Heartland Financial USA(HTLF) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents Heartland Financial USA, Inc.'s unaudited consolidated financial statements for the quarter ended March 31, 2023, including the balance sheets, statements of income, comprehensive income, cash flows, and changes in equity, along with accompanying notes. The financial information is prepared in accordance with U.S. GAAP for interim reporting and reflects all necessary adjustments for a fair presentation - Financial statements are unaudited and prepared in accordance with U.S. GAAP for interim financial reporting, reflecting all necessary adjustments for fair presentation[17] - During Q1 2023, HTLF reclassified swap and loan syndication income to 'capital markets fees' from 'other noninterest income' on the consolidated statements of income, with prior periods adjusted accordingly[18] Consolidated Balance Sheets The consolidated balance sheets show a slight decrease in total assets and liabilities from December 31, 2022, to March 31, 2023, while total stockholders' equity increased. Key changes include a shift in deposit composition with a significant increase in time deposits and a decrease in demand and savings deposits | Metric (in thousands) | March 31, 2023 | December 31, 2022 | Change (QoQ) | % Change (QoQ) | | :-------------------- | :------------- | :---------------- | :----------- | :------------- | | Assets: | | | | | | Cash and cash equivalents | $362,111 | $363,087 | $(976) | (0.27)% | | Securities carried at fair value | $6,096,657 | $6,147,144 | $(50,487) | (0.82)% | | Loans receivable, net | $11,382,646 | $11,318,869 | $63,777 | 0.56% | | Total Assets | $20,182,544 | $20,244,228 | $(61,684) | (0.30)% | | Liabilities: | | | | | | Demand Deposits | $5,119,554 | $5,701,340 | $(581,786) | (10.20)% | | Savings Deposits | $9,256,609 | $9,994,391 | $(737,782) | (7.38)% | | Time Deposits | $3,305,183 | $1,817,278 | $1,487,905 | 81.87% | | Total Deposits | $17,681,346 | $17,513,009 | $168,337 | 0.96% | | Short-term borrowings | $92,337 | $376,117 | $(283,780) | (75.45)% | | Total Liabilities | $18,353,139 | $18,509,173 | $(156,034) | (0.84)% | | Equity: | | | | | | Total Stockholders' Equity | $1,829,405 | $1,735,055 | $94,350 | 5.44% | Consolidated Statements of Income The consolidated statements of income show a significant increase in net interest income and net income available to common stockholders for the three months ended March 31, 2023, compared to the same period in 2022, driven by higher interest income on loans and securities, despite a substantial rise in interest expense | Metric (in thousands, except per share) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (YoY) | % Change (YoY) | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :----------- | :------------- | | Interest and fees on loans | $153,843 | $102,369 | $51,474 | 50.28% | | Interest on securities | $62,004 | $38,822 | $23,182 | 59.71% | | Total Interest Income | $216,978 | $141,262 | $75,716 | 53.60% | | Total Interest Expense | $64,766 | $6,583 | $58,183 | 883.85% | | Net Interest Income | $152,212 | $134,679 | $17,533 | 13.02% | | Provision for credit losses | $3,074 | $3,245 | $(171) | (5.27)% | | Total Noninterest Income | $29,999 | $34,569 | $(4,570) | (13.22)% | | Total Noninterest Expenses | $111,043 | $110,797 | $246 | 0.22% | | Net Income | $52,776 | $43,089 | $9,687 | 22.48% | | Net Income Available to Common Stockholders | $50,763 | $41,076 | $9,687 | 23.58% | | Earnings Per Common Share - Basic | $1.19 | $0.97 | $0.22 | 22.68% | | Earnings Per Common Share - Diluted | $1.19 | $0.97 | $0.22 | 22.68% | | Cash Dividends Declared Per Common Share | $0.30 | $0.27 | $0.03 | 11.11% | Consolidated Statements of Comprehensive Income The consolidated statements of comprehensive income show a significant positive shift from a comprehensive loss in Q1 2022 to a comprehensive income in Q1 2023, primarily due to a substantial net change in unrealized gains on available-for-sale securities | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (YoY) | | :-------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Net Income | $52,776 | $43,089 | $9,687 | | Net change in unrealized gain (loss) on securities | $66,167 | $(378,690) | $444,857 | | Other comprehensive income (loss) | $53,087 | $(281,169) | $334,256 | | Total Comprehensive Income (Loss) | $105,863 | $(238,080) | $343,943 | Consolidated Statements of Cash Flows The consolidated statements of cash flows indicate a decrease in net cash provided by operating activities but a significant positive swing in investing activities from net cash used to net cash provided. Financing activities shifted from providing cash to using cash, primarily due to changes in deposit types and short-term borrowings | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (YoY) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Net Cash Provided by Operating Activities | $74,432 | $83,779 | $(9,347) | | Net Cash Provided (Used) by Investing Activities | $54,576 | $(126,447) | $181,023 | | Net Cash (Used) Provided by Financing Activities | $(129,984) | $211,971 | $(341,955) | | Net (Decrease) Increase in Cash and Cash Equivalents | $(976) | $169,303 | $(170,279) | | Cash and Cash Equivalents at End of Period | $362,111 | $604,902 | $(242,791) | Consolidated Statements of Changes in Equity The consolidated statements of changes in equity show an increase in total equity from January 1, 2023, to March 31, 2023, primarily driven by comprehensive income, despite common and preferred dividends declared | Metric (in thousands) | Balance at January 1, 2023 | Balance at March 31, 2023 | Change (QoQ) | | :-------------------- | :------------------------- | :------------------------ | :----------- | | Preferred Stock | $110,705 | $110,705 | $0 | | Common Stock | $42,467 | $42,559 | $92 | | Capital Surplus | $1,080,964 | $1,084,112 | $3,148 | | Retained Earnings | $1,120,925 | $1,158,948 | $38,023 | | Accumulated Other Comprehensive Loss | $(620,006) | $(566,919) | $53,087 | | Total Equity | $1,735,055 | $1,829,405 | $94,350 | Notes to Consolidated Financial Statements The notes provide detailed disclosures on the basis of presentation, significant accounting policies, and specific financial statement line items, including securities, loans, allowance for credit losses, goodwill, intangible assets, derivative instruments, fair value measurements, and stock compensation. They also cover recent accounting standard adoptions and subsequent events Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on HTLF's financial performance and condition for the first quarter of 2023, highlighting key operational results, responses to banking industry disruptions, strategic initiatives like charter consolidation, and detailed analysis of net interest income, noninterest income/expenses, credit quality, and capital adequacy - HTLF is a bank holding company operating under the brand name 'HTLF' with independently branded banks serving communities across 12 states[135] - HTLF's operations primarily depend on net interest income, supplemented by noninterest income from various financial services[136] - In response to Q1 2023 banking disruptions, HTLF proactively engaged large depositors, increased deposit pricing, strategically increased wholesale deposits, and enhanced liquidity access through Federal Reserve and FHLB systems[137] SAFE HARBOR STATEMENT This statement cautions readers that the report contains forward-looking statements regarding HTLF's future performance, which are subject to inherent uncertainties and risks. It advises against undue reliance on these statements and disclaims any obligation to update them - The report contains forward-looking statements identifiable by words like 'believe,' 'expect,' 'anticipate,' and 'plan,' which are based on management's beliefs and expectations[130] - Actual results may differ materially from forward-looking statements due to various risks, many beyond management's control, including economic, credit, liquidity, operational, strategic, legal, and stock ownership risks[130][133] - HTLF does not undertake any obligation to publicly update or revise any forward-looking statements[131] CRITICAL ACCOUNTING ESTIMATES This section reiterates that financial statement preparation involves significant management estimates and judgments, particularly for asset and liability carrying values. It confirms no significant changes in critical accounting estimates or assumptions since December 31, 2022 - Financial statements require management estimates and judgments, which are based on historical experience and reasonable assumptions[132] - No significant changes in critical accounting estimates or the assumptions and judgments used since December 31, 2022[134] OVERVIEW HTLF operates as a bank holding company with six banks under 11 local brands across 12 states, focusing on commercial business supported by retail operations and diversified financial services. Its profitability is primarily driven by net interest income and noninterest income, offset by operating expenses and provision for credit losses - HTLF operates six banks under 11 local brands across Arizona, California, Colorado, Illinois, Iowa, Kansas, Minnesota, Missouri, Montana, New Mexico, Texas, and Wisconsin, with 119 locations as of March 31, 2023[135] - HTLF's core business is commercial, supported by retail operations, offering diversified financial services including treasury management, commercial credit cards, wealth management, investments, and residential mortgages[135] - Results of operations depend primarily on net interest income (interest income minus interest expense) and noninterest income (service charges, loan servicing, trust fees, etc.), offset by provision for credit losses and various noninterest expenses[136] HTLF Response to Recent Banking Industry Disruptions In response to Q1 2023 banking industry disruptions, HTLF implemented several measures to manage liquidity and deposit stability. These included proactive engagement with large depositors, adjusting deposit pricing, increasing wholesale deposits, and expanding access to borrowing capacity through federal programs - Proactively reached out to over 1,000 large depositors to facilitate additional FDIC insurance through Insured Cash Sweep (ICS) and Certificate of Deposit Registry Service (CDARS) products[137] - Increased deposit pricing to address the competitive deposit environment and strategically increased wholesale deposits to reduce short-term borrowings[137] - Increased access to liquidity sources through the Federal Reserve and FHLB system by $1.68 billion, with total borrowing capacity of $2.76 billion as of March 31, 2023, of which no balance was drawn[137] - Retail deposit campaign resulted in over 8,000 new consumer accounts opened[137] - As of March 31, 2023, 35% of HTLF's deposits were uninsured and uncollateralized[137] - HTLF's capital ratios substantially exceeded well-capitalized thresholds, and management believes they would withstand regulatory changes requiring inclusion of unrealized losses[137] - Subsequent to March 31, 2023, HTLF repositioned hedges and entered new swaps totaling approximately $1.34 billion to protect against unrealized securities losses from higher mid-to-long term interest rates[137] Overview of First Quarter 2023 Results HTLF reported strong financial performance in Q1 2023 compared to Q1 2022, with significant increases in net income, EPS, and net interest income. Asset and deposit bases grew modestly, while capital ratios remained strong, exceeding well-capitalized thresholds | Metric | Q1 2023 | Q1 2022 | Change (YoY) | % Change (YoY) | | :------------------------------------ | :------ | :------ | :----------- | :------------- | | Net income available to common stockholders | $50.8M | $41.1M | $9.7M | 24% | | Earnings per diluted common share | $1.19 | $0.97 | $0.22 | 23% | | Net interest income | $152.2M | $134.7M | $17.5M | 13% | | Return on average assets | 1.06% | 0.91% | 0.15 pp | 16.48% | | Return on average common equity | 12.43% | 8.32% | 4.11 pp | 49.40% | | Return on average tangible common equity (non-GAAP) | 20.05% | 12.41% | 7.64 pp | 61.56% | | Net interest margin (GAAP) | 3.36% | 3.08% | 0.28 pp | 9.09% | | Net interest margin, fully tax-equivalent (non-GAAP) | 3.40% | 3.12% | 0.28 pp | 8.97% | | Efficiency ratio (GAAP) | 60.94% | 65.46% | (4.52) pp | (6.91)% | | Adjusted efficiency ratio, fully tax-equivalent (non-GAAP) | 57.16% | 64.65% | (7.49) pp | (11.59)% | - Total assets decreased slightly by less than 1% to $20.18 billion at March 31, 2023, from $20.24 billion at December 31, 2022[143] - Total loans held to maturity increased by 1% to $11.50 billion at March 31, 2023, from $11.43 billion at December 31, 2022[143] - Total deposits increased by 1% to $17.68 billion at March 31, 2023, from $17.51 billion at December 31, 2022[144] - Total equity increased to $1.83 billion at March 31, 2023, from $1.74 billion at December 31, 2022, with book value per common share rising to $40.38 from $38.25[145] - Unrealized loss on available-for-sale securities, net of taxes, improved to $568.2 million at March 31, 2023, from $619.2 million at December 31, 2022[145] 2023 Developments HTLF initiated strategic developments in Q1 2023, including the sale of its mortgage servicing rights portfolio and an agreement to sell its Retirement Plan Services business. A post-quarter overdraft event with a single customer resulted in a potential credit exposure of $5.3-$7.0 million - Dubuque Bank & Trust (HTLF subsidiary) agreed to sell and transfer its Retirement Plan Services business to July Business Services, expected to complete in Q2 2023[147] - First Bank & Trust (HTLF subsidiary) sold its mortgage servicing rights portfolio, comprising approximately 4,500 loans with an unpaid principal balance of $698.5 million, on March 31, 2023[148] - Subsequent to Q1 2023, one bank experienced a $5.3 million overdraft from a single long-term customer, with a potential credit exposure range of $5.3-$7.0 million[149] Charter Consolidation Update HTLF continued its charter consolidation project in Q1 2023, with Wisconsin Bank & Trust and Bank of Blue Valley consolidating into HTLF Bank. This initiative aims to eliminate redundancies, improve operating efficiency, and is projected to generate approximately $20 million in annual benefits upon completion by the end of 2023 - Wisconsin Bank & Trust was consolidated into HTLF Bank during Q1 2023; Bank of Blue Valley was consolidated subsequent to March 31, 2023[151] - Seven charters are now operating as divisions of HTLF Bank, with the remaining four expected to consolidate by the end of 2023[151][196] - Consolidation restructuring costs are projected at $19-$20 million, with $8-$9 million remaining in 2023. Total costs incurred through March 31, 2023, were $11.0 million, with $1.7 million in Q1 2023[152][197] - The project is designed to eliminate redundancies, improve operating efficiency, and is projected to generate approximately $20 million annually in benefits upon completion[152][197] FINANCIAL HIGHLIGHTS HTLF's financial highlights for Q1 2023 show improved profitability metrics, including higher net income and returns on equity, alongside a stronger tangible common equity ratio. Total assets and deposits remained relatively stable, while the allowance for credit losses increased | Metric (in thousands, except per share) | March 31, 2023 | December 31, 2022 | September 30, 2022 | June 30, 2022 | March 31, 2022 | | :------------------------------------ | :------------- | :---------------- | :----------------- | :------------ | :------------- | | Statement of Income Data (QoQ): | | | | | | | Net income available to common stockholders | $50,763 | N/A | N/A | N/A | $41,076 | | Key Performance Ratios (QoQ): | | | | | | | Annualized return on average assets | 1.06% | N/A | N/A | N/A | 0.91% | | Annualized return on average common equity (GAAP) | 12.43% | N/A | N/A | N/A | 8.32% | | Annualized net interest margin (GAAP) | 3.36% | N/A | N/A | N/A | 3.08% | | Efficiency ratio (GAAP) | 60.94% | N/A | N/A | N/A | 65.46% | | Balance Sheet Data (Period End): | | | | | | | Investments | $7,001,119 | $7,051,114 | $6,970,864 | $7,274,056 | $7,189,779 | | Loans receivable held to maturity | $11,495,353 | $11,428,352 | $10,923,532 | $10,678,218 | $10,177,385 | | Allowance for credit losses | $112,707 | $109,483 | $105,715 | $101,353 | $100,522 | | Total assets | $20,182,544 | $20,244,228 | $19,682,950 | $19,658,399 | $19,230,879 | | Total deposits | $17,681,346 | $17,513,009 | $17,267,121 | $17,225,550 | $16,666,684 | | Common equity | $1,718,700 | $1,624,350 | $1,545,253 | $1,663,363 | $1,821,152 | | Common Share Data (Period End): | | | | | | | Book value per common share (GAAP) | $40.38 | $38.25 | $36.41 | $39.19 | $42.98 | | Tangible book value per common share (non-GAAP) | $26.30 | $24.09 | $22.20 | $24.94 | $28.66 | | Tangible common equity ratio (non-GAAP) | 5.72% | 5.21% | 4.94% | 5.56% | 6.52% | | Adjusted tangible common equity ratio (non-GAAP) | 8.61% | 8.37% | 8.35% | 8.11% | 8.06% | Non-GAAP Reconciliations This section provides reconciliations of non-GAAP financial measures to their most directly comparable GAAP measures, including tangible book value per common share, tangible common equity ratio, adjusted tangible common equity ratio, annualized return on average tangible common equity, annualized net interest margin (fully tax-equivalent), adjusted efficiency ratio (fully tax-equivalent), and annualized ratio of core expenses to average assets. These non-GAAP measures are used by management to analyze and evaluate financial condition and operating results, enhancing comparability and excluding specific items - Non-GAAP measures are used to analyze and evaluate HTLF's financial condition and operating results, despite inherent limitations[160] - Key non-GAAP measures include annualized net interest margin (fully tax-equivalent), adjusted efficiency ratio (fully tax equivalent), tangible book value per common share, tangible common equity ratio, and adjusted tangible common equity ratio[161] - The adjusted tangible common equity ratio, which excludes accumulated other comprehensive loss, increased to 8.61% at March 31, 2023, from 8.37% at December 31, 2022[157] RESULTS OF OPERATIONS HTLF's results of operations for Q1 2023 were characterized by a significant increase in net interest income due to higher interest rates and earning asset growth, partially offset by increased interest expense. Noninterest income decreased, while noninterest expenses remained relatively stable, leading to improved profitability and efficiency ratios Net Interest Margin and Net Interest Income Net interest income increased by 13% year-over-year, driven by a 54% rise in total interest income from higher average earning assets and yields, despite an 884% surge in total interest expense due to increased rates on interest-bearing liabilities. The net interest margin improved to 3.36% (3.40% FTE) in Q1 2023 from 3.08% (3.12% FTE) in Q1 2022 - Net interest income increased by $17.5 million (13%) to $152.2 million in Q1 2023 compared to $134.7 million in Q1 2022[167] - Total interest income rose by $75.7 million (54%) to $217.0 million, primarily due to a 4% increase in average earning assets and a 156 basis point increase in the average rate on earning assets to 4.83%[167] - Total interest expense surged by $58.2 million from $6.6 million to $64.8 million, driven by a 183 basis point increase in the average interest rate paid on interest-bearing liabilities to 2.09%[167] - Net interest margin (GAAP) improved to 3.36% in Q1 2023 from 3.08% in Q1 2022; on a fully tax-equivalent basis (non-GAAP), it increased to 3.40% from 3.12%[164] - Average interest-bearing deposits increased by $2.03 billion (20%) to $11.99 billion, including a $1.04 billion increase in wholesale deposits[167] Provision For Credit Losses The provision for credit losses for loans decreased by 17% year-over-year to $2.2 million in Q1 2023, influenced by specific individually assessed loans, a shift to net recoveries from net charge-offs, and a macroeconomic outlook anticipating a moderate recession. The total provision for credit losses was $3.1 million | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (YoY) | % Change (YoY) | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :----------- | :------------- | | Provision expense for credit losses-loans | $2,184 | $2,628 | $(444) | (16.89)% | | Provision expense for credit losses-unfunded commitments | $890 | $617 | $273 | 44.25% | | Total provision expense | $3,074 | $3,245 | $(171) | (5.27)% | - Provision expense for individually assessed loans totaled $2.5 million in Q1 2023[176] - Q1 2022 provision was negatively impacted by $9.2 million in charge-offs related to two lending relationships with collateral deficiencies due to customer fraud[176] - Net recoveries of $1.0 million in Q1 2023 compared to net charge-offs of $12.2 million in Q1 2022[176] - The macroeconomic outlook used in Q1 2023 anticipated a moderate recession within the next twelve months, compared to an improved outlook in Q1 2022[176] Noninterest Income Total noninterest income decreased by 13% year-over-year to $30.0 million in Q1 2023, primarily due to lower net gains on sale of loans held for sale, net security losses, and the absence of a valuation adjustment on servicing rights. This was partially offset by increases in service charges and fees, loan servicing income, and income on bank-owned life insurance | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (YoY) | % Change (YoY) | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :----------- | :------------- | | 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% | | Net gains on sale of loans held for sale | $1,831 | $3,411 | $(1,580) | (46)% | | Valuation adjustment on servicing rights | $0 | $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)% | Service Charges and Fees Service charges and fees increased by 12% year-over-year to $17.1 million in Q1 2023, primarily driven by a larger customer base for deposit accounts and increased commercial credit card utilization | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (YoY) | % Change (YoY) | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :----------- | :------------- | | Service charges and fees on deposit accounts | $4,911 | $4,395 | $516 | 12% | | Overdraft fees | $2,969 | $2,825 | $144 | 5% | | 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% | - Increase in service charges and fees on deposit accounts was due to a larger customer base[180] - Increase in credit card fee income was due to a larger commercial credit card customer base and increased utilization[180] Loan Servicing Income Loan servicing income significantly increased by 150% year-over-year to $714,000 in Q1 2023, primarily driven by a 100% increase in commercial and agricultural loan servicing fees and a 48% decrease in mortgage servicing rights amortization | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (YoY) | % Change (YoY) | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :----------- | :------------- | | Commercial and agricultural loan servicing fees | $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% | Securities Losses/Gains, Net HTLF recorded net security losses of $1.1 million in Q1 2023, a significant decrease of $4.0 million compared to net gains of $2.9 million in Q1 2022 | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (YoY) | | :-------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Net security losses (gains) | $(1,104) | $2,872 | $(3,976) | Net Gains on Sale of Loans Held for Sale Net gains on sale of loans held for sale decreased by 46% year-over-year to $1.8 million in Q1 2023, primarily due to a 61% reduction in residential mortgage loan sales to investors | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (YoY) | % Change (YoY) | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :----------- | :------------- | | Net gains on sale of loans held for sale | $1,831 | $3,411 | $(1,580) | (46)% | | Loans sold to investors | $38,100 | $98,300 | $(60,200) | (61)% | - The decrease in net gains was primarily attributable to a reduction in residential mortgage activity due to recent increases in residential mortgage loan interest rates[185] Valuation Adjustment on Servicing Rights No valuation adjustment on servicing rights was recorded in Q1 2023, compared to a $1.7 million adjustment in Q1 2022, as HTLF sold its mortgage servicing rights portfolio in Q1 2023 | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (YoY) | | :-------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Valuation adjustment on servicing rights | $0 | $1,658 | $(1,658) | - HTLF sold its mortgage servicing rights portfolio in Q1 2023, resulting in no valuation adjustment[186] - The valuation allowance was recovered in Q1 2022 due to increases in residential mortgage loan interest rates[186] Noninterest Expenses Total noninterest expenses remained relatively stable, increasing by less than 1% year-over-year to $111.0 million in Q1 2023. This was driven by higher professional fees (due to FDIC assessments), losses on asset sales/valuations, and acquisition/restructuring costs, largely offset by decreases in salaries and employee benefits, occupancy, and furniture and equipment expenses | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (YoY) | % Change (YoY) | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :----------- | :------------- | | 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% | | Advertising | $1,985 | $1,555 | $430 | 28% | | Core deposit and customer relationship intangibles amortization | $1,788 | $2,054 | $(266) | (13)% | | Loss on sales/valuations of assets, net | $1,115 | $46 | $1,069 | 2324% | | 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 | 0% | Salaries and Employee Benefits Salaries and employee benefits decreased by 6% year-over-year to $62.1 million in Q1 2023, primarily due to a reduction of 217 full-time equivalent employees and lower incentive compensation expense | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (YoY) | % Change (YoY) | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :----------- | :------------- | | Salaries and employee benefits | $62,149 | $66,174 | $(4,025) | (6)% | | Full-time equivalent employees | 1,991 | 2,208 | (217) | (10)% | Occupancy Occupancy expense decreased by 2% year-over-year to $7.2 million in Q1 2023, primarily due to a reduced number of branch locations as part of HTLF's branch optimization strategy | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (YoY) | % Change (YoY) | | :-------------------- | :-------------------------------- | :-------------------------------- | :----------- | :------------- | | Occupancy expense | $7,209 | $7,362 | $(153) | (2)% | | Number of branches | 119 | 130 | (11) | (8.46)% | Furniture and Equipment Furniture and equipment expense decreased by 17% year-over-year to $2.9 million in Q1 2023, also attributed to the branch optimization strategy and fewer branch locations | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (YoY) | % Change (YoY) | | :-------------------- | :-------------------------------- | :-------------------------------- | :----------- | :------------- | | Furniture and equipment expense | $2,915 | $3,519 | $(604) | (17)% | - Decreases in occupancy and furniture/equipment expenses are primarily attributable to the decreased number of branch locations as a result of HTLF's branch optimization strategy[191] Professional Fees Professional fees increased by 6% year-over-year to $16.1 million in Q1 2023, primarily due to a $1.7 million increase in FDIC insurance assessments | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (YoY) | % Change (YoY) | | :-------------------- | :-------------------------------- | :-------------------------------- | :----------- | :------------- | | Professional fees | $16,076 | $15,156 | $920 | 6% | | FDIC insurance assessments | $3,300 | $1,600 | $1,700 | 106.25% | Loss on sales/valuations of assets, net Net losses on sales/valuations of assets significantly increased to $1.1 million in Q1 2023 from $46,000 in Q1 2022, primarily due to losses on fixed assets from branch optimization and the sale of the mortgage servicing rights portfolio | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (YoY) | % Change (YoY) | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :----------- | :------------- | | Loss on sales/valuations of assets, net | $1,115 | $46 | $1,069 | 2324% | - Losses included $813,000 on fixed assets from branch optimization activities and $193,000 from the sale of the mortgage servicing rights portfolio[193] Acquisition, integration and restructuring costs Acquisition, integration, and restructuring costs increased by 190% year-over-year to $1.7 million in Q1 2023, driven by the ongoing charter consolidation project | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (YoY) | % Change (YoY) | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :----------- | :------------- | | Acquisition, integration and restructuring costs | $1,673 | $576 | $1,097 | 190% | - The increase is due to the progression of the charter consolidation project, which will continue through the end of 2023[194] Efficiency Ratio HTLF's efficiency ratio improved to 60.94% (57.16% adjusted fully tax-equivalent) in Q1 2023 from 65.46% (64.65% adjusted fully tax-equivalent) in Q1 2022. The company continues to pursue strategies like charter consolidation and branch optimization to achieve its goal of maintaining an adjusted efficiency ratio at or below 57% | Metric | Q1 2023 | Q1 2022 | Change (YoY) | % Change (YoY) | | :------------------------------------ | :------ | :------ | :----------- | :------------- | | Efficiency ratio (GAAP) | 60.94% | 65.46% | (4.52) pp | (6.91)% | | Adjusted efficiency ratio, fully tax-equivalent (non-GAAP) | 57.16% | 64.65% | (7.49) pp | (11.59)% | - HTLF's strategic priority is to improve its adjusted efficiency ratio (fully tax-equivalent) to at or below 57%[195] - Ongoing initiatives include charter consolidation (six charters consolidated by Q1 2023, one more post-quarter, remaining by end of 2023) and branch optimization (anticipating 2-3 branch closures in 2023)[196][198] - Charter consolidation is projected to generate approximately $20 million annually in benefits, with core operating expenses expected to decline to 2.10% or less of average assets[197] Income Taxes The effective tax rate for Q1 2023 was 22.50%, slightly higher than 21.95% in Q1 2022. This was influenced by various tax credits (solar energy, low-income housing, new markets, historic rehabilitation), changes in tax-exempt interest income, and tax benefits/expenses related to stock-based compensation and disallowed interest expense | Tax Item | Q1 2023 Impact | Q1 2022 Impact | | :------------------------------------ | :------------- | :------------- | | Effective tax rate | 22.50% | 21.95% | | Solar energy tax credits | $310,000 | $0 | | Federal low-income housing tax credits | $311,000 | $135,000 | | New markets tax credits | $90,000 | $75,000 | | Historic rehabilitation tax credits | $258,000 | $63,000 | | Tax-exempt interest income (% of pre-tax income) | 12.20% | 14.44% | | Tax benefit from stock-based compensation | $46,000 | $172,000 | | Tax expense from disallowed interest expense | $929,000 | $58,000 | FINANCIAL CONDITION HTLF's financial condition at March 31, 2023, showed stable total assets, modest loan growth driven by commercial and real estate sectors, and an increased allowance for credit losses. Deposit composition shifted towards time deposits, while short-term borrowings decreased significantly. Capital ratios remained strong, exceeding well-capitalized thresholds, and liquidity was maintained through diverse funding sources - Total assets were $20.18 billion at March 31, 2023, a decrease of $61.7 million (less than 1%) from December 31, 2022[200] - Securities represented 35% of total assets at both March 31, 2023, and December 31, 2022[200] LENDING ACTIVITIES Total loans held to maturity increased by 1% to $11.50 billion at March 31, 2023, driven primarily by growth in commercial, owner-occupied commercial real estate, non-owner occupied commercial real estate, and real estate construction loans. This growth was partially offset by a decrease in agricultural and residential mortgage loans | Loan Category (in thousands) | March 31, 2023 | December 31, 2022 | Change (QoQ) | % Change (QoQ) | | :------------------------------------ | :------------- | :---------------- | :----------- | :------------- | | 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% | - Loan growth was attributed to an emphasis on organic growth, expansion of commercial and agribusiness lending teams, and market penetration in HTLF growth markets[202] - Agricultural and agricultural real estate loans decreased due to paydowns of credit lines and delayed utilization, primarily from weather concerns in California markets[204] ALLOWANCE FOR CREDIT LOSSES The total allowance for lending related credit losses increased to $133.8 million (1.16% of loans) at March 31, 2023, from $129.7 million (1.13% of loans) at December 31, 2022. This increase was driven by a rise in both quantitative and qualitative components, reflecting a macroeconomic outlook anticipating a moderate recession - Total allowance for lending related credit losses was $133.8 million (1.16% of loans) at March 31, 2023, up from $129.7 million (1.13% of loans) at December 31, 2022[207] - The quantitative allowance increased by $2.1 million (2%) to $86.5 million, with specific reserves for individually assessed loans rising by $2.5 million (35%) to $9.6 million[208] - The qualitative allowance totaled $47.3 million (35% of total allowance), reflecting a macroeconomic outlook anticipating a moderate recession[209][210] | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (YoY) | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :----------- | | Balance at beginning of period | $109,483 | $110,088 | $(605) | | Provision for credit losses | $2,184 | $2,628 | $(444) | | Recoveries on loans previously charged off | $3,191 | $1,023 | $2,168 | | Charge-offs on loans | $(2,151) | $(13,217) | $11,066 | | Balance at end of period | $112,707 | $100,522 | $12,185 | | Allowance for credit losses for loans as a percent of loans | 0.98% | 0.99% | (0.01) pp | | Annualized ratio of net charge offs/(recoveries) to average loans | (0.04)% | 0.49% | (0.53) pp | - The allowance for unfunded commitments increased to $21.1 million at March 31, 2023, from $20.2 million at December 31, 2022, corresponding to a 3% increase in unfunded commitments to $4.87 billion[213] CREDIT QUALITY AND NONPERFORMING ASSETS HTLF's credit quality showed a slight increase in nonpass loans, which totaled $546.8 million (4.8% of total loans) at March 31, 2023. Total nonperforming assets decreased by 2% to $65.7 million (0.33% of total assets), with nonperforming loans remaining stable at 0.51% of total loans - Nonpass loans increased by $13.5 million (3%) to $546.8 million (4.8% of total loans) at March 31, 2023, from $533.3 million (4.7% of total loans) at December 31, 2022[215][216] - Nonpass loans consisted of approximately 49% watch loans and 51% substandard loans at March 31, 2023[215] - Total nonperforming assets decreased by $1.2 million (2%) to $65.7 million (0.33% of total assets) at March 31, 2023, from $66.9 million (0.33% of total assets) at December 31, 2022[218] | Metric (in thousands) | March 31, 2023 | December 31, 2022 | Change (QoQ) | % Change (QoQ) | | :------------------------------------ | :------------- | :---------------- | :----------- | :------------- | | Nonaccrual loans | $58,066 | $58,231 | $(165) | (0.28)% | | Loans contractually past due 90 days or more | $174 | $273 | $(99) | (36.26)% | | Total nonperforming loans | $58,240 | $58,504 | $(264) | (0.45)% | | Other real estate | $7,438 | $8,401 | $(963) | (11.46)% | | Other repossessed assets | $24 | $26 | $(2) | (7.69)% | | Total nonperforming assets | $65,702 | $66,931 | $(1,229) | (1.84)% | | Nonperforming loans to total loans | 0.51% | 0.51% | 0.00 pp | 0.00% | | Nonperforming assets to total assets | 0.33% | 0.33% | 0.00 pp | 0.00% | - Approximately $40.0 million (69%) of nonperforming loans at March 31, 2023, had individual balances exceeding $1.0 million, spread across fifteen borrowers[218] SECURITIES The securities portfolio, representing 35% of total assets, decreased slightly to $6.10 billion at March 31, 2023. HTLF pledged an additional $1.48 billion in securities to increase borrowing capacity, bringing total pledged securities to $2.96 billion, with $3.83 billion remaining available to pledge - Total securities carried at fair value decreased by $50.5 million (1%) to $6.10 billion at March 31, 2023, from $6.15 billion at December 31, 2022[219] - Securities represented 35% of total assets at both March 31, 2023, and December 31, 2022[219] - HTLF pledged an additional $1.48 billion in securities, bringing total pledged securities to $2.96 billion at March 31, 2023 (up from $1.49 billion at Dec 31, 2022), to secure public/trust deposits and short-term borrowings[220] - Approximately $3.83 billion of securities remained available to pledge as of March 31, 2023[220] - The securities portfolio had an expected modified duration of 6.19 years at both March 31, 2023, and December 31, 2022[221] DEPOSITS Total deposits increased by 1% to $17.68 billion at March 31, 2023. This was driven by a significant 82% increase in time deposits, particularly wholesale time deposits, which offset decreases in demand and savings deposits. As of March 31, 2023, 35% of deposits were uninsured and uncollateralized, but HTLF maintains a granular and diverse deposit base | Deposit Type (in thousands) | March 31, 2023 | December 31, 2022 | Change (QoQ) | % Change (QoQ) | | :------------------------------------ | :------------- | :---------------- | :----------- | :------------- | | 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% | - As of March 31, 2023, 35% of HTLF's deposits were uninsured and uncollateralized[223] - HTLF maintains a granular and diverse deposit base, with no Bank Market representing more than 12% and no major industry more than 10% of total customer deposits[223] SHORT-TERM BORROWINGS Short-term borrowings significantly decreased by 75% to $92.3 million at March 31, 2023, from $376.1 million at December 31, 2022. This reduction was primarily due to decreases in advances from the FHLB and the federal discount window, partially offset by an increase in other short-term borrowings | Short-term Borrowing (in thousands) | March 31, 2023 | December 31, 2022 | Change (QoQ) | % Change (QoQ) | | :------------------------------------ | :------------- | :---------------- | :----------- | :------------- | | 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 | $0 | $224,000 | $(224,000) | (100)% | | Other short-term borrowings | $9,696 | $6,814 | $2,882 | 42% | | Total | $92,337 | $376,117 | $(283,780) | (75)% | - The Banks pledged securities providing $476.9 million in borrowing capacity to the BTFP (Federal Reserve Bank program), with no advances drawn in Q1 2023[227] - HTLF renewed its $100.0 million revolving credit line agreement, with no outstanding balance at March 31, 2023[229] OTHER BORROWINGS Other borrowings, defined as those with original maturities over one year, remained stable at $372.1 million at March 31, 2023. This category primarily consists of trust preferred securities and subordinated notes | Other Borrowing (in thousands) | March 31, 2023 | December 31, 2022 | Change (QoQ) | % Change (QoQ) | | :------------------------------------ | :------------- | :---------------- | :----------- | :------------- | | Advances from the FHLB | $710 | $740 | $(30) | (4)% | | Trust preferred securities | $148,565 | $148,284 | $281 | 0% | | Contracts payable | $80 | $82 | $(2) | (2)% | | Subordinated notes | $222,742 | $222,647 | $95 | 0% | | Total | $372,097 | $371,753 | $344 | 0% | - The effective weighted average interest rate for trust preferred securities was 7.60% as of March 31, 2023[230] CAPITAL REQUIREMENTS HTLF and its Banks remained well-capitalized at March 31, 2023, with capital ratios substantially exceeding regulatory minimums. Management believes these buffers would withstand potential regulatory changes requiring the inclusion of unrealized losses in the investment portfolio. HTLF also has a universal shelf registration statement effective until August 2025 for future capital raising - HTLF and its Banks were categorized as well-capitalized under regulatory frameworks at March 31, 2023[232] | Capital Ratio | March 31, 2023 | Minimum Requirement | Well Capitalized Requirement | | :------------------------------------ | :------------- | :------------------ | :------------------------- | | Total Capital (to Risk-Weighted Assets) | 14.98% | 8.00% | 10.00% | | Tier 1 Capital (to Risk-Weighted Assets) | 12.02% | 6.00% | 8.00% | | Common Equity Tier 1 (to Risk-Weighted Assets) | 11.28% | 4.50% | 6.50% | | Tier 1 Capital (to Average Assets) | 9.25% | 4.00% | 5.00% | - Management believes regulatory capital ratio buffers would withstand any changes requiring the inclusion of unrealized losses in the total investment portfolio[235] - Retained earnings available for dividends from banks to HTLF totaled $756.5 million (most restrictive) and $456.3 million (well-capitalized requirement) at March 31, 2023[234] - HTLF has a universal shelf registration statement effective until August 8, 2025, allowing for future debt or equity securities offerings[237] COMMITMENTS AND CONTRACTUAL OBLIGATIONS Commitments to extend credit aggregated $4.87 billion at March 31, 2023, and standby letters of credit totaled $55.6 million. There have been no other material changes to HTLF's contractual obligations since the 2022 Annual Report on Form 10-K. HTLF continues to explore acquisition opportunities to expand its banking footprint and fee income businesses - Commitments to extend credit aggregated $4.87 billion at March 31, 2023, up from $4.73 billion at December 31, 2022[239] - Standby letters of credit aggregated $55.6 million at March 31, 2023, up from $55.1 million at December 31, 2022[239] - HTLF's banks had $614.3 million in standby letters of credit with FHLB to secure public funds and municipal deposits at March 31, 2023[240] - No other material changes to contractual obligations since the 2022 Annual Report on Form 10-K[240] - HTLF continues to explore acquisition targets to augment organic growth, increase market penetration, and expand fee income businesses[242] LIQUIDITY HTLF maintains adequate liquidity through cash, securities, and diverse borrowing capacities. At March 31, 2023, it held $362.1 million in cash and cash equivalents and $6.10 billion in securities. Management expects $1.3 billion in cash flows from the securities portfolio over the next twelve months. HTLF increased borrowing capacity by pledging additional securities and shifted towards brokered CDs for funding - At March 31, 2023, HTLF had $362.1 million in cash and cash equivalents and $6.10 billion in securities carried at fair value[245] - Management expects the securities portfolio to generate approximately $1.3 billion in cash flows over the next twelve months[245][250] - HTLF shifted from overnight borrowings to brokered CDs in Q1 2023 and pledged an additional $1.48 billion in securities, bringing total pledged securities to $2.96 billion[249] - As of March 31, 2023, approximately $3.83 billion of securities remained available to pledge[249] | Funding Source (in thousands) | Outstanding | Available | | :------------------------------------ | :---------- | :-------- | | Federal Reserve Discount Window | $0 | $1,604,904 | | Bank Term Funding Program | $0 | $476,925 | | Federal Home Loan Bank | $1,711 | $679,588 | | Federal Funds | $0 | $247,500 | | Wholesale deposits/brokered CDs | $2,842,920 | $1,689,420 | | Total | $2,844,631 | $4,698,337 | - The parent company had $284.4 million in cash and a $100.0 million revolving credit agreement (undrawn) at March 31, 2023[253] Item 3. Quantitative and Qualitative Disclosures About Market Risk HTLF's primary market risk is interest rate risk, which is continually managed through strategies and reviewed quarterly by asset/liability committees and the board of directors. Simulations of net interest income under various interest rate scenarios (up 200 bps, down 100 bps) indicate manageable impacts on net interest margin for both Year 1 and Year 2 - HTLF's market risk primarily consists of interest rate risk from lending and deposit activities[256] - Interest rate risk is managed through strategies and reviewed quarterly via interest rate sensitivity analyses that simulate changes in net interest income under various rate scenarios[257] | Scenario | Year 1 Net Interest Margin (in thousands) | Year 1 % Change From Base | Year 2 Net Interest Margin (in thousands) | Year 2 % Change From Base | | :-------------------- | :-------------------------------------- | :------------------------ | :-------------------------------------- | :------------------------ | | Down 100 Basis Points | $632,070 | (1.32)% | $658,497 | 2.81% | | Base | $640,512 | — | $688,624 | 7.51% | | Up 200 Basis Points | $654,132 | 2.13% | $713,149 | 11.34% | Item 4. Controls and Procedures As of March 31, 2023, HTLF's Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were effective. No material changes in internal controls over financial reporting occurred during the quarter - Disclosure controls and procedures were effective as of March 31, 2023[260] - No material changes in internal controls over financial reporting occurred during the three months ended March 31, 2023[260] PART II. OTHER INFORMATION Item 1. Legal Proceedings As of March 31, 2023, HTLF and its subsidiaries had certain legal proceedings pending, which are considered ordinary routine litigation incidental to business - Certain legal proceedings are pending against HTLF and its subsidiaries as of March 31, 2023[262] - These proceedings are ordinary routine litigation incidental to business[262] Item 1A. Risk Factors There have been no material changes to the risk factors applicable to HTLF from those disclosed in its 2022 Annual Report on Form 10-K - No material changes in risk factors from those disclosed in HTLF's 2022 Annual Report on Form 10-K[263] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds HTLF did not make any purchases of its common stock during the quarter ended March 31, 2023, under the board-authorized program to acquire up to 5% of capital or $85.9 million as treasury shares - The board of directors authorized management to acquire and hold up to 5% of capital or $85.9 million as of March 31, 2023, as treasury shares[264] - HTLF and its affiliated purchasers made no purchases of common stock during the quarter ended March 31, 2023[264] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the period - No defaults upon senior securities[265] Item 4. Mine Safety Disclosures This item is not applicable to HTLF - Not applicable[265] Item 5. Other Information No other information is reported under this item - None[265] Item 6. Exhibits This section lists the exhibits filed or furnished with the Quarterly Report on Form 10-Q, including forms of restricted stock unit agreements, CEO and CFO certifications, and financial statements formatted in Inline Extensible Business Reporting Language (XBRL) - Exhibits include forms of Time-Based and Performance-Based Restricted Stock Unit Award Agreements[266] - Certifications from the Chief Executive Officer and Chief Financial Officer are included pursuant to the Securities Exchange Act and Sarbanes-Oxley Act[266] - Financial statements are formatted in Inline Extensible Business Reporting Language (XBRL)[266]