March 31, 2019, and 34,477,499 shares at December 31, 2018)
34,604

 
34,477

Capital surplus
745,596

 
743,095

Retained earnings
603,506

 
579,252

Accumulated other comprehensive loss
(11,604
)
 
(31,649
)
TOTAL STOCKHOLDERS' EQUITY
1,372,102

 
1,325,175

TOTAL LIABILITIES AND EQUITY
$
11,312,495

 
$
11,408,006

 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 





HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share data)
 
 
 
 
Three Months Ended
March 31,
 
2019
 
2018
INTEREST INCOME:
 
 
 
Interest and fees on loans
$
100,456

 
$
85,651

Interest on securities:
 
 
 
Taxable
15,876

 
11,577

Nontaxable
3,093

 
3,579

Interest on federal funds sold
4

 

Interest on interest bearing deposits in other financial institutions
1,292

 
407

TOTAL INTEREST INCOME
120,721


101,214

INTEREST EXPENSE:
 
 
 
Interest on deposits
13,213

 
5,766

Interest on short-term borrowings
889

 
268

Interest on other borrowings (includes $165 and $197 of interest expense related to derivatives reclassified from accumulated other comprehensive income for the three months ended March 31, 2019 and 2018, respectively)
3,664

 
3,596

TOTAL INTEREST EXPENSE
17,766


9,630

NET INTEREST INCOME
102,955


91,584

Provision for loan losses
1,635

 
4,263

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
101,320


87,321

NONINTEREST INCOME:
 
 
 
Service charges and fees
12,794

 
10,079

Loan servicing income
1,729

 
1,754

Trust fees
4,474

 
4,680

Brokerage and insurance commissions
734

 
907

Securities gains, net (includes $1,575 and $1,441 of net security gains reclassified from accumulated other comprehensive income for the three months ended March 31, 2019 and 2018, respectively)
1,575

 
1,441

Unrealized gain/(loss) on equity securities, net
258

 
(28
)
Net gains on sale of loans held for sale
3,176

 
4,051

Valuation allowance on servicing rights
(589
)
 
(2
)
Income on bank owned life insurance
899

 
614

Other noninterest income
1,667

 
1,220

TOTAL NONINTEREST INCOME
26,717


24,716

NONINTEREST EXPENSES:
 
 
 
Salaries and employee benefits
50,285

 
48,710

Occupancy
6,607

 
6,043

Furniture and equipment
2,692

 
2,749

Professional fees
11,379

 
9,448

Advertising
2,325

 
1,940

Core deposit intangibles and customer relationship intangibles amortization
2,842

 
1,863

Other real estate and loan collection expenses
701

 
732

Gain on sales/valuations of assets, net
(3,004
)
 
(197
)
Restructuring expenses
3,227

 
2,564

Other noninterest expenses
11,176

 
9,794

TOTAL NONINTEREST EXPENSES
88,230


83,646

INCOME BEFORE INCOME TAXES
39,807


28,391

Income taxes (includes $358 and $261 of income tax expense reclassified from accumulated other comprehensive income for the three months ended March 31, 2019 and 2018, respectively)
8,310

 
5,123

NET INCOME
31,497


23,268

Preferred dividends

 
(13
)
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS
$
31,497


$
23,255

EARNINGS PER COMMON SHARE - BASIC
$
0.91

 
$
0.76

EARNINGS PER COMMON SHARE - DILUTED
$
0.91

 
$
0.76

CASH DIVIDENDS DECLARED PER COMMON SHARE
$
0.16

 
$
0.13

 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 





HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)
 
Three Months Ended
March 31,
 
2019
 
2018
NET INCOME
$
31,497

 
$
23,268

OTHER COMPREHENSIVE INCOME/(LOSS)
 
 
 
Securities:
 
 
 
Net change in unrealized gain/(loss) on securities
29,965

 
(19,834
)
Reclassification adjustment for net gains realized in net income
(1,575
)
 
(1,441
)
Income taxes
(7,281
)
 
5,391

Other comprehensive income/(loss) on securities
21,109

 
(15,884
)
Derivatives used in cash flow hedging relationships:
 
 
 
Net change in unrealized gain/(loss) on derivatives
(1,505
)
 
1,699

Reclassification adjustment for net losses on derivatives realized in net income
158

 
197

Income taxes
283

 
(708
)
Other comprehensive income/(loss) on cash flow hedges
(1,064
)
 
1,188

Other comprehensive income/(loss)
20,045

 
(14,696
)
TOTAL COMPREHENSIVE INCOME
$
51,542

 
$
8,572

 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 





HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
 
 
Three Months Ended
March 31,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
31,497

 
$
23,268

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
8,155

 
6,802

Provision for loan losses
1,635

 
4,263

Net amortization of premium on securities
5,692

 
5,823

Securities gains, net
(1,575
)
 
(1,441
)
Unrealized (gain)/loss on equity securities, net
(258
)
 
28

Stock based compensation
2,375

 
1,858

Loans originated for sale
(61,348
)
 
(112,433
)
Proceeds on sales of loans held for sale
64,941

 
135,506

Net gains on sale of loans held for sale
(2,978
)
 
(2,889
)
Decrease in accrued interest receivable
682

 
3,239

(Increase) decrease in prepaid expenses
(1,708
)
 
194

Increase in accrued interest payable
1,261

 
1,029

Capitalization of servicing rights
(266
)
 
(1,183
)
Valuation allowance on servicing rights
589

 
2

(Gain)/loss on sales/valuations of assets, net
1,512

 
(197
)
Net excess tax benefit from stock based compensation
336

 
611

Other, net
(16,493
)
 
(5,441
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
34,049

 
59,039

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of time deposits in other financial institutions
(248
)
 

Proceeds from the sale of securities available for sale
434,154

 
392,246

Proceeds from the redemption of time deposits in other financial institutions

 
8,767

Proceeds from the maturity of and principal paydowns on securities available for sale
86,727

 
49,603

Proceeds from the maturity of and principal paydowns on securities held to maturity
2,156

 
3,570

Proceeds from the maturity of and principal paydowns on time deposits in other financial institutions
245

 
4,368

Proceeds from the sale, maturity of and principal paydowns on other investments
2,730

 
677

Purchase of securities available for sale
(299,105
)
 
(244,289
)
Purchase of other investments
(1,779
)
 
(644
)
Net (increase) decrease in loans
43,925

 
(32,314
)
Purchase of bank owned life insurance policies
(5
)
 

Capital expenditures
(1,123
)
 
(2,356
)
Net cash and cash equivalents received in acquisitions

 
5,543

Proceeds from the sale of equipment
117

 
615

Net cash received in divestitures
28,142

 

Proceeds on sale of OREO and other repossessed assets
2,537

 
668

NET CASH PROVIDED BY INVESTING ACTIVITIES
$
298,473

 
$
186,454

 
 
 
 





HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (Unaudited)
(Dollars in thousands)
 
 
 
 
Three Months Ended
March 31,
 
2019
 
2018
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net increase/(decrease) in demand deposits
$
(131,876
)
 
$
5,834

Net increase in savings deposits
74,016

 
100,608

Net (increase) decrease in time deposit accounts
75,141

 
(69,143
)
Proceeds on short-term revolving credit line

 
15,000

Net decrease in short-term borrowings
(43,000
)
 
(168,451
)
Proceeds from short term FHLB advances
430,888

 
220,000

Repayments of short term FHLB advances
(506,725
)
 
(260,000
)
Proceeds from other borrowings
50

 

Repayments of other borrowings
(6,868
)
 
(14,995
)
Purchase of treasury stock

 
(97
)
Proceeds from issuance of common stock
253

 
14

Dividends paid
(5,530
)
 
(3,920
)
NET CASH USED BY FINANCING ACTIVITIES
(113,651
)
 
(175,150
)
Net increase in cash and cash equivalents
218,871

 
70,343

Cash and cash equivalents at beginning of year
273,630

 
196,003

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
492,501

 
$
266,346

Supplemental disclosures:
 
 
 
Cash paid for income/franchise taxes
$
84

 
$
2

Cash paid for interest
$
16,537

 
$
8,601

Loans transferred to OREO
$
1,694

 
$
939

Transfer of premises from premises, furniture and equipment, net, to premises, furniture and equipment held for sale
$
654

 
$

Deposits transferred to held for sale
$
76,968

 
$

Loans transferred to held for sale
$
32,111

 
$

Securities transferred from held to maturity to available for sale
$
148,030

 
$

Purchases of securities available for sale, accrued, not settled
$
2,019

 
$

Maturity of securities available for sale, accrued, not settled
$
1,000

 
$

Stock consideration granted for acquisitions
$

 
$
53,621

 
 
 
 
See accompanying notes to consolidated financial statements.





HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)
(Dollars in thousands, except per share data)
 
 
Heartland Financial USA, Inc. Stockholders' Equity
 
 
Preferred
 Stock
 
Common
 Stock
 
Capital
 Surplus
 
Retained
 Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Treasury
Stock
 
Total
 Equity
Balance at January 1, 2018
$
938

 
$
29,953

 
$
503,709

 
$
481,331

 
$
(24,474
)
 
$

 
$
991,457

Comprehensive income


 






23,268

 
(14,696
)




8,572

Reclassification of unrealized net gain on equity securities


 






280

 
(280
)





Cash dividends declared:


 


 


 


 


 


 
 
Series D Preferred, $17.50 per share
 
 
 
 
 
 
(13
)
 
 
 
 
 
(13
)
Common, $0.13 per share


 






(3,907
)
 






(3,907
)
Purchase of 1,761 shares of common stock


 








 



(97
)

(97
)
Issuance of 1,116,644 shares of common stock


 
1,115


52,423




 



97


53,635

Stock based compensation


 



1,858




 






1,858

Balance at March 31, 2018
$
938

 
$
31,068

 
$
557,990

 
$
500,959

 
$
(39,450
)
 
$

 
$
1,051,505

Balance at January 1, 2019
$

 
$
34,477

 
$
743,095

 
$
579,252

 
$
(31,649
)
 
$

 
$
1,325,175

Comprehensive income
 
 
 
 
 
 
31,497

 
20,045

 


 
51,542

Retained earnings adjustment for adoption of leasing standard
 
 
 
 
 
 
(1,713
)
 
 
 
 
 
(1,713
)
Cash dividends declared:
 
 
 
 
 
 
 
 


 


 


Common, $0.16 per share
 
 
 

 

(5,530
)
 






(5,530
)
Issuance of 126,112 shares of common stock
 
 
127


126

 


 






253

Stock based compensation
 
 
 

2,375




 






2,375

Balance at March 31, 2019
$

 
$
34,604

 
$
745,596

 
$
603,506

 
$
(11,604
)
 
$

 
$
1,372,102

 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 
 
 
 
 
 






HEARTLAND FINANCIAL USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: BASIS OF PRESENTATION

The interim unaudited consolidated financial statements contained herein should be read in conjunction with the audited consolidated financial statements and accompanying notes to the consolidated financial statements for the fiscal year ended December 31, 2018, included in the Form 10-K of Heartland Financial USA, Inc. ("Heartland") filed with the Securities and Exchange Commission ("SEC") on February 27, 2019. Footnote disclosures to the interim unaudited consolidated financial statements which would substantially duplicate the disclosure contained in the footnotes to the audited consolidated financial statements have been omitted.

The financial information of Heartland included herein has been prepared in accordance with U.S. generally accepted accounting principles for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X. Such information reflects all adjustments (consisting of normal recurring adjustments), that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of the interim period ended March 31, 2019, are not necessarily indicative of the results expected for the year ending December 31, 2019.

Earnings Per Share

Basic earnings per share is determined using net income available to common stockholders and weighted average common shares outstanding. Diluted earnings per share is computed by dividing net income available to common stockholders by the weighted average common shares and assumed incremental common shares issued. Amounts used in the determination of basic and diluted earnings per share for the three-month periods ended March 31, 2019, and 2018, are shown in the table below:
 
Three Months Ended
March 31,
(Dollars and number of shares in thousands, except per share data)
2019
 
2018
Net income
$
31,497

 
$
23,268

Preferred dividends

 
(13
)
Net income available to common stockholders
$
31,497

 
$
23,255

Weighted average common shares outstanding for basic earnings per share
34,564

 
30,442

Assumed incremental common shares issued upon vesting of outstanding restricted stock units
136

 
203

Weighted average common shares for diluted earnings per share
34,700

 
30,645

Earnings per common share — basic
$
0.91

 
$
0.76

Earnings per common share — diluted
$
0.91

 
$
0.76

Number of antidilutive common stock equivalents excluded from diluted earnings per share computation
2

 


Subsequent Events - Heartland has evaluated subsequent events that may require recognition or disclosure through the filing date of this Quarterly Report on Form 10-Q with the SEC. On April 26, 2019, Heartland signed an agreement to sell the mortgage servicing rights portfolio of Dubuque Bank and Trust Company, and the transaction closed on April 30, 2019. See Note 6, "Goodwill, Core Deposit Premium and Other Intangible Assets," for further details on this transaction.

Effect of New Financial Accounting Standards

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." Topic 842 requires a lessee to recognize leases on-balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as financing or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The amendment is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and is applied on a modified retrospective basis. Heartland leases certain properties and equipment under operating leases that will result in recognition of lease assets and lease liabilities on the consolidated balance sheets under the ASU; however the majority of Heartland's properties and equipment are owned, not leased. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. These practical expedients relate to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase





the underlying asset. Early adoption is permitted. In January 2018, the FASB issued an amendment to provide entities with the optional practical expedient to not evaluate existing or expired land easements that were previously not accounted for as leases under Topic 840. In July 2018, the FASB issued ASU 2018-11, "Leases - Targeted Improvements" to provide entities with relief from the costs of implementing certain aspects of the new leasing standard, Specifically, under the amendments in ASU 2018-11, entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and lessors may elect not to separate lease and non-lease components when certain conditions are met. The amendments have the same effective date as ASU 2016-02. Heartland adopted the accounting standard on January 1, 2019, on a modified retrospective basis, as required, and will not restate comparative periods. Heartland adopted the practical expedients, which allow for existing leases to be accounted for under previous guidance with the exception of balance sheet recognition for lessees. The adoption of the new standard resulted in the recording of ROU assets and lease liabilities of approximately $25.9 million and $27.6 million, respectively, on January 1, 2019. The difference between the lease assets and lease liabilities, which was $1.7 million, was recorded as an adjustment to retained earnings. The adoption of the standard did not impact Heartland's results of operations or liquidity. See Note 11, "Leases", for more information on Heartland's leases.

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)." The amendments in this ASU require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The amendments in this ASU indicate that an entity should not use the length of time a security has been in an unrealized loss position to avoid recording a credit loss. In addition, in determining whether a credit loss exists, the amendments in this ASU also remove the requirements to consider the historical and implied volatility of the fair value of a security and recoveries or declines in fair value after the balance sheet date. The amendment is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. An entity may adopt the amendments earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Heartland intends to adopt the accounting standard in 2020, as required. Upon adoption of ASU 2016-13, a cumulative-effect adjustment to retained earnings will be recorded as of the beginning of the first reporting period in which the guidance is effective. Heartland has formed an internal committee to assess and implement the standard. Heartland has entered into an agreement with a third party vendor to evaluate potential methodologies and data and has started designing its financial models to estimate credit losses in accordance with the new standard. Further development, testing and evaluation of the models is required to determine the impact that the adoption of this standard will have on Heartland's results of operations, financial position and liquidity.

In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350)." This amendment is to simplify the subsequent measurement of goodwill by eliminating step two from the goodwill impairment test. Instead, an entity will perform only step one of its quantitative goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and then recognizing the impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized cannot exceed the total amount of goodwill allocated to that reporting unit. An entity will still have the option to perform a qualitative assessment for a reporting unit to determine if the quantitative step one impairment test is necessary. This amendment is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied prospectively. Early adoption is permitted, including in an interim period for impairment tests performed after January 1, 2017. Heartland intends to adopt this ASU in the third quarter of 2020, consistent with the annual impairment test as of September 30, 2020, and is currently evaluating the potential impact of this guidance on its results of operations, financial position and liquidity.

In March 2017, the FASB issued ASU 2017-08, "Receivables - Nonrefundable Fee and Other Costs (Subtopic 310-20)." These amendments shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount. Discounts continue to be amortized to maturity. These amendments are effective for public business entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If any entity early adopts the amendments in an interim period, any adjustments must be reflected as of the beginning of the fiscal year that includes the interim period. The amendments must be applied and Heartland intends to apply these amendments on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Heartland adopted this ASU on January 1, 2019, as required, and the adoption did not have a material impact on its results of operations, financial position and liquidity.

In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities." The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. For a closed portfolio of prepayable





financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments, this ASU permits an entity to designate an amount that is not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows (the “last-of-layer” method). Under this designation, prepayment risk is not incorporated into the measurement of the hedged item. ASU 2017-12 requires a modified retrospective transition method in which Heartland will recognize the cumulative effect of the change on the opening balance of each affected component of equity on the balance sheet as of the date of adoption. Heartland adopted this ASU on January 1, 2019, as required, and as a result of the adoption, $148.0 million of held to maturity securities were reclassified to available for sale debt securities carried at fair value. See Note 3, "Securities," for further details. There was no impact to Heartland's results of operations, or liquidity as a result of the adoption of this amendment.

In August 2018, the FASB issued ASU 2018-13, "Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. Heartland intends to adopt this ASU in 2020, as required, and because the ASU only revises disclosure requirements, the adoption of this ASU is not expected to have a material impact on results of operations, financial position and liquidity.

NOTE 2: ACQUISITIONS

Blue Valley Ban Corp.
On January 16, 2019, Heartland entered into a definitive merger agreement to acquire Blue Valley Ban Corp., and its wholly-owned subsidiary, Bank of Blue Valley, headquartered in Overland Park, Kansas. As of the announcement date, the transaction, in which all of the issued and outstanding shares of Blue Valley Ban Corp. stock will be exchanged for shares of Heartland common stock, was valued at approximately $93.9 million. Simultaneous with the closing of the transaction, Bank of Blue Valley will merge into Heartland's Kansas-based subsidiary, Morrill & Janes Bank and Trust Company, and the combined entity will operate as Bank of Blue Valley. The amount of the merger consideration is subject to fluctuations in the price of Heartland common stock and certain potential adjustments, and the transaction is subject to customary closing conditions. The transaction is expected to close in the second quarter of 2019 with a systems conversion planned for the third quarter of 2019. As of March 31, 2019, Bank of Blue Valley had total assets of approximately $711.6 million, which included approximately $564.1 million of gross loans outstanding, and approximately $587.2 million of deposits.

First Bank Lubbock Bancshares, Inc.
On May 18, 2018, Heartland completed the acquisition of Lubbock, Texas based First Bank Lubbock Bancshares, Inc. ("FBLB"), parent company of First Bank & Trust, and PrimeWest Mortgage Corporation, which is a wholly-owned subsidiary of First Bank & Trust. Under the terms of the definitive merger agreement, Heartland acquired FBLB in a transaction valued at approximately $189.9 million, of which $5.5 million was cash, and the remainder was settled by delivery of 3,350,664 shares of Heartland common stock. On the closing date, in addition to this merger consideration, Heartland provided FBLB the funds necessary to repay outstanding debt of $3.9 million, and Heartland assumed $8.2 million of trust preferred securities at fair value. Immediately after the close of the transaction, Heartland paid $13.3 million to the holders of FBLB's stock appreciation rights. The transaction included, at fair value, total assets of $1.12 billion, including $681.1 million of gross loans held to maturity, and deposits of $893.8 million. Upon closing of the transaction, First Bank & Trust became a wholly-owned subsidiary of Heartland and continues to operate under its current name and management team as Heartland's eleventh state-chartered bank. The transaction was a tax-free reorganization with respect to the stock consideration received by the stockholders of FBLB.
Signature Bancshares, Inc.
On February 23, 2018, Heartland completed the acquisition of Signature Bancshares, Inc., parent company of Signature Bank, headquartered in Minnetonka, Minnesota. Under the terms of the definitive merger agreement, Heartland acquired Signature Bancshares, Inc. in a transaction valued at approximately $61.4 million, of which $7.8 million was cash, and the remainder was settled by delivery of 1,000,843 shares of Heartland common stock. Simultaneous with the close, Signature Bank merged into Heartland's wholly-owned Minnesota Bank & Trust subsidiary, and the combined entity operates under the Minnesota Bank & Trust brand name. The transaction included, at fair value, total assets of $427.1 million, including $324.5 million of gross loans held to maturity, and deposits of $357.3 million. On the closing date, Heartland provided Signature Bancshares, Inc. the funds necessary to repay outstanding subordinated debt of $5.9 million. The transaction was a tax-free reorganization with respect to the stock consideration received by the stockholders of Signature Bancshares, Inc.






NOTE 3: SECURITIES

The amortized cost, gross unrealized gains and losses, and estimated fair values of debt securities available for sale and equity securities with a readily determinable fair value that are carried at fair value as of March 31, 2019, and December 31, 2018, are summarized in the table below, in thousands:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
March 31, 2019
 
 
 
 
 
 
 
U.S. government corporations and agencies
$
26,873

 
$
10

 
$
(115
)
 
$
26,768

Mortgage and asset-backed securities
1,889,977

 
6,476

 
(25,055
)
 
1,871,398

Obligations of states and political subdivisions
481,452

 
6,146

 
(2,643
)
 
484,955

Total debt securities
2,398,302

 
12,632

 
(27,813
)
 
2,383,121

Equity securities with a readily determinable fair value
17,339

 

 

 
17,339

Total
$
2,415,641

 
$
12,632

 
$
(27,813
)
 
$
2,400,460

December 31, 2018
 
 
 
 
 
 
 
U.S. government corporations and agencies
$
32,075

 
$
3

 
$
(127
)
 
$
31,951

Mortgage and asset-backed securities
2,061,358

 
3,740

 
(38,400
)
 
2,026,698

Obligations of states and political subdivisions
382,101

 
919

 
(8,046
)
 
374,974

Total debt securities
2,475,534


4,662


(46,573
)

2,433,623

Equity securities with a readily determinable fair value
17,086

 

 

 
17,086

Total
$
2,492,620

 
$
4,662

 
$
(46,573
)
 
$
2,450,709


On January 1, 2019, Heartland adopted ASU 2017-12, and as a result of the adoption, $148.0 million of held to maturity debt securities were transferred to debt securities available for sale. The securities were transferred at book value on the date of the transfer.

The amortized cost, gross unrealized gains and losses and estimated fair values of held to maturity securities as of March 31, 2019, and December 31, 2018, are summarized in the table below, in thousands:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
March 31, 2019
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
88,089

 
$
7,151

 
$

 
$
95,240

Total
$
88,089

 
$
7,151

 
$

 
$
95,240

December 31, 2018
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
236,283

 
$
9,554

 
$
(496
)
 
$
245,341

Total
$
236,283

 
$
9,554

 
$
(496
)
 
$
245,341






The amortized cost and estimated fair value of investment securities carried at fair value at March 31, 2019, by contractual maturity, are as follows, in thousands. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.
 
March 31, 2019
 
Amortized Cost
 
Estimated Fair Value
Due in 1 year or less
$
29,138

 
$
29,100

Due in 1 to 5 years
51,367

 
50,972

Due in 5 to 10 years
123,062

 
123,289

Due after 10 years
304,758

 
308,362

Total debt securities
508,325

 
511,723

Mortgage and asset-backed securities
1,889,977

 
1,871,398

Equity securities with a readily determinable fair value
17,339

 
17,339

Total investment securities
$
2,415,641

 
$
2,400,460


The amortized cost and estimated fair value of debt securities held to maturity at March 31, 2019, by contractual maturity, are as follows, in thousands. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.
 
March 31, 2019
 
Amortized Cost
 
Estimated Fair Value
Due in 1 year or less
$
6

 
$
6

Due in 1 to 5 years
12,966

 
13,200

Due in 5 to 10 years
58,150

 
61,138

Due after 10 years
16,967

 
20,896

Total investment securities
$
88,089

 
$
95,240


As of March 31, 2019, and December 31, 2018, securities with a fair value of $455.6 million and $524.8 million, respectively, were pledged to secure public and trust deposits, short-term borrowings and for other purposes as required or permitted by law.

Gross gains and losses realized related to the sales of securities carried at fair value for the three-month periods ended March 31, 2019 and 2018, are summarized as follows, in thousands:
 
Three Months Ended
March 31,
 
2019
 
2018
Proceeds from sales
$
434,154

 
$
392,246

Gross security gains
2,408

 
3,013

Gross security losses
833

 
1,572


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 Heartland's securities portfolio as of March 31, 2019, and December 31, 2018. The investments were segregated into two categories: those that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 months or more. The reference point for determining how long an investment was in an unrealized loss position was March 31, 2018, and December 31, 2017, respectively. Securities for which Heartland has taken credit-related other-than-temporary impairment ("OTTI") write-downs are categorized as being "less than 12 months" or "12 months or longer" in a continuous loss position based on the point in time that the fair value declined to below the cost basis and not the period of time since the credit-related OTTI write-down.





Debt securities available for sale
Less than 12 months
 
12 months or longer
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
U.S. government corporations and agencies
$
18,742

 
$
(95
)
 
$
4,541

 
$
(20
)
 
$
23,283

 
$
(115
)
Mortgage and asset-backed securities
227,902

 
(2,075
)
 
926,176

 
(22,980
)
 
1,154,078

 
(25,055
)
Obligations of states and political subdivisions
26,161

 
(98
)
 
132,515

 
(2,545
)
 
158,676

 
(2,643
)
Total temporarily impaired securities
$
272,805

 
$
(2,268
)
 
$
1,063,232

 
$
(25,545
)
 
$
1,336,037

 
$
(27,813
)
December 31, 2018
U.S. government corporations and agencies
$
24,902

 
$
(83
)
 
$
4,577

 
$
(44
)
 
$
29,479

 
$
(127
)
Mortgage and asset-backed securities
733,826

 
(9,060
)
 
805,089

 
(29,340
)
 
1,538,915

 
(38,400
)
Obligations of states and political subdivisions
34,990

 
(390
)
 
258,143

 
(7,656
)
 
293,133

 
(8,046
)
Total temporarily impaired securities
$
793,718

 
$
(9,533
)
 
$
1,067,809

 
$
(37,040
)
 
$
1,861,527

 
$
(46,573
)

Securities held to maturity
Less than 12 months
 
12 months or longer
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$

 
$

 
$

 
$

 
$

 
$

Total temporarily impaired securities
$

 
$

 
$

 
$

 
$

 
$

December 31, 2018
Obligations of states and political subdivisions
$
10,802

 
$
(17
)
 
$
19,508

 
$
(479
)
 
$
30,310

 
$
(496
)
Total temporarily impaired securities
$
10,802

 
$
(17
)
 
$
19,508

 
$
(479
)
 
$
30,310

 
$
(496
)

Heartland reviews the investment securities portfolio on a quarterly basis to monitor its exposure to OTTI. A determination as to whether a security's decline in fair value is other-than-temporary takes into consideration numerous factors and the relative significance of any single factor can vary by security. Some factors Heartland may consider in the OTTI analysis include the length of time the security has been in an unrealized loss position, changes in security ratings, financial condition of the issuer, as well as security and industry specific economic conditions. In addition, with regard to debt securities, Heartland may also evaluate payment structure, whether there are defaulted payments or expected defaults, prepayment speeds and the value of any underlying collateral. For certain debt securities in unrealized loss positions, Heartland prepares cash flow analyses to compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security.

The remaining unrealized losses on Heartland's mortgage and asset-backed securities are the result of changes in market interest rates or widening of market spreads subsequent to the initial purchase of the securities. The losses are not related to concerns regarding the underlying credit of the issuers or the underlying collateral. It is expected that the securities will not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates or widening market spreads and not credit quality, and because Heartland has the intent and ability to hold these investments until a market price recovery or to maturity and does not believe it will be required to sell the securities before maturity, these investments are not considered other-than-temporarily impaired.

The remaining unrealized losses on Heartland's obligations of states and political subdivisions are the result of changes in market interest rates or widening of market spreads subsequent to the initial purchase of the securities. Management monitors the published credit ratings of these securities and the stability of the underlying municipalities. Because the decline in fair value is attributable to changes in interest rates or widening market spreads due to insurance company downgrades and not underlying credit quality, and because Heartland has the intent and ability to hold these investments until a market price recovery or to maturity and does not believe it will be required to sell the securities before maturity, these investments are not considered other-than-temporarily impaired.






There were no gross realized gains or losses on the sale of securities carried at fair value or held to maturity securities with OTTI write-downs for the three-month periods ended March 31, 2019, and March 31, 2018, respectively.

Other investments, at cost, include equity securities without a readily determinable fair value. Equity securities without a readily determinable fair value totaled $17.3 million and $17.1 million at March 31, 2019, and December 31, 2018, respectively. At March 31, 2019, and December 31, 2018, other investments at cost included shares of stock in the Federal Home Loan Banks (the "FHLBs") of Des Moines, Chicago, Dallas, San Francisco and Topeka at an amortized cost of $15.4 million and $16.6 million, respectively.

The Heartland banks are required by federal law to maintain FHLB stock as members of the various FHLBs. These equity securities are "restricted" in that they can only be sold back to the respective institutions from which they were acquired or another member institution at par. Therefore, the FHLB stock is less liquid than other marketable equity securities, and the fair value approximates amortized cost. Heartland considers its FHLB stock as a long-term investment that provides access to competitive products and liquidity. Heartland evaluates impairment in these investments based on the ultimate recoverability of the par value and, at March 31, 2019, did not consider the investments to be other than temporarily impaired.

NOTE 4: LOANS

Loans as of March 31, 2019, and December 31, 2018, were as follows, in thousands:
 
March 31, 2019
 
December 31, 2018
Loans receivable held to maturity:
 
 
 
Commercial
$
2,042,594

 
$
2,020,231

Commercial real estate
3,702,457

 
3,711,481

Agricultural and agricultural real estate
544,805

 
565,408

Residential real estate
630,433

 
673,603

Consumer
412,573

 
440,158

Gross loans receivable held to maturity
7,332,862

 
7,410,881

Unearned discount
(288
)
 
(1,624
)
Deferred loan fees
(1,030
)
 
(1,560
)
Total net loans receivable held to maturity
7,331,544

 
7,407,697

Allowance for loan losses
(62,639
)
 
(61,963
)
Loans receivable, net
$
7,268,905

 
$
7,345,734


Heartland has certain lending policies and procedures in place that are designed to provide for an acceptable level of credit risk. The board of directors reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management and the board with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming loans and potential problem loans.

Heartland originates commercial and 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. Agricultural loans provide financing for capital improvements and farm operations, as well as livestock and machinery purchases. Residential mortgage loans are originated for the construction, purchase or refinancing of single family residential properties. Consumer loans include loans for motor vehicles, home improvement, home equity and personal lines of credit.

Under Heartland’s credit practices, a loan is impaired when, based on current information and events, it is probable that Heartland will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loan impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except where more practical, impairment is measured at the observable market price of the loan or the fair value of the collateral if the loan is collateral dependent.






The following table shows the balance in the allowance for loan losses at March 31, 2019, and December 31, 2018, and the related loan balances, disaggregated on the basis of impairment methodology, in thousands. Loans evaluated under ASC 310-10-35 include loans on nonaccrual status and troubled debt restructurings, which are individually evaluated for impairment, and other impaired loans deemed to have similar risk characteristics. All other loans are collectively evaluated for impairment under ASC 450-20. Heartland has made no significant changes to the accounting for the allowance for loan losses during the quarter ended March 31, 2019.
 
Allowance For
Loan Losses
 
Gross Loans Receivable
Held to Maturity
 
Ending Balance
Under ASC
310-10-35
 
Ending Balance
Under ASC
450-20
 
Total
 
Ending Balance Evaluated for Impairment
Under ASC
310-10-35
 
Ending Balance Evaluated for Impairment
Under ASC
450-20
 
 Total
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
6,301

 
$
17,520

 
$
23,821

 
$
24,498

 
$
2,018,096

 
$
2,042,594

Commercial real estate
353

 
26,434

 
26,787

 
18,150

 
3,684,307

 
3,702,457

Agricultural and agricultural real estate
1,099

 
4,499

 
5,598

 
20,475

 
524,330

 
544,805

Residential real estate
153

 
1,452

 
1,605

 
18,619

 
611,814

 
630,433

Consumer
653

 
4,175

 
4,828

 
5,826

 
406,747

 
412,573

Total
$
8,559

 
$
54,080

 
$
62,639

 
$
87,568

 
$
7,245,294

 
$
7,332,862

December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
5,733

 
$
18,772

 
$
24,505

 
$
24,202

 
$
1,996,029

 
$
2,020,231

Commercial real estate
218

 
25,320

 
25,538

 
14,388

 
3,697,093

 
3,711,481

Agricultural and agricultural real estate
686

 
4,267

 
4,953

 
15,951

 
549,457

 
565,408

Residential real estate
168

 
1,617

 
1,785

 
20,251

 
653,352

 
673,603

Consumer
749

 
4,433

 
5,182

 
7,004

 
433,154

 
440,158

Total
$
7,554

 
$
54,409

 
$
61,963

 
$
81,796

 
$
7,329,085

 
$
7,410,881


The following table presents nonaccrual loans, accruing loans past due 90 days or more and performing troubled debt restructured loans at March 31, 2019, and December 31, 2018, in thousands:
 
March 31, 2019
 
December 31, 2018
Nonaccrual loans
$
72,670

 
$
67,833

Nonaccrual troubled debt restructured loans
4,624

 
4,110

Total nonaccrual loans
$
77,294

 
$
71,943

Accruing loans past due 90 days or more
$
1,706

 
$
726

Performing troubled debt restructured loans
$
3,460

 
$
4,026







The following tables provide information on troubled debt restructured loans that were modified during the three-month periods ended March 31, 2019, and March 31, 2018, dollars in thousands:
 
Three Months Ended
March 31,
 
2019
 
2018
 
Number
of Loans
 
Pre-
Modification
Recorded
Investment
 
Post-
Modification
Recorded
Investment
 
Number
of Loans
 
Pre-
Modification
Recorded
Investment
 
Post-
Modification
Recorded
Investment
Commercial

 
$

 
$

 

 
$

 
$

Commercial real estate

 

 

 

 

 

Total commercial and commercial real estate

 

 

 

 

 

Agricultural and agricultural real estate

 

 

 

 

 

Residential real estate
1

 
36

 
42

 
5

 
877

 
752

Consumer

 

 

 

 

 

Total
1

 
$
36

 
$
42

 
5

 
$
877

 
$
752


The pre-modification and post-modification recorded investment represents amounts as of the date of loan modification. The difference between the pre-modification investment and post-modification investment amounts on Heartland's residential real estate trouble debt restructured loans for the three-months ended March 31, 2019, is due to principal deferment collected from government guarantees and capitalized interest and escrow. At March 31, 2019, there were no commitments to extend credit to any of the borrowers with an existing troubled debt restructured loan.

The following table shows troubled debt restructured loans for which there was a payment default during the three month periods ended March 31, 2019, and March 31, 2018, that had been modified during the twelve-month period prior to default, in thousands:
 
With Payment Defaults During the
Three Months Ended
March 31,
 
2019
 
2018
 
Number of Loans
 
Recorded Investment
 
Number of Loans
 
Recorded Investment
Commercial

 
$




$

Commercial real estate

 





  Total commercial and commercial real estate

 

 

 

Agricultural and agricultural real estate

 





Residential real estate
1

 
42


3


519

Consumer

 





  Total
1

 
$
42

 
3

 
$
519


Heartland's internal rating system is a series of grades reflecting management's risk assessment, based on its analysis of the borrower's financial condition. The "pass" category consists of all loans that are not in the "nonpass" category, 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 special mention, substandard, doubtful and loss loans. The "special mention" 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 paying capacity of the borrower and that may be further at risk due to deterioration in the value of collateral pledged. Well-defined weaknesses jeopardize liquidation of the debt. These loans are still considered collectible; however, a distinct possibility exists that Heartland will sustain some loss if deficiencies are not corrected. Substandard loans may exhibit some or all of the following weaknesses: deteriorating financial trends, lack of earnings, inadequate debt service capacity, excessive debt and/or lack of liquidity. The "doubtful" rating is assigned to loans where identified weaknesses in the borrowers' ability to repay the loan make collection or liquidation in full, on the basis of existing facts, conditions and values, highly questionable and improbable. These borrowers are usually in default, lack liquidity and capital, as well as





resources necessary to remain as an operating entity. Specific pending events, such as capital injections, liquidations or perfection of liens on additional collateral, may strengthen the credit, thus deferring the rating of the loan as "loss" until the exact status of the loan can be determined. The loss rating is assigned to loans considered uncollectible. Heartland had no loans classified as loss or doubtful as of March 31, 2019. Loans are placed on "nonaccrual" when management does not expect to collect payments of principal and interest in full or when principal or interest has been in default for a period of 90 days or more, unless the loan is both well secured and in the process of collection.

The following table presents loans by credit quality indicator at March 31, 2019, and December 31, 2018, in thousands:
 
Pass
 
Nonpass
 
Total
March 31, 2019
 
 
 
 
 
Commercial
$
1,907,620

 
$
134,974

 
$
2,042,594

Commercial real estate
3,510,161

 
192,296

 
3,702,457

  Total commercial and commercial real estate
5,417,781

 
327,270

 
5,745,051

Agricultural and agricultural real estate
440,927

 
103,878

 
544,805

Residential real estate
603,647

 
26,786

 
630,433

Consumer
398,695

 
13,878

 
412,573

  Total gross loans receivable held to maturity
$
6,861,050

 
$
471,812

 
$
7,332,862

December 31, 2018
 
 
 
 
 
Commercial
$
1,880,579

 
$
139,652

 
$
2,020,231

Commercial real estate
3,524,344

 
187,137

 
3,711,481

  Total commercial and commercial real estate
5,404,923

 
326,789

 
5,731,712

Agricultural and agricultural real estate
471,642

 
93,766

 
565,408

Residential real estate
645,478

 
28,125

 
673,603

Consumer
425,451

 
14,707

 
440,158

  Total gross loans receivable held to maturity
$
6,947,494

 
$
463,387

 
$
7,410,881

The nonpass category in the table above is comprised of approximately 48% special mention loans and 52% substandard loans as of March 31, 2019. The percent of nonpass loans on nonaccrual status as of March 31, 2019, was 16%. As of December 31, 2018, the nonpass category in the table above was comprised of approximately 52% special mention loans and 48% substandard loans. The percent of nonpass loans on nonaccrual status as of December 31, 2018, was 16%. Loans delinquent 30 to 89 days as a percent of total loans were 0.47% at March 31, 2019, compared to 0.21% at December 31, 2018. Changes in credit risk are monitored on a continuous basis and changes in risk ratings are made when identified. All impaired loans are reviewed at least annually.

As of March 31, 2019, Heartland had $2.8 million of loans secured by residential real estate property that were in the process of foreclosure.

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Heartland’s policy is to discontinue the accrual of interest income on any loan when, in the opinion of management, there is a reasonable doubt as to the timely collection of the interest and principal, normally when a loan is 90 days past due. When interest accruals are deemed uncollectible, interest credited to income in the current year is reversed and interest accrued in prior years is charged to the allowance for loan 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) that there is a sustained period of repayment performance (generally a minimum of six months) by the borrower in accordance with the scheduled contractual terms.







The following table sets forth information regarding Heartland's accruing and nonaccrual loans at March 31, 2019, and December 31, 2018, in thousands:
 
Accruing Loans
 
 
 
 
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days or
More
Past Due
 
Total
Past Due
 
Current
 
Nonaccrual
 
Total Loans
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
8,253

 
$
2,859

 
$
325

 
$
11,437

 
$
2,006,358

 
$
24,799

 
$
2,042,594

Commercial real estate
5,870

 
4,942

 
1,264

 
12,076

 
3,674,676

 
15,705

 
3,702,457

Total commercial and commercial real estate
14,123

 
7,801

 
1,589

 
23,513

 
5,681,034

 
40,504

 
5,745,051

Agricultural and agricultural real estate
2,179

 
800

 
31

 
3,010

 
521,621

 
20,174

 
544,805

Residential real estate
4,224

 
110

 

 
4,334

 
613,667

 
12,432

 
630,433

Consumer
4,835

 
536

 
86

 
5,457

 
402,932

 
4,184

 
412,573

Total gross loans receivable held to maturity
$
25,361

 
$
9,247

 
$
1,706

 
$
36,314

 
$
7,219,254

 
$
77,294

 
$
7,332,862

December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
2,574

 
$
205

 
$

 
$
2,779

 
$
1,991,525

 
$
25,927

 
$
2,020,231

Commercial real estate
4,819

 

 
726

 
5,545

 
3,694,259

 
11,677

 
3,711,481

Total commercial and commercial real estate
7,393

 
205

 
726

 
8,324

 
5,685,784

 
37,604

 
5,731,712

Agricultural and agricultural real estate
99

 

 

 
99

 
549,376

 
15,933

 
565,408

Residential real estate
5,147

 
49

 

 
5,196

 
655,329

 
13,078

 
673,603

Consumer
2,724

 
307

 

 
3,031

 
431,799

 
5,328

 
440,158

Total gross loans receivable held to maturity
$
15,363

 
$
561

 
$
726

 
$
16,650

 
$
7,322,288

 
$
71,943

 
$
7,410,881







The majority of Heartland's impaired loans are those that are nonaccrual, are past due 90 days or more and still accruing or have had their terms restructured in a troubled debt restructuring. The following tables present the unpaid principal balance that was contractually due at March 31, 2019, and December 31, 2018, the outstanding loan balance recorded on the consolidated balance sheets at March 31, 2019, and December 31, 2018, any related allowance recorded for those loans as of March 31, 2019, and December 31, 2018, the average outstanding loan balances recorded on the consolidated balance sheets during the three months ended March 31, 2019, and year ended December 31, 2018, and the interest income recognized on the impaired loans during the three-month period ended March 31, 2019, and year ended December 31, 2018, in thousands:
 
Unpaid
Principal
Balance
 
Loan
Balance
 
Related
Allowance
Recorded
 
Year-
to-
Date
Avg.
Loan
Balance
 
Year-
to-
Date
Interest
Income
Recognized
March 31, 2019
 
 
 
 
 
 
 
 
 
Impaired loans with a related allowance:
 
 
 
 
 
 
 
 
 
Commercial
$
12,107

 
$
12,096

 
$
6,301

 
$
12,046

 
$
7

Commercial real estate
1,421

 
1,421

 
353

 
1,201

 
6

Total commercial and commercial real estate
13,528

 
13,517

 
6,654

 
13,247

 
13

Agricultural and agricultural real estate
3,280

 
3,280

 
1,099

 
2,225

 
1

Residential real estate
1,253

 
1,253

 
153

 
1,012

 

Consumer
1,272

 
1,270

 
653

 
1,275

 
6

Total loans held to maturity
$
19,333

 
$
19,320

 
$
8,559

 
$
17,759

 
$
20

Impaired loans without a related allowance:
 
 
 
 
 
 
 
 
 
Commercial
$
14,467

 
$
12,402

 
$

 
$
11,928

 
$
330

Commercial real estate
16,809

 
16,729

 

 
14,008

 
54

Total commercial and commercial real estate
31,276

 
29,131

 

 
25,936

 
384

Agricultural and agricultural real estate
19,538

 
17,195

 

 
14,373

 
16

Residential real estate
17,370

 
17,366

 

 
17,933

 
76

Consumer
4,620

 
4,556

 

 
4,820

 
25

Total loans held to maturity
$
72,804

 
$
68,248

 
$

 
$
63,062

 
$
501

Total impaired loans held to maturity:
 
 
 
 
 
 
 
 
 
Commercial
$
26,574

 
$
24,498

 
$
6,301

 
$
23,974

 
$
337

Commercial real estate
18,230

 
18,150

 
353

 
15,209

 
60

Total commercial and commercial real estate
44,804