TOGETHER,
WE ARE
HEARTLAND.
20 19 ANNUAL REPORT
03435 C + 8 cmyk
CORPORATE PROFILE
Founded in 1981, Heartland Financial USA, Inc. is a
multibank holding company with assets of over $13
billion offering uniquely different banking solutions
for business and personal clients.
Heartland’s independent community banks are in Arizona, California,
Colorado, Illinois, Iowa, Kansas, Minnesota, Missouri, Montana, New
Mexico, Texas and Wisconsin, with 115 banking locations serving 84
communities, as of December 31, 2019.
Heartland remains committed to its core commercial business,
which is supported by a strong retail operation. Spread across a
geographically diverse footprint, we have the robust capabilities of
the big banks, and our unique operating model of 11 bank brands
supports our mission of enriching lives, one customer, employee and
community at a time.
Heartland’s common stock is traded through the NASDAQ Global
Select Market System under the symbol “HTLF.” Complete information
about Heartland Financial USA, Inc. is available at HTLF.com.
Forbes ranked Heartland 40th among a nationwide group of 100 leading banking
organizations with assets ranging from $9 billion to over $2 trillion.
1 | Together, we are Heartland
T E X A S
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MINNESOTA
B A N K & T R U S T
VISION STATEMENT
– We will be a top-performing and
admired banking organization.
– We will actively contribute to the
vitality of the communities
where we live and work.
– We will deliver financial expertise
and excellent experiences.
FINANCIAL HIGHLIGHTS
For the years ended December 31, 2019, 2018 and 2017.
(Dollars in thousands, except per share data)
FOR THE YEAR
Net income
Net income, exclusive of tax charge
Net income available to common stockholders
Cash dividends, common
PER SHARE DATA
Earnings per common share – diluted
Earnings per common share – diluted,
exclusive of tax charge
Cash dividends, common
Book value at December 31
AT YEAR END
2019
$149,129
149,129
149,129
24,607
$4.14
4.14
0.68
43.00
% INCREASE/
(DECREASE)
FROM 2018
TO 2019
27.46%
27.46
27.51
27.38
17.61%
17.61
15.25
11.86
2018
2017
$116,998
116,998
116,959
19,318
$75,272
85,668
75,226
14,499
$3.52
3.52
0.59
38.44
$2.65
3.01
0.51
33.07
Total assets
Total loans receivable
Total deposits
Total common stockholders' equity
$13,209,597
8,367,917
11,044,331
1,578,137
15.79% $11,408,006
7,407,697
12.96
9,396,429
17.54
1,325,175
19.09
$9,810,739
6,391,464
8,146,909
990,519
FINANCIAL RATIOS
Return on average total assets
Return on average stockholders' equity
Return on average tangible common
equity (non-GAAP) 1
Net interest margin (GAAP)
Net interest margin, fully tax-equivalent
(non-GAAP) 2
Average common stockholders' equity to
average total assets
Total capital to risk-adjusted assets
Tier 1 capital ratio
Common equity Tier 1 ratio
Tier 1 leverage ratio
1.24%
10.12
15.73
4.00
4.04
13.76%
1.91
0.06
(6.10)
(6.48)
1.09%
9.93
15.72
4.26
4.32
12.26
12.17
10.93
13.75
12.31
10.88
10.10
0.22
1.23
2.06
3.80
13.72
12.16
10.66
9.73
0.83%
8.63
12.05
4.04
4.22
9.68
13.45
11.70
10.07
9.20
1 Refer to the "Reconciliation of Return on Average Tangible Common Equity (non-GAAP)" table on page 37 of the annual report on Form 10-K.
2 Refer to the "Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP)" table on page 38 of the annual report on Form 10-K.
It is an honor to write to you after my
first full year as President and CEO of
Heartland Financial USA, Inc. I am
grateful for the confidence our Board
of Directors has shown in my
leadership. I am humbled by the
courage, dedication and hard work
demonstrated by the people of
Heartland. It is remarkable how
much we have accomplished,
not only in terms of financial
performance, but in our
unwavering dedication to our
customers, each other and the
communities we serve.
Bruce K. Lee tours Hennig, Inc., a longtime
customer of Illinois Bank & Trust, in
Rockford, IL. They are a well-established
manufacturer whose products protect
valuable machines and the people who
operate them.
2 | Together, we are Heartland
TO MY FELLOW SHAREHOLDERS
As we head into 2020, Heartland is a stronger
franchise, and better positioned for growth. I will
share highlights of our strong 2019 financial
performance, advancement of our strategic priorities
and plans to deliver growth and shareholder value.
HEARTLAND IS A GROWTH COMPANY
Ì We increased total assets 15.8% to $13.2 billion.
Ì We grew net income 27% to $149 million.
Ì We grew earnings per share 18% to $ 4.14.
Ì We increased dividends paid over 15% to $ .68.
Ì In 2019, we propelled from #66 to #40 on the
Forbes Best Bank list, our best ranking ever.
FORTIFYING OUR FOUNDATION
In 2019, we executed our strategic initiatives with
laser focus. We streamlined our company, added
capacity and built a foundation for future growth. We
renewed focus on our core commercial and retail
business through the profitable sales of our non-
core consumer finance and mortgage servicing
businesses. In response to the increased adoption
of digital channels and to align our branch
infrastructure with our growth markets we sold,
consolidated or closed banking centers. We realized
over $24 million of gains from streamlining activities
and we have reinvested over half of those gains into
an initiative called Operation Customer Compass.
CREATING EXCEPTIONAL
CUSTOMER EXPERIENCES
Investing in Technology
Ì We invested in a new commercial online banking
platform that delivers more sophisticated
capabilities and a more intuitive interface.
Ì We invested in a world-class sales platform and
loan origination system.
Ì We automated processes to improve efficiency
and reduce administrative activities.
Investing in Our People
Ì We invested over 38,000 hours training and
developing our teams.
Ì We advanced our comprehensive succession
plan adding several strategic leaders.
Ì We enhanced our benefits, allowing us to recruit
and retain our workforce.
Our employees are more empowered, engaged and
enriched. In turn, we are delivering excellent
banking experiences.
HONORING THE PAST
AND EMBRACING THE FUTURE
During 2019, we reexamined our mission, vision and
values to more deeply connect our company. We
continue to honor the past and hold firm to our core
values of integrity, accountability, excellence and
community. We recognize the importance of the
work we do every day that enriches the lives of our
customers, each other and the communities that
we call home. In 2019, our employees volunteered
over 31,000 hours—a significant point of pride.
Additionally, we contributed more than $2 million to
support our local communities and continue to
make investments in energy efficiency initiatives
such as solar energy to preserve our planet.
POSITIONED FOR GROWTH
The combination of our strong balance sheet and
our unique operating model of 11 bank brands
across a geographically diverse footprint positions
us to confidently navigate economic uncertainty.
The dedicated and talented people of Heartland are
poised to deliver growth in 2020 and beyond. Thank
you for your investment and continued confidence
in Heartland.
Ì We launched call center technology that delivers
robust security and convenient self-service options.
Sincerely,
Bruce K. Lee
We made significant investments in technologies
that enable us to exceed customer’s expectations
and further our ability to deliver one-of-a-kind
banking experiences.
President and CEO
In the heart of Dubuque, Iowa,
Lynn B. Fuller proudly stands in the
midst of where it all begin 85 years ago.
Together, we
continue our solid
track record as a
growth company,
balancing profits and
growth, doubling
earnings, assets and
EPS every five to
seven years.
LYNN B. FULLER
Executive Operating Chairman
Heartland Financial USA, Inc.
4 | Together, we are Heartland
TO THE SHAREHOLDERS AND FRIENDS
OF HEARTLAND FINANCIAL USA, INC.
Simply put, 2019 was an outstanding year for Heartland Financial USA, Inc.
For 85 years, our franchise has grown and prospered
from our very humble beginnings to our impressive
standing amongst the best 100 largest banks in the
country. That kind of success only happens through
leadership and clear strategic focus. Addressing our
exceptional performance in 2019, I will reflect on two
primary topics—our superior leadership and trends
in the banking industry.
As part of a thoughtfully crafted succession plan
for our company, Bruce K. Lee became President
and CEO in May 2018, when I assumed the role of
Executive Operating Chairman. Completing his first
full year as Heartland’s President and CEO, Bruce,
along with his superior executive team, are skillfully
executing a plan for growth and long-term success.
Adding to our leadership depth, I want to welcome
Barry Orr and Robert Engel, two strong executives
from our growing western markets, to the Heartland
Board of Directors.
Next, I will share some observations across the
financial services industry. The high cost of talent,
technology and regulatory compliance is making
scale and efficiency more important than ever.
Heartland has distinguished itself as a skilled and
experienced acquirer, and we have completed 27
acquisitions and formed five de novo banks since
Heartland’s formation in 1981. We have focused
our acquisition efforts on high growth markets and
organic growth. Our history has been to double
earnings, assets and earnings per share (EPS) every
five to seven years. Our five year compound growth
has delivered 17% annual asset growth, 29% annual
net income growth and 14% annual earnings per
share growth. We are proud to say we have delivered
39 years of level or increased dividends and we have
never experienced an annual loss.
combined charter that operates as Bank of Blue
Valley, with $1.3 billion in assets, is well positioned
in the high growth metro Kansas City market. In
November, Illinois Bank & Trust acquired the assets
of Rockford Bank and Trust Company and established
Illinois Bank & Trust as a premier community bank
with assets of $1.3 billion, earning the top deposit
market share in Winnebago County. Along with our
solid organic growth, our 2019 acquisitions pushed
Heartland’s assets over $13 billion, and currently seven
of our 11 member banks have surpassed Heartland’s
goal with assets exceeding $1 billion. Looking into 2020,
we continue to focus on in-market acquisitions and
remain committed to achieving our goal of $1 billion
or more in assets for each of our brands. We remain
disciplined with respect to our financial performance
metrics for M&A, our pipeline is extremely deep and
we continue to be a highly respected and sought-after
partner for community banks.
I will conclude as I started—I am delighted with
Heartland’s performance in 2019! Together we
move into 2020 continuing our solid track record as
a growth company, balancing profits and growth,
doubling earnings, assets and EPS every five to
seven years. Thank you to our corporate board and
subsidiary bank boards for their continued support
and guidance. Thank you to our leadership teams and
professional staff throughout the organization for their
hard work and dedication meeting and exceeding our
customer’s expectations. And finally, thank you to our
shareholders for the confidence you have placed in
Heartland Financial USA, Inc. today and in the future.
Sincerely,
During 2019, we completed two acquisitions. In
May, Bank of Blue Valley merged into our Kansas
subsidiary, Morrill & Janes Bank and Trust. The
Lynn B. Fuller
Executive Operating Chairman
TOGETHER,
WE ARE
HEARTLAND.
6 | Together, we are Heartland
MISSION STATEMENT
Enriching lives one
customer, employee and
community at a time.
The impact of
Operation
Customer
Compass will
live on, and is
now an
integrated part
of our Heartland
culture.
BRUCE K. LEE
President and CEO
Heartland Financial USA, Inc.
We embarked on
Operation Customer
Compass, because we
owed it to ourselves,
our customers and our
shareholders to be the
best that we can be.
LYNN H. "TUT" FULLER, MD.
President and CEO
Dubuque Bank and Trust
8 | Together, we are Heartland
TOGETHER,
WE’RE CREATING
EXCEPTIONAL
CUSTOMER
EXPERIENCES.
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PASS
PASSOPE
OPE
People. Process. Technology.
We believe our customers deserve a one-of-a-kind, exceptional experience and that
our employees should have minimal friction as they provide that service. Operation
Customer Compass emerged out of our commitment to our customers. We started
our journey by targeting opportunities centered around Our People. Our Process. Our
Technology. Together, we energized and enriched the Heartland experience.
OUR PEOPLE
How do you take the finest talent in the Midwest
and across the western United States and create
the framework to make them even better? Our
solution, guided by Operation Customer Compass,
was to increase transparency and accountability
in our work. This was done by installing continuous
feedback loops, providing job aids, implementing daily
management routines and refocusing priorities to
strategic and value-added work, instead of repetitive
and mundane tasks. These new tools and measures
ensure we always stay focused on our goal of
providing exceptional customer service.
OUR PROCESS
We needed to evolve our processes because
customer behaviors have changed. Looking at our
processes through the lens of the customer, we
identified improvement opportunities, which would
remove friction for our employees and provide quicker
turnaround times for our customers. This was done by
mapping every process in Heartland, getting feedback
from both front office and back office employees and
installing a robust error tracking program. This all
resulted in faster turn around times and reduced errors
between our departments and for our customers.
OUR TECHNOLOGY
Customers deserve and demand faster, better, smarter
technology so they can bank when and where they
want. Operation Customer Compass drove investment
in cutting edge technologies like an industry-leading
commercial loan origination system, a cloud based
call center platform and a leading electronic signature
application. We built responsive dashboards to track
our performance and hold ourselves accountable.
Robotics tools allowed us to automate high-volume,
repetitive tasks so our employees could focus on
value-added activities. All of these investments were
essential to enhance our processes, enrich the lives
of our employees and most importantly, improve the
customer experience.
Every segment of the organization was impacted, and
“Compass” became a new part of our vernacular. The
goals were aggressive and the stakes were high. It
was only through our dedicated strategy, our focused
commitment and our outstanding team that such
an undertaking could be successful—and it was.
Together, we made it happen.
TOGETHER, WE
ARE DELIVERING.
KIM CARROLL
CEO
Heart to Heart International
BRIAN GEARY
Commercial Banker, SVP
Bank of Blue Valley
Making an impact when
it is needed most.
Heart to Heart International doesn’t wait for the
wind to blow or a disaster to strike—they are
prepared—always.
When the siren sounds or a crisis unfolds, Heart to Heart
International is ready. In times of disasters, Heart to Heart
International and Bank of Blue Valley partner in serving and
strengthening communities.
Heart to Heart International provides humanitarian service
in more than 130 countries, shipping over $2 billion in aid and
logging 1.1 million volunteer hours. They have worked
alongside many people, from local community members to
foreign government officials to humanitarian Mother
Theresa.
“Our relationship with Bank of Blue Valley goes beyond
banking. They are a true partner. Our 150,000-square foot
facility housing our expansive medical supply warehouse
and mobile first response units would not have been a reality
without a Commercial Real Estate Loan through Bank of
Blue Valley. We have a robust banking relationship including
a revolving line of credit and international wire services—
both essential in time of natural disasters and crisis relief.
More profoundly, administering to worldwide crises requires
a willingness to understand and respond with immediacy,
and Bank of Blue Valley does that and more. Bank of Blue
Valley acts as a trusted partner—both financially and
philanthropically—as we prepare for what lies ahead,”
stated Kim Carroll, CEO.
10 | Together, we are Heartland
From floods, tornadoes, hurricanes,
earthquakes, typhoons and
humanitarian crises, Heart to Heart
International team members are
often the first people on the ground
with medical teams, medical
supplies, equipment and hygiene
health products.
Bank of Blue Valley
goes beyond banking,
they are a true partner
in our ability to live
our mission.
—KIM CARROLL
Heart to Heart International
Proudly served by
Their partnership
was a game-changer
for us, allowing us to
move forward with our
strategic plan.
—GERMAN REYES
Chicanos Por La Causa
Proudly served by
12 | Together, we are Heartland
Chicanos Por La Causa offers
comprehensive, bilingual and
bicultural services in Health & Human
Services, Housing, Education and
Economic Development.
TOGETHER, WE
ARE EMPOWERING.
DAVID ADAME
President and CEO
Chicanos Por La Causa
ALICIA NUNEZ
CFO, EVP
Chicanos Por La Causa
GERMAN REYES
Real Estate Operations, EVP
Chicanos Por La Causa
Bill Callahan
President and CEO
Arizona Bank & Trust
Focused on the CAUSE
for an underserved
population.
Chicanos Por La Causa enriches the lives of the
communities they serve.
As one of the largest community development corporations
in Arizona, Chicanos Por La Causa (CPLC) focuses on
individuals and families with low to moderate income levels.
CPLC serves more than 378,000 individuals annually and is
one of the largest Hispanic nonprofits in the country. The
opportunity to promote positive change and offer self-
sufficiency for their clientele is enhanced by a partnership
with Arizona Bank & Trust.
“We are not your typical nonprofit, owning and managing a
wide range of for-profit businesses, including many real
estate opportunities, which in turn sustains our charitable
initiatives. Arizona Bank & Trust earned our respect by
gaining an in-depth knowledge about our organization, they
invested their time when no one else would,” said Alicia
Nunez, CFO, EVP. “Arizona Bank & Trust worked with us,
pitched a unique financing solution that aligned with our
sizable needs. They embrace the cause in so many ways—
by serving on our boards, understanding our cash cycles,
digging into our acquisition initiatives and understanding our
nonprofit intricacies. They are the catalyst to growing our
business—helping us build our financial foundation so that
we can be the foundation for our community,” commented
David Adame, President and CEO, Chicanos Por La Causa.
TOGETHER,
WE ARE CARING.
Providing the best
experience when it
matters most.
Medical Associates Clinic has been providing
superior health care since 1924.
Medical Associates, headquartered in Dubuque, Iowa, is
the tri-state area’s leading health care provider, serving as
Iowa’s oldest multispecialty group practice. In 1982, Medical
Associates developed the tri-state's first health maintenance
organization, Medical Associates Health Plans. They are the
only physician group owned plan in Iowa and the highest rated.
Since 1997, Medical Associates Health Plans has maintained
accreditation by the National Committee for Quality Assurance.
Medical Associates believes that patients deserve affordable,
coordinated, high-quality care and services that are easy to find
and simple to use. Dubuque Bank and Trust (DB&T) and Medical
Associates, are two legacy Dubuque companies working to
provide the best experience for patients and providers.
“Our business is complex. After more than 40 years, we
decided to bring our business to DB&T, which was no small
decision, but a new and exciting one. The consultative DB&T
team collaborated with us to offer sophisticated financial
solutions that were innovative and creative. They listened to
us and provided a customized financing solution and strategic
debt structure to help us solve a challenge we’ve been working
on for more than five years. We also took advantage of a more
robust and holistic Treasury Management solution creating
efficiencies and matching our growing needs. We believe in
delivering excellence and working with trusted partners, we
will not work with people we do not trust and we completely
trust the entire team at DB&T." expressed Jeff Gonner, CFO,
Medical Associates.
14 | Together, we are Heartland
JOHN TALLENT
CEO
Medical Associates
JEFF GONNER
CFO
Medical Associates
TYSON LEYENDECKER
Market President, EVP
Dubuque Bank and Trust
Medical Associates is a well-
established multispecialty group
practice with over 170 providers
and a staff of over 1,000 health
care professionals and support
personnel.
DB&T took the time
to understand our
business and provided
true tangible value that is
unmatched in our market.
—JOHN TALLENT
Medical Associates
Proudly served by
ROBERT REGNIER
Chairman and CEO
Bank of Blue Valley
WENDY REYNOLDS
President
Bank of Blue Valley
JEFFREY HULTMAN
CEO
Illinois Bank & Trust
THOMAS BUDD
President
Illinois Bank & Trust
Bloch Memorial Fountain and Washington Square Park, Kansas City, Missouri.
Jefferson Street Bridge, Rockford, Illinois.
16 | Together, we are Heartland
TOGETHER, WE ARE
GROWING.
Our 2019 acquisitions pushed Heartland's
assets over $13 billion.
Our merger and acquisition strategy focuses on expanding our footprint in areas where
we already have a presence. In 2019, Heartland strengthened its presence in Kansas
and Illinois, helping both brands propel beyond $1 billion in assets.
In May of 2019, Heartland enhanced its presence
in Kansas City with the acquisition of Blue Valley
Ban Corp. and its wholly owned subsidiary, Bank
of Blue Valley. We merged Bank of Blue Valley
into our existing bank, Morrill & Janes Bank and
Trust, retaining the Bank of Blue Valley name and
growing assets in that market to $1.3 billion. “The
acquisition of Bank of Blue Valley, a premier Kansas
City community bank, provided great opportunity
to broaden Heartland’s footprint in Johnson County
and the greater Kansas City metropolitan area,”
says Lynn B. Fuller, Executive Operating Chairman
of Heartland. “An economically strong and vibrant
region, Bank of Blue Valley complements our
existing Kansas franchise, and the synergies
resulting from our combined organizations will
deliver broader client services, enhance Heartland
shareholder value and position us well for additional
growth in the Kansas City market.”
The purchase of Rockford Bank & Trust assets was
an excellent fit for our community banking business
model in our expanding Illinois market, creating
critical mass with approximately $1.3 billion in
assets. “Their two office locations were a natural
fit with our geographic footprint and the culture of
our existing bank, Illinois Bank & Trust," said Bruce
K. Lee, President and CEO of Heartland. “We were
very fortunate to integrate two talented teams of
local banking professionals and staff with excellent
knowledge of the Rockford community and the
clients they serve.”
BANK OF BLUE VALLEY
“Joining with Heartland was an exceptional
opportunity to further leverage our growth. We look
forward to expanding our lending capacity and
enhancing our technology with a focus on treasury
management and wealth advisory services,” Robert
Regnier, Chairman and CEO, Bank of Blue Valley.
ILLINOIS BANK & TRUST
“We are excited to partner with Rockford Bank &
Trust. We have great respect for Tom Budd, the
management team and the company they have
built. Combining these two high-performing teams
allows us to build an even stronger company
together, creating the largest, locally-headquartered
community bank in the Rockford market,” Jeffrey
Hultman, CEO, Illinois Bank & Trust.
31,000
Employee
volunteer hours
Minnesota Bank & Trust collaborates
with WomenVenture for
$500,000
in support of microlending to entrepreneurs
TOGETHER, WE ARE
MAKING A DIFFERENCE.
Committed to our communities and planet.
The strength of our mission runs strong across our footprint and beyond—each of
our employees is committed to enriching the lives of our customers and community.
$857.4M
In new community
development loans
275+
Community
boards served
Bank of Blue Valley commits
$100,000
to Kansas City Women’s Business Center in
support of their microlending program
FirstBank & Trust commits
$500,000
to Texas Tech University’s Jerry S. Rawls College of Business
supporting the college’s new Excellence in Banking Program
18 | Together, we are Heartland
Illinois Bank & Trust
led a group of
local banks to raise
$4M
to support
small business and
neighborhoods
Dubuque Bank
and Trust offsets
16
TONS
of carbon through
solar initiatives—
equivalent to
400 trees
Illinois Bank & Trust
led a group of
local banks to raise
$4M
to support
small business and
neighborhoods
31,000
Employee
volunteer hours
Citywide Banks supports mental
health wellness in Colorado with
$180,000
in nonprofit contributions
Arizona Bank & Trust offsets
62 TONS
of carbon through solar initiatives—
equivalent to 1,026 trees
Minnesota Bank & Trust collaborates
with WomenVenture for
$500,000
in support of microlending to entrepreneurs
$21.7M
In new
community
investments
$2.3M
In contributions
and sponsorships
to local
organizations
Heartland purchases
LEED
Platinum
certified
Roshek building
TOGETHER, WE ARE
BUILDING THE
FOUNDATION.
Heartland added several key leaders as part of a thoughtful and comprehensive
succession plan. We are strategic in workforce investment to attract and retain talent
to drive success.
EXECUTIVE MANAGEMENT
Back row from left to right: R. Greg Leyendecker, Brian J. Fox, Dennis J. Mochal, Andrew E. Townsend, Lynn H. "Tut" Fuller, M.D., Bruce K. Lee,
Kevin G. Quinn, Laura J. Hughes, Michael J. Coyle, Bryan R. McKeag, Lynn B. Fuller, Jay L. Kim
Front row from left to right: Deborah K. Deters, David A. Prince, Tamina L. O'Neill, Kevin K. Karrels, J. Daniel Patten, Daniel C. Stevens, Steven E.
Ward, Janet M. Quick
20 | Together, we are Heartland
NEW HEARTLAND LEADERSHIP (Pictured in the photo on the left.)
KEVIN KARRELS
Head of Consumer Banking, EVP
Heartland Financial USA, Inc.
Kevin has spent his career transforming the consumer landscape with convenient
technology, including mobile and online banking solutions with First Tennessee
Bank. He is responsible for managing all facets of Heartland's consumer banking
needs, ensuring exceptional customer satisfaction both in-branch and online.
JAY KIM
General Counsel, EVP
Heartland Financial USA, Inc.
Jay spent his career as general counsel, and in senior management roles and as
an attorney in private practice. As a partner with Dorsey & Whitney, Jay focused
on advising banks, trust companies, wealth management firms, commercial and
residential mortgage brokers and retirement plan administrators on mergers and
acquisitions and regulatory and operational matters.
DENNIS MOCHAL
Chief Information Officer, EVP
Heartland Financial USA, Inc.
Dennis is responsible for managing all facets of Heartland's information
technology needs, heading up the security of essential information. Dennis
has spent his career directing technological initiatives and creating protective
information solutions at UMB Bank, J.P. Morgan Retirement Plan Service and
Wells Fargo Asset Management.
TAMINA O’NEILL
Chief Risk Officer, EVP
Heartland Financial USA, Inc.
Tamina’s financial services and compliance career started over 25 years ago in a
leadership development program at LaSalle Bank. Over the course of her career,
she has been involved with and/or led teams in government lending, commercial
banking compliance, corporate compliance and operational and enterprise risk.
DANIEL STEVENS
Operations, EVP
Heartland Financial USA, Inc.
Dan joined Heartland from Rabobank, NA, Roseville, CA, where he served as Chief
Operating Officer. Prior to that role, he was the Chief Financial Officer for Rabobank,
Bank of Hawaii Corporation and UMB Financial Corporation. Dan has 35 years of
experience in operations, treasury, risk management and SEC related matters.
NEW BANK LEADERSHIP
LO NESTMAN
President & CEO
Premier Valley Bank
Lo brings nearly two decades of banking leadership experience to the
executive team. Prior to joining Heartland, Lo served as Region President
for Wasatch Bank, a division of Zion’s First National Bank in Utah.
TOD PETERSEN
President and CEO
Rocky Mountain Bank
Tod has an impressive career of banking, including experience in
commercial lending, branch operations and consumer banking. His
strategic leadership provides thoughtful solutions and guidance that helps
clients achieve their financial goals.
ROBERT REGNIER
Executive Chairman
and CEO
Bank of Blue Valley
Bob has served as the director, the President and the CEO of Bank of Blue
Valley during his tenure. He has over 45 years of experience in a number of
banking areas, including lending, investments, personnel, administration,
trust, operations, new business development and mergers.
OUR DIRECTORS
Back row from left to right: John K. Schmidt, Kurt M. Saylor, Duane E. White, Bruce K. Lee, Thomas L. Flynn, Robert B. Engel, Barry H. Orr,
R. Michael McCoy
Front row from left to right: Susan G. Murphy, Mark C. Falb, Martin J. Schmitz, Jennifer K. Hopkins, Lynn B. Fuller
NEW BOARD MEMBERS
ROBERT B. ENGEL
Managing Director, CEO
BLT Advisory Services, LLC
Bob has over 30 years of experience in the financial services industry, including
17 years at CoBank ACB, Denver CO, where he ultimately served as President and
Chief Executive Officer.
BARRY H. ORR
Director and CEO
FirstBank & Trust
Barry has over 40 years of banking experience, including organizing and
founding FirstBank Lubbock Bancshares holding company in 1993. He has
successfully completed 14 mergers or acquisitions during his tenure as
Chairman and CEO of FirstBank Lubbock Bancshares.
22 | Together, we are Heartland
SUBSIDIARY DIRECTORS AND PRESIDENTS
ARIZONA BANK & TRUST
John D. Benton
Board Chair
William H. Callahan
President & CEO
—
Lynn B. Fuller
R. Greg Leyendecker
Paul F. Muscenti
Christian Roe
Jerry L. Schwallier
R. Randy Stolworthy
Dr. Philip To
Frank E. Walter
BANK OF BLUE VALLEY
Kurt M. Saylor
Chairman
Robert D. Regnier
Executive Chairman & CEO
Wendy Reynolds
President
—
Lynn B. Fuller
Bruce K. Lee
Thomas A. McDonnell
Rhonda S. McHenry
Kent P. Saylor
Anne D. St. Peter
Robert D. Taylor
Leland M. Walker
Ryan Wilkerson
Steven D. Wilkinson
CITYWIDE BANKS
Martin J. Schmitz
Board Chair
Joanne C. Sherwood
President and CEO
—
Robert B. Engel
Lynn B. Fuller
Jennifer K. Hopkins
Bruce K. Lee
Susan G. Murphy
Kevin G. Quinn
W. Scott Reichenberg
Mike Zoellner
DUBUQUE BANK AND
TRUST COMPANY
Thomas L. Flynn
Board Chair
Lynn H. “Tut” Fuller, MD.
President and CEO
—
Chad M. Chandlee
Richard C. Cody
David C. Davis
James R. Etheredge
Donnelle M. Fuerste
Lynn B. Fuller
James P. Gantz
Charles D. Glab
Timothy W. Hodge
Douglas J. Horstmann
R. Michael McCoy
James C. Mulgrew
John B. (J.B.) Priest
John K. Schmidt
John Tallent
FIRSTBANK & TRUST
Barry H. Orr
Chairman and CEO
Greg Garland
President
—
Barry Brown
Bill deTournillon
Lynn B. Fuller
Ricky Green
Bruce K. Lee
R. Bruce Orr
Gary Rothwell
ILLINOIS BANK & TRUST
Frank E. Walter
Board Chair
Jeffrey S. Hultman
CEO
Thomas D. Budd
President
—
Charles E. Box
Michael K. Broski
Todd B. Colin
John W. Cox, Jr.
Craig A. Erdmier
Monica B. Glenny
Damon C. Heim
Martin H. Johnson
Dana S. Kiley, Jr.
Pamela R. Maher
Thomas R. Nelson
Michael J. Rogers
Steven E. Ward
Laurel S. Wurster
MINNESOTA
BANK & TRUST
Steven M. Thul
Board Chair
Stephen G. Bishop
President and CEO
—
Timothy S. Clark
Lynn B. Fuller
Randy Morgan
Steven E. Ward
NEW MEXICO
BANK & TRUST
Nadyne L. Bicknell
Board Chair
R. Greg Leyendecker
President and CEO
—
Robert W. Eaton
Lynn B. Fuller
Sherman McCorkle
Michael Mechenbier
Ben F. Spencer
Randy Ware
PREMIER VALLEY BANK
Thomas G. Richards
Board Chair
Lo B. Nestman
President and CEO
—
Linda F. East
Lynn B. Fuller
Richard H. Lehman
J. Mike McGowan
ROCKY MOUNTAIN BANK
Wallace E. Anderson
Board Chair
Tod M. Petersen
President and CEO
—
Catherine Bergman
Lynn B. Fuller
Michael Johns
Pamela K. Mower
Gerald Pearsall
Kevin G. Quinn
WISCONSIN BANK &
TRUST
J. Cory Recknor
Board Chair
Curtis Chrystal
President and CEO
—
John K. Faust
Lynn B. Fuller
Erik A. Huschitt
Ramesh C. Kapur
Jack R. Liebl
Stephan J. Nickels
Steven F. Streff
Paul W. Sweeney
Steven E. Ward
Thomas J. Wilkinson
PROFILE
MAILING ADDRESS
Heartland Financial USA, Inc.
1398 Central Avenue
P.O. Box 778
Dubuque, Iowa 52004-0778
Telephone: 563.589.2100
INDEPENDENT
AUDITORS
KPMG LLP
Des Moines, Iowa
CORPORATE COUNSEL
Dorsey & Whitney LLP
Minneapolis, Minnesota
STOCK LISTING
Heartland’s common stock is
traded on the NASDAQ Global
Select Market System under
the symbol “HTLF.”
CORPORATE AND
INVESTOR INFORMATION
ANNUAL MEETING
In accordance with local, state and national pandemic guidance
and with the safety and health of Heartland Financial USA, Inc.
shareholders, employees and the broader community as top
priority, the company will hold a “virtual” Annual Meeting. We
invite you to electronically attend the annual meeting which
will be held on Wednesday, May 20, 2020 at 1:00 p.m. Central
Daylight Time. You will be able to attend the Annual Meeting,
vote and submit your questions during the meeting by visiting
http://virtualshareholdermeeting.com/HTLF2020. Prior to the
meeting, you will be able to vote at www.proxyvote.com.
TRANSFER AGENT/STOCKHOLDER SERVICES
Inquiries related to stockholder records, stock transfers, changes of
ownership, changes of address and dividend payments should be sent to
Heartland’s transfer agent at the following address: Broadridge Corporate
Issuer Solutions, P.O. Box 1342, Brentwood, NY 11717. They may also be
contacted by phone at 1.866.741.7520.
FORM 10-K AND OTHER INFORMATION
The company submits an annual report to the Securities and Exchange
Commission on Form 10-K. Stockholders may obtain copies of our Form 10-K
without charge by writing to Michael J. Coyle, EVP, Senior General Counsel and
Corporate Secretary, Heartland Financial USA, Inc., 1398 Central Avenue, P.O.
Box 778, Dubuque, Iowa 52004-0778. The Form 10-K is also available on the
Heartland website under the heading Investor Relations. Securities analysts
and other investors seeking additional information about Heartland should
contact Bryan R. McKeag, Chief Financial Officer, EVP, at the above address or
call him at 563.589.1994. Additional information is also available at Heartland’s
website: HTLF.com.
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
Heartland Financial USA, Inc. offers stockholders of record a simple and
convenient method of increasing holdings in our company by participating in
Heartland’s Dividend Reinvestment and Stock Purchase Plan. Participants can
directly reinvest dividends and make optional cash purchases to acquire
additional shares. They may elect to reinvest dividends on either all or a
portion of the shares they hold. Participants may also elect to purchase shares
of common stock by making optional cash payments. For additional
information regarding the Plan, or to request a copy of the Plan’s prospectus,
please call Heartland’s transfer agent, Broadridge Corporate Issuer Solutions,
toll free at 1.866.741.7520.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of Class
Common Stock $1.00 par value
Trading Symbol(s)
HTLF
Name of Each Exchange on Which Registered
The Nasdaq Global Select Market
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Securities registered pursuant to Section 12(g) of the Act:
None
Yes ☐ No ☑
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 ☑ No ☐
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 such files). Yes ☑ No ☐
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 ☑ 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 in Exchange Act Rule 12b-2). Yes ☐ No ☑
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant (assuming, for purposes of
this calculation only, that the Registrant's directors, executive officers and greater than 10% shareholders are affiliates of the Registrant),
based on the last sales price quoted on the Nasdaq Global Select Market on June 30, 2019, the last business day of the registrant's most
recently completed second fiscal quarter, was approximately $1,548,354,472.
As of February 25, 2020, the Registrant had issued and outstanding 36,766,531 shares of common stock, $1.00 par value per share.
Portions of the Proxy Statement for the 2020 Annual Meeting of Stockholders are incorporated by reference into Part III.
DOCUMENTS INCORPORATED BY REFERENCE
HEARTLAND FINANCIAL USA, INC.
Form 10-K Annual Report
Table of Contents
Part I
Item 1.
A.
B.
C.
D.
E.
Business
General Description
Market Areas
Competition
Employees
Supervision and Regulation
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Part II
Item 5.
Item 6.
Item 7.
Properties
Legal Proceedings
Mine Safety Disclosures
Information About Our Executive Officers
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Part IV
Principal Accountant Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
Item 16.
10-K Summary
Index of Exhibits
PART I
SAFE HARBOR STATEMENT
This Annual Report on Form 10-K (including information incorporated by reference) contains, and future oral and written
statements of Heartland Financial USA, Inc. and its management may contain, forward-looking statements, within the meaning
of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of
operations, plans, objectives, future performance and business of Heartland. Forward-looking statements, which may be based
upon beliefs, expectations and assumptions of Heartland's management and on information currently available to management,
are generally identifiable by the use of words such as "believe", "expect", "anticipate", "plan", "intend", "estimate", "may",
"will", "would", "could", "should" or other similar expressions. Additionally, all statements in this Annual Report on Form 10-
K, including forward-looking statements, speak only as of the date they are made, and Heartland undertakes no obligation to
update any statement in light of new information or future events.
Heartland's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. The factors which
could have a material adverse effect on the operations and future prospects of Heartland are detailed in the "Risk Factors"
section included under Item 1A. of Part I of this Annual Report on Form 10-K. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.
ITEM 1. BUSINESS
A. GENERAL DESCRIPTION
Heartland Financial USA, Inc. (individually referred to herein as "Parent Company" and collectively with all of its subsidiaries
and affiliates referred to herein as "Heartland," "we," "us," or "our") is a multi-bank holding company registered under the Bank
Holding Company Act of 1956, as amended (the "BHCA"), that was originally formed in the state of Iowa in 1981 and
reincorporated in the State of Delaware in 1993. Heartland's headquarters are located at 1398 Central Avenue, Dubuque, Iowa.
Our website address is www.htlf.com. You can access, free of charge, our filings with the Securities and Exchange Commission
(the "SEC"), including our Annual Report on Form 10-K, our quarterly reports on Form 10-Q, current reports on Form 8-K and
any other amendments to those reports, at our website under the Investor Relations tab, or at the SEC website at www.sec.gov.
Proxy materials for our upcoming 2020 Annual Shareholders Meeting to be held on May 20, 2020, will be available
electronically via a link on our website at www.htlf.com.
At December 31, 2019, Heartland had total assets of $13.21 billion, total loans held to maturity of $8.37 billion and total
deposits of $11.04 billion. Heartland’s total stockholders' equity as of December 31, 2019, was $1.58 billion. Net income
available to common stockholders for 2019 was $149.1 million.
Heartland conducts a community banking business through 11 independently branded and chartered community banks
(collectively, the "Banks") operating in the states of Iowa, Illinois, Wisconsin, New Mexico, Arizona, Montana, Colorado,
Minnesota, Kansas, Missouri, Texas and California. All Banks are members of the Federal Deposit Insurance Corporation (the
"FDIC"). Listed below are the Banks, which, as of the date of this Annual Report on Form 10-K, operate a total of 115 banking
locations:
•
•
Dubuque Bank and Trust Company, Dubuque, Iowa, is chartered under the laws of the state of Iowa.
Illinois Bank & Trust, Rockford, Illinois, is chartered under the laws of the state of Illinois.
• Wisconsin Bank & Trust, Madison, Wisconsin, is chartered under the laws of the state of Wisconsin.
•
•
•
•
New Mexico Bank & Trust, Albuquerque, New Mexico, is chartered under the laws of the state of New Mexico.
Rocky Mountain Bank, Billings, Montana, is chartered under the laws of the state of Montana.
Arizona Bank & Trust, Phoenix, Arizona, is chartered under the laws of the state of Arizona.
Citywide Banks, Denver, Colorado, is chartered under the laws of the state of Colorado.
• Minnesota Bank & Trust, Edina, Minnesota, is chartered under the laws of the state of Minnesota.
•
•
•
Bank of Blue Valley, Merriam, Kansas, is chartered under the laws of the state of Kansas.
Premier Valley Bank, Fresno, California, is chartered under the laws of the state of California.
First Bank & Trust, Lubbock, Texas, is chartered under the laws of the state of Texas.
1 Dubuque Bank and Trust Company also has two wholly-owned non-bank subsidiaries:
•
•
DB&T Insurance, Inc., a multi-line insurance agency, with one wholly-owned subsidiary:
◦
Heartland Financial USA, Inc. Insurance Services, a multi-line insurance agency with the primary purpose of
providing online insurance products to consumers and small business clients in Bank markets.
DB&T Community Development Corp., a community development company with the primary purpose of partnering
in low-income housing and historic rehabilitation projects.
First Bank & Trust has one wholly-owned mortgage company:
•
PrimeWest Mortgage Corporation, a mortgage company with the primary purpose of originating, selling and servicing
residential mortgage loans. The loans are primarily sold into the secondary market with mortgage servicing rights
retained.
Heartland has two non-bank subsidiaries as listed below:
•
•
Heartland Community Development Inc., a property management company with the primary purpose of holding and
managing certain nonperforming assets acquired from the Banks.
Citizens Finance Parent Co., a consumer finance company with two wholly-owned companies:
Citizens Finance Co., a consumer finance company with offices in Iowa and Wisconsin.
◦
Citizens Finance of Illinois Co., a consumer finance company with offices in Illinois.
◦
Prior to December 31, 2018, Heartland decided to exit the consumer finance business and entered into an agreement to sell the
loan portfolios of Citizens Finance Co. and Citizens Finance of Illinois Co. The transaction closed on January 11, 2019. The
offices in Iowa and Wisconsin closed on February 1, 2019, and the offices in Illinois closed on February 11, 2019.
In addition, as of December 31, 2019, Heartland had trust preferred securities issued through special purpose trust subsidiaries
formed for the purpose of offering cumulative capital securities including Heartland Financial Statutory Trust IV, Heartland
Financial Statutory Trust V, Heartland Financial Statutory Trust VI, Heartland Financial Statutory Trust VII, Morrill Statutory
Trust I, Morrill Statutory Trust II, Sheboygan Statutory Trust I, CBNM Capital Trust I, Citywide Capital Trust III, Citywide
Capital Trust IV, Citywide Capital Trust V, OCGI Statutory Trust III, OCGI Capital Trust IV, BVBC Capital Trust II and
BVBC Capital Trust III.
All of Heartland’s subsidiaries were wholly owned as of December 31, 2019.
The principal business of our Banks consists of making loans to and accepting deposits from businesses and individuals. Our
Banks provide full service commercial and retail banking in their communities. Both our loans and our deposits are generated
primarily through strong banking and community relationships, and through management that is actively involved in the
community. Our lending and investment activities are funded primarily by core deposits. This stable source of funding is
achieved by developing strong banking relationships with customers through value-added product offerings, competitive market
pricing, convenience and high-touch personal service. Deposit products, which are insured by the FDIC to the full extent
permitted by law, include checking and other demand deposit accounts, NOW accounts, savings accounts, money market
accounts, certificates of deposit, individual retirement accounts, health savings accounts and other time deposits. Loan products
include commercial and industrial, commercial real estate, small business, agricultural, real estate mortgage, consumer, and
credit cards for commercial, business and personal use.
We enhance the customer-centric local services of our Banks with a full complement of value-added services, including wealth
management, investment and insurance services. We provide contemporary technology solutions that provide our customers
convenient electronic banking services and client access to account information through business and personal online banking,
mobile banking, bill payment, remote deposit capture, treasury management services, credit and debit cards and automated
teller machines.
2 Business Model and Operating Philosophy
Heartland’s operating philosophy is to maximize the benefits of a community banking model by:
1. Creating strong community ties through customer-centric local bank delivery of products and services.
•
•
•
•
•
•
Deeply rooted local leadership and boards
Local community knowledge and relationships
Local decision-making
Independent charters
Locally recognized brands
Commitment to an exceptional customer experience
2. Providing extensive banking services to increase revenue.
•
•
•
•
•
Full range of commercial products, including government guaranteed lending and treasury management services
Private client services, including investment management, trust, retirement plans and brokerage and investment
services
Convenient and competitive retail products and services
Residential mortgage origination
Providing added client value through consultative relationship building
3. Centralizing back-office operations for efficiency.
•
•
•
•
•
•
Leverage expertise across all Banks
Contemporary technology for account processing and delivery systems
Efficient back-office support for loan processing and deposit operations
Centralized loan underwriting and collections
Centralized loss management and risk analysis
Centralized support for other professional services, including human resources, marketing, legal, compliance,
finance, administration, internal audit, investment management, customer support and facilities
We believe the personal and professional service we offer to our customers provides an appealing alternative to the service
provided by the "megabanks." While we are committed to a community banking philosophy, we believe our size, combined
with our robust suite of financial products and services, allows us to effectively compete in our respective market areas. To
remain price competitive, we also believe that we must manage expenses and gain economies of scale by centralizing back
office support functions. Although each of our Banks operates under the direction of its own board of directors, we have
standard operating policies regarding asset/liability management, liquidity management, investment management, and lending
and deposit structure management.
Another component of our operating strategy is to encourage all directors, officers and employees to maintain a strong
ownership interest in Heartland. We have established ownership guidelines for our directors and executive management and
have an employee stock purchase plan available to employees.
We maintain a strong community commitment by encouraging the active participation of our employees, officers and board
members in local charitable, civic, school, religious and community development activities.
Acquisition and Branch Optimization Strategy
Our primary objectives are to increase profitability and diversify our market area and asset base by expanding through
acquisitions and to grow organically by increasing our customer base in the markets we serve. In the current environment, we
are continuing to seek opportunities for growth through acquisitions. Although we are focused on opportunities in our existing
and adjacent markets, we would consider acquisitions in new growth markets if they fit our business model, support our
customer-centric culture, provide a sufficient return on investment and would be accretive to earnings within the first year of
combined operations. We typically consider acquisitions of established financial institutions, primarily commercial banks or
thrifts.
In recent years, we have focused on markets with growth potential in the Midwestern and Western regions of the United States.
Our strategy is to balance the growth in our Western markets with the stability of our Midwestern markets.
3 The following table provides information about the implementation of Heartland's expansion strategy:
Name
Farley State Bank
First National Bank of Clovis
Year
1988 Citizens Finance Co.(1)
1989 Key City Bank
1991
1992 Galena State Bank & Trust Co.
First Community Bank(2)
1994
1995 Riverside Community Bank(3)
1997 Cottage Grove State Bank(4)
1998 New Mexico Bank & Trust
1999 Bank One Monroe (branch)
2000
2003 Arizona Bank & Trust
2004 Rocky Mountain Bank
Summit Bank & Trust(5)
2006
2006 Bank of the Southwest
2008 Minnesota Bank & Trust
2009 Elizabeth State Bank
2012 Liberty Bank, FSB (three branches)
2012
2012 Heritage Bank, N.A.
2013 Morrill & Janes Bank and Trust Company
2013
2015 Community Bank & Trust (Sheboygan)
2015 Community Bank (Santa Fe)
2015
2015
2016 Centennial Bank(5)
2017
2017 Citywide Banks
Signature Bank
2018
First Bank & Trust
2018
First Scottsdale Bank, N.A.
Premier Valley Bank
First National Bank Platteville
Founders Community Bank
Freedom Bank(7)
2019 Bank of Blue Valley
2019 Rockford Bank and Trust Company
De Novo
Acquisition
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
Merged Into or Assets Purchased By
N/A
Dubuque Bank and Trust Company
Dubuque Bank and Trust Company
Illinois Bank & Trust (2015)
Dubuque Bank and Trust Company (2011)
N/A
N/A
N/A
Wisconsin Bank & Trust
New Mexico Bank & Trust
N/A
N/A
N/A
Arizona Bank & Trust
N/A
Galena State Bank & Trust Co.(6)
Dubuque Bank and Trust Company
Wisconsin Bank & Trust
Arizona Bank & Trust
N/A
Illinois Bank & Trust (2014)
Wisconsin Bank & Trust
New Mexico Bank & Trust
Arizona Bank & Trust
N/A
Summit Bank & Trust(5)
Premier Valley Bank
Centennial Bank and Trust(8)
Minnesota Bank & Trust
N/A
Morrill & Janes Bank and Trust Company(9)
Illinois Bank & Trust
(1) The loans of Citizens Finance Co. were sold in the first quarter of 2019.
(2) First Community Bank branches were sold in the second quarter of 2019.
(3) Riverside Community Bank changed its name to Illinois Bank & Trust in 2014.
(4) Cottage Grove State Bank was renamed Wisconsin Community Bank upon acquisition and subsequently changed its name to Wisconsin
Bank & Trust.
(5) Summit Bank & Trust changed its name to Centennial Bank and Trust upon the acquisition of Centennial Bank.
(6) Galena State Bank & Trust Co. was merged into Illinois Bank & Trust in 2015.
(7) Two Freedom Bank branches were sold in the second quarter of 2019.
(8) Centennial Bank and Trust changed its name to Citywide Banks upon the acquisition of Citywide Banks.
(9) Morrill & Janes Bank and Trust Company changed its name to Bank of Blue Valley upon the acquisition of Bank of Blue Valley.
Through acquisition and organic growth, our goal is to reach at least $1 billion in assets in each state where Heartland operates.
As of December 31, 2019, Dubuque Bank and Trust Company, Illinois Bank & Trust, Wisconsin Bank & Trust, New Mexico
Bank & Trust, Citywide Banks, Bank of Blue Valley and First Bank & Trust each have assets over $1 billion.
Due to changes in the competitive landscape and our customers' banking behaviors, we selectively sold, consolidated and
closed branches in 2019 and 2018. We also sold the loans of our consumer finance company. These sales, consolidations, and
closures resulted in the reduction of twelve bank branches and fourteen consumer finance offices across our footprint. We
4 anticipate these strategic activities will provide the resources to support our investments in areas that improve our customer
experiences and fuel our organic growth. As a result of our ongoing branch optimization, we may complete additional, selective
reductions in our branch network in the future.
Primary Business Lines
General
We are engaged in the business of community banking, and operate as a single business segment. Previously, we had operated
as two business segments: community banking and retail mortgage banking services. We decided to fully outsource our legacy
residential real estate lending business beginning in the fourth quarter of 2018, as more fully described in the section entitled
"Residential Real Estate Mortgage Lending," and as a result, the retail mortgage banking services segment was eliminated.
Our Banks provide a wide range of commercial, small business and consumer banking services to businesses, including public
sector and non-profit entities, and to individuals. We have a broad customer base and are not dependent upon a single or a few
customers. We provide a contemporary menu of traditional and non-traditional service channels including online banking,
mobile banking and telephone banking. Our Banks provide a comprehensive suite of banking services comprised of
competitively priced deposit and innovative credit offerings, along with treasury management and private client services.
Our bankers actively solicit the business of new companies entering their market areas as well as established companies in their
respective business communities. We believe that the Banks are successful in attracting new customers in their markets through
professional service, a suite of comprehensive banking products, competitive pricing, innovative credit facilities, convenient
locations and proactive communications. Our primary lines of business are described below.
Commercial Banking
Our Banks have a strong commercial loan base generated primarily through business networks and personal relationships in the
communities they serve. The current portfolios of the Banks reflect the businesses in those communities and include a wide
range of business loans, including lines of credit for working capital and operational purposes and term loans for the acquisition
of equipment and real estate. Although most loans are made on a secured basis, loans may be made on an unsecured basis
where warranted by the overall financial condition of the borrower. Generally, terms of commercial business loans range from
one to five years.
Commercial bankers at the Banks provide a consultative customer-centric approach utilizing the comprehensive suite of
banking products and services to deliver tailored solutions to the client in an organized and efficient manner both for the client
and the bank. Bankers are trained and experienced in providing consultative solutions to clients to assist them in accomplishing
their business strategies and objectives. The suite of banking services used to accompany this approach are developed to be at
the highest level in the industry and can be customized to fit the objectives of the client.
Closely integrated with our loan programs is a significant emphasis on treasury management services that enhance our business
clients' ability to monitor, accumulate and disburse funds efficiently. Our treasury management has five basic functions:
•
•
collection;
disbursement;
• management of cash;
•
•
information reporting; and
fraud detection and prevention.
Our treasury management services suite includes online banking and bill payment, automated clearing house ("ACH") services,
wire transfer, zero balance accounts, transaction reporting, lock box services, remote deposit capture, accounts receivable
solutions, commercial purchasing cards, merchant credit card services, investment sweep accounts, reconciliation services,
foreign exchange and several fraud prevention services, including check and electronic positive pay, and virus/malware
protection service.
5 Many of the businesses in the communities we serve are small to mid-sized businesses, and commercial lending to small
businesses has been, and continues to be, an emphasis for the Banks. The table below shows the certifications granted to the
Banks from the United States Small Business Administration ("SBA") and United States Department of Agriculture (the
"USDA") Rural Development Business and Industry loan program.
Dubuque Bank and Trust Company
Bank
Illinois Bank & Trust
Wisconsin Bank & Trust
New Mexico Bank & Trust
Arizona Bank & Trust
Rocky Mountain Bank
Citywide Banks
Minnesota Bank & Trust
Bank of Blue Valley
Premier Valley Bank
First Bank & Trust
SBA
Express
Lender
X
SBA
Preferred
Lender
SBA
Export
Express
USDA
Certified
Lender
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
Our commercial loans are primarily made based on the identified cash flow of the borrower and secondarily on the underlying
collateral provided by the borrower. We value the collateral for most of these loans based upon its estimated fair market value
and require personal guarantees in most instances. The primary repayment risks of commercial loans are that the cash flow of
the borrowers may be unpredictable, and the collateral securing these loans may fluctuate in value.
In order to limit underwriting risk, we are committed to ensuring that all loan personnel are well trained. We use a third-party
assessment to assess the credit skills and training needs for our loan personnel, and we have developed specific individualized
training. All new lending personnel are expected to complete a similar diagnostic training program. Centralized staff in the
credit administration department assists all of the commercial and agricultural lending officers of the Banks in the analysis and
underwriting of credit.
In addition to the lending personnel of the Banks reporting to their respective board of directors, we use an internal loan review
function to analyze credits of the Banks and provide periodic reports to their boards of directors. To reduce the risk of loss, we
have processes to help identify problem loans early, and we aggressively seek resolution of credit problems.
Heartland has a Special Assets group which focuses on resolving problem assets. Commercial or agricultural loans in a default
or workout status are assigned to the Special Assets group. Special Assets personnel are also responsible for marketing
repossessed properties and meet with representatives from each Bank on a quarterly basis.
Small Business Banking
Heartland's Small Business Lending Center is dedicated to serving the credit needs of small businesses with annual sales
generally under $5 million. The Small Business Lending Center is designed to provide quick turnaround on small business
customer credit requests on a wide variety of credit products. We believe that small businesses are an underserved market
segment and see additional opportunity in serving this market with competitively priced deposit offerings and convenient
electronic banking services, as well as wealth management, retirement plan services and brokerage services. The Banks have
designated business bankers and banking center managers that serve the distinct banking needs of this customer segment.
Agricultural Loans
Agricultural loans are emphasized by those Banks with operations in and around rural areas, including Dubuque Bank and Trust
Company, Rocky Mountain Bank, Wisconsin Bank & Trust's Monroe and Platteville banking centers, New Mexico Bank &
Trust’s Clovis banking offices, Bank of Blue Valley's northeast Kansas banking offices, and First Bank & Trust. Agricultural
loans constituted approximately 6% of our total loan portfolio at December 31, 2019. Dubuque Bank and Trust Company,
Wisconsin Bank & Trust and Bank of Blue Valley are designated as Preferred Lenders by the USDA Farm Service Agency (the
"FSA"). In making agricultural loans, we have policies designating a primary lending area for each Bank, in which a majority of
its agricultural operating and real estate loans are made. Under this policy, loans in a secondary market area must be secured by
real estate.
6 Agricultural
loans, many of which are secured by crops, machinery and real estate, are provided to finance capital
improvements and farm operations as well as acquisitions of livestock and machinery. Agricultural loans present unique credit
risks relating to adverse weather conditions, loss of livestock due to disease or other factors, declines in market prices for
agricultural products and the impact of government regulations. The ultimate repayment of agricultural loans is dependent upon
the profitable operation or management of the agricultural entity.
In underwriting agricultural loans, the lending officers of the Banks work closely with their customers to review budgets and
cash flow projections for the ensuing crop year. These budgets and cash flow projections are monitored closely during the year
and reviewed with the customers at least annually. The Banks also work closely with governmental agencies, including the
FSA, to help agricultural customers obtain credit enhancement products such as loan guarantees, interest assistance and crop
insurance.
Residential Real Estate Mortgage Lending
Heartland’s residential real estate mortgage lending business experienced low and declining profitability over the past several
years, and competitive changes have evolved in the residential real estate lending market, which would have required
In response,
significant investments in technology and process changes for Heartland to remain competitive in this space.
Heartland decided to fully outsource its legacy residential real estate mortgage lending business, which was completed during
the fourth quarter of 2018, by entering into arrangements with third parties to offer residential mortgage loans to customers in
many of our markets. Additionally, in the second quarter of 2019, Heartland's Dubuque Bank and Trust Company subsidiary
sold substantially all of its mortgage servicing rights portfolio. Residential mortgage loans originated after the transition
through third parties are not being serviced by us.
With our acquisition in 2018 of First Bank & Trust in Lubbock, Texas, we acquired its wholly owned mortgage subsidiary,
PrimeWest Mortgage Corporation. PrimeWest Mortgage Corporation was not included in the outsourcing changes and
continues to provide mortgage loans to customers in Texas and has expanded to also serve the mortgage needs of our customers
in several of our southwestern markets. PrimeWest Mortgage Corporation continues to service the loans it sells into the
secondary market. At December 31, 2019, residential real estate mortgage loans serviced by PrimeWest Mortgage Corporation,
primarily for government sponsored entities ("GSE"), totaled $616.7 million.
Retail Banking
A wide variety of retail banking services are delivered through our 115 banking centers. Services include checking, savings,
money market accounts, certificates of deposit, individual retirement accounts ("IRAs"), health savings accounts ("HSAs") and
consumer credit cards. Brokerage services, including fixed rate annuity products are also provided in many locations. Consumer
lending services of the Banks include a broad array of consumer loans, including motor vehicle, home improvement, home
equity lines of credit ("HELOC"), fixed rate home equity and personal lines of credit.
Our Banks continue to enhance our retail customers' banking experience through the addition of secure electronic banking
options including on-line account opening and mobile banking. Our retail customers receive high-touch service in our banking
center locations and further enjoy the convenience of on-line bill pay, mobile deposit, and 24-hour access to account detail. As
technology advances, we are committed to offering our customers the convenience of online and mobile delivery channels with
the security they expect.
Private Client Services
In most markets where the Banks operate, trust and investment services are offered to customers in the community. In the
Heartland markets that do not yet warrant a full trust department, the sales and administration of trust and investment services is
performed by Dubuque Bank and Trust Company personnel. As of December 31, 2019, total trust assets under management
were $3.03 billion. Collectively, the Banks provide a full complement of trust, investment and financial planning services for
individuals and corporations. Heartland also specializes in Retirement Plan Services, offering business clients customized
401(k), 403(b) and Profit Sharing plans.
Heartland has contracted with LPL Financial Institution Services, a division of LPL Financial, to operate independent securities
brokerage offices at the majority of the Banks. Through LPL Financial, Heartland offers a full array of investment services
including mutual funds, annuities, retirement products, education savings products, brokerage services, employer sponsored
plans and insurance products. A complete line of vehicle, property and casualty, life and disability insurance is also offered by
Heartland through DB&T Insurance, Inc. and Heartland Financial USA, Inc. Insurance Services.
7 B. MARKET AREAS
Heartland is a geographically diversified company with a Midwestern and Western franchise, which balances the risk of
regional economic fluctuations. In general, we view our Midwest markets as stable with slower growth prospects and the West
as offering greater opportunities for growth accompanied by the potential of wider economic swings. We strive to balance the
growth in our Western markets with the stability of our Midwestern markets. The following table sets forth certain information
about the offices and total deposits of each of the Banks as of December 31, 2019, (dollars in thousands):
Charter
State
IA
IL
Bank
Name
Dubuque Bank and Trust Company
Illinois Bank & Trust
WI
Wisconsin Bank & Trust
NM
New Mexico Bank & Trust
AZ
MT
Arizona Bank & Trust
Rocky Mountain Bank
Total
Bank
Deposits
$ 1,290,756
$ 1,167,905
$
941,109
$ 1,565,070
$
$
693,975
468,314
Banking
Locations
6
2
2
6
3
1
5
2
2
1
9
2
3
2
1
6
2
2
1
1
1
1
1
Market
Areas
Served
Dubuque MSA
Galena
Jo Daviess County
Rockford MSA
Madison MSA
Green Bay MSA
Sheboygan MSA
Milwaukee County
Grant County
Green County
Albuquerque MSA
Santa Fe MSA
Clovis MSA
Rio Arriba County
Los Alamos County
Phoenix MSA
Billings MSA
Flathead County
Gallatin County
Ravalli County
Jefferson County
Sanders County
Sheridan County
8 Charter
State
CO
Citywide Banks
Bank
Name
MN
KS
Minnesota Bank & Trust
Bank of Blue Valley
CA
Premier Valley Bank
TX
First Bank & Trust
Banking
Locations
11
4
2
2
1
1
1
1
2
8
1
2
1
1
1
1
4
1
4
2
1
1
Market
Areas
Served
Denver MSA
Jefferson County
Arapahoe County
Boulder County
Eagle County
Grand County
Clear Creek County
Summit County
Minneapolis/St. Paul MSA
Kansas City MSA
Nemaha County
Brown County
Atchison County
Fresno MSA
Madera County
Mariposa County
San Luis Obispo County
Tuolumne County
Lubbock, TX MSA
Lynn County
Mitchell County
Scurry County
Total
Bank
Deposits
$ 1,829,217
$
574,369
$ 1,016,743
$
707,814
$
893,419
C. COMPETITION
We face direct competition for deposits, loans and other financial related services. To compete effectively, develop our market
share, maintain flexibility and keep pace with changing consumer preferences, business and economic conditions, we
continuously refine and develop our banking products and services. We have found the principal methods of competing in the
financial services industry are through personal service, product selection, convenience and technology.
The market areas of the Banks are highly competitive, and our competitors are comprised of other commercial banks, credit
unions, thrifts, stock brokers, mutual fund companies, mortgage companies and loan production offices, insurance companies
and on-line providers and other non-bank financial service companies. Some of these competitors are local, while others are
regional, national or global.
Under the Gramm-Leach-Bliley Act, effective in 2000, securities firms and insurance companies that elect to become financial
holding companies may acquire banks and other financial institutions. As a result of the enactment of the Wall Street Reform
and Consumer Protection Act (the "Dodd-Frank Act") in 2010, substantial changes to the regulation of bank holding companies
and their subsidiaries have occurred, significantly changing the regulatory environment in which we operate. The Dodd-Frank
Act originally mandated certain enhanced prudential standards for bank holding companies with greater than $50 billion in total
consolidated assets as well as company-run stress tests for firms with greater than $10 billion in assets. On May 24, 2018, the
Economic Growth, Regulatory Relief and Consumer Protection Act (the "Economic Growth Act") was signed into law. The
Economic Growth Act exempted bank holding companies under $100 billion in assets from these requirements immediately
upon enactment. This change shifts the increased costs of these requirements to bank holding companies with assets of $100
billion or more, removing a deterrent to merger and acquisition activity by institutions that were approaching $50 billion in
assets.
The financial services industry is also likely to face heightened competition as technological advances enable more companies
to provide financial services. These technological advances may diminish the importance of depository institutions and other
financial intermediaries in the transfer of funds between parties.
9 We believe we are positioned to compete for loans effectively through the array and quality of the credit services we provide,
and the high-touch, customer-centric way in which we provide them. We invest in building long-lasting customer relationships,
and our strategy is to serve our customers above and beyond their expectations through excellence in customer service and
providing banking solutions that are tailored to our customers’ needs. We believe that our long-standing presence and
commitment to the communities we serve and the personal service we emphasize enhance our ability to compete favorably in
attracting and retaining consumer and business customers. We continue to attract deposit-oriented customers by offering
personal attention, combined with contemporary electronic banking convenience, professional service and competitive interest
rates. The breadth of our product suite, coupled with our superior customer service, allows us to compete favorably with our
larger competitors.
D. EMPLOYEES
At December 31, 2019, Heartland employed 1,908 full-time equivalent employees, none of whom are covered by a collective
bargaining agreement.
E. SUPERVISION AND REGULATION
General
Financial institutions, their holding companies, and their affiliates are extensively regulated under federal and state law. As a
result, the growth and earnings performance of Heartland may be affected not only by management decisions and general
economic conditions, but also by the requirements of federal and state statutes and by the regulations and policies of various
bank regulatory authorities. Both the scope of the laws and regulations and the intensity of the supervision to which Heartland
is subject have increased in recent years because of the increase in Heartland's asset size and the industry response to the
financial crisis, as well as other factors such as technological and market changes. Regulatory enforcement and fines have also
increased across the banking and financial services sector. Many of these changes have occurred as a result of the Dodd-Frank
Act and its implementing regulations. While the regulatory environment has entered a period of rebalancing of the post
financial crisis framework, notably with the passage of the Economic Growth Act, Heartland expects that its business will
remain subject to extensive regulation and supervision.
As a bank holding company with subsidiary banks chartered under the laws of eleven different states, Heartland is regulated by
the Board of Governors of the Federal Reserve System (the "Federal Reserve"). Each of the Banks is regulated by the FDIC as
its principal federal regulator and one of the following as its state regulator: the Arizona State Banking Department (the
"Arizona Department"); the California Department of Business Oversight, Division of Financial Institutions (the "California
Division"); the Colorado Department of Regulatory Agencies, Division of Banking (the "Colorado Division"); the Illinois
Department of Financial and Professional Regulation (the "Illinois DFPR"); the Iowa Superintendent of Banking (the "Iowa
Superintendent"); the State Bank Commissioner of Kansas Division of Banking (the "Kansas Division"); the Minnesota
Department of Commerce: Division of Financial Institutions (the "Minnesota Division"); the Montana Division of Banking and
Financial Institutions (the "Montana Division"); the New Mexico Financial Institutions Division (the "New Mexico FID"); the
Texas Department of Banking (the "Texas Division"); and the Division of Banking of the Wisconsin Department of Financial
Institutions (the "Wisconsin DFI").
Federal and state laws and regulations generally applicable to financial institutions regulate, among other things, the scope of
business, the kinds and amounts of investments, reserve requirements, capital levels, the establishment of branches, mergers
and consolidations and the payment of dividends. This system of supervision and regulation establishes a comprehensive
framework for the respective operations of Heartland and its subsidiaries and is intended primarily for the protection of the
FDIC-insured deposits and depositors, consumers, the stability of the financial system in the United States, and the health of the
national economy, rather than stockholders.
Federal and state banking regulators regularly examine Heartland and its subsidiaries to evaluate their financial condition and
monitor their compliance with laws and regulatory policies. Following those exams, Heartland and the Banks are assigned
supervisory ratings. These ratings are considered confidential supervisory information and disclosure to third parties is not
allowed without permission of the issuing regulator. Violations of laws and regulations or deemed deficiencies in risk
management practices may be incorporated into these supervisory ratings. A downgrade in these ratings could limit Heartland’s
ability to pursue acquisitions or conduct other expansionary activities for a period of time, require new or additional regulatory
approvals before engaging in certain other business activities or investments, affect a subsidiary bank’s deposit insurance
assessment rate, and impose additional recordkeeping and corporate governance requirements, as well as generally increase
regulatory scrutiny of Heartland.
10 Banking and other financial services statutes, regulations and policies are continually under review by Congress, state
legislatures and federal and state regulatory agencies. In addition to laws and regulations, state and federal bank regulatory
agencies may issue policy statements, interpretive letters and similar written guidance applicable to Heartland and its
subsidiaries. Any change in the statutes, regulations or regulatory policies including changes in their interpretation or
implementation, may have a material effect on the business of Heartland and its subsidiaries.
This section summarizes material elements of the regulatory framework that applies to Heartland and its subsidiaries. It does
not describe all of the applicable statutes, regulations and regulatory policies that apply, nor does it disclose all of the
requirements of the statutes, regulations and regulatory policies requirements that are described.
Economic Growth, Regulatory Relief and Consumer Protection Act
On May 24, 2018, the Economic Growth Act was signed into law, easing various regulatory requirements and reducing the cost
of complying with the original Dodd-Frank Act.
•
•
•
•
•
Among other regulatory changes, the Economic Growth Act amends various sections of the Dodd-Frank Act,
providing relief from Dodd-Frank’s enhanced prudential standards and regulatory and company-run stress tests. The
Dodd-Frank Act originally mandated certain enhanced prudential standards for bank holding companies with greater
than $50 billion in total consolidated assets as well as company-run stress tests for firms with greater than $10 billion
in assets. As a result of the Economic Growth Act, bank holding companies with less than $100 billion in assets are no
longer required to comply with Dodd-Frank requirements related to resolution planning, liquidity risk management,
internal liquidity stress testing, the liquidity coverage ratio, debt-to-equity limits, and capital planning.
In addition, the Economic Growth Act increased the threshold for requiring a dedicated board risk committee from $10
billion in total consolidated assets (established under the Dodd-Frank Act) to $50 billion in total consolidated assets.
The Economic Growth Act amends the Volcker Rule by narrowing the definition of "banking entity" and revising the
statutory provisions related to the naming of covered funds.
The Economic Growth Act provides that a depository institution must only assign a heightened risk weight to High
Volatility Commercial Real Estate exposures as defined in the Economic Growth Act.
The Economic Growth Act also provides an exemption to the appraisal requirements for certain transactions with
values of less than $400,000 involving real property or an interest in real property that is located in a rural area, as
defined in the Economic Growth Act.
Most of the changes required by the Economic Growth Act applicable to bank holding companies with less than $100 billion in
assets were effective upon adoption or have been effectively implemented by interim rules and regulatory policy statements.
Furthermore, as required by the Economic Growth Act, in November 2019, the Federal Reserve and FDIC adopted rules further
tailoring their supervision and regulation of large bank holding companies with more than $100 billion in assets.
The federal banking agencies indicated through interagency guidance that the capital planning and risk management practices
of institutions with total assets less than $100 billion would continue to be reviewed through the regular supervisory process,
which may offset the impact of the relief from stress testing and risk management requirements provided by the Economic
Growth Act.
Regulation of Heartland
General
Heartland, as the sole shareholder of Dubuque Bank and Trust Company, New Mexico Bank & Trust, Rocky Mountain Bank,
Wisconsin Bank & Trust, Illinois Bank & Trust, Arizona Bank & Trust, Citywide Banks, Minnesota Bank & Trust, Bank of
Blue Valley, Premier Valley Bank and First Bank & Trust, is a bank holding company. As a bank holding company, Heartland
is registered with, and is subject to regulation, supervision and examination by, the Federal Reserve under the BHCA.
In accordance with Federal Reserve policy, Heartland is expected to act as a source of financial and managerial strength to the
Banks and to commit resources to support the Banks in circumstances where Heartland might not otherwise do so. In addition,
under the Dodd-Frank Act, the FDIC has backup enforcement authority over a depository institution holding company, such as
Heartland, if the conduct or threatened conduct of the holding company poses a risk to the Deposit Insurance Fund, although
such authority may not be used if the holding company is in sound condition and does not pose a foreseeable and material risk
to the insurance fund.
11 Under the BHCA, Heartland is subject to examination by the Federal Reserve. Supervision and examinations are confidential,
and the outcomes of these actions will not be made public. Heartland is also required to file with the Federal Reserve periodic
reports of Heartland's operations and such additional information regarding Heartland and its subsidiaries as the Federal
Reserve may require.
Acquisitions, Activities and Change in Control
The primary purpose of a bank holding company is to control and manage banks. The BHCA generally requires the prior
approval of the Federal Reserve for any merger involving a bank holding company or any acquisition by a bank holding
company. Subject to certain conditions (including certain deposit concentration limits established by the BHCA), the Federal
Reserve may allow a bank holding company to acquire banks located in any state of the United States. In approving interstate
acquisitions, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of
deposits that may be held by the acquiring bank holding company and its insured depository institution affiliates in the state in
which the target bank is located (provided that those limits do not discriminate against out-of-state depository institutions or
their holding companies).
The BHCA generally prohibits Heartland from acquiring direct or indirect ownership or control of more than 5% of the voting
shares of any company that is not a bank and from engaging in any business other than that of banking, managing and
controlling banks, or furnishing services to banks and their subsidiaries. This general prohibition is subject to a number of
exceptions. The principal exception allows bank holding companies to engage in, and to own shares of companies engaged in,
certain businesses found by the Federal Reserve to be "so closely related to banking ... as to be a proper incident thereto." This
authority permits bank holding companies, such as Heartland, to engage in a variety of banking-related businesses, including
consumer finance, equipment leasing, mortgage banking, brokerage and the operation of a computer service bureau (which may
engage in software development). Under the Dodd-Frank Act, however, any non-bank subsidiary would be subject to regulation
no less stringent than the regulation applicable to the lead bank of the bank holding company. The BHCA generally does not
place territorial restrictions on the domestic activities of non-bank subsidiaries of bank holding companies.
Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA may elect to operate
as financial holding companies which may engage in, or own shares in companies engaged in, a wider range of nonbanking
activities. As of the date of this Annual Report on Form 10-K, Heartland has not applied for approval to operate as a financial
holding company.
Federal law also prohibits any person or persons acting in concert from acquiring "control" of an FDIC-insured institution or its
holding company without prior notice to the appropriate federal bank regulator or any other company from acquiring "control"
without Federal Reserve approval to become a bank holding company. "Control" is conclusively presumed to exist upon the
acquisition of 25% or more of the outstanding voting securities of a bank or bank holding company, but may exist at 10%
ownership levels for public companies, such as Heartland, and under certain other circumstances. Each of the Banks is
generally subject to similar restrictions on changes in control under the law of the state granting its charter.
Capital Requirements
Bank holding companies and their subsidiary financial institutions are required to maintain minimum levels of capital in
accordance with Federal Reserve and FDIC regulations. These requirements include quantitative measures that assign risk
weightings to assets and off-balance sheet items and define and set minimum regulatory capital ratios. Failure to meet minimum
capital requirements can initiate certain mandatory, and possible additional discretionary, actions by the federal banking
regulators that, if undertaken, could have a material adverse effect on the financial condition and results of operations of a bank
holding company and its subsidiaries. Federal banking regulators are required by law to take prompt action when institutions
are viewed as engaging in unsafe or unsound practices or do not meet certain minimum capital requirements. In addition to
other potential actions, failure to meet regulatory capital requirements would result in limitations on capital distributions as well
as executive bonuses. The Federal Reserve, FDIC and applicable state banking regulators may determine that a banking
organization, based on its size, complexity or risk profile, must maintain a higher level of capital in order to operate in a safe
and sound manner. In addition, if a bank holding company is not well-capitalized, it will have difficulty engaging in acquisition
transactions.
The regulations of the Federal Reserve and the FDIC as the primary regulator of state banks, separate capital into three
components, Common Equity Tier 1 capital, Tier 1 or "Core" capital and Tier 2 or "Supplementary" capital, and test these
capital components based on their ratio to assets and to "risk weighted assets." Common Equity Tier 1 capital consists of
common stockholders' equity. Tier 1 capital generally consists of (a) common stockholders' equity, qualifying noncumulative
preferred stock, and to the extent they do not exceed 25% of total Tier 1 capital, qualifying cumulative perpetual preferred stock
and, for some institutions, trust preferred securities, and (b) among other things, goodwill and specified intangible assets, credit
enhancing strips and investments in unconsolidated subsidiaries. Tier 2 capital includes, to the extent not in excess of Tier 1
12 capital, the allowance for loan losses, other qualifying perpetual preferred stock, certain hybrid capital instruments, qualifying
term subordinated debt and certain trust preferred securities not otherwise included in Tier 1 capital. Risk weighted assets
include the sum of specific assets of an institution multiplied by risk weightings for each asset class.
Under Basel III, the Federal Reserve's capital guidelines applicable to bank holding companies, like the regulations applicable
to subsidiary banks, require holding companies to comply with a leverage requirement consisting of a minimum ratio of Tier 1
capital to total assets (the "Leverage Ratio") of 4.0%. The Basel III capital standard also requires a capital conservation buffer
designed to absorb losses during periods of economic stress and composed entirely of common equity Tier 1 capital. Basel III
requires a capital conservation buffer of 2.5% on top of the minimum risk-weighted asset ratios, resulting in three minimum
risk-based capital ratios: (i) a Common Equity Tier 1 capital to risk-weighted assets ratio ("Common Equity Tier 1 Capital
Ratio") of 7.0%; (ii) a Tier 1 capital to total risk-weighted assets ratio (the "Tier1 Capital Ratio") of 8.5% and (iii) a total
capital to total risk-weighted assets ratio (the "Total Capital Ratio") of 10.5%. The Basel III Rules generally require that
Common Equity Tier 1 capital include the effects of other comprehensive income adjustments, such as gains and losses on
securities held to maturity, but allow institutions, such as Heartland, to make a one-time election not to include those effects.
Heartland and its Banks elected not to include the effects of other comprehensive income in Common Equity Tier 1 capital.
If an institution grows beyond $15 billion in assets as a result of mergers or acquisitions, it loses its ability to include trust
preferred securities in Tier 1 capital. Previously issued trust preferred securities are excluded from Tier 1 capital but remain
included in Tier 2 capital. Heartland had $13.21 billion of assets as of December 31, 2019, and classified $145.2 million of trust
preferred securities as Tier 1 capital. On February 11, 2020, Heartland announced the planned acquisition of AIM Bancshares,
Inc., which had $1.78 billion in assets as of December 31, 2019. With the completion of this pending acquisition, Heartland is
expected to exceed $15.0 billion in assets, and Heartland will no longer be able to include its trust preferred securities as Tier 1
capital. However, Heartland expects to remain well-capitalized under all regulatory capital ratio requirements after its assets
exceed $15.0 billion.
Further, federal law and regulations provide various incentives for financial institutions to maintain regulatory capital at levels
in excess of minimum regulatory requirements. For example, a financial institution generally must be "well-capitalized" to
engage in acquisitions, and well-capitalized institutions may qualify for exemptions from prior notice or application
requirements otherwise applicable to certain types of activities and may qualify for expedited processing of other required
notices or applications. Additionally, one of the criteria that determines a bank holding company's eligibility to operate as a
financial holding company is a requirement that both the holding company and all of its financial institution subsidiaries be
"well-capitalized." In order to be "well-capitalized" a financial institution must maintain a Leverage Ratio of 5.0% or greater, a
Common Equity Tier 1 Capital Ratio of 6.5% or greater, a Tier 1 Capital Ratio of 8.0% or greater, and a Total Capital Ratio of
10.0% or greater. As of December 31, 2019, Heartland had regulatory capital in excess of the Federal Reserve requirements for
well-capitalized bank holding companies
In December 2018, the United States federal banking agencies finalized standards that permit bank holding companies and
banks to phase-in, for regulatory capital purposes, the day-one impact as of January 1, 2020, of the new current expected credit
loss accounting standard on retained earnings over a period of three years. For further discussion of the new current expected
credit loss accounting standard, see Note 1 of the consolidated financial statements.
Stress Testing
The Dodd-Frank Act requires certain institutions to conduct an annual "stress test" of capital and consolidated earnings and
losses under a base case and two severely adverse stress scenarios. The Economic Growth Act raised the asset threshold for
stress testing from $10 billion in average total consolidated assets to $100 billion for bank holding companies. As a result
Heartland, as well as its Banks, are no longer subject to stress test regulations or any requirement to publish the results of stress
testing. Despite elimination of this requirement, Heartland plans to continue to perform certain stress tests internally and
incorporate the economic models and information developed through its stress testing program into its risk management and
business planning activities.
Dividend Payments
Heartland's ability to pay dividends to its stockholders may be affected by both general corporate law consideration, minimum
regulatory capital requirements and policies of the Federal Reserve applicable to bank holding companies. As a Delaware
corporation, Heartland is subject to the limitations of the Delaware General Corporation Law (the "DGCL"), which allows
Heartland to pay dividends only out of its surplus (as defined and computed in accordance with the provisions of the DGCL) or,
if Heartland has no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding
fiscal year. In addition, policies of the Federal Reserve suggest that a bank holding company should not pay cash dividends
unless its net income available to common stockholders over the past year has been sufficient to fully fund the dividends and
13 the prospective rate of earnings retention appears consistent with its capital needs, asset quality, and overall financial condition.
The Federal Reserve also possesses enforcement powers over bank holding companies and their non-bank subsidiaries to
prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among
these powers is the ability to proscribe the payment of dividends by banks and bank holding companies.
Regulation of the Banks
General
All of the Banks are state chartered, non-member banks, which means that they are all formed under state law and are not
members of the Federal Reserve System. As a result, each Bank is subject to direct regulation by the banking authorities in the
state in which it was chartered, as well as by the FDIC as its primary federal regulator.
Dubuque Bank and Trust Company is an Iowa-chartered bank. As an Iowa-chartered bank, Dubuque Bank and Trust Company
is subject to the examination, supervision, reporting and enforcement requirements of the Iowa Superintendent, the chartering
authority for Iowa banks.
Illinois Bank & Trust is an Illinois-chartered bank. As an Illinois-chartered bank, Illinois Bank & Trust is subject to the
examination, supervision, reporting and enforcement requirements of the Illinois DFPR, the chartering authority for Illinois
banks.
Wisconsin Bank & Trust is a Wisconsin-chartered bank. As a Wisconsin-chartered bank, Wisconsin Bank & Trust is subject to
the examination, supervision, reporting and enforcement requirements of the Wisconsin DFI, the chartering authority for
Wisconsin banks.
New Mexico Bank & Trust is a New Mexico-chartered bank. As a New Mexico-chartered bank, New Mexico Bank & Trust is
subject to the examination, supervision, reporting and enforcement requirements of the New Mexico FID, the chartering
authority for New Mexico banks.
Arizona Bank & Trust is an Arizona-chartered bank. As an Arizona-chartered bank, Arizona Bank & Trust is subject to the
examination, supervision, reporting and enforcement requirements of the Arizona Department, the chartering authority for
Arizona banks.
Rocky Mountain Bank is a Montana-chartered bank. As a Montana-chartered bank, Rocky Mountain Bank is subject to the
examination, supervision, reporting and enforcement requirements of the Montana Division, the chartering authority for
Montana banks.
Citywide Banks is a Colorado-chartered bank. As a Colorado-chartered bank, Citywide Banks is subject to the examination,
supervision, reporting and enforcement requirements of the Colorado Division, the chartering authority for Colorado banks.
Minnesota Bank & Trust is a Minnesota-chartered bank. As a Minnesota-chartered bank, Minnesota Bank & Trust is subject to
the examination, supervision, reporting and enforcement requirements of the Minnesota Division, the chartering authority for
Minnesota banks.
Bank of Blue Valley is a Kansas-chartered bank. As a Kansas-chartered bank, Bank of Blue Valley is subject to the
examination, supervision, reporting and enforcement requirements of the Kansas Division, the chartering authority for Kansas
banks.
Premier Valley Bank is a California-chartered bank. As a California-chartered bank, Premier Valley Bank is subject to the
examination, supervision, reporting and enforcement requirements of the California Division, the chartering authority for
California banks.
First Bank & Trust is a Texas-chartered bank. As a Texas-chartered bank, First Bank & Trust is subject to the examination,
supervision, reporting and enforcement requirements of the Texas Division, the chartering authority for Texas banks.
Deposit Insurance
The FDIC is an independent federal agency that insures the deposits, up to $250,000 per depositor, of federally insured banks
and savings institutions and safeguards the safety and soundness of the commercial banking and thrift industries.
14 As FDIC-insured institutions, the Banks are required to pay deposit insurance premium assessments to the FDIC using a risk-
based assessment system based upon average total consolidated assets minus tangible equity of the insured bank.
The Dodd-Frank Act directed that the minimum deposit insurance fund reserve ratio would increase from 1.15% to 1.35% by
September 30, 2020, and that the cost of the increase be borne by depository institutions with assets of $10 billion or more. This
requirement was met effective September 30, 2018, at which time the FDIC's reserve ratio exceeded 1.35%.
The Dodd-Frank Act also provides the FDIC with discretion to determine whether to pay rebates to insured depository
institutions when its deposit insurance reserves exceed certain thresholds. Previously, the FDIC was required to give rebates to
depository institutions equal to the excess once the reserve ratio exceeded 1.50%, and was required to rebate 50% of the excess
over 1.35% but not more than 1.50% of insured deposits. In July 2016, the FDIC implemented rules for the reserve ratio
requirements of the Dodd-Frank Act. Under the rules, banks with assets of less than $10 billion will receive assessment credits
for the portion of their assessments that contribute to the increase in the reserve ratio from 1.15% to 1.35%. The FDIC will
apply the credits each quarter that the bank's reserve ratio is at or above 1.38% to offset the regular deposit insurance
assessments. The Banks had credits applied to their FDIC insurance assessments starting in the second half of 2019, and at
December 31, 2019, the Banks had $1.2 million of credits remaining that will be applied to their FDIC insurance assessments in
future periods.
In addition, all institutions with deposits insured by the FDIC were required to pay assessments to fund interest payments on
bonds issued by the Financing Corporation ("FICO"), an agency of the federal government established to recapitalize the
predecessor to the Savings Association Insurance Fund. The assessment rate for the first quarter of 2019 was 0.0140% of total
assets. The assessment rate for the second quarter of 2019 was 0.0120% of total assets and was the final assessment payable as
all outstanding FICO bonds were then retired.
Supervisory Assessments
Each of the Banks is required to pay supervisory assessments to its respective state banking regulator to fund the operations of
that agency. In general, the amount of the assessment is calculated on the basis of each institution's total assets. During 2019,
the Banks paid supervisory assessments totaling $1.2 million.
Capital Requirements
Like Heartland, under current federal regulations, each Bank is required to maintain the minimum Leverage Ratio, Common
Equity Tier 1 Capital Ratio, Tier 1 Capital Ratio and Total Capital Ratio described under the caption "Heartland-Capital
Requirements" above. The capital requirements described above are minimum requirements and higher capital levels may be
required if warranted by the particular circumstances or risk profiles of individual institutions. For example, federal regulators
may require additional capital to take adequate account of, among other things, interest rate risk or the risks posed by
concentrations of credit, nontraditional activities or securities trading activities.
Federal law also provides the federal banking regulators with broad power to take prompt corrective action to resolve the
problems of undercapitalized institutions. The extent of the regulators' powers depends on whether the institution in question is
"adequately capitalized," "undercapitalized," "significantly undercapitalized" or "critically undercapitalized," in each case as
defined by regulation. Depending upon the capital category to which an institution is assigned, the regulators' corrective powers
include: (i) requiring the institution to submit a capital restoration plan; (ii) limiting the institution's asset growth and restricting
its activities; (iii) requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired;
(iv) restricting transactions between the institution and its affiliates; (v) restricting the interest rate the institution may pay on
deposits; (vi) ordering a new election of directors of the institution; (vii) requiring that senior executive officers or directors be
dismissed; (viii) prohibiting the institution from accepting deposits from correspondent banks; (ix) requiring the institution to
divest certain subsidiaries; (x) prohibiting the payment of principal or interest on subordinated debt; and (xi) ultimately,
appointing a receiver for the institution.
As of December 31, 2019: (i) none of the Banks was subject to a directive from its primary federal regulator to increase its
capital; (ii) each of the Banks exceeded its minimum regulatory capital requirements under applicable capital adequacy
guidelines; (iii) each of the Banks was "well-capitalized," as defined by applicable regulations; and (iv) none of the Banks were
subject to a directive to maintain capital higher than the regulatory capital requirements, as discussed below under the caption
"Safety and Soundness Standards."
Liability of Commonly Controlled Institutions
Under federal law, institutions insured by the FDIC may be liable for any loss incurred by, or reasonably expected to be
incurred by, the FDIC in connection with the default of commonly controlled FDIC-insured depository institutions or any
15 assistance provided by the FDIC to commonly controlled FDIC-insured depository institutions in danger of default. Because
Heartland controls each of the Banks, the Banks are commonly controlled for purposes of these provisions of federal law.
including the Banks,
Anti-Money Laundering
The Bank Secrecy Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001 (the "PATRIOT Act") and other related federal laws and regulations require financial
institutions,
to implement policies and procedures relating to anti-money laundering, customer
identification and due diligence requirements and the reporting of certain types of transactions and suspicious activity. In May
2016, the Financial Crimes Enforcement Network published a final rule that requires financial institutions to develop policies,
procedures and practices to prevent and deter money laundering. The program must be a written board-approved program that
is reasonably designed to identify and verify the identities of beneficial owners of legal entity customers at the time a new
account is opened. The program must, at a minimum (1) provide for a system of internal controls to assure ongoing compliance;
(2) designate a compliance officer; (3) establish an ongoing employee training program; and (4) implement an independent
audit function to test programs. Financial institutions were required to comply with the new rule beginning May 11, 2018. This
rule has increased compliance costs for the Banks.
Dividend Payments
The primary source of funds for Heartland is dividends from the Banks. In general, the Banks may only pay dividends either
out of their historical net income after any required transfers to surplus or reserves have been made or out of their retained
earnings.
The payment of dividends by any financial institution is affected by the requirement to maintain adequate capital pursuant to
applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any
dividends if, following payment thereof, the institution would be undercapitalized. As described above, each of the Banks
exceeded its minimum capital requirements under applicable guidelines as of December 31, 2019.
As of December 31, 2019, approximately $331.5 million was available in retained earnings at the Banks for payment of
dividends to Heartland under the regulatory capital requirements to remain well-capitalized. Notwithstanding the availability of
funds for dividends, however, the FDIC and state regulators may reduce or prohibit the payment of dividends by the Banks.
Transactions with Affiliates
The Federal Reserve regulates transactions among Heartland and its subsidiaries. Generally, the Federal Reserve Act and
Regulation W, as amended by the Dodd-Frank Act, limit lending and certain other "covered transactions" as well as other
transactions between the Banks and their affiliates, including Heartland and its subsidiaries and for the primary purpose of
protecting the interests of the Banks. The aggregate amount of "covered transactions" a Bank may enter into with an affiliate
may not exceed 10% of the capital stock and surplus of the Bank. The aggregate amount of "covered transactions" with all
affiliates may not exceed 20% of the capital stock and surplus of the Bank.
"Covered transactions" between each Bank and its affiliates are also subject to collateralization requirements and must be
conducted on arm’s length terms. "Covered transactions" include (a) a loan or extension of credit by a Bank, including
derivative contracts, (b) a purchase of securities issued to a Bank, (c) a purchase of assets by a Bank unless otherwise exempted
by the Federal Reserve, (d) acceptance of securities issued by an affiliate to the Bank as collateral for a loan, and (e) the
issuance of a guarantee, acceptance or letter of credit by a Bank on behalf of an affiliate.
While the quantitative limits and collateral requirement described above are generally not applicable to transactions between
Banks, all affiliate transactions, including those between Banks, are subject to safety and soundness requirements, prohibitions
on the purchase of low-quality assets, and certain other requirements and most affiliate transactions are required to be on market
terms and conditions at least as favorable to the Bank as comparable transactions with non-affiliates.
Insider Transactions
The Banks are subject to certain restrictions imposed by federal law on extensions of credit to Heartland and its subsidiaries, on
investments in the stock or other securities of Heartland and its subsidiaries and the acceptance of the stock or other securities
of Heartland or its subsidiaries as collateral for loans made by the Banks. Certain limitations and reporting requirements are
also placed on extensions of credit by each of the Banks to its directors and officers, to directors and officers of Heartland and
its subsidiaries, to principal stockholders of Heartland and to "related interests" of such directors, officers and principal
stockholders. In addition, federal law and regulations may affect the terms upon which any person who is a director or officer of
Heartland or any of its subsidiaries or a principal stockholder of Heartland may obtain credit from banks with which the Banks
maintain correspondent relationships.
16 Safety and Soundness Standards
The federal banking agencies have adopted guidelines that establish operational and managerial standards to promote the safety
and soundness of federally insured depository institutions. The guidelines set forth standards for internal controls, information
systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation,
fees and benefits, vendor and model risk management, asset quality and earnings. In general, the safety and soundness
guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures
to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines, the institution's
primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. If an institution
fails to submit an acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been
accepted by its primary federal regulator, the regulator is required to issue an order directing the institution to cure the
deficiency. Until the deficiency cited in the regulator's order is cured, the regulator may restrict the institution's rate of growth,
require the institution to increase its capital, restrict the rates the institution pays on deposits or require the institution to take
any action the regulator deems appropriate under the circumstances. Noncompliance with the standards established by the
safety and soundness guidelines may also constitute grounds for other enforcement action by the federal banking regulators,
including cease and desist orders and civil money penalty assessments.
In June 2016, the Federal Reserve Board issued supervisory guidance for assessing risk management for supervised institutions
with total consolidated assets of less than $50 billion ("SR 16-11"). This guidance provides four key areas to evaluate in
assessing a risk management system: board and senior management oversight of risk management; policies, procedures and
limits; risk monitoring and management information systems and internal controls. In August 2017, the Federal Reserve Board
issued proposed guidance addressing supervisory expectations of boards of directors that includes a proposal to further revise
and align the supervisory expectations of boards of directors in areas beyond risk management with the board expectations set
forth in SR 16-11.
Branching Authority
Each of the Banks has the authority, pursuant to the laws under which it is chartered, to establish branches anywhere in the state
in which its main office is located, subject to the receipt of all required regulatory approvals.
Federal law permits state and national banks to merge with banks in other states subject to: (i) regulatory approval; (ii) federal
and state deposit concentration limits; and (iii) state law limitations requiring the merging bank to have been in existence for a
minimum period of time (not to exceed five years) prior to the merger.
State Bank Investments and Activities
Each of the Banks generally is permitted to make investments and engage in activities directly or through subsidiaries as
authorized by the laws of the state under which it is chartered. However, under federal law and FDIC regulations, FDIC-insured
state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount,
that are not permissible for a national bank. Federal law and FDIC regulations also prohibit FDIC-insured state banks and their
subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank,
unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines the
activity would not pose a significant risk to the deposit insurance fund of which the bank is a member.
Incentive Compensation Policies and Restrictions
In July 2010, the federal banking agencies issued guidance that applies to all banking organizations supervised by the agencies.
Pursuant
to be consistent with safety and soundness principles, Heartland's incentive compensation
arrangements should: (1) appropriately balance risk and financial reward; (2) be compatible with effective controls and risk
management; and (3) be supported by strong corporate governance, including active and effective oversight by Heartland's
board of directors.
to the guidance,
In addition, in March 2011, the federal banking agencies, along with the Federal Housing Finance Agency, and the Securities
and Exchange Commission, released a proposed rule intended to ensure that regulated financial institutions design their
incentive compensation arrangements to account for risk. In May 2016, financial regulators proposed a rule replacing the 2011
proposed rule. While the proposed 2011 proposed rule was principles-based, the new proposed rule is prescriptive in nature
and is intended to prohibit incentive-based compensation arrangements that could encourage inappropriate risk taking by
providing excessive compensation or could lead to material financial loss. The new proposed rule would require financial
institutions to consider compensation arrangements for "senior executive officers" and "significant risk takers" against several
factors, and would require that such arrangements contain both financial and non-financial measures of performance. Until a
final rule is issued, it is not clear whether and how this rule will ultimately impact the Banks.
17 The Volcker Rule and Proprietary Trading
In December 2013, federal banking regulators jointly issued a final rule to implement Section 13 of the BHCA (adopted as part
619 of the Dodd-Frank Act), which prohibits banking entities (including Heartland and the Banks) from engaging in proprietary
trading of securities, derivatives and certain other financial instruments for the entity's own account; prohibits certain interests
in, or relationships with, a hedge fund or private equity fund; and requires the implementation of related compliance programs,
commonly referred to as the "Volcker Rule." On January 1, 2020, a revised rule was adopted that will be effective January 1,
2021, subject to voluntary compliance prior to that time. Under this revised rule, banks that do not have significant trading
activities will have simplified and streamlined compliance requirements, while banks with significant trading activity will have
more stringent compliance requirements. The revised rule continues to prohibit proprietary trading, while providing greater
clarity and certainty for activities allowed under the law. Heartland did not engage in any significant amount of proprietary
trading, as defined in the Volcker Rule, and the impact of the Volcker Rule on Heartland's business activities and investment
portfolio was minimal. Heartland has reviewed its investment portfolio to determine if any investments meet the Volcker Rule's
definition of covered funds. Based on the review, Heartland determined that the impact related to investments considered to be
covered funds did not have a significant effect on its financial condition or results of operations.
Community Reinvestment Act Requirements
The Community Reinvestment Act ("CRA") imposes a continuing and affirmative obligation on each of the Banks to help meet
the credit needs of their respective communities, including low- and moderate-income neighborhoods, in a safe and sound
manner. The FDIC and the respective state regulators regularly assess the record of each Bank in meeting the credit needs of its
community. Applications for additional acquisitions are subject to evaluation of the effectiveness of the Banks' in meeting their
CRA requirements.
In December of 2019, the FDIC issued a proposal to significantly amend existing CRA regulations, with the goal of making the
regulatory framework more objective, transparent, consistent, and easy to understand. To accomplish these goals, this proposed
rule would strengthen the CRA regulations by clarifying which activities qualify for CRA credit, updating where activities
count for CRA credit, creating a more transparent and objective method for measuring CRA performance, and providing for
more transparent, consistent, and timely CRA-related data collection, recordkeeping, and reporting. While the adoption and
implementation of this proposed rule is uncertain, if adopted it is not anticipated that the rule would become effective before
2022.
Consumer Protection
The Consumer Finance Protection Bureau ("CFPB") has undertaken numerous rule-making and other initiatives, including
issuing informal guidance and taking enforcement actions against certain financial institutions. The CFPB’s rulemaking,
examination and enforcement authority has affected and will continue to significantly affect financial institutions involved in
the provision of consumer financial products and services.
The CFPB has also been publishing complaints submitted by consumers regarding consumer financial products and services in
a publicly-accessible online portal. The CFPB also publishes complaint narratives from consumers that opted to have their
narratives made public. The publication of complaint narratives could affect the Banks in the following ways: (i) complaint data
might be used by the CFPB to make decisions regarding regulatory, enforcement or examination issues; and (ii) the publication
of such narratives may have a negative effect on the reputation of those institutions that are the subject of complaints.
Mortgage Lending
Mortgage loans held at each of the Banks, which were made prior to the outsourcing of Heartland’s legacy mortgage lending
business, and mortgage loans originated by PrimeWest Mortgage Corporation are subject to a number of laws and rules
affecting residential mortgages, including the Home Mortgage Disclosure Act ("HMDA") and Regulation C and the Real Estate
Settlement Procedures Act ("RESPA") and Regulation X. In recent years, the CFPB and other federal agencies have proposed
and finalized a number of rules affecting residential mortgages. These rules implement the Dodd-Frank Act amendments to the
Equal Credit Opportunity Act, Truth in Lending Act ("TILA") and RESPA. The rules, among other things, impose requirements
regarding procedures to ensure compliance with "ability to repay" requirements, policies and procedures for servicing
mortgages, and additional rules and restrictions regarding mortgage loan originator compensation and qualification and
registration requirements for individual
loan originator employees. These rules also impose new or revised disclosure
requirements, including a new integrated mortgage origination disclosure that combines disclosures currently required under
TILA and RESPA.
The HMDA and Regulation C require lenders to report certain information regarding home loans and includes tests for
determining what financial institutions and credit transactions are covered under HMDA and reporting requirements for new
data points identified in the Dodd-Frank Act or identified by the CPFB as necessary to carry out the purposes of HMDA.
Regulation C requires detailed information from lenders and the reporting on mortgage loan underwriting and pricing.
18 Federal law also requires financial institutions to impose a mandatory purchase requirement for flood insurance for loans
secured by certain real property located in areas with special flood hazards. In February 2019, federal regulators issued a final
rule implementing the Biggert-Waters Flood Insurance Reform Act. The final rule, which became effective July 1, 2019,
includes rules for identifying when private flood insurance policies must be accepted and criteria to apply in determining
whether certain types of coverage qualify as "flood insurance" for federal flood insurance law purposes.
Ability-to-Repay and Qualified Mortgage Rule
Under Federal Reserve Board Regulation Z, mortgage lenders, such as PrimeWest Mortgage Corporation, are required to make
a reasonable and good faith determination based on verified and documented information that a consumer applying for a
mortgage loan has a reasonable ability to repay the loan according to its terms. Mortgage lenders are required to determine
consumers’ ability to repay in one of two ways. The first alternative requires the mortgage lender to consider the following
eight underwriting factors when making the credit decision: (1) current or reasonably expected income or assets; (2) current
employment status; (3) the monthly payment on the covered transaction; (4) the monthly payment on any simultaneous loan; (5)
the monthly payment for mortgage-related obligations; (6) current debt obligations, alimony and child support; (7) the monthly
debt-to-income ratio or residual income; and (8) credit history. Alternatively, the mortgage lender can originate "qualified
mortgages," which are entitled to a presumption that the creditor making the loan satisfied the ability-to-repay requirements. In
general, a "qualified mortgage" is a mortgage loan without negative amortization, interest-only payments, balloon payments or
terms exceeding 30 years. In addition, to be a qualified mortgage, the points and fees paid by a consumer cannot exceed 3% of
the total loan amount. Qualified mortgages that are "higher-priced" (e.g., subprime loans) have a rebuttable presumption of
compliance with the ability-to-repay rules, while qualified mortgages that are not "higher-priced" (e.g., prime loans) are given a
safe harbor of compliance. The Banks and PrimeWest Mortgage Corporation primarily originate compliant qualified mortgages.
Data Privacy and Cybersecurity
Federal and state law contains extensive consumer privacy protection provisions. The Gramm-Leach-Bliley Act ("GLBA")
requires financial institutions to periodically disclose their privacy policies and practices relating to sharing such information
and, in some cases, enables retail customers to opt out of the sharing of certain information with unaffiliated third parties. Other
federal and state laws and regulations impact Heartland’s ability to share certain information with affiliates and non-affiliates.
The GLBA also requires financial institutions to implement an information security program that includes administrative,
technical and physical safeguards to ensure the security and confidentiality of customer records and information.
In January 2015, new legislative proposals and administration efforts regarding privacy and cybersecurity were announced
which, among other things, propose a national data breach notification standard. Legislation regarding data security with respect
to security breach notifications and sharing cybersecurity threat information has also been proposed. In 2015, the Federal
Financial Institutions Examination Council ("FFIEC") developed the Cybersecurity Assessment Tool to help institutions
identify their risks and determine their preparedness for cybersecurity threats.
In September 2016, the FFIEC issued a revised Information Security booklet. The revised booklet includes updated guidelines
for evaluating the adequacy of information security programs (including effective threat identification, assessment and
monitoring, and incident identification assessment and response), assurance reports and testing of information security
programs.
Data privacy and data protection are areas of increasing state legislative focus. For example, the California Consumer
Protection Act of 2018 (the "CCPA"), which became effective on January 1, 2020, applies to for-profit businesses that conduct
business in California and meet certain revenue or data collection thresholds. The CCPA will give consumers the right to
request disclosure of information collected about them, and whether that information has been sold or shared with others, the
right to request deletion of personal information (subject to certain exceptions), the right to opt out of the sale of the consumer’s
personal information, and the right not to be discriminated against for exercising these rights. The CCPA contains several
exemptions, including an exemption applicable to information that is collected, processed, sold or disclosed pursuant to the
GLBA. In addition, similar laws may be adopted by other states where Heartland does business.
Like other lenders, the Banks use credit bureau data in their underwriting activities. Use of such data is regulated under the Fair
Credit Reporting Act ("FCRA"), and the FCRA also regulates reporting information to credit bureaus, prescreening individuals
for credit offers, sharing of information between affiliates, and using affiliate data for marketing purposes. Similar state laws
may impose additional requirements on Heartland and its subsidiaries.
The federal banking regulators, as well as the SEC and related self-regulatory organizations, regularly issue guidance regarding
cybersecurity that is intended to enhance cyber risk management among financial institutions. A financial institution is expected
19 to establish a framework of internal control, first, second and third lines of defense, and risk management policies, procedures
and processes that are designed to address the risks that it faces in its business operations. A financial institution’s management
is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and
maintenance of the institution’s operations after a cyber-attack. A financial institution is also expected to develop appropriate
processes to enable recovery of data and business operations if the institution or its critical service providers fall victim to a
cyber-attack.
Durbin Amendment
The Dodd-Frank Act included provisions (known as the "Durbin Amendment"), which restrict interchange fees to those which
are "reasonable and proportionate" for certain debit card issuers and limits the ability of networks and issuers to restrict debit
card transaction routing. The Federal Reserve issued final rules implementing the Durbin Amendment on June 29, 2011. In the
final rules, interchange fees for debit card transactions were capped at $0.21 plus five basis points to be eligible for a safe
harbor such that the fee is conclusively determined to be reasonable and proportionate. The interchange fee restrictions
contained in the Durbin Amendment, and the rules promulgated thereunder, only apply to debit card issuers with $10 billion or
more in total consolidated assets at year-end. Because Heartland's assets exceeded $10 billion at December 31, 2018, it was
required to comply with the Durbin Amendment effective July 1, 2019.
ITEM 1A. RISK FACTORS
An investment in our securities is subject to risks inherent in our business. The material risks and uncertainties that management
believes affect us are described below. Additional risks and uncertainties that management is not aware of or that management
currently deems immaterial may also impair our business operations. If any of the events described in the risk factors should
actually occur, our financial condition and results of operations could be materially and adversely affected. If this were to
happen, the value of our securities could decline significantly, and you could lose all or part of your investment.
Economic and Market Conditions Risk
Our business and financial results are significantly affected by general business and economic conditions.
Our business activities and earnings are affected by general business conditions in the United States and particularly in the
states in which our Banks operate. Factors such as the volatility of interest rates, home prices and real estate values,
unemployment, credit defaults, increased bankruptcies, decreased consumer spending and household income, volatility in the
securities markets, and the cost and availability of capital have negatively impacted our business in the past and may adversely
impact us in the future. Economic deterioration that affects household and/or corporate incomes could result in renewed credit
deterioration and reduced demand for credit or fee-based products and services, negatively impacting our performance. In
addition, changes in securities market conditions and monetary fluctuations could adversely affect the availability and terms of
funding necessary to meet our liquidity needs.
Our business is concentrated in and dependent upon the continued growth and welfare of the various markets that we serve.
We operate in markets in Iowa, Illinois, Wisconsin, Arizona, New Mexico, Montana, Colorado, Minnesota, Kansas, Missouri,
Texas and California, and our financial condition, results of operations and cash flows are subject to changes in the economic
conditions in those markets. Our success depends upon the economic vitality, business activity, population, income levels,
deposits and real estate activity in those areas. Although our customers' business and financial interests may extend well beyond
our market areas, adverse economic conditions that affect our specific market area could reduce our growth rate, affect the
ability of our customers to repay their loans to us and impact the stability of our deposit funding sources. Consequently,
declines in economic conditions in those markets could generally affect our financial condition and results of operations.
Our business and performance is vulnerable to the impact of volatility in debt and equity markets.
As most of our assets and liabilities are financial in nature, our performance is sensitive to the performance of the financial
markets. Turmoil and volatility in the financial markets can be a major contributory factor to overall weak economic conditions,
including the impaired ability of borrowers and other counterparties to meet obligations to us. Financial market volatility may:
•
•
•
•
Affect the value or liquidity of our on-balance sheet and off-balance sheet financial instruments.
Affect the value of capitalized servicing assets.
Affect our ability to access capital markets to raise funds. Inability to access capital markets if needed, at cost effective
rates, could adversely affect our liquidity and results of operations.
Affect the value of the assets that we manage or otherwise administer or service for others. Although we are not
directly impacted by changes in the value of such assets, decreases in the value of those assets would affect related fee
income and could result in decreased demand for our services.
20 Changes in interest rates and other conditions could negatively impact our results of operations.
As a result of the high percentage of our assets and liabilities that are interest-bearing, changes in interest rates, in the shape of
the yield curve or in spreads between different market interest rates, can have a material effect on our financial performance.
Our profitability is in part a function of the spread between the interest rates earned on investments and loans and the interest
rates paid on deposits and other interest-bearing liabilities. Like most banking institutions, our net interest spread and margin
will be affected by general economic conditions and other factors, including fiscal and monetary policies of the Federal Reserve
that influence market interest rates, and our ability to respond to changes in such rates. The Board of Governors of the Federal
Reserve System regulates the supply of money and credit in the United States, and it influences interest rates by changing the
discount rate at which it lends money to banks and by adjusting the target for the federal funds rate at which banks borrow from
other banks. Its fiscal and monetary policies determine, in a large part, our cost of funds for lending and investing and the return
that can be earned on those loans and investments, both of which affect our net interest margin. Federal Reserve Board policies
can also materially affect the value of financial instruments that we hold, such as debt securities and mortgage servicing rights.
At any given time, our assets and liabilities may be affected differently by a given change in interest rates. Asset values,
especially commercial real estate collateral, securities or other fixed rate earning assets, can decline significantly with relatively
minor changes in interest rates. As a result, an increase or decrease in rates, the length of loan terms or the mix of adjustable and
fixed rate loans in our portfolio could have a positive or negative effect on our net income, capital and liquidity. We measure
interest rate risk under various rate scenarios using specific criteria and assumptions. A summary of this process, along with the
results of our net interest income simulations, is presented under the caption "Quantitative and Qualitative Disclosures About
Market Risk" included under Item 7A of Part II of this Annual Report on Form 10-K. Although we believe our current level of
interest rate sensitivity is reasonable and effectively managed, significant fluctuations in interest rates may have an adverse
effect on our business, financial condition and results of operations, and specifically, our net interest income. Also, our interest
rate risk modeling techniques and assumptions may not fully predict or capture the impact of actual interest rate changes on our
financial condition and results of operations.
We may be adversely impacted by the planned phasing out of the London Interbank Offered Rate ("LIBOR") as a reference
rate.
We have derivative contracts, borrowings and other financial instruments with attributes that are either directly or indirectly
dependent on the LIBOR. In 2017, the United Kingdom Financial Conduct Authority indicated in an announcement that the
continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. United States regulatory authorities
have voiced similar support for phasing out LIBOR. The impact of alternatives to LIBOR on the valuations, pricing and
operation of our financial instruments is not yet known. In April 2018, the Federal Reserve Bank of New York commenced
publication of three reference rates based on overnight U.S. Treasury repurchase agreement transactions, including the Secured
Overnight Financing Rate ("SOFR"), which has been recommended as an alternative to U.S. dollar LIBOR by the Alternative
Reference Rates Committee. At this time, we cannot predict whether SOFR will become an accepted alternative to LIBOR. The
uncertainty surrounding potential reforms, including the use of alternative reference rates and changes to the methods and
processes used to calculate rates, may have an adverse effect on the trading market for LIBOR-based securities, loan yield and
the amounts received and paid on derivative instruments and our ability to manage and hedge exposures to fluctuations in
interest rates using derivative instruments. In addition, the implementation of LIBOR reform proposals may result in increased
compliance and operational costs. In preparation for the potential phaseout of LIBOR, we may need to renegotiate our financial
instruments that utilize LIBOR. We are evaluating SOFR and the steps necessary to effect a transition to SOFR for existing and
future loans and other products and services that may be impacted by a phase out of LIBOR. However, these efforts may not be
successful in mitigating the legal and financial risk from changing the reference rate in our legacy arrangements.
Changes in the federal, state or local tax laws may negatively impact our financial performance.
We are subject to changes in tax law that could increase our effective tax rates. The enactment of such legislation including
provisions impacting tax rates, apportionment, consolidation or combination, income, expenses, credits and exemptions may
have a material impact on our business, financial conditions and results of operations. These tax law changes may also be
retroactive to previous periods and could negatively affect our current and future financial performance. For example, while the
Tax Cuts and Jobs Act signed into law in December 2017 reduced our federal corporate tax rate from 35% in 2017 to 21%,
there is no assurance that presently anticipated benefits will be realized in future years’ financial performance. We will continue
to monitor the evolving impact of the Tax Cuts and Jobs Act.
Credit Risks
If we do not properly manage our credit risk, we could suffer material credit losses.
There are substantial risks inherent in making any loan, including, but not limited to:
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risks resulting from changes in economic and industry conditions;
risks inherent in dealing with individual borrowers;
uncertainties as to the future value of collateral; and
the risk of non-payment of loans.
to minimize our credit risk through prudent
loan underwriting procedures and by monitoring
Although we attempt
concentrations of our loans, there can be no assurance that these underwriting and monitoring procedures will effectively reduce
these risks. Moreover, as we continue to expand into new markets, credit administration and loan underwriting policies and
procedures may need to be adapted to local conditions. The inability to properly manage our credit risk or appropriately adapt
our credit administration and loan underwriting policies and procedures to local market conditions or to changing economic
circumstances could have an adverse impact on our allowance and provision for loan losses and our financial condition, results
of operations and liquidity.
We are subject to lending concentration risks.
Heartland's commercial loans were $6.79 billion (including $4.37 billion of commercial real estate loans), or approximately
81%, of our total loan portfolio as of December 31, 2019. Our commercial loans, which tend to be larger and more complex
credits than loans to individuals, are primarily approved based on the identified cash flow of the borrower and secondarily on
the underlying collateral provided by the borrower. If the economy weakens or if the industry in which the borrower operates
weakens, our borrowers may experience depressed or sudden decreases in revenues that could hinder their cash flow and ability
to repay their loans. Consequently, declines in the economy could have a material adverse impact on our earnings. Most often,
the underlying collateral consists of accounts receivable, inventory, machinery or real estate. In the case of loans secured by
accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of
the borrower to collect amounts due from its customers. The other types of collateral securing these loans may depreciate over
time, may be difficult to appraise and may fluctuate in value based on the success of the customer's business and market
conditions.
We depend on the accuracy and completeness of information about our customers and counterparties.
In deciding whether to extend credit or enter into other transactions, we may rely on information furnished by or on behalf of
customers and counterparties, including financial statements, credit reports and other financial information. We may also rely
on representations of those customers, counterparties or other third parties, such as independent auditors, regarding the accuracy
and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports or other
financial information could cause us to make uncollectible loans or enter into other unfavorable transactions, which could have
a material adverse effect on our financial condition and results of operations.
Our loan portfolio has a large concentration of commercial real estate loans, a segment that can be subject to volatile cash
flows and collateral values.
Commercial real estate lending, which is comprised of owner-occupied, non-owner occupied, and lot and land development
loans, represents a large portion of our commercial loan portfolio. These loans were $4.37 billion, or approximately 52%, of our
total commercial loan portfolio as of December 31, 2019. The market value of real estate can fluctuate significantly in a short
period of time as a result of market conditions in any of our geographic markets in which the real estate is located. Adverse
developments in nationwide or regional market conditions affecting real estate values could negatively impact of our
commercial real estate loans, and other developments could increase the credit risk associated with our loan portfolio. Non-
owner occupied commercial real estate loans typically are dependent, in large part, on sufficient income from the properties
securing the loans to cover operating expenses and debt service.
Lot and land development loans involve additional risks because funds are advanced based upon estimates of costs and the
estimated value of the completed project and also have a greater risk of default in a weaker economy because the source of
repayment is reliant on the successful and timely sale of lots or land held for resale. These loans present project completion
risks, as well as the risks applicable to other commercial real estate loans. Economic events or governmental regulations outside
of the control of Heartland or the borrower could negatively impact the future cash flow and market values of the affected
properties.
We may encounter issues with environmental law compliance if we take possession, through foreclosure or otherwise, of the
real property that secures a commercial real estate loan.
A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose
on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be
found on these properties. If previously unknown or undisclosed hazardous or toxic substances are discovered, we may be liable
22 for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur
substantial expenses which may materially reduce the affected property's value or limit our ability to use or sell the affected
property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may
increase our exposure to environmental liability. Although we have policies and procedures to perform an environmental
review at the time of underwriting a loan secured by real property and also before initiating any foreclosure action on real
property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other
financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and
results of operations.
Our agricultural loans are often dependent upon the health of the agricultural industry in the location of the borrower, and
the ability of the borrower to repay may be affected by many factors outside of the borrower’s control.
At December 31, 2019, agricultural and agricultural real estate loans totaled $533.1 million, or approximately 6%, of our total
loan portfolio. Payments on agricultural and agricultural real estate loans are dependent on the profitable operation or
management of the farm property securing the loan. If the cash flow from a farming operation is diminished, the borrower's
ability to repay the loan may be impaired. Loans that are unsecured or secured by rapidly depreciating assets such as farm
equipment or assets such as livestock or crops may not provide an adequate source of repayment of the outstanding loan
balance as a result of the greater likelihood of damage to or depreciation in the value of livestock.
The success of a farm may be affected by many factors outside the control of the borrower, including adverse weather
conditions that prevent the planting of a crop or limit crop yields (such as hail, drought and floods), loss of livestock due to
disease or other factors, declines in market prices for agricultural products (both domestically and internationally) and the
impact of government regulations (including changes to global trade agreements, price supports, subsidies and environmental
regulations). In addition, many farms are dependent on a limited number of key individuals whose injury or death may
significantly affect the successful operation of the farm.
We hold one- to four-family first-lien residential mortgage loans in our loan portfolio, and the ability of the borrower to
repay may be difficult to estimate.
The residential mortgage loans that we hold in our loan portfolio, which totaled $597.7 million, or approximately 7% of our
total loan portfolio as of December 31, 2019, are primarily to borrowers we believe to be credit worthy based on internal
standards and guidelines. Repayment is dependent upon the borrower's ability to repay the loan and the underlying value of the
collateral. If we have overestimated or improperly calculated the abilities of the borrowers to repay those loans, default rates
could be high, and we could face more legal process and costs to enforce collection of the loan obligations. If the value of the
collateral is incorrect, we could face higher losses on the loans.
Our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio.
We establish our allowance for loan losses in consultation with management of the Banks and maintain it at a level considered
appropriate by management to absorb probable loan losses and risks inherent in the portfolio. While the level of allowance for
loan losses reflects management's continuing evaluation of quantitative and qualitative factors including industry
concentrations, loan portfolio quality and economic conditions, the amount of future loan losses is susceptible to changes in
economic, operating and other conditions, including changes in interest rates, which may be beyond our control, and such losses
may exceed current estimates. Despite the current stable economic and market conditions, there remains a risk of continued
asset and economic deterioration. At December 31, 2019, our allowance for loan losses as a percentage of total loans was
0.84% and as a percentage of total nonperforming loans was approximately 87%. Although we believe that the allowance for
loan losses is appropriate to absorb probable losses on any existing loans that may become uncollectible, we cannot predict loan
losses with certainty, and we cannot provide assurance that our allowance for loan losses will prove sufficient to cover actual
loan losses in the future. Further significant provisions, or charge-offs against our allowance that result in provisions, could
have a significant negative impact on our profitability. Loan losses in excess of our reserves may adversely affect our business,
financial condition and results of operations.
the Financial Accounting Standards Board ("FASB") issued an accounting standard update, "Financial
In June 2016,
Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments," which replaces the current
"incurred loss" model for recognizing credit losses with an "expected loss" model referred to as the Current Expected Credit
Loss ("CECL") model. The new CECL standard became effective for us for fiscal years beginning after December 15, 2019 and
for interim periods within those fiscal years. Under the CECL model, we are required to present certain financial assets carried
at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be
collected. The measurement of expected credit losses is based on information about past events, including historical experience,
current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This
measurement takes place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs
significantly from the incurred loss model previously required under GAAP, which delays recognition until it is probable a loss
23 has been incurred. Accordingly, we expect that the adoption of the CECL model will materially affect how we determine our
allowance for loan losses and could require us to significantly increase our allowance in future periods. Moreover, the CECL
model may create more volatility in the level of our allowance for loan losses. If we are required to materially increase our level
of allowance for loan losses for any reason, such increase could adversely affect our business, financial condition and results of
operations. See Note 1, "Basis of Presentation," of the notes to the consolidated financial statements for additional information
on the impact of the adoption of this standard.
Liquidity and Interest Rate Risks
Liquidity is essential to our business, and our performance could be adversely affected by constraints in or increased costs
for funding.
We require liquidity to fund our deposit and debt obligations as they come due. A number of factors beyond our control could
have a detrimental impact on the availability or costs of that funding. These include market disruptions, changes in our credit
ratings or the sentiment of investors, the state of the regulatory environment and monetary and fiscal policies, declines in the
value of our investment securities, loss of substantial deposits or customer relationships, financial or systemic shocks,
significant counterparty failures or reputational damage. Our ability to meet current financial obligations is a function of our
balance sheet structure, ability to liquidate assets and access to alternative sources of funds. Our access to deposits can be
impacted by the liquidity needs of our customers as a substantial portion of our deposit liabilities are on demand, while a
significant portion of our assets are loans that cannot be sold in the same timeframe or are securities that may not be readily
saleable if there is disruption in capital markets. If we become unable to obtain funds when needed, it could have a material
adverse effect on our business, financial condition and results of operations.
including purchase credit
The required accounting treatment of loans we acquire through acquisitions, including purchase credit impaired loans,
could result in higher net interest margins and interest income in current periods and lower net interest margins and interest
income in future periods.
Under United States generally accepted accounting principles ("GAAP"), we are required to record loans acquired through
acquisitions,
impaired loans, at fair value. Estimating the fair value of such loans requires
management to make estimates based on available information and facts and circumstances on the acquisition date. Any
discount, which is the excess of the amount of reasonably estimable and probable discounted future cash collections over the
purchase price, is accreted into interest income over the weighted average remaining contractual life of the loans. Therefore, our
net interest margins may initially increase due to the discount accretion. We expect the yields on the total loan portfolio will
decline as our acquired loan portfolios pay down or mature and the corresponding accretion of the discount decreases. We
expect downward pressure on our interest income to the extent that the runoff of our acquired loan portfolios is not replaced
with comparable high-yielding loans. This could result in higher net interest margins and interest income in current periods and
lower net interest margins and interest income in future periods.
Our liability portfolio, including deposits, may subject us to liquidity risk and pricing risk from concentrations.
We strive to maintain a diverse liability portfolio, and we manage deposit portfolio diversification through our asset/liability
committee process. However, even with our efforts to maintain diversification, we occasionally accept larger deposit customers,
and our typical deposit customers might occasionally carry larger balances. Unanticipated, significant changes in these large
balances could affect our liquidity risk and pricing risk, particularly within the deposit portfolio of a single Bank, where the
effects of the concentration would be greater than for Heartland as a whole. Our inability to manage deposit concentration risk
could have a material adverse effect on our business, financial condition and results of operations.
Our growth may create the need to raise additional capital in the future, but that capital may not be available when it is
needed.
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. We
anticipate that our existing capital resources will satisfy our capital requirements for the foreseeable future. However, from time
to time, we raise additional capital to support continued growth, both internally and through acquisitions. Our ability to raise
additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside of our control, and
on our financial performance. Accordingly, we cannot assure you that we will be able to raise additional capital if needed on
terms acceptable to us. If we cannot raise additional capital when needed, our ability to further expand our operations through
internal growth and acquisitions could be materially impaired.
We rely on dividends from our subsidiaries for most of our revenue and are subject to restrictions on payment of dividends.
The primary source of funds for Heartland is dividends from the Banks. In general, the Banks may only pay dividends either
out of their historical net income after any required transfers to surplus or reserves have been made or out of their retained
earnings. The payment of dividends by any financial institution is affected by the requirement to maintain adequate capital
pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from
24 paying any dividends if, following payment thereof, the institution would be undercapitalized. These dividends are the principal
source of funds to pay dividends on Heartland's common stock and to pay interest and principal on our debt.
Reduction in the value, or impairment of our investment securities, can impact our earnings and common stockholders'
equity.
We maintained a balance of $3.44 billion, or 26% of our assets, in investment securities at December 31, 2019. Changes in
market interest rates can affect the value of these investment securities, with increasing interest rates generally resulting in a
reduction of value. Although the reduction in value from temporary increases in market rates does not affect our income until
the security is sold, it does result in an unrealized loss recorded in other comprehensive income that can reduce our common
stockholders’ equity. Further, we must periodically test our investment securities for other-than-temporary impairment in value.
In assessing whether the impairment of investment securities is other-than-temporary, we consider the length of time and extent
to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and
ability to retain our investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value
in the near term.
Operational Risks
We have a continuing need for technological change and we may not have the resources to effectively implement new
technology.
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven
products and services. In addition to being able to better serve customers, the effective use of technology increases efficiency
and enables financial institutions to reduce costs. Our future success will depend, in part, upon our ability to address the needs
of our customers by using technology to provide products and services that will satisfy customer demands for convenience, as
well as to create additional efficiencies in our operations as we continue to grow and expand our market areas. Many of our
larger competitors have substantially greater resources to invest in technological improvements. As a result, they may be able to
offer additional or superior products to those that we will be able to offer, which would put us at a competitive disadvantage.
Our operations are affected by risks associated with our use of vendors and other third-party service providers.
We rely on vendor and third-party relationships for a variety of products and services necessary to maintain our day-to-day
activities, particularly in the areas of correspondent relationships, operations, treasury management, information technology and
security. This reliance exposes us to risks of those third parties failing to perform financially or failing to perform contractually
or to our expectations. These risks could include material adverse impacts on our business, such as credit loss or fraud loss,
disruption or interruption of business activities, cyber-attacks and information security breaches, poor performance of services
affecting our customer relationships and/or reputation, and possibilities that we could be responsible to our customers for legal
or regulatory violations committed by those third parties while performing services on our behalf. While we have implemented
an active program of oversight to address this risk, there can be no assurance that our vendor and third-party relationships will
not have a material adverse impact on our business.
Interruption in or breaches of our network security and the resulting theft or compromise of business and customer
information could adversely affect our business or reputation, and create significant legal, regulatory or financial exposure.
We rely heavily on communications and information systems to conduct our business, and as part of our business, we maintain
significant amounts of data about our customers and the products they use. Our operations are dependent upon our ability to
protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar
catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems
caused by hackers and fraudsters. Our business relies on the secure processing, transmission, storage and retrieval of
confidential, personal, proprietary and other information in our computer and data management systems and networks, and in
the computer and data management systems and networks of third parties.
We, our customers, regulators and other third parties, including other financial service institutions and companies engaging in
data processing, have been subject to, and are likely to continue to be the target of cyber-attacks. These cyber-attacks include
computer viruses, malicious or destructive code, phishing attacks, denial of service information, ransomware, improper access
by employees or vendors, attacks on personal emails of employees, or breaches of third party vendors that could result in the
unauthorized release, gathering and monitoring, misuse,
loss or destruction of confidential, proprietary and any other
information of ours, our employees, our customers, or of third parties, and damage to our systems or other material disruptions.
As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or
enhance our protective measures or to investigate or remediate any information security vulnerabilities or incidents. Despite
efforts to protect our systems and implement controls, processes, policies, and other measures, we may not be able to anticipate
all security breaches, nor may we be able to implement guaranteed preventive measures against such security breaches.
Cybersecurity risks for banking organizations have significantly increased in recent years in part because of the proliferation of
25 and rapid evolution of new technologies, the use of the internet and telecommunication technologies to conduct financial
transactions. For example, cybersecurity risks may increase in the future as we continue to increase our mobile-payment and
other internet-based products offerings and increase our internal usage of web-based products and applications. Given the
continued and rapid evolution of cyber threats, we may not be able to anticipate or prevent all such attacks and could be held
liable for any security breach or loss. The occurrence of any failure, interruption, or security breach of our information systems
could result in violations of privacy and other laws, damage our reputation, result in a loss of customer business, subject us to
additional regulatory scrutiny or expose us to civil litigation, any of which could have a material adverse effect on our financial
condition and results of operations
We also face indirect technology, cybersecurity and operational risks relating to the customers, clients and other third parties
with whom we do business or upon whom we rely to facilitate or enable our business activities, including for example financial
counterparties, regulators, and provides of critical infrastructure such as internet access or electrical power. Due to the
increasing consolidation, interdependence, and complexity of financial entities and technology systems, a technology failure,
cyber-attack or other information or security breach that significantly degrades, deletes or comprises the systems or data of one
or more financial entities could have a material impact on counterparties or other market participants, including us. This
consolidation, interconnectivity and complexity may increase the risk of operational failure on both an individual and industry-
wide basis.
We could face significant legal and reputational harm if we fail to safeguard personal information
Heartland is subject to complex and evolving laws and regulations governing the privacy and protection of personal information
of individuals. The protected individuals can include our customers, our employees, and the employees of our suppliers,
counterparties and other third parties. Ensuring that our collection, use, transfer and storage of personal information comply
with applicable laws and regulations in relevant jurisdictions can increase operating costs, impact the development of new
products or services, and reduce operational efficiency. Any mishandling or misuse of the personal information of customers,
employees or others by Heartland or a third party affiliated with Heartland could expose us to litigation or regulatory fines,
penalties or other sanctions.
Additional risks could arise if Heartland or third parties do not provide adequate disclosure or transparency to our customers
about the personal information collected from them and its use; any failure to receive, document, and honor the privacy
preferences expressed by our customers; any failure to protect personal information from unauthorized disclosure; or any failure
to maintain proper training on privacy practices for all employees or third parties who have access to personal data. Concerns
regarding the effectiveness of our measures to safeguard personal information and abide by privacy preferences, or even the
perception that those measures are inadequate, could cause us to lose existing or potential customers and thereby reduce our
revenues. In addition, any failure or perceived failure by Heartland to comply with applicable privacy or data protection laws
and regulations could result in requirements to modify or cease certain operations or practices, significant liabilities or
regulatory fines, penalties, or other sanctions. Any of these outcomes could damage our reputation and otherwise adversely
affect our business.
The potential for business interruption exists throughout our organization.
Integral to our performance is the continued efficacy of our technical systems, operational infrastructure, relationships with
third parties and the ability of our employees to perform their jobs day-to-day to support our on-going operations. Failure by
any or all of these resources subjects us to risks that may vary in size, scale and scope. These risks include, but are not limited
to, operational or technical failures, ineffectiveness or exposure due to interruption in third party support, as well as the loss of
key individuals, including those with specialized skills, or in general, the failure of key individuals to perform properly. These
risks are heightened during necessary data system changes or conversions and system integrations of newly acquired entities.
Although management has established policies and procedures to address such failures, the occurrence of any such event could
have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition
and results of operations.
We are subject to risks from employee errors, customer or employee fraud and data processing system failures and errors.
Employee errors and employee or customer misconduct could subject us to financial losses or regulatory sanctions and
seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or
unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to
prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in
all cases. Employee errors could also subject us to financial claims for negligence. We maintain a system of internal controls
and insurance coverage to mitigate against operational risks, including data processing system failures and errors and customer
or employee fraud. Should our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or
26 exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition and results of
operations.
Our markets and growth strategy relies heavily on our management team, and the unexpected loss of key managers may
adversely affect our operations.
Much of our success to date has been influenced strongly by our ability to attract and to retain senior management experienced
in banking and financial services and familiar with the communities in our different market areas. Because our service areas are
spread over such a wide geographical area, our management headquartered in Dubuque, Iowa, is dependent on the effective
leadership and capabilities of the management in our local markets for the continued success of Heartland. Our ability to retain
executive officers, the current management teams and loan officers of our operating subsidiaries will continue to be important
to the successful implementation of our strategy and could be difficult during times of low unemployment. It is also critical, as
we grow, to be able to attract and retain qualified additional management and loan officers with the appropriate level of
experience and knowledge about our market area to implement our community-based operating strategy. The unexpected loss
of services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have
an adverse effect on our business, financial condition and results of operations.
New lines of business, products and services are essential to our ability to compete but may subject us to additional risks.
We continually implement new lines of business and offer new products and services within existing lines of business to offer
our customers a competitive array of products and services. There can be substantial risks and uncertainties associated with
these efforts, particularly in instances where the markets for such products and services are still developing. In developing and
marketing new lines of business and/or new products or services, we may invest significant time and resources. Initial
timetables for the introduction and development of new lines of business and/or new products or services may not be achieved,
and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive
alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new
product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the
effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and
implementation of new lines of business or new products or services could have a material adverse effect on our business,
financial condition and results of operations.
Our models may be improper or ineffective.
The processes we use to estimate our inherent loan losses and to measure the fair value of financial instruments, as well as the
processes used to estimate the effects of changing interest rates and other market measures on our financial condition and
results of operations, depends upon the use of analytical and forecasting models. These models could reflect assumptions that
may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are
adequate, the models may prove to be inadequate or inaccurate because of other flaws and limitations in their design or their
implementation. If the models we use to guide management's decisions and oversight relating to interest rate risk and asset-
liability management are inadequate, we may incur increased or unexpected losses upon changes in market interest rates or
other market measures. If the models we use for determining our probable loan losses are inadequate, the allowance for loan
losses may not be appropriate to support future charge-offs. If the models we use to measure the fair value of financial
instruments are inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately
reflect what we could realize upon sale or settlement of such financial instruments. Any such failure in our analytical or
forecasting models could have a material adverse effect on our business, financial condition and results of operations.
Our internal controls may be ineffective.
Management regularly reviews and updates our internal controls, disclosure controls and procedures and corporate governance
policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions
and can provide only reasonable, not absolute, assurances that the objectives of the controls are met. Any failure or
circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could
have a material adverse effect on our business, financial condition and results of operation.
We have recorded goodwill as a result of acquisitions, and if it becomes impaired, our earnings could be significantly
impacted.
Under current accounting standards, goodwill is not amortized but, instead, is subject to impairment tests on at least an annual
basis or more frequently if an event occurs or circumstances change that reduce the fair value of a reporting unit below its
carrying amount. Although we do not anticipate impairment charges, if we conclude that some portion of our goodwill may be
impaired, a non-cash charge for the amount of such impairment would be recorded against earnings. A goodwill impairment
charge could be caused by a decline in our stock price or occurrence of a triggering event that compounds the negative results in
an unfavorable quarter. At December 31, 2019, we had goodwill of $446.3 million, representing approximately 28% of
stockholders’ equity.
27 We have substantial deferred tax assets that could require a valuation allowance and a charge against earnings if we
conclude that the tax benefits represented by the assets are unlikely to be realized.
Our consolidated balance sheet reflected approximately $41.4 million of deferred tax assets at December 31, 2019, that
represents differences in the timing of the benefit of deductions, credits and other items for accounting purposes and the benefit
for tax purposes. To the extent we conclude that the value of this asset is not more likely than not to be realized, we would be
obligated to record a valuation allowance against the asset, impacting our earnings during the period in which the valuation
allowance is recorded. Assessing the need for, or the sufficiency of, a valuation allowance requires management to evaluate all
available evidence, both negative and positive. Positive evidence necessary to overcome the negative evidence includes whether
future taxable income in sufficient amounts and character within the carryback and carryforward periods is available under the
tax law. When negative evidence (e.g., cumulative losses in recent years, history of operating losses or tax credit carryforwards
expiring unused) exists, more positive evidence than negative evidence will be necessary. If the positive evidence is not
sufficient to exceed the negative evidence, a valuation allowance for deferred tax assets is established. The creation of a
substantial valuation allowance could have a significant negative impact on our reported results in the period in which it is
recorded. The impact of the impairment of Heartland's deferred tax assets could have a material adverse effect on our business,
results of operations and financial condition.
Strategic and External Risks
The soundness of other financial institutions could adversely affect our liquidity and operations.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of
other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other
relationships. We have exposure to many different counterparties, and we routinely execute transactions with counterparties in
the financial industry, including brokers and dealers, commercial banks, investment banks, and other institutional clients. As a
result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services
industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by Heartland or the Banks or
by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In
addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not
sufficient to recover the full amount of the financial instrument exposure due us. There is no assurance that any such losses
would not materially and adversely affect our results of operations.
We may experience difficulties in managing our growth and our growth strategy involves risks that may negatively impact
our net income.
As part of our general growth strategy, we have acquired, and may acquire, additional banks that we believe provide a strategic
and geographic fit with our business. We cannot predict the number, size or timing of acquisitions. To the extent that we grow
through acquisitions, we cannot assure you that we will be able to adequately and profitably manage this growth. Acquiring
other banks and businesses will involve risks commonly associated with acquisitions, including:
•
•
•
•
•
•
•
•
potential exposure to unknown or contingent liabilities of the banks and businesses we acquire;
exposure to potential asset quality issues of the acquired bank or related business;
difficulty and expense of integrating the operations and personnel of banks and businesses we acquire;
potential disruption to our business;
potential restrictions on our business resulting from the regulatory approval process;
inability to realize the expected revenue increases, costs savings, market presence and/or other anticipated benefits;
potential diversion of our management's time and attention; and
the possible loss of key employees and customers of the banks and businesses we acquire.
In addition to acquisitions, we may expand into additional communities or attempt to strengthen our position in our current
markets by undertaking additional de novo bank formations or branch openings. Based on our experience, we believe that it
generally takes three years or more for new banking facilities to first achieve operational profitability, due to the impact of
organization and overhead expenses and the start-up phase of generating loans and deposits. To the extent that we undertake
additional branching and de novo bank and business formations, we are likely to continue to experience the effects of higher
operating expenses relative to operating income from the new operations, which may have an adverse effect on our levels of
reported net income, return on average equity and return on average assets.
28 We face intense competition in all phases of our business and competitive factors could adversely affect our business.
The banking and financial services business in our markets is highly competitive and is currently undergoing significant
change. Our competitors include large regional banks, local community banks, online banks, thrifts, securities and brokerage
companies, mortgage companies, insurance companies, finance companies, money market mutual funds, credit unions and
other non-bank financial service providers, and increasingly these competitors provide integrated financial services over a broad
geographic area. Some of our competitors may also have access to governmental programs that impact their position in the
marketplace favorably. Increased competition in our markets may result in changes in our business model, sales of certain
assets or business units, decreases in the amounts of our loans and deposits, reduced spreads between loan rates and deposit
rates or loan terms that are more favorable to the borrower. Any of these results could have a material adverse effect on our
ability to grow and remain profitable.
Legal, Compliance and Reputational Risks
Government regulation can result in limitations on our growth strategy.
We operate in a highly regulated environment and are subject to supervision and regulation by a number of governmental
regulatory agencies, including the Federal Reserve, the FDIC, the CFPB, Housing and Urban Development ("HUD") and the
various state agencies where we have a bank presence. Regulations adopted by these agencies, which are generally intended to
provide protection for depositors and customers rather than for the benefit of stockholders, govern a comprehensive range of
matters relating to ownership and control of our shares, our acquisition of other companies and businesses, our ability to offer
new products, our ability to obtain financing and other aspects of our strategy.
We are subject to extensive and evolving government regulation and supervision, which can increase the cost of doing
business and lead to enforcement actions.
Federal and state banking laws impose a comprehensive system of supervision, regulation and enforcement on the operations of
FDIC-insured institutions, their holding companies and affiliates that is intended primarily for the protection of the FDIC-
insured deposits and depositors of banks, rather than shareholders. These laws, and the regulations of the bank regulatory
agencies issued under them, affect, among other things, the scope of our business, the kinds and amounts of investments that we
and the Banks may make, reserve requirements, required capital levels relative to assets, the nature and amount of collateral for
loans, the establishment of branches, our ability to merge, consolidate and acquire, dealings with our and the Banks' insiders
and affiliates and our payment of dividends.
While it is anticipated that the current administration will not increase the regulatory burden on community banks and may
further reduce some of the burdens associated with implementation of the Dodd-Frank Act beyond those enacted in the
Economic Growth Act, the ongoing impact of the administration is impossible to predict with any certainty, and changes in
existing regulations and their enforcement may require modification to Heartland's existing regulatory compliance and risk
management infrastructure.
We have experienced heightened regulatory requirements and scrutiny following the global financial crisis and as a result of the
Dodd-Frank Act. Although the reforms primarily targeted systemically important financial service providers, their influence
filtered down in varying degrees to community banks over time and the reforms have caused our compliance and risk
management processes, and the costs thereof, to increase. The Dodd-Frank Act established the CFPB with broad authority to
administer and enforce a new federal regulatory framework of consumer financial regulation, changing the base for deposit
insurance assessments, introducing regulatory rate-setting for interchange fees charged to merchants for debit card transactions,
enhancing the regulation of consumer mortgage banking, changing the methods and standards for resolution of troubled
institutions, and changing the Tier 1 regulatory capital ratio calculations for bank holding companies.
In the routine course of regulatory oversight, proposals to change the laws and regulations governing the operations of banks
and other financial institutions are frequently raised in the U.S. Congress, state legislatures and before bank regulatory
authorities. Similarly, proposals to change the accounting and financial reporting requirements applicable to banks and other
depository financial institutions are frequently raised by the SEC, the federal banking agencies and other authorities. The
likelihood of significant changes in laws and regulations in the future and the effect such changes might have on our operations
are impossible to determine. Recent changes in the laws and regulations that apply to us have been significant. Moreover,
dramatic changes in statutes, regulations or policies could affect us in substantial and unpredictable ways, including limiting the
types of financial services and products that we offer and/or increasing the ability of non-banks to offer competing financial
services and products.
29 More stringent requirements related to capital and liquidity may limit our ability to return earnings to stockholders or
operate or invest in our business.
The Federal Reserve has adopted capital adequacy guidelines that are used to assess the adequacy of capital in supervising a
bank holding company. The final Basel III rules and changes required by the Dodd-Frank Act substantially amended the
regulatory risk-based capital rules applicable to Heartland. Under Basel III, the fully-phased in capital conservation buffer is
2.50% above the minimum capital requirement.
Additional requirements may be imposed in the future. The Basel Committee continues to examine ways to strengthen the
regulation, supervision and practices of banks and has produced, and continues to produce a number of consultation and
discussion papers which point to a significant revision of the Basel Framework, including improvements to the calculation of
risk-weighted assets and the comparability of capital ratios. The ultimate impact on our capital and liquidity will depend on the
implementation of further changes in the United States.
to additional regulatory requirements as our total assets increase, and these additional
We are becoming subject
requirements could have an adverse effect on our financial condition or results of operations.
Various federal banking laws and regulations impose heightened requirements on larger banks and bank holding companies.
These heightened requirements have added, and will continue to add, restrictions and complexity to our business operations, as
we expand. For example, we were required to comply with the Durbin Amendment effective July 1, 2019, which imposes
interchange fee restrictions to debit card issuers.
The Economic Growth Act exempted bank holding companies under $100 billion in assets from certain Dodd-Frank Act
requirements that were otherwise applicable to bank holding companies with greater than $10 billion and $50 billion in total
consolidated assets. As required by the Economic Growth Act, the federal banking agencies adopted rules further tailoring their
supervision and regulation of large bank holding companies with more than $100 billion in assets. However, federal banking
agencies have also indicated through interagency guidance that the capital planning and risk management practices of
institutions with total assets less than $100 billion would continue to be reviewed through the regular supervisory process,
which may offset the impact of the relief from stress testing and risk management requirements provided by the Economic
Growth Act.
Litigation and enforcement actions could result in negative publicity and could adversely impact our business and financial
results.
We face significant legal and regulatory risks in our business, and the volume of claims and amount of damages and penalties
claimed in litigation and governmental proceedings against financial institutions have increased in recent years. Reputation risk,
or the risk to our earnings and capital from the resulting negative publicity, is inherent to our business. Current public
uneasiness with the United States banking system heightens this risk, as banking customers often transfer news regarding
consumer fraud, financial difficulties or even failure of some institutions, to fear of fraud, financial difficulty or failure of even
the most secure institutions. In this climate, any negative news may become cause for curtailment of business relationships,
withdrawal of funds or other actions that can have a compounding effect, and could adversely affect our operations. Substantial
legal liability or significant governmental action against us could materially impact our business and financial results. Also, the
resolution of a litigation or regulatory matter could result in additional accruals or exceed established accruals for a particular
period, which could materially impact our results from operations for that period.
Risks of Owning Stock in Heartland
Our stock price can be volatile.
Our stock price can fluctuate widely in response to a variety of factors, including: actual or anticipated variations in our
quarterly operating results;
recommendations by securities analysts; acquisitions or business combinations; capital
commitments by or involving Heartland or our Banks; operating and stock price performance of other companies that investors
deem comparable to us; new technology used or services offered by our competitors; new reports relating to trends, concerns
and other issues in the financial services industry; and changes in government regulations. General market fluctuations, industry
factors and general economic and political conditions and events have caused a decline in our stock price in the past, and these
factors, as well as, interest rate changes, continued unfavorable credit loss trends, or unforeseen events such as terrorist attacks
could cause our stock price to be volatile regardless of our operating results.
30 Stockholders may experience dilution as a result of future equity offerings and acquisitions.
In order to raise capital for future acquisitions or for general corporate purposes, we may offer additional shares of our common
stock or other securities convertible into or exchangeable for our common stock at a price per share that may be lower than the
current price. In addition, investors purchasing shares or other securities in the future could have rights superior to existing
stockholders. The price per share at which we sell additional shares of our common stock, or securities convertible or
exchangeable into common stock, may be higher or lower than the price paid by existing stockholders.
Certain banking laws and the Heartland Stockholder Rights Plan may have an anti-takeover effect.
Certain federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to
acquire Heartland, even if doing so would be perceived to be beneficial to Heartland’s stockholders. In addition, Heartland's
Amended and Restated Rights Agreement (the "Rights Plan") causes it to be difficult for any person to acquire 15% or more of
the permission of our board of directors. The
Heartland's outstanding stock (with certain limited exceptions) without
combination of these provisions may inhibit a non-negotiated merger or other business combination, which, in turn, could
adversely affect the market price of Heartland's common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
As of December 31, 2019, Heartland had no unresolved staff comments.
31 ITEM 2. PROPERTIES
The following table is a listing of Heartland’s principal operating facilities and the home offices of each of the Banks as of
December 31, 2019:
Name and Main Facility Address
Heartland Financial USA, Inc.
1398 Central Avenue
Dubuque, IA 52001
Dubuque Bank and Trust Company
1398 Central Avenue
Dubuque, IA 52001
Illinois Bank & Trust
6855 E. Riverside Blvd.
Rockford, IL 60114
Wisconsin Bank & Trust
119 Junction Road
Madison, WI 53719
New Mexico Bank & Trust
320 Gold NW
Albuquerque, NM 87102
Arizona Bank & Trust
2036 E. Camelback Road
Phoenix, AZ 85016
Rocky Mountain Bank
2615 King Avenue West
Billings, MT 59102
Citywide Banks
1800 Larimer Street
Suite 100
Denver, CO 80202
Minnesota Bank & Trust
7701 France Avenue South, Suite 110
Edina, MN 55435
Bank of Blue Valley
11935 Riley Street
Overland Park, KS 66213
Premier Valley Bank
255 East River Park Circle, Suite 180
Fresno, CA 93720
First Bank & Trust(1)
9816 Slide Road
Lubbock, TX 79424
Main Facility
Square Footage
65,000
Main Facility
Owned or Leased
Owned
Number of
Locations
3
65,500
Owned
8,000
Owned
19,000
Owned
11,400
Lease term
through 2026
14,000
Owned
16,600
Owned
8,700
6,100
Lease term
through 2030
Lease term
through 2023
38,000
Owned
17,600
Lease term
through 2023
64,500
Owned
6
10
14
17
6
9
23
2
12
8
15
(1) Includes PrimeWest Mortgage Corporation loan production offices.
The corporate office of Heartland is located in Dubuque Bank and Trust Company's main office. A majority of the support
functions provided to the Banks by Heartland are performed in two leased facilities: one located at 1301 Central Avenue in
Dubuque, Iowa, which is leased from Dubuque Bank and Trust Company, and the other located at 700 Locust Street, Suites 300
and 400 in Dubuque, Iowa. In December 2019, Heartland formed a limited liability corporation with an unrelated third party to
purchase the location on Locust Street, and Heartland has a lease with the limited liability corporation.
For information on obligations related to our leased facilities, see Note 23, "Leases," to the consolidated financial statements.
32 ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which Heartland or its subsidiaries are a party at December 31, 2019, other
legal
than ordinary routine litigation incidental
proceedings cannot be predicted with certainty, it is the opinion of management that the resolution of these legal actions should
not have a material effect on Heartland's consolidated financial position or results of operations.
to their respective businesses. While the ultimate outcome of current
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
The names and ages of the executive officers of Heartland, the position held by these officers with Heartland, and the positions
held with Heartland subsidiaries, are set forth below:
Name
Lynn B. Fuller
Age Position with Heartland and Subsidiaries and Principal Occupation
70
Executive Operating Chairman and Director of Heartland; Vice Chairman of Dubuque Bank
and Trust Company, Wisconsin Bank & Trust, New Mexico Bank & Trust, Arizona Bank &
Trust, Rocky Mountain Bank, Citywide Banks, Minnesota Bank & Trust, Bank of Blue
Valley, Premier Valley Bank and First Bank & Trust; Director of Heartland Financial USA,
Inc. Insurance Services
Bruce K. Lee
59 Chief Executive Officer, President and Director of Heartland; Director of Citywide Banks,
Bryan R. McKeag
Brian J. Fox
David A. Prince
Janet M. Quick
Michael J. Coyle
Deborah K. Deters
Lynn H. Fuller
Tamina L. O'Neill
Andrew E. Townsend
59
71
50
54
74
55
36
50
53
Bank of Blue Valley and First Bank & Trust; President of Heartland Financial USA, Inc.
Insurance Services
Executive Vice President, Chief Financial Officer of Heartland; Treasurer of Citizens Finance
Parent Co.; Director of Heartland Financial USA, Inc. Insurance Services
Executive Vice President, Operations, of Heartland
Executive Vice President, Commercial Banking, of Heartland
Executive Vice President, Deputy Chief Financial Officer, Principal Accounting Officer of
Heartland
Executive Vice President, Corporate Secretary, Senior General Counsel, of Heartland;
Secretary of Heartland Financial USA, Inc. Insurance Services
Executive Vice President, Chief Human Resources Officer, of Heartland
President and Chief Executive Officer of Dubuque Bank and Trust Company
Executive Vice President, Chief Risk Officer of Heartland
Executive Vice President, Chief Credit Officer of Heartland
Lynn B. Fuller was named Executive Operating Chairman of Heartland in 2018. Mr. Fuller has been a Director of Heartland
since 1987 and of Dubuque Bank and Trust Company since 1984 and was the Chief Executive Officer of Heartland from 1999
to 2018. He was President of Heartland from 1990 to 2015. Mr. Fuller has been a Director of Wisconsin Bank & Trust since
1997, New Mexico Bank & Trust since 1998, Arizona Bank & Trust since 2003, Rocky Mountain Bank since 2004, Citywide
Banks since 2006, Minnesota Bank & Trust since 2008, Heritage Bank, N.A. from 2012 until its merger with Arizona Bank &
Trust in 2013, Bank of Blue Valley since 2013. In 2015, he was named Director of Heartland Financial USA, Inc. Insurance
Services and Premier Valley Bank. In 2018, Mr. Fuller was named a Director of First Bank & Trust. He was a Director of
Galena State Bank & Trust Co. from 1992 to 2004 and of Illinois Bank & Trust from 1995 until 2004. Mr. Fuller joined
Dubuque Bank and Trust Company in 1971 as a consumer loan officer and was named Dubuque Bank and Trust Company's
Executive Vice President and Chief Executive Officer in 1987. Mr. Fuller was President of Dubuque Bank and Trust Company
from 1987 until 1999 at which time he was named Chief Executive Officer of Heartland. Mr. Fuller is the father of Lynn H.
Fuller, President and Chief Executive Officer of Dubuque Bank and Trust Company.
Bruce K. Lee was named Chief Executive Officer of Heartland in 2018. Mr. Lee joined Heartland in 2015 as President and was
elected a Director of Heartland in 2017. Mr. Lee was a Director of Rocky Mountain Bank from 2015 to 2018. Mr. Lee has been
a Director of Heartland Financial USA, Inc. Insurance Services since 2015. In 2017, Mr. Lee was named a Director of Citywide
Banks, in 2018, he was named a Director of First Bank & Trust, and in 2019, he was named a Director of Bank of Blue Valley.
Prior to joining Heartland, Mr. Lee held various leadership positions at Fifth Third Bancorp from 2001 to 2013, serving most
recently as Executive Vice President, Chief Credit Officer from 2011 to 2013. Mr. Lee previously served as President and CEO
of a Fifth Third affiliate bank in Ohio where he managed sales and service functions for retail, commercial, residential
33 mortgage, and investments as well as finance, human resources, and marketing. Prior to Fifth Third, Mr. Lee served as an
Executive Vice President and board member for Capital Bank, a community bank located in Sylvania, Ohio.
Bryan R. McKeag joined Heartland in 2013 as Executive Vice President, Chief Financial Officer. Mr. McKeag was named
Director of Heartland Financial USA, Inc. Insurance Services in 2015. Prior to joining Heartland, Mr. McKeag served as
Executive Vice President, Corporate Controller and Principal Accounting Officer with Associated Banc-Corp in Green Bay,
Wisconsin. Prior to Associated Banc-Corp, Mr. McKeag spent 9 years in various finance positions at JP Morgan and 9 years in
public accounting at KPMG in Minneapolis. He is an inactive holder of the certified public accountant certification.
Brian J. Fox joined Heartland in 2010 as Executive Vice President, Operations. From 2008 until joining Heartland, Mr. Fox
served as Chief Information Officer of First Olathe Bancshares in Overland Park, Kansas. For the eight years prior to joining
First Olathe Bancshares, Mr. Fox drew on his 30 years of experience at various banking organizations to provide consulting
services to over 100 community banks as Senior Consultant at Vitex, Inc. His areas of responsibility have included strategic
planning, credit administration, loan workouts, information technology, project management, mortgage banking, deposit
operations and loan operations.
David A. Prince joined Heartland in 2018 as Executive Vice President, Commercial Banking. Prior to joining Heartland, Mr.
Prince was the Commercial Banking Group Executive Vice President at Associated Banc-Corp., headquartered in Green Bay,
Wisconsin from 2010 until joining Heartland. Mr. Prince has served in leadership roles at GE Capital Commercial Finance and
National City Bank and has extensive commercial lending experience.
Janet M. Quick was named Executive Vice President, Deputy Chief Financial Officer and Principal Accounting Officer in
January 2016. Ms. Quick had served as Senior Vice President, Deputy Chief Financial Officer since July 2013. Ms. Quick has
been with Heartland since 1994, serving in various audit, finance and accounting positions. Prior to joining Heartland, Ms.
Quick was with Hawkeye Bancorporation in the corporate finance area. She is an active holder of the certified public
accountant certification.
Michael J. Coyle joined Heartland in 2009 as Executive Vice President, Senior General Counsel. He serves as Corporate
Secretary, which is a role he previously held from 2013 to 2018. In 2015, Mr. Coyle was named Secretary of Heartland
Financial USA, Inc. Insurance Services. Prior to joining Heartland, Mr. Coyle was an attorney with the Dubuque, Iowa based
law firm of Fuerste, Carew, Coyle, Juergens & Sudmeier, P.C. for 38 years, including 35 years as a senior partner. He has
extensive experience in corporate and contract law.
Deborah K. Deters joined Heartland in 2017 as Executive Vice President, Chief Human Resource Officer. Ms. Deters most
recently served as the Senior Vice President and Chief Human Resources Officer at HUB International, LTD., based in
Chicago, Illinois from 2009 until joining Heartland. While at HUB she was named the organization's first Chief Human
Resources Officer and transformed its Human Resources function while supporting the company’s growth from 4,000 to over
10,000 employees. Prior to HUB International, LTD., Ms. Deters held several positions over 17 years with Bally Entertainment,
finishing as Senior Vice President, Chief Human Resource Officer of Bally Total Fitness.
Lynn H. Fuller was named President and Chief Executive Officer of Dubuque Bank and Trust Company in 2017. Mr. Fuller
joined Heartland in 2013 as Executive Vice President, Corporate Director of Retail. In 2016, Mr. Fuller assumed the position of
Market President of Dubuque Bank and Trust Company, and in 2017, Mr. Fuller was named President and Chief Executive
Officer of Dubuque Bank and Trust Company. He serves on the board of Dubuque Bank and Trust Company. Prior to joining
Heartland, from 2010 to 2013, Mr. Fuller was a Case Team Leader at Bain & Company in Chicago, Illinois. He led his team in
providing expert advice on client issues and industry topics and recommended solutions.
Tamina L. O'Neill joined Heartland in 2019 as Executive Vice President, Chief Risk Officer. Ms. O’Neill was most recently the
Director of Enterprise Risk Management at MB Financial Bank, a Chicago based mid-size institution from 2013 until joining
Heartland. Ms. O’Neill’s experience spans small, mid-size and larger global financial institutions as her financial services and
risk management career started approximately 30 years ago with LaSalle Bank/ABN AMRO, a multi-national global financial
institution. Over the course of her career, she has built programs and led teams in government lending, commercial banking
compliance, corporate compliance, operational risk and enterprise risk management.
Andrew E. Townsend was named Executive Vice President, Chief Credit Officer, of Heartland in 2016. Mr. Townsend joined
Dubuque Bank and Trust Company in 1993 as a Loan Review Officer and was selected to join Galena State Bank as Executive
Vice President, Head of Lending in 1996. In 2003, Mr. Townsend assumed the position of President and CEO of Galena State
Bank and joined the bank's board of directors. He was named Deputy Chief Credit Officer of Heartland in 2013. Prior to joining
Heartland, he worked at Bank One in the loan review area and had also been an examiner for the Iowa Division of Banking.
34 PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Heartland's common stock was held by approximately 2,900 stockholders of record as of February 14, 2020, and approximately
19,500 additional stockholders held shares in street name. The common stock of Heartland has been quoted on the Nasdaq
Stock Market since May 2003 under the symbol "HTLF" and is a Nasdaq Global Select Market security.
Effective January 24, 2008, Heartland's board of directors authorized management to acquire and hold up to 500,000 shares of
common stock as treasury shares at any one time. Heartland and its affiliated purchasers made no purchases of its common
stock during the year ended December 31, 2019.
The following table and graph show a five-year comparison of cumulative total returns for Heartland, the Nasdaq Composite
Index, the SNL U.S. Bank Nasdaq Index and the SNL Bank and Thrift Index, in each case assuming investment of $100 on
December 31, 2014, and reinvestment of dividends. The table and graph were prepared at our request by S&P Global Market
Intelligence.
Heartland Financial USA, Inc.
Nasdaq Composite Index
SNL U.S. Bank NASDAQ Index
SNL Bank and Thrift Index
$
Cumulative Total Return Performance
12/31/2016
12/31/2015
181.93
117.25
116.45
106.96
149.68
107.95
128.80
102.02
12/31/2014
100.00
100.00
100.00
100.00
$
$
$
12/31/2017
205.52
150.96
157.58
151.45
$
12/31/2018
170.20
146.67
132.82
125.81
$
12/31/2019
195.50
200.49
166.75
170.04
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
ASSUMES $100 INVESTED ON DECEMBER 31, 2014
* Total return assumes reinvestment of dividends
Index ValueTotal Return PerformanceHeartland Financial USA, Inc.Nasdaq Composite IndexSNL U.S. Bank Nasdaq IndexSNL Bank and Thrift Index12/31/1412/31/1512/31/1612/31/1712/31/1812/31/195010015020025035
ITEM 6. SELECTED FINANCIAL DATA
The following tables contain selected historical financial data for Heartland for the years ended December 31, 2019, 2018,
2017, 2016 and 2015. The selected historical consolidated financial information set forth below is qualified in its entirety by
reference to, and should be read in conjunction with, Heartland’s consolidated financial statements and notes thereto, included
elsewhere in this Annual Report on Form 10-K, and Item 7. "Management’s Discussion and Analysis of Financial Condition
and Results of Operations."
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
STATEMENT OF INCOME DATA
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expenses
Income taxes
Net income
Preferred dividends and discount
Interest expense on convertible preferred debt
Net income available to common stockholders
PER COMMON SHARE DATA
Net income – diluted
Cash dividends
Dividend payout ratio
Book value per common share (GAAP)
Tangible book value per common share (non-GAAP)(1)
Weighted average shares outstanding-diluted
Tangible common equity ratio (non-GAAP)(1)
Reconciliation of Tangible Book Value Per Common Share
(non-GAAP)(1)
Common stockholders' equity (GAAP)
Less goodwill
Less core deposit intangibles and customer relationship
intangibles, net
2019
514,329
80,600
433,729
16,657
417,072
116,208
349,161
34,990
149,129
—
—
149,129
$
$
For the Years Ended December 31,
2016
2017
2018
$
$
465,820
51,866
413,954
24,013
389,941
109,160
353,888
28,215
116,998
(39)
—
116,959
$
$
363,658
33,350
330,308
15,563
314,745
102,022
297,675
43,820
75,272
(58)
12
75,226
$
$
326,479
31,813
294,666
11,694
282,972
113,601
279,668
36,556
80,349
(292)
51
80,108
2015
265,968
31,970
233,998
12,697
221,301
110,685
251,046
20,898
60,042
(817)
—
59,225
$
$
$
$
4.14
0.68
16.43 %
43.00
$
29.51
$
36,061,908
$
$
$
$
3.52
0.59
16.76 %
38.44
25.70
33,213,148
$
$
$
$
2.65
0.51
19.25 %
33.07
23.99
28,425,652
$
$
$
$
3.22
0.50
15.53 %
28.31
22.55
24,873,430
$
$
$
$
2.83
0.45
15.90 %
25.92
20.57
20,929,385
8.52 %
8.08 %
7.53 %
7.28 %
6.09 %
$ 1,578,137
446,345
$ 1,325,175
391,668
$
990,519
236,615
$
739,559
127,699
$
581,475
97,852
48,688
47,479
35,203
22,775
22,020
Tangible common stockholders' equity (non-GAAP)
$ 1,083,104
$
886,028
$
718,701
$
589,085
$
461,603
Common shares outstanding, net of treasury stock
Common stockholders' equity (book value) per share (GAAP) $
36,704,278
43.00
Tangible book value per common share (non-GAAP)
$
29.51
34,477,499
38.44
25.70
$
$
29,953,356
33.07
23.99
$
$
26,119,929
28.31
22.55
$
$
22,435,693
25.92
20.57
$
$
Reconciliation of Tangible Common Equity Ratio (non-
GAAP)(1)
Total assets (GAAP)
Less goodwill
Less core deposit intangibles and customer relationship
intangibles, net
Total tangible assets (non-GAAP)
Tangible common equity ratio (non-GAAP)
$13,209,597
446,345
$11,408,006
391,668
$ 9,810,739
236,615
$ 8,247,079
127,699
$ 7,694,754
97,852
48,688
47,479
35,203
22,775
22,020
$12,714,564
$10,968,859
$ 9,538,921
$ 8,096,605
$ 7,574,882
8.52 %
8.08 %
7.53 %
7.28 %
6.09 %
(1) Refer to the "Non-GAAP Financial Measures section after these financial tables for additional information on the usage
and presentation of these non-GAAP measures, and refer to these tables for reconciliations to the most directly comparable
36
SELECTED FINANCIAL DATA (Continued)
(Dollars in thousands, except per share data)
BALANCE SHEET DATA
Investments
Loans held for sale
Total net loans receivable held to maturity
Allowance for loan losses
Total assets
Total deposits(1)
Long-term obligations
Preferred equity
Common stockholders’ equity
EARNINGS PERFORMANCE DATA
Return on average total assets
Return on average common equity (GAAP)
Return on average tangible common equity (non-GAAP)(2)
Net interest margin (GAAP)
Net interest margin, fully tax-equivalent (non-GAAP)(2)
Efficiency ratio, fully tax-equivalent (non-GAAP)(2)
Earnings to fixed charges:
Excluding interest on deposits
Including interest on deposits
ASSET QUALITY RATIOS
Nonperforming assets to total assets
Nonperforming loans to total loans
Net loan charge-offs to average loans
Allowance for loan losses to total loans
Allowance for loan losses to nonperforming loans
CONSOLIDATED CAPITAL RATIOS
Average equity to average assets
Average common equity to average assets
Total capital to risk-adjusted assets
Tier 1 capital
Common Equity Tier 1
Tier 1 leverage
As of and For the Years Ended December 31,
2019
2018
2017
2016
2015
$ 3,435,441
26,748
8,367,917
70,395
13,209,597
11,044,331
275,773
—
1,578,137
$ 2,715,388
119,801
7,407,697
61,963
11,408,006
9,396,429
274,905
—
1,325,175
$ 2,492,866
44,560
6,391,464
55,686
9,810,739
8,146,909
285,011
938
990,519
$ 2,131,086
61,261
5,351,719
54,324
8,247,079
6,847,411
288,534
1,357
739,559
$ 1,878,994
74,783
5,001,486
48,685
7,694,754
6,405,823
263,214
81,698
581,475
1.24 %
10.12
15.73
4.00
4.04
63.11
9.84x
2.85
0.66 %
0.96
0.11
0.84
87.28
12.26 %
12.26
13.75
12.31
10.88
10.10
1.09 %
9.93
15.72
4.26
4.32
63.54
8.59x
3.65
0.69 %
0.98
0.25
0.84
85.27
10.94 %
10.93
13.72
12.16
10.66
9.73
0.83 %
8.63
12.05
4.04
4.22
65.41
7.69x
4.30
0.76 %
0.99
0.24
0.87
87.82
9.69 %
9.68
13.45
11.70
10.07
9.20
0.98 %
11.80
15.84
3.95
4.13
66.24
7.27x
4.38
0.91 %
1.20
0.11
1.02
84.37
8.53 %
8.31
14.01
11.93
10.09
9.28
0.88 %
11.92
14.36
3.80
3.97
69.16
5.20x
3.33
0.67 %
0.79
0.12
0.97
122.77
8.55 %
7.35
13.74
11.56
8.23
9.58
Reconciliation of Return on Average Tangible Common
Equity (non-GAAP)(2)
Net income available to common stockholders (GAAP)
Plus core deposit and customer intangibles amortization, net
of tax(3)
$
149,129
$
116,959
$
75,226
$
80,108
$
59,225
9,458
7,391
3,950
3,660
1,936
Adjusted net income available to common stockholders (non-
GAAP)
$
158,587
$
124,350
Average common stockholders' equity (GAAP)
Less average goodwill
Less average other intangibles, net
Average tangible common equity (non-GAAP)
Annualized return on average common equity (GAAP)
Annualized return on average tangible common equity (non-
GAAP)
$ 1,473,396
415,841
49,377
$ 1,008,178
$ 1,177,346
340,352
46,206
790,788
$
$
$
$
79,176
871,683
184,554
30,109
657,020
$
$
$
83,768
$
61,161
678,989
125,724
24,553
528,712
$ 496,877
56,781
14,153
$ 425,943
10.12 %
9.93 %
8.63 %
11.80 %
11.92 %
15.73 %
15.72 %
12.05 %
15.84 %
14.36 %
37
SELECTED FINANCIAL DATA (Continued)
(Dollars in thousands, except per share data)
Reconciliation of Annualized Net Interest Margin,
Fully Tax-Equivalent (non-GAAP)(2)
Net Interest Income (GAAP)
Plus tax-equivalent adjustment(3)
Net interest income - tax-equivalent (non-GAAP)
As of and For the Years Ended December 31,
2019
2018
2017
2016
2015
$
$
433,729
4,929
438,658
$
$
413,954
6,228
420,182
$
$
330,308
15,139
345,447
$
$
294,666
12,919
307,585
$ 233,998
10,216
$ 244,214
Average earning assets
Net interest margin (GAAP)
Net interest margin, fully tax-equivalent (non-GAAP)
$10,845,940
$ 9,718,106
$ 8,181,914
$ 7,455,217
$ 6,152,090
4.00 %
4.04 %
4.26 %
4.32 %
4.04 %
4.22 %
3.95 %
4.13 %
3.80 %
3.97 %
Reconciliation of Non-GAAP Measure-Efficiency Ratio(2)
Net Interest Income (GAAP)
Plus tax-equivalent adjustment(3)
Net interest income - tax-equivalent (non-GAAP)
Noninterest income
Securities gains, net
Unrealized gain on equity securities, net
Impairment loss on securities
Gain on extinguishment of debt
Valuation adjustment on servicing rights
Adjusted income (non-GAAP)
Total noninterest expenses (GAAP)
Less:
Core deposit intangibles and customer relationship
intangibles amortization
Partnership investment in tax credit projects
(Gain)/loss on sales/valuations of assets, net
Restructuring expenses
Adjusted noninterest expenses (non-GAAP)
$
$
$
$
433,729
4,929
438,658
116,208
(7,659)
(525)
—
(375)
911
547,218
349,161
11,972
8,030
(19,422)
3,227
345,354
$
$
$
$
413,954
6,228
420,182
109,160
(1,085)
(212)
—
—
46
528,091
353,888
9,355
4,233
2,208
2,564
335,528
$
$
$
$
330,308
15,139
345,447
102,022
(6,973)
—
—
(1,280)
(21)
439,195
297,675
6,077
1,860
2,475
—
287,263
$
$
$
$
294,666
12,919
307,585
113,601
(11,340)
—
—
—
33
409,879
$ 233,998
10,216
244,214
110,685
(13,143)
—
769
—
—
$ 342,525
279,668
$ 251,046
5,630
1,051
1,478
—
271,509
2,978
4,357
6,821
—
$ 236,890
Efficiency ratio, fully tax-equivalent (non-GAAP)
63.11 %
63.54 %
65.41 %
66.24 %
69.16 %
(1) Excludes deposits held for sale.
(2) Refer to the "Non-GAAP Financial Measures" section after these financial tables for additional information on the usage and presentation of
these non-GAAP measures, and refer to these financial tables for the reconciliations to the most directly comparable GAAP measures.
(3) Computed on a tax-equivalent basis using an effective tax rate of 21% for periods after January 1, 2018, and a 35% effective tax rate for periods
prior to January 1, 2018.
Non-GAAP Financial Measures
This Annual Report on Form 10-K contains references to financial measures which are not defined by generally accepted
accounting principles ("GAAP"). Management believes the non-GAAP measures are helpful for investors to analyze and
evaluate Heartland's financial condition and operating results. However, these non-GAAP measures have inherent limitations
and should not be considered a substitute for operating results determined in accordance with GAAP. Additionally, because
non-GAAP measures are not standardized, it may not be possible to compare the non-GAAP measures presented in this section
with other companies' non-GAAP measures. Reconciliations of each non-GAAP measure to the most directly comparable
GAAP measure may be found in the financial tables above.
The non-GAAP measures presented in this Annual Report on Form 10-K, management's reason for including each measure and
the method of calculating each measure are presented below:
•
Annualized return on average tangible common equity is net income available to common stockholders plus core
deposit and customer relationship intangibles amortization, net of tax, divided by average common stockholders'
38
•
•
•
•
•
•
equity less goodwill and core deposit and customer relationship intangibles, net. This measure is included as it is
considered to be a critical metric to analyze and evaluate financial condition and capital strength.
Annualized net interest margin, fully tax-equivalent, adjusts net interest income for the tax-favored status of certain
loans and securities. Management believes this measure enhances the comparability of net interest income arising from
taxable and tax-exempt sources.
Efficiency ratio, fully tax equivalent, expresses noninterest expenses as a percentage of fully tax-equivalent net interest
income and noninterest income. This efficiency ratio is presented on a tax-equivalent basis which adjusts net interest
income and noninterest expenses for the tax favored status of certain loans, securities, and tax credit projects.
Management believes the presentation of this non-GAAP measure provides supplemental useful information for
proper understanding of the financial results as it enhances the comparability of income and expenses arising from
taxable and nontaxable sources and excludes specific items as noted in reconciliation contained in this Annual Report
on Form 10-K.
Tangible book value per common share is total common stockholders' equity less goodwill and core deposit and
customer relationship intangibles, net, divided by common shares outstanding, net of treasury. This measure is
included as it is considered to be a critical metric to analyze and evaluate use of equity, financial condition and capital
strength.
Tangible common equity ratio is total common stockholders' equity less goodwill and core deposit and customer
relationship intangibles, net, divided by total assets less goodwill and core deposit and customer relationship
intangibles, net. This measure is included as it is considered to be a critical metric to analyze and evaluate use of
equity, financial condition and capital strength.
Organic deposit growth is exclusive of deposits obtained through acquisitions and the reclassification of deposits that
are held for sale. Management believes that this measure provides a more complete understanding of underlying trends
in deposit growth notwithstanding dispositions and acquisitions.
Organic loan growth is exclusive of loans obtained through acquisitions and the reclassification of loans that are held
for sale. Management believes that this measure provides a more complete understanding of underlying trends in loan
growth notwithstanding dispositions and acquisitions.
39 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management’s discussion and analysis of the consolidated financial condition and results of operations of Heartland as of the
dates and for the periods indicated is presented below. This discussion should be read in conjunction with the Selected Financial
Data, the consolidated financial statements and the notes thereto and other financial data appearing elsewhere in this Annual
Report on Form 10-K. The consolidated financial statements include the accounts of Heartland and its subsidiaries, all of which
are wholly-owned.
For a discussion of 2017 results of operations, including a discussion of the financial results for the fiscal year ended December
31, 2018, compared to the fiscal year ended December 31, 2017, refer to Part I, Item 7 of our Annual Report on Form 10-K,
which was filed with the SEC on February 27, 2019.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts
of assets, liabilities, income and expenses. These estimates are based upon historical experience and on various other
assumptions that management believes are reasonable under the circumstances. Among other things, the estimates form the
basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or conditions. Refer to Note 1, "Summary of
Significant Accounting Policies," for further discussion on Heartland's critical accounting policies.
The estimates and judgments that management believes have the most effect on Heartland’s reported financial position and
results of operations are as follows:
Allowance For Loan Losses
The process utilized by Heartland to estimate the allowance for loan losses is considered a critical accounting policy for
Heartland. The allowance for loan losses represents management’s estimate of identified and unidentified probable losses in the
existing loan portfolio. Therefore, the accuracy of this estimate could have a material impact on Heartland’s earnings.
Our allowance for loan losses methodology includes the establishment of a dual risk rating system, which allows the utilization
of a probability of default and loss given default for certain commercial and agricultural loans in the calculation of the
allowance for loan losses. The probability of default and loss given default methodology have been developed using
Heartland’s default and loss experience over historical observation periods. Heartland's allowance for loan losses methodology
also utilizes loss emergence periods, which represents the average amount of time from the point that a loss is incurred to the
point at which the loss is confirmed. The loss rates used in the allowance calculation are periodically re-evaluated and adjusted
to reflect changes in historical loss levels or other risks. In addition to past loss experience, management also utilizes certain
qualitative factors in our allowance for loan losses methodology including the overall composition of the loan portfolio, general
In
economic conditions, types of loans, loan collateral values, and trends in loan delinquencies and non-performing assets.
addition to the allowance methodology, our software also has the ability to perform stress testing and migration analysis on
various portfolio segments.
For loans individually evaluated and determined to be impaired, the allowance is allocated on a loan-by-loan basis as deemed
necessary. These estimates reflect consideration of one of the following impairment measurement methods as of the evaluation
date:
•
•
the present value of expected future cash flows discounted at the loan's effective interest rate; or
the fair value of the collateral if the loan is collateral dependent.
All other loans, including individually evaluated loans determined not to be impaired, are segmented into groups of loans with
similar risk characteristics for evaluation and analysis. Loss rates for various collateral types of commercial and agricultural
loans are based upon the realizable value historically received on the various types of collateral. For smaller commercial and
agricultural loans, residential real estate loans and consumer loans, a historical loss rate is established for each group of loans
based upon an average loss rate calculated using a historical observation period of twelve quarters. The appropriateness of the
allowance for loan losses is monitored on an ongoing basis by the loan review staff, senior management and the boards of
directors of each Bank.
40 There can be no assurances that the allowance for loan losses will be adequate to cover all probable loan losses, but
management believes that the allowance for loan losses was appropriate at December 31, 2019. While management uses
available information to provide for loan losses, the ultimate collectability of a substantial portion of the loan portfolio and the
need for future additions to the allowance will be based on changes in economic conditions. Should the economic climate
deteriorate, borrowers may experience difficulty, and the level of nonperforming loans, charge-offs, and delinquencies could
rise and require further increases in the provision for loan losses. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the allowance for loan losses carried by the Banks. Such agencies may require us
to make additional provisions to the allowance based upon their judgment about information available to them at the time of
their examinations.
Business Combinations, Goodwill and Core Deposit Intangibles
We record all assets and liabilities purchased in an acquisition, including intangibles, at fair value. Determining the fair value of
assets and liabilities acquired often involves estimates based on third-party valuations, such as appraisals, or internal valuations
based on discounted cash flow analyses or other valuation techniques that may include the use of estimates. Goodwill and
indefinite-lived assets are not amortized but are subject, at a minimum, to annual tests for impairment. In certain situations,
interim impairment tests may be required if events occur or circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying amount. Core deposit intangibles assets are amortized over their estimated
useful lives using straight-line and accelerated methods and are subject to impairment if events or circumstances indicate a
possible inability to realize the carrying amount.
The initial fair value measurement of loans and core deposit intangibles require us to make subjective judgments concerning
estimates of how the acquired assets will perform in the future using valuation methods. The fair value of acquired loans is
based on a discounted cash flow methodology that projects principal and interest payments using key assumptions related to the
discount rate and loss rates. The fair value of core deposit intangibles is based on the cost savings approach under a discounted
cash flow methodology, whereby projected net cash flow benefits are derived from estimating costs to carry deposits compared
to alternative funding costs, and includes key assumptions related to the discount rate, deposit attrition rates and net costs,
including discounted cash flow analyses. Events and factors that may significantly affect the estimates include, among others,
competitive forces, customer behaviors, changes in revenue growth trends, cost structures, technology, changes in discount
rates and market conditions. In determining the reasonableness of cash flow estimates, Heartland reviews historical
performance of the underlying assets or similar assets in an effort to assess and validate assumptions utilized in its estimates.
OVERVIEW
Heartland is a multi-bank holding company providing banking, mortgage, wealth management, investments and insurance
services to individuals and businesses. As of the date of this Annual Report on Form 10-K, Heartland has eleven banking
subsidiaries with 115 locations in Iowa, Illinois, Wisconsin, New Mexico, Arizona, Montana, Colorado, Minnesota, Kansas,
Missouri, Texas and California. Our primary objectives are to increase profitability and diversify our market area and asset base
by expanding through acquisitions and to grow organically by increasing our customer base in the markets we serve.
Our results of operations depend primarily on net interest income, which is the difference between interest income from interest
earning assets and interest expense on interest bearing liabilities. Noninterest income, which includes service charges and fees,
loan servicing income, trust income, brokerage and insurance commissions, securities gains and gains on sale of loans held for
sale and income on bank owned life insurance also affects our results of operations. Our principal operating expenses, aside
from interest expense, consist of the provision for loan losses, salaries and employee benefits, occupancy and equipment costs,
professional fees, advertising, core deposit intangibles and customer relationship intangibles amortization and other real estate
and loan collection expenses.
2019 Overview
Net income available to common stockholders was $149.1 million, or $4.14 per diluted common share, for the year ended
December 31, 2019, compared to $117.0 million, or $3.52 per diluted common share, earned during the prior year. Return on
average common equity was 10.12% and return on average assets was 1.24% for 2019, compared to 9.93% and 1.09%,
respectively, for 2018.
In keeping with its focus on core businesses and execution of strategic priorities, which included select divestitures and
optimization of branch locations, Heartland completed the following transactions since January 1, 2019:
41 Blue Valley Ban Corp. Acquisition
On May 10, 2019, Heartland completed the acquisition of Blue Valley Ban Corp. and its wholly-owned subsidiary, Bank of
Blue Valley, headquartered in Overland Park, Kansas. Based on Heartland's closing common stock price of $44.78 per share on
May 10, 2019, the aggregate consideration paid to Blue Valley Ban Corp. common shareholders was $92.3 million, which was
paid by delivery of 2,060,258 shares of Heartland common stock. On the closing date, in addition to this merger consideration,
Heartland provided Blue Valley Ban Corp. the funds necessary to repay outstanding debt of $6.9 million, and Heartland
assumed $16.1 million of trust preferred securities at fair value. Immediately following the closing of the transaction, Bank of
Blue Valley was merged with and into Heartland's wholly-owned Kansas subsidiary, Morrill & Janes Bank and Trust Company,
and the combined entity operates under the Bank of Blue Valley brand. As of the closing date, Blue Valley Ban Corp. had, at
fair value, total assets of $766.2 million, total loans held to maturity of $542.0 million, and total deposits of $617.1 million. The
transaction was a tax-free reorganization with respect to the stock consideration received by the stockholders of Blue Valley
Ban Corp.
Rockford Bank and Trust Company Asset Purchase and Assumption
On November 30, 2019, Heartland's Illinois Bank & Trust subsidiary completed its acquisition of substantially all of the assets
and substantially all of the deposits and certain other liabilities of Rockford Bank and Trust Company, headquartered in
Rockford, Illinois. The all-cash payment was approximately $46.6 million. Rockford Bank and Trust Company was a wholly-
owned subsidiary of Moline, Illinois-based QCR Holdings, Inc. As of the closing date, Rockford Bank and Trust Company had,
at fair value, total assets of $495.7 million, which included $354.0 million of gross loans held to maturity, and $430.3 million of
deposits.
The financial impact of the Blue Valley Ban Corp. and Rockford Bank and Trust Company acquisitions are included in the
results of operations for the year ended December 31, 2019, but not in the results of operations for the period ended December
31, 2018.
Branch Sales and Other Divestitures
•
•
•
•
•
•
On January 11, 2019, Heartland exited the consumer finance business and entered into an agreement to sell the loan
portfolios of its consumer finance subsidiaries, Citizens Finance Co. and Citizens Finance of Illinois Co. (collectively,
"Citizens"). The loan portfolios had a fair value of $67.2 million and were classified as held for sale as of December
31, 2018. All of the Citizens locations closed in February 2019.
On February 22, 2019, Heartland completed the sale of two branch locations of Wisconsin Bank & Trust. The sale
included loans of $11.7 million and deposits of $48.6 million. Heartland recorded a net gain of $3.2 million in the first
quarter of 2019, which consisted of a gain of $3.5 million and write-off of $329,000 of core deposit intangibles.
On April 30, 2019, Dubuque Bank and Trust Company closed on the sale of substantially all its mortgage servicing
rights portfolio, which contained loans with an unpaid principal balance of approximately $3.31 billion to PNC Bank,
N.A. The transaction qualified as a sale, and $20.6 million of mortgage servicing rights were de-recognized on the
consolidated balance sheet as of June 30, 2019. Cash of $36.6 million was received during 2019, and Heartland
recorded a gain on the sale of this portfolio of $14.5 million. In the agreement, which includes customary terms and
conditions, Dubuque Bank and Trust Company provided interim servicing of the loans until the transfer date, which
was August 1, 2019.
On May 3, 2019, Heartland completed the sale of two branches of Illinois Bank & Trust. The sale included loans of
$1.2 million and deposits of $11.4 million. Heartland recorded a net gain of $340,000 in the second quarter of 2019,
which consisted of a gain of $519,000 and write-off of $179,000 of core deposit intangibles.
On May 17, 2019, Heartland completed the sale of one branch of Citywide Banks. The sale included loans of $8.4
million and deposits of $24.4 million. Heartland recorded a net gain of $1.6 million in the second quarter of 2019,
which consisted of a gain of $1.8 million and write-off of $174,000 of core deposit intangibles.
On May 31, 2019, Heartland completed the sale of two branch locations of Dubuque Bank and Trust Company, which
operated as First Community Bank, in Keokuk, Iowa. The sale included loans of $17.5 million and deposits of $72.0
million. Heartland recorded a gain of $4.2 million in the second quarter of 2019.
Through the end of 2019, approximately $14 million of the net gains from the divestitures were invested in talent, process
improvement, and technology upgrades that management believes are necessary to support future organic and acquired growth,
improve efficiency and ultimately provide a superior customer experience and enhance profitability. Three of the most
significant investments in technology and process improvement are:
42 •
•
•
a project called Operation Customer Compass, which is focused gaining efficiencies through streamlined and
automated processes.
an upgrade to the existing customer relationship management system to the Salesforce Platform, which is an industry
leader for relationship management, and,
the implementation of nCino, a premier commercial loan origination system.
Operation Customer Compass is intended to create back-office capacity for growth and enhance the customer experience
through streamlining processes and creating efficiencies. During 2019, full-time equivalent employees were reduced to 1,908 at
year-end compared to 2,045 at year-end 2018 while assets grew $1.80 billion. Expense reductions of over $10 million annually
are expected to be realized once the project is completed, and management expects the efficiency ratio to move below 60% in
2020.
The upgrade to Salesforce and the implementation of nCino is expected to significantly improve the sales management process
and improve the efficiency of the commercial sales teams. The integration between nCino and Salesforce is expected to
improve back office functions and shorten the sales cycle. These two projects have launched at two of the Banks and are
expected to be rolled out to the remaining banks by mid-2020.
Total assets of Heartland were $13.21 billion at December 31, 2019, an increase of $1.80 billion or 16% from $11.41 billion at
year-end 2018. Included in this increase, at fair value, were $766.2 million of assets acquired in the Blue Valley Ban Corp.
transaction and $495.7 million of assets acquired in the Rockford Bank and Trust transaction. Exclusive of these transactions,
total assets increased $539.7 million or 5% since December 31, 2018. Securities represented 26% of Heartland's total assets at
December 31, 2019, compared to 24% at year-end 2018.
Total loans held to maturity were $8.37 billion at December 31, 2019, compared to $7.41 billion at year-end 2018, an increase
of $960.2 million or 13%. This change includes $896.0 million of total loans held to maturity acquired at fair value in the Blue
Valley Ban Corp. and Rockford Bank and Trust transactions. During the first quarter of 2019, Heartland classified $32.1
million of loans as held for sale in conjunction with the branch sales. Excluding the reclassification of loans to held for sale and
the Blue Valley Ban Corp. and Rockford Bank and Trust transactions, total loans held to maturity organically grew $96.3
million or 1% since December 31, 2018.
Total deposits were $11.04 billion as of December 31, 2019, compared to $9.40 billion at year-end 2018, an increase of $1.65
billion or 18%. This increase includes $1.05 billion of deposits acquired at fair value in the Blue Valley Ban Corp. and
Rockford Bank and Trust transactions. During the first quarter of 2019, Heartland classified $77.0 million of deposits as held
for sale in conjunction with the branch sales. Exclusive of the reclassification of deposits to held for sale and the deposits
acquired at fair value in the Blue Valley Ban Corp. and Rockford Bank and Trust transactions, total deposits organically grew
$677.5 million or 7% since December 31, 2018.
Common stockholders' equity was $1.58 billion at December 31, 2019, compared to $1.33 billion at year-end 2018. Book value
per common share was $43.00 at December 31, 2019, compared to $38.44 at year-end 2018. Heartland's unrealized gains and
losses on securities available for sale, net of applicable taxes, reflected an unrealized gain of $969,000 at December 31, 2019,
compared to an unrealized loss of $32.5 million at December 31, 2018.
2018 Overview
Net income recorded for 2018 was $117.0 million compared to $75.3 million recorded in 2017, an increase of $41.7 million or
55%. Net income available to common stockholders was $117.0 million, or $3.52 per diluted common share, for the year ended
December 31, 2018, compared to $75.2 million, or $2.65 per diluted common share, earned during 2017. Return on average
common equity was 9.93% and return on average assets was 1.09% for 2018, compared to 8.63% and 0.83%, respectively, for
2017.
2018 Transactions
•
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
43 •
•
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.
On May 18, 2018, Heartland completed the acquisition of Lubbock, Texas based First Bank Lubbock Bancshares, Inc.,
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 First Bank Lubbock
Bancshares, Inc. 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 First Bank Lubbock Bancshares, Inc. 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 First Bank Lubbock
Bancshares, Inc.'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.
In 2018, Heartland recorded $2.6 million of restructuring expenses related to its legacy retail mortgage lending
operation. The restructuring projects were primarily related to fully outsourcing all aspects of its legacy mortgage
lending business and included a workforce reduction of approximately 100 employees and the discontinuation of
several information systems. Because of the significant reduction in infrastructure and employees, retail mortgage
lending is no longer considered a separate business segment as of January 1, 2018. Heartland has partnered with third-
party providers to offer residential mortgage loans to customers in many of its markets. PrimeWest Mortgage
Corporation continues to serve customers in Texas and has expanded to serve customers in Heartland's Southwestern
markets.
Total assets were $11.41 billion at December 31, 2018, an increase of $1.60 billion or 16% since year-end 2017. Included in
this increase, at fair value, were $427.1 million of assets acquired in the Signature Bancshares, Inc. transaction, and $1.12
billion of assets acquired in the First Bank Lubbock Bancshares, Inc. transaction. Exclusive of these transactions, total assets
increased $52.8 million or 1%. Securities represented 24% of total assets at December 31, 2018, compared to 25% at year-end
2017.
Total loans held to maturity were $7.41 billion at December 31, 2018, compared to $6.39 billion at year-end 2017, an increase
of $1.02 billion or 16%. Excluding $96.0 million of loans that were classified as held for sale in conjunction with the pending
branch sales and the Citizens transaction and $1.01 billion of loans acquired in 2018, total loans held to maturity increased
$106.7 million or 2% since year-end 2017.
Total deposits were $9.40 billion as of December 31, 2018, compared to $8.15 billion at year-end 2017, an increase of $1.25
billion or 15%. This increase included $1.25 billion of deposits, at fair value, acquired in the Signature Bancshares, Inc. and
First Bank Lubbock Bancshares, Inc. transactions. As of December 31, 2018, Heartland had $106.4 million of deposits
classified as held for sale in conjunction with the pending branch sales. Exclusive of these transactions, total deposits increased
$104.8 million or 1% since year-end 2017.
Common stockholders' equity was $1.33 billion at December 31, 2018, compared to $990.5 million at year-end 2017. Book
value per common share was $38.44 at December 31, 2018, compared to $33.07 at year-end 2017. Heartland's unrealized gains
and losses on securities available for sale, net of applicable taxes, reflected an unrealized loss of $32.5 million at December 31,
2018, compared to an unrealized loss of $24.3 million at December 31, 2017.
44 RECENT DEVELOPMENTS
Pending Acquisition-AIM Bancshares, Inc.
On February 11, 2020, Heartland entered into a definitive merger agreement to acquire AIM Bancshares, Inc., and its wholly-
owned subsidiary, AimBank, headquartered in Levelland, Texas. As of the announcement date, the shares of Heartland
common stock to be issued in the transaction along with cash to be paid to holders of AIM Bancshares, Inc. common stock and
the cash to be paid to holders of in-the-money options to purchase AIM Bancshares, Inc. common stock, had an aggregate value
of approximately $280.4 million. Simultaneous with the closing of the transaction, AimBank will merge into Heartland's Texas-
based subsidiary, First Bank & Trust, and the combined entity will operate as First Bank & Trust. 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. As of December 31, 2019, AimBank had total assets of $1.78 billion,
$1.16 billion of net loans outstanding, and $1.54 billion of deposits. The transaction is expected to close in the third quarter of
2020 with a systems conversion planned for the fourth quarter of 2020.
Accounting Pronouncement Adoption-ASU 2016-13
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)," commonly referred to as
"CECL." Heartland adopted the accounting standard on January 1, 2020, as required. Management currently expects the
adoption of ASU 2016-13 will result in an increase of $17.6 million to $28.2 million in the allowance for loan losses and the
reserve for unfunded commitments and a reduction of the tangible common equity ratio of approximately 8 to 14 basis points.
Because management is finalizing and refining its controls and processes, the ultimate impact of the adoption of ASU 2016-13
as of January 1, 2020, could differ from management's current expectation. Refer to Note 1, "Basis of Presentation," to the
consolidated financial statements for further information on ASU 2016-13.
Under CECL, on the date of acquisition, acquired loans are divided into two categories: purchased-credit deteriorated ("PCD")
loans and all other loans. The allowance for PCD loans is established through purchase accounting, and the allowance for all
other loans is established through provision expense. Based on AimBank's loan portfolio as of October 31, 2019, an allowance
of approximately $19.1 million established through purchase accounting would be required on the PCD loans, and an allowance
of approximately $9.0 million established through provision expense would be required on all other loans when the transaction
closes in the third quarter of 2020. This estimate could vary based upon changes in loan balances outstanding and credit quality.
Any future acquisitions will negatively impact Heartland's earnings in the period of acquisition by the provision expense
recorded on non-PCD loans.
RESULTS OF OPERATIONS
Net Interest Income and Net Interest Margin
Heartland's management monitors and manages net interest income and net interest margin and shares the results with investors
because they are indicators of Heartland's profitability and growth of earning assets.
Net interest income is the difference between interest income earned on earning assets and interest expense paid on interest
bearing liabilities. As such, net interest income is affected by changes in the volume and yields on earning assets and the
volume and rates paid on interest bearing liabilities. Net interest margin is the ratio of net interest income to average earning
assets.
Net interest margin, expressed as a percentage of average earning assets, was 4.00% (4.04% on a fully tax-equivalent basis)
during 2019, compared to 4.26% (4.32% on a fully tax-equivalent basis) during 2018 and 4.04% (4.22% on a fully tax-
equivalent basis) during 2017. The sale of the Citizens' loan portfolios occurred in the first quarter of 2019, and these loan
portfolios accounted for approximately 12 basis points and 17 basis points of margin, respectively, in 2018 and 2017. The Tax
Cuts and Jobs Act that passed on December 22, 2017, reduced the corporate federal tax rate from a graduated maximum 35% to
a flat 21%. With the new 21% corporate federal tax rate, which was effective January 1, 2018, the conversion factor to a fully
tax-equivalent basis has decreased. The decline had no impact on net interest income but caused net interest margin on a fully
tax-equivalent basis to decrease.
Our success in maintaining competitive net interest margin has been the result of an increase in average earning assets and a
favorable deposit mix. Also contributing to our ability to maintain net interest margin has been the amortization of purchase
accounting discounts associated with acquisitions completed since 2015. For the years ended December 31, 2019, 2018 and
2017, our net interest margin included 18 basis points, 22 basis points and 18 basis points, respectively, of purchase accounting
discount amortization.
45 See "Analysis of Average Balances, Tax-Equivalent Yields and Rates" for a description of our use of net interest income and
net interest margin on a fully tax-equivalent basis, which is not defined by GAAP, and a reconciliation of annualized net
interest margin on a fully tax-equivalent basis to GAAP.
Interest income increased $48.5 million or 10% to $514.3 million in 2019 and increased $102.2 million or 28% to $465.8
million in 2018 from $363.7 million in 2017. The tax-equivalent adjustments for income taxes saved on the interest earned on
nontaxable securities and loans were $4.9 million in 2019 and $6.2 million in 2018. With these adjustments, interest income on
a tax-equivalent basis was $519.3 million during 2019, an increase of $47.2 million or 10%, and $472.0 million during 2018, an
increase of $93.3 million or 25% from $378.8 million in 2017.
The average interest rate earned on total average earning assets was 4.79% during 2019 compared to 4.86% during 2018 and
4.63% during 2017. The overall tax-equivalent yield earned on the securities portfolio was 3.02% in 2019 compared to 2.95%
in 2018 and 3.06% in 2017, an increase of 7 basis points in 2019 and a decrease of 11 basis points in 2018. The overall tax-
equivalent yield earned on the loan portfolio was 5.55% in 2019 compared to 5.60% in 2018 and 5.33% in 2017, a decrease of 5
basis points in 2019 and an increase of 27 basis points in 2018. The percentage of average loans, which are typically the highest
yielding asset, to total average earning assets was 71% during 2019 compared to 73% during 2018 and 71% during 2017.
The increases in interest income during both 2019 and 2018 were primarily due to growth in average earning assets, which
totaled $10.85 billion during 2019 compared to $9.72 billion during 2018 and $8.18 billion during 2017. The increase in
average earning assets was $1.13 billion or 12% for 2019 and $1.54 billion or 19% for 2018. A majority of the growth in
average earning assets during both years was attributable to the acquisitions completed during 2019 and 2018.
Interest expense increased $28.7 million or 55% during 2019 to $80.6 million compared to $51.9 million during 2018 and
increased $18.5 million or 56% during 2018 from $33.4 million during 2017. The average interest rate paid on Heartland's
interest bearing deposits and borrowings was 1.14% in 2019 compared to 0.83% in 2018 and 0.61% in 2017. Average savings
balances, as a percentage of total average interest bearing deposits, was 83% during 2019 compared to 82% in 2018 and 2017.
The average interest rate paid on savings deposits was 0.85% during 2019 compared to 0.53% during 2018 and 0.27% during
2017. The increases in 2019 and 2018 in the average rate paid on interest bearing deposits were primarily attributable to the full
year impact of the 2018 Federal Funds rate increases partially offset by the impact of the three Federal Funds rate cuts in the
second half of 2019.
Net interest income totaled $433.7 million during 2019, an increase of $19.8 million or 5% from the $414.0 million recorded
during 2018. Net interest income increased $83.6 million or 25% during 2018 from the $330.3 million recorded during 2017.
After the tax-equivalent adjustment discussed above, net interest income on a fully tax-equivalent basis increased $18.5 million
or 4% during 2019 and $74.7 million or 22% during 2018. Management believes net interest margin in dollars will continue to
increase as the amount of earning assets grows, however net interest margin as a percentage of average earning assets may
decrease because of interest rate changes. The Federal Reserve has indicated it will closely assess economic data and be patient
before moving ahead with any additional changes to the Federal Funds rate; therefore, the timing and magnitude of any such
changes are uncertain and will depend on domestic and global economic conditions.
We attempt to manage our balance sheet to minimize the effect that a change in interest rates has on our net interest margin. We
plan to continue to work toward improving both our earning assets and funding mix through targeted organic growth strategies,
which we believe will result in additional net interest income. We believe our net interest income simulations reflect a well-
balanced and manageable interest rate posture. Item 7A of this Annual Report on Form 10-K contains additional information
about the results of our most recent net interest income simulations. Note 12, "Derivative Financial Instruments" to the
consolidated financial statements contains a detailed discussion of the derivative instruments we have utilized to manage
interest rate risk.
The following table provides certain information relating to our average consolidated balance sheets and reflects the yield on
average earning assets and the cost of average interest bearing liabilities for the years indicated, in thousands. Dividing income
or expense by the average balance of assets or liabilities derives such yields and costs. Average balances are derived from daily
balances, and nonaccrual loans and loans held for sale are included in each respective loan category. Assets with tax favorable
treatment are evaluated on a tax-equivalent basis assuming a federal income tax rate of 21% beginning January 1, 2018, and
35% for all prior periods. Tax favorable assets generally have lower contractual pre-tax yields than fully taxable assets. A tax-
equivalent yield is calculated by adding the tax savings to the interest earned on tax favorable assets and dividing by the average
balance of the tax favorable assets. Deposits held for sale are included in each respective deposit category.
46 ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES(1)
For the Year Ended December 31,
2019
2018
2017
Average
Balance
Interest
Rate
Average
Balance
Interest
Rate
Average
Balance
Interest
Rate
Earning Assets
Securities:
Taxable
Nontaxable(1)
Total securities
Interest bearing deposits with other
banks and other short-term investments
Federal funds sold
Loans:(2)
Commercial and commercial real
estate(1)
Residential mortgage
Agricultural and agricultural real
estate(1)
Consumer
Fees on loans
Less: allowance for loan losses
Net loans
Total earning assets
Nonearning Assets
Total Assets
Interest Bearing Liabilities(3)
Savings
Time deposits
Short-term borrowings
Other borrowings
Total interest bearing liabilities
Noninterest Bearing Liabilities(3)
Noninterest bearing deposits
Accrued interest and other liabilities
Total noninterest bearing liabilities
Stockholders' Equity
Total Liabilities and Stockholders'
Equity
Net interest income, fully tax-
equivalent (non-GAAP)(1)
Net interest spread(1)
Net interest income, fully tax-
equivalent (non-GAAP) to total
earning assets
6,105,889
656,741
550,231
448,230
(64,224)
7,696,867
10,845,940
1,175,977
$12,021,917
$ 5,530,503
1,115,785
126,337
275,982
7,048,607
3,384,341
115,573
3,499,914
1,473,396
$ 2,522,365
313,197
2,835,562
$
73,147
12,491
85,638
2.90 % $1,999,321
439,894
3.99
2,439,215
3.02
$
54,131
17,873
72,004
2.71 % $1,629,936
617,267
4.06
2,247,203
2.95
$
38,365
30,305
68,670
2.35 %
4.91
3.06
313,373
138
6,695
4
2.14
2.90
197,562
430
3,698
1.87
— —
136,555
5,932
1,547
42
1.13
0.71
332,866
30,552
5.45
4.65
5,401,683
692,310
289,379
32,047
5.36
4.63
4,256,158
655,515
211,316
30,242
4.96
4.61
29,438
5.35
549,346
28,331
5.16
498,032
23,651
4.75
25,802
496,900
5.76
8,263 —
(59,340)
— —
5.55
7,080,899
4.79 % 9,718,106
1,054,191
$10,772,297
426,921
519,258
37,250
437,356
7.50
9,339 —
(54,837)
— —
5.60
5,792,224
4.86 % 8,181,914
827,711
$9,009,625
396,346
472,048
35,194
8.05
8,135 —
— —
5.33
4.63 %
308,538
378,797
$
47,069
16,665
1,748
15,118
80,600
0.85 % $4,779,977
1,058,769
1.49
142,295
1.38
272,545
5.48
1.14 % 6,253,586
$
25,123
10,544
1,696
14,503
51,866
0.53 % $4,044,032
902,255
1.00
190,040
1.19
290,398
5.32
0.83 % 5,426,725
$
11,107
7,172
678
14,393
33,350
0.27 %
0.79
0.36
4.96
0.61 %
3,265,532
75,224
3,340,756
1,177,955
2,643,945
66,248
2,710,193
872,707
$9,009,625
$12,021,917
$10,772,297
$ 438,658
$ 420,182
$ 345,447
3.65 %
4.04 %
4.03 %
4.32 %
4.02 %
4.22 %
(1) Computed on a tax-equivalent basis using an effective tax rate of 21% beginning January 1, 2018, and 35% for all prior periods.
(2) Nonaccrual loans and loans held for sale are included in the average loans outstanding.
(3) Includes deposits held for sale.
The following table presents the dollar amount of changes in interest income and interest expense for the major components of
interest earning assets and interest bearing liabilities, in thousands. It quantifies the changes in interest income and interest
expense related to changes in the average outstanding balances (volume) and those changes caused by fluctuating interest rates.
For each category of interest earning assets and interest bearing liabilities, information is provided on changes attributable to (i)
changes in volume, calculated by multiplying the difference between the average balance for the current period and the average
balance for the prior period by the rate for the prior period, and (ii) changes in rate, calculated by multiplying the difference
between the rate for the current period and the rate for the prior period by the average balance for the prior period. The
unallocated change has been allocated pro rata to volume and rate variances.
47
ANALYSIS OF CHANGES IN NET INTEREST INCOME(1)
EARNING ASSETS / INTEREST INCOME
Investment securities:
Taxable
Nontaxable(1)
Interest bearing deposits
Federal funds sold
Loans(1)(2)
TOTAL EARNING ASSETS
LIABILITIES / INTEREST EXPENSE
Interest bearing deposits(3):
Savings
Time deposits
Short-term borrowings
Other borrowings
For the Years Ended December 31,
2019 Compared to 2018
Change Due to
2018 Compared to 2017
Change Due to
Volume
Rate
Net
Volume
Rate
Net
$
14,953
$
4,063
$
19,016
$
9,480
$
6,286
$
15,766
(5,059)
2,415
—
34,195
46,504
4,439
595
(203)
185
(323)
582
4
(3,620)
706
17,507
5,526
255
430
(5,382)
2,997
4
30,575
47,210
21,946
6,121
52
615
(7,770)
(4,662)
(12,432)
874
(20)
71,484
74,048
2,328
1,384
(209)
(914)
2,589
1,277
(22)
16,324
19,203
2,151
(42)
87,808
93,251
11,688
14,016
1,988
1,227
1,024
3,372
1,018
110
15,927
18,516
TOTAL INTEREST BEARING LIABILITIES
5,016
23,718
28,734
NET INTEREST INCOME
$
41,488
$
(23,012) $
18,476
$
71,459
$
3,276
$
74,735
(1) Computed on a tax-equivalent basis using an effective tax rate of 21% beginning January 1, 2018, and 35% for all prior periods.
(2) Nonaccrual loans and loans held for sale are included in average loans outstanding.
(3) Includes deposits held for sale.
Provision For Loan Losses
A provision for loan losses is charged to expense to provide, in Heartland management’s opinion, an appropriate allowance for
loan losses. In determining that the allowance for loan losses is appropriate, management uses factors that include the overall
composition of the loan portfolio, general economic conditions, types of loans, loan collateral values, past loss experience, loan
delinquencies, substandard credits and doubtful credits. Given the size of Heartland's loan portfolio, the level of organic loan
growth, acquired loans that move out of the purchase accounting pool, changes in credit quality and the variability that can
occur in the factors considered when determining the appropriateness of the allowance for loan losses, Heartland's provision for
loan losses will vary from year to year. For additional details on the specific factors considered, refer to the discussion under the
captions "Critical Accounting Policies" and "Allowance For Loan Losses" in this Annual Report on Form 10-K. Heartland
believes the allowance for loan losses as of December 31, 2019, was at a level commensurate with the overall risk exposure of
the loan portfolio. However, if economic conditions should become more unfavorable, certain borrowers may experience
difficulty and the level of nonperforming loans, charge-offs and delinquencies could rise and require further increases in the
provision for loan losses.
The provision for loan losses was $16.7 million during 2019 compared to $24.0 million during 2018 and $15.6 million during
2017. Loans covered by the allowance totaled $6.57 billion as of December 31, 2019, compared to $5.73 billion as of
December 31, 2018, and $4.89 billion as of December 31, 2017.
Provision expense decreased $7.4 million or 31% during 2019 primarily due to the reduction of net charge offs. Net charge-offs
totaled $8.2 million in 2019 compared to $17.7 million in 2018, which was a reduction of $9.5 million or 54%. In 2018, two
impaired commercial loans from acquired portfolios totaling $5.8 million required provision expense of $4.0 million.
Additionally, provision expense was positively impacted by the sale of the Citizens' Finance loan portfolios in 2019. In 2019, a
provision benefit of $631,000 was recorded at Citizens Finance Parent Co. compared to provision expense of $2.2 million in
2018, and $4.8 million in 2017.
48 The allowance for loan losses at December 31, 2019, was 0.84% of loans and 87.28% of nonperforming loans compared to
0.84% of loans and 85.27% of nonperforming loans at December 31, 2018, and 0.87% of loans and 87.82% of nonperforming
loans at December 31, 2017.
Noninterest Income
The table below summarizes Heartland's noninterest income for the years indicated, in thousands:
NONINTEREST INCOME
Service charges and fees
Loan servicing income
Trust fees
Brokerage and insurance commissions
Securities gains, net
Unrealized gain on equity securities, net
Net gains on sale of loans held for sale
Valuation allowance on servicing rights
Income on bank owned life insurance
Other noninterest income
Total Noninterest Income
For the Years Ended December 31,
% Change
2019
$
52,157
4,843
19,399
3,786
7,659
525
15,555
(911)
3,785
9,410
$ 116,208
$
2018
48,706
7,292
18,393
4,513
1,085
212
21,450
(46)
2,793
4,762
$ 109,160
$
2017
39,183
5,636
15,818
4,033
6,973
—
22,251
21
2,772
5,335
$ 102,022
2019/2018
7 %
(34)
5
(16)
606
148
(27)
(1,880)
36
98
6 %
2018/2017
24 %
29
16
12
(84)
100
(4)
(319)
1
(11)
7 %
Noninterest income was $116.2 million in 2019 compared to $109.2 million in 2018, an increase of $7.0 million or 6%. This
increase is the result of higher service charges and fees, securities gains, net and other noninterest income, the effect of which
was partially offset by reduced loan servicing income and net gains on sale of loans held for sale. During 2018, noninterest
income was $109.2 million compared to $102.0 million in 2017, an increase of $7.1 million or 7%. This increase reflected
higher service charges and fees and trust fees, the effect of which was partially offset by lower net gains on sale of loans held
for sale and lower net securities gains.
Service Charges and Fees
The following table summarizes the changes in service charges and fees for the years ended indicated, in thousands:
For the Years Ended December 31,
% Change
2019
2018
2017
2019/2018 2018/2017
Service charges and fees on deposit accounts
$
12,790
$
11,291
$
Overdraft fees
Customer service fees
Credit card fee income
Debit card income
11,543
331
15,594
11,899
10,796
330
11,893
14,396
Total service charges and fees
$
52,157
$
48,706
$
9,570
9,365
296
7,968
11,984
39,183
13 %
18 %
7
—
31
(17)
7 %
15
11
49
20
24 %
Total service charges and fees of $52.2 million in 2019 increased $3.5 million or 7% from $48.7 million in 2018 and $9.5
million or 24% from $39.2 million in 2017. Service charges on checking and savings accounts totaled $12.8 million during
2019 compared to $11.3 million during 2018 and $9.6 million during 2017. Overdraft fees totaled $11.5 million during 2019,
$10.8 million during 2018 and $9.4 million during 2017. The increases in service charges and fees on deposit accounts and
overdraft fees are primarily attributable to a larger customer base.
Credit card fee income totaled $15.6 million during 2019 compared to $11.9 million during 2018 and $8.0 million in 2017.
These increases resulted primarily from efforts to increase the level of commercial credit card services provided at the Banks,
including recently acquired Banks. Heartland has focused on expanding its card payment solution for businesses. As an
example, Heartland introduced an expense management service that provides business customers the ability to more efficiently
manage their card-based spending.
49
Interchange revenue from activity on bank debit cards, along with surcharges on ATM activity, resulted in debit card income of
$11.9 million during 2019, $14.4 million during 2018 and $12.0 million during 2017. The decrease of $2.5 million or 17%
during 2019 was primarily attributable to the impact of the Durbin amendment, which restricts interchange fees to those which
are "reasonable and proportionate" for certain debit card issuers and limits the ability of networks and issuers to restrict debit
card transaction routing. The Durbin Amendment was effective for Heartland on July 1, 2019.
Loan Servicing Income
The following tables show the changes in loan servicing income for the years indicated, in thousands:
For the Years Ended December 31,
2018
2019
2017
% Change
2019/2018 2018/2017
Commercial and agricultural loan servicing fees(1)
Residential mortgage servicing fees(2)
Mortgage servicing rights amortization
$
3,110
$
3,229
$
3,118
(4)%
4 %
4,901
(3,168)
9,931
(5,868)
11,567
(9,049)
(51)
(46)
(14)
(35)
Total loan servicing income
$
4,843
$
7,292
$
5,636
(34)%
29 %
(1) Includes servicing fees for commercial, commercial real estate, agricultural and agricultural real estate loans and
amortization of capitalized commercial servicing rights.
(2) Heartland's mortgage servicing portfolio totaled $616.7 million, $4.10 billion and $3.56 billion as of December 31,
2019, 2018 and 2017, respectively.
On April 30, 2019, Heartland's Dubuque Bank and Trust Company subsidiary sold substantially all of its mortgage servicing
rights portfolio. This transaction did not impact the residential mortgage servicing portfolio of Heartland's PrimeWest Mortgage
Corporation subsidiary.
Loan servicing income includes the fees collected for the servicing of commercial, agricultural, and mortgage loans, which are
dependent upon the aggregate outstanding balance of these loans, rather than quarterly production and sale of these loans. Loan
servicing income totaled $4.8 million for 2019 compared to $7.3 million for 2018 and $5.6 million for 2017. Loan servicing
income related to the servicing of commercial and agricultural loans totaled $3.1 million during 2019 compared to $3.2 million
during 2018 and $3.1 million during 2017.
Fees collected for the servicing of mortgage loans, primarily for GSEs, were $4.9 million during 2019 compared to $9.9 million
during 2018 and $11.6 million during 2017. Included in and offsetting loan servicing income is the amortization of capitalized
servicing rights, which was $3.2 million during 2019 compared to $5.9 million during 2018 and $9.0 million during 2017. The
decrease in amortization of servicing rights in 2019 was primarily due to the sale of Dubuque Bank and Trust Company's
mortgage servicing portfolio, and the decrease in 2018 compared to 2017 was primarily due to decreased prepayment speeds of
mortgage loans.
The portfolio of mortgage loans serviced by Heartland, primarily for GSEs, totaled $616.7 million at December 31, 2019,
compared to $4.10 billion at December 31, 2018, and $3.56 billion at December 31, 2017. The increase in the mortgage
servicing portfolio in 2018 was primarily attributable to the PrimeWest servicing portfolio that was acquired during the year,
which totaled $648.9 million at December 31, 2018. The decrease in the mortgage servicing portfolio in 2019 was primarily
attributable to the sale of the mortgage servicing portfolio of Dubuque Bank and Trust Company previously discussed. Note 8,
"Goodwill, Core Deposit Intangibles and Other Intangible Assets," to the consolidated financial statements contains a
discussion of our servicing rights.
Net Gains on Sale of Loans Held for Sale
Net gains on sale of loans held for sale totaled $15.6 million during 2019 compared to $21.5 million during 2018 and $22.3
million during 2017. These gains result primarily from the gain or loss on sales of mortgage loans into the secondary market,
related fees and fair value marks on the associated derivatives. Due to changes in Heartland's legacy mortgage lending business,
net gains on sales of residential mortgage loans only reflected PrimeWest Mortgage Corporation mortgage production in 2019.
Securities Gains, Net
Securities gains totaled $7.7 million during 2019 compared to $1.1 million during 2018 and $7.0 million during 2017.
Heartland's securities portfolio was in a net unrealized gain position of $1.4 million at the end of 2019 compared to a net
50 unrealized loss position of $41.9 million at the end of 2018. During 2017, three private label Z tranche securities with a book
value of $57,000 were sold for a gain of $2.8 million.
Other Noninterest Income
Other noninterest income was $9.4 million during 2019 compared to $4.8 million during 2018 and $5.3 million during 2017, an
increase of $4.6 million or 98% during 2019 and a decrease of $573,000 or 11% during 2018. Commercial swap fee income
increased $1.4 million or 142% to $2.4 million for 2019 compared to $1.0 million for 2018. The increase in 2019 included
$768,000 of swap fee income related to one large commercial loan at Dubuque Bank and Trust Company. Also included in
other noninterest income for 2019 was $1.3 million of death benefits on bank owned life insurance and a $266,000 recovery on
an acquired loan that was charged off prior to acquisition. Heartland also recorded $375,000 of other noninterest income for the
gain on extinguishment of debt. There were no similar items recorded in 2018.
Noninterest Expenses
The following table summarizes Heartland's noninterest expenses for the years indicated, in thousands:
NONINTEREST EXPENSES
For the Years Ended December 31,
% Change
2019
2018
2017
2019/2018
2018/2017
Salaries and employee benefits
$ 200,541
$ 196,118
$ 171,407
2 %
14 %
Occupancy
Furniture and equipment
Professional fees
Advertising
Core deposit intangibles and customer relationship
intangibles amortization
Other real estate and loan collection expenses
(Gain)/loss on sales/valuations of assets, net
Restructuring expenses
Other noninterest expenses
Total Noninterest Expenses
25,450
12,100
50,022
10,028
11,972
1,035
(19,422)
3,227
54,208
25,328
12,529
43,510
9,565
9,355
3,038
2,208
2,564
22,244
11,061
36,474
7,229
6,077
2,461
2,475
—
49,673
38,247
—
(3)
15
5
28
(66)
(980)
26
9
14
13
19
32
54
23
(11)
100
30
$ 349,161
$ 353,888
$ 297,675
(1)%
19 %
Noninterest expenses totaled $349.2 million in 2019 compared to $353.9 million in 2018, a $4.7 million or 1% decrease, with
the most significant increases in professional fees, core deposit intangibles and customer relationship intangibles amortization
and other noninterest expenses, which were partially offset by net gains on sales/valuations of assets. Noninterest expenses
totaled $353.9 million in 2018 compared to $297.7 million in 2017, an $56.2 million or 19% increase, with the most significant
increases in salaries and employee benefits, professional fees, advertising, restructuring expenses and other noninterest
expenses.
Salaries and Employee Benefits
The largest component of noninterest expense, salaries and employee benefits, increased $4.4 million or 2% to $200.5 million
in 2019 and $24.7 million or 14% to $196.1 million in 2018. In 2019, the increase in salaries and benefits was primarily
attributable to increased incentive compensation costs. The increases in 2018 and 2017 were primarily attributable to the
additional salaries and employee benefits for employees of the acquired entities. Full-time equivalent employees totaled 1,908
on December 31, 2019, compared to 2,045 on December 31, 2018, and 2,008 on December 31, 2017. The reduction in full-time
equivalent employees in 2019 was primarily attributable to the closure of Heartland's legacy mortgage operations, the sale of
the Citizen's Finance loan portfolios and the efficiency opportunities realized from Operation Customer Compass.
Professional Fees
Professional fees increased $6.5 million or 15% to $50.0 million during 2019 and $7.0 million or 19% to $43.5 million during
2018. Professional fees recorded in 2019 related to Heartland's strategic initiatives totaled $4.7 million. The remainder of the
increases for 2019 and 2018 were primarily attributable to the services provided to Heartland by third-party advisors, including
services performed related to mergers and acquisitions, model validation expenses and advisory services associated with the
increased level of regulation resulting from Heartland having assets over $10 billion.
51
Core Deposit Intangibles and Customer Relationship Intangibles Amortization
Core deposit intangibles and customer relationship intangibles amortization totaled $12.0 million during 2019 and $9.4 million
in 2018, which was an increase of $2.6 million or 28%. Core deposit intangibles and customer relationship intangibles
amortization increased $3.3 million or 54% during 2018 from $6.1 million in 2017. Included in core deposit intangibles and
customer relationship intangibles amortization in 2019 were write-offs totaling $682,000 related to the branch sales at Illinois
Bank & Trust, Citywide Banks and Wisconsin Bank & Trust. The remainder of the increases for the years ended December 31,
2019 and 2018 were attributable to recent acquisitions.
Net Gains/Losses on Sales/Valuations of Assets
Net gains on sales/valuations of assets totaled $19.4 million during 2019 compared to losses of $2.2 million during 2018 and
losses of $2.5 million during 2017. Heartland recorded $24.5 million of gains associated with the branch sales and sale of the
mortgage servicing rights portfolio previously discussed. Excluding these sales, net losses of $5.1 million were recorded in
2019, of which $4.6 million related to write-downs and disposals of fixed assets of closed branch locations. Write-downs and
losses of $1.3 million related to three other real estate properties were recorded in 2018.
Restructuring Expenses
Restructuring expenses totaled $3.2 million and $2.6 million in 2019 and 2018, respectively. In 2019, the restructuring expenses
consisted of severance and retention payments for legacy mortgage and Citizens' Finance Co. employees, software
discontinuation fees and expected lease buyouts. In 2018, the restructuring expenses were primarily related to outsourcing the
residential mortgage loan application processing, underwriting and loan closing functions. The restructuring expenses consisted
of severance and retention costs related to the workforce reduction and contract buyouts associated with the discontinued use of
several systems.
Other Noninterest Expenses
Other noninterest expenses were $54.2 million during 2019, $49.7 million during 2018 and $38.2 million during 2017. Included
in other noninterest expenses were write-downs on partnership investments which qualified for tax credits totaling $8.0 million
in 2019, $4.2 million in 2018 and $1.9 million in 2017.
Excluding the items noted above, increases in all other noninterest expense categories for the years ended December 31, 2019,
and 2018, were primarily attributable to recent acquisitions.
Efficiency Ratio
One of Heartland's top priorities has been to improve its efficiency ratio, on a fully tax-equivalent basis, with the goal of
reducing it to below 60%. The efficiency ratio, fully tax-equivalent, improved during 2019 to 63.11% compared to 63.54% for
2018 and 65.41% for 2017. The process improvement and automation opportunities realized from Operation Customer
Compass are expected to reduce the efficiency ratio. Management continues to review branch locations for optimization.
Additionally, systems conversions of newly acquired entities are completed as soon as possible after the closing of the
transaction to optimize cost savings. Management expects the efficiency ratio will show variability from year to year as a result
of acquisition activities.
See "Selected Financial Data" in Item 6 of this Annual Report on Form 10-K for a description of the calculation of the
efficiency ratio on a fully tax-equivalent basis, which is a non-GAAP financial measure.
52 Income Taxes
Heartland's effective tax rate was 19.0% for 2019 compared to 19.4% for 2018 and 36.8% for 2017. The lower effective tax rate
for 2019 and 2018 when compared to 2017 was primarily the result of the reduced corporate federal tax rate. The Tax Cuts and
Jobs Act, which among other provisions, reduced the federal corporate tax rate to 21% from the maximum rate of 35% effective
January 1, 2018. In response to the Tax Cuts and Jobs Act, Heartland recorded a $10.4 million non-cash charge to income tax
expense in 2017 to adjust the value of its deferred tax assets and liabilities.
The following items impacted Heartland's 2019, 2018 and 2017 tax calculations:
•
•
•
•
•
Solar energy tax credits of $4.0 million, $2.9 million and $449,000 during 2019, 2018 and 2017 respectively.
Federal low-income housing tax credits of $1.1 million for the year ended December 31, 2019, compared to $1.2
million for the years ended December 31, 2018, and December 31, 2017.
Historic rehabilitation tax credits of $1.8 million for 2019 compared to $0 for 2018 and $713,000 for 2017.
Tax-exempt interest income as a percentage of pre-tax income of 10.1% during 2019 compared to 16.1% for 2018 and
23.6% for 2017. The tax-equivalent adjustment for this tax-exempt interest income was $4.9 million during 2019, $6.2
million during 2018 and $15.1 million during 2017.
Included in 2019's tax calculation were $1.9 million of tax benefits related to the release of valuation allowances on
deferred tax assets.
FINANCIAL CONDITION
Heartland's total assets were $13.21 billion at December 31, 2019, an increase of $1.80 billion or 16% since December 31,
2018. Included in this increase, at fair value, were $766.2 million of assets acquired in the Blue Valley Ban Corp. transaction
and $495.7 million of assets acquired in the Rockford Bank and Trust Company transaction. Heartland's total assets were
$11.41 billion at December 31, 2018, an increase of $1.60 billion or 16% compared to $9.81 billion at December 31, 2017.
Included in this increase, at fair value, were $427.1 million of assets acquired in the Signature Bancshares, Inc. transaction and
$1.12 billion of assets acquired in the First Bank Lubbock Bancshares, Inc. transaction.
Lending Activities
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.
The commercial and commercial real estate loan portfolio includes a wide range of business loans, including lines of credit for
working capital and operational purposes and term loans for the acquisition of equipment and real estate. Although most loans
are made on a secured basis, loans may be made on an unsecured basis where warranted by the overall financial condition of the
borrower. Terms of commercial business loans generally range from one to five years. Commercial loans are primarily made
based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The
collateral for most of these loans is based upon a discount from its market value. The primary repayment risks of commercial
loans are that the cash flow of the borrowers may be unpredictable, and the collateral securing these loans may fluctuate in
value. Heartland seeks to minimize these risks in a variety of ways. The underwriting analysis includes credit verification,
analysis of global cash flows, appraisals and a review of the financial condition of the borrower. Personal guarantees are
frequently required as a tertiary form of repayment. In addition, when underwriting loans for commercial real estate, careful
consideration is given to the property's operating history, future operating projections, current and projected occupancy,
location and physical condition. Heartland also utilizes government guaranteed lending through the U.S. Small Business
Administration and the USDA Rural Development Business and Industry Program to assist customers with longer-term funding
and to reduce risk.
loans, many of which are secured by crops, machinery and real estate, are provided to finance capital
Agricultural
improvements and farm operations as well as acquisitions of livestock and machinery. Agricultural loans present unique credit
risks relating to adverse weather conditions, loss of livestock due to disease or other factors, declines in market prices for
agricultural products and the impact of government regulations and trade policies. The ultimate repayment of agricultural loans
is dependent upon the profitable operation or management of the agricultural entity. In underwriting agricultural loans, lending
53 personnel work closely with their customers to review budgets and cash flow projections for the ensuing crop year. These
budgets and cash flow projections are monitored closely during the year and reviewed with the customers at least annually.
Lending personnel also work closely with governmental agencies, including the Farm Service Agency, to help agricultural
customers obtain credit enhancement products such as loan guarantees or interest assistance.
Heartland has not been active in the origination of first-lien, one-to-four family residential mortgages since the end of 2018.
During the fourth quarter of 2018, Heartland entered into arrangements with third parties to offer residential mortgage loans to
customers in many of its markets. In addition, the acquisition in 2018 of First Bank & Trust in Lubbock, Texas, included its
wholly owned mortgage subsidiary, PrimeWest Mortgage Corporation. PrimeWest Mortgage Corporation provides mortgage
loans to customers in Texas and has expanded to also serve the mortgage needs of customers in several of Heartland's
southwestern markets. PrimeWest Mortgage Corporation services the loans it sells into the secondary market.
Consumer lending includes motor vehicle, home improvement, home equity and small personal credit lines. Consumer loans
typically have shorter terms, lower balances, higher yields and higher risks of default than one- to four-family first-lien
residential mortgage loans. Consumer loan collections are dependent on the borrower's continuing financial stability, and are
therefore more likely to be affected by adverse personal circumstances. Risk is reduced through underwriting criteria, which
include credit verification, appraisals, a review of the borrower's financial condition and personal cash flows. A security
interest, with title insurance when necessary, is taken in the underlying real estate.
Heartland’s major source of income is interest on loans. The table below presents the composition of Heartland’s loan portfolio
at the end of the years indicated, in thousands:
LOAN PORTFOLIO
Loans receivable held to
maturity:
2019
2018
2017
2016
2015
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
As of December 31,
Commercial
$2,419,909
28.90 % $2,020,231
27.26 % $1,646,606
25.76 % $1,287,265
24.04 % $1,279,214
25.56 %
Commercial real estate
4,370,549
52.19
3,711,481
50.08
3,163,269
49.48
2,538,582
47.42
2,326,360
46.50
Agricultural and
agricultural real estate
Residential mortgage
Consumer
Gross loans receivable
held to maturity
Unearned discount
Deferred loan fees
(680)
(4,900)
Total net loans receivable
held to maturity
8,367,917
Allowance for loan losses
(70,395)
Loans receivable, net
$8,297,522
533,064
597,742
452,233
6.37
7.14
5.40
565,408
673,603
440,158
7.63
9.09
5.94
511,588
624,279
447,484
8.00
9.76
7.00
489,318
9.14
471,870
9.43
617,924
11.54
539,555
10.78
420,613
7.86
386,867
7.73
8,373,497
100.00 % 7,410,881
100.00 % 6,393,226
100.00 % 5,353,702
100.00 % 5,003,866
100.00 %
(1,624)
(1,560)
7,407,697
(61,963)
$7,345,734
(556)
(1,206)
6,391,464
(55,686)
$6,335,778
(699)
(1,284)
5,351,719
(54,324)
$5,297,395
(488)
(1,892)
5,001,486
(48,685)
$4,952,801
Loans held for sale totaled $26.7 million, which was primarily residential mortgage loans, at December 31, 2019, $119.8
million at December 31, 2018, which included $96.0 million of loans to be sold in conjunction with the pending branch sales
and Citizens' loan portfolios, and $23.8 million of primarily residential mortgage loans, and $44.6 million at December 31,
2017, which was a result of mortgage loan origination activity.
54
The table below sets forth the remaining maturities of loans by category, including loans held for sale and excluding unearned
discount and deferred loan fees, as of December 31, 2019, in thousands:
MATURITY AND RATE SENSITIVITY OF LOANS(1)
Commercial
Commercial real estate
Agricultural and agricultural real estate
Residential real estate
Consumer
Total
One Year
or Less
$ 1,025,085
886,282
261,842
100,912
70,362
$ 2,344,483
(1) Maturities based upon contractual dates.
Over 5 Years
$
Over 1 Year
Through 5 Years
Fixed
Rate
488,544
1,235,433
186,739
41,440
65,079
$ 2,017,235
Floating
Rate
$ 399,111
716,262
21,924
57,625
60,802
Fixed
Rate
$ 309,824
345,299
33,846
111,959
28,104
$1,255,724 $ 829,032
$
Floating
Rate
197,345
1,187,273
28,713
312,554
227,886
$ 1,953,771
Total
$ 2,419,909
4,370,549
533,064
624,490
452,233
$ 8,400,245
Total loans held to maturity were $8.37 billion at December 31, 2019, compared to $7.41 billion at year-end 2018, an increase
of $960.2 million or 13%. Excluding $32.1 million of loans that were reclassified as held for sale in conjunction with the branch
sales and the Citizens transaction and $896.0 million of loans acquired from Blue Valley Ban Corp. and Rockford Bank and
Trust Company in 2019, total loans held to maturity organically increased $96.3 million or 1% since year-end 2018. Total loans
held to maturity were $7.41 billion at December 31, 2018, compared to $6.39 billion at year-end 2017, an increase of $1.02
billion or 16%. Excluding $96.0 million of loans that were classified as held for sale in conjunction with the pending branch
sales and the Citizens transaction and $1.01 billion of loans acquired from Signature Bancshares, Inc. and First Bank Lubbock
Bancshares, Inc., in 2018, total loans held to maturity organically increased $106.7 million or 2% since year-end 2017.
The commercial and commercial real estate loan category continues to be the primary focus for all of the Banks. These loans
comprised 81% of the loan portfolio at December 31, 2019 compared to 77% at year-end 2018. Commercial and commercial
real estate loans, which totaled $6.79 billion at December 31, 2019, increased $1.06 billion or 18% from $5.73 billion at year-
end 2018. Excluding $14.9 million of commercial and commercial real estate loans classified as held for sale during the first
quarter of 2019 and $780.3 million of loans acquired in the Blue Valley Ban Corp. and Rockford Bank and Trust Company
transactions, commercial and commercial real estate loans organically increased $293.4 million or 5% since December 31,
2018. Commercial and commercial real estate loans increased $921.8 million or 19% to $5.73 billion at December 31, 2018
from $4.81 billion at year-end 2017. Exclusive of $830.0 million of commercial and commercial real estate loans acquired from
Signature Bancshares, Inc. and First Bank Lubbock Bancshares, Inc. in 2018, commercial and commercial real estate loans
organically increased $91.8 million or 2% since year-end 2017.
Residential mortgage loans, which totaled $597.7 million at December 31, 2019, decreased $75.9 million or 11% from $673.6
million at year-end 2018 Excluding $2.0 million of residential mortgage loans classified as held for sale during the first quarter
of 2019 and $59.3 million of loans acquired in the Blue Valley Ban Corp. and Rockford Bank and Trust Company transactions,
residential mortgage loans organically decreased $133.2 million or 20% since December 31, 2018. The decrease was primarily
as a result of customers refinancing loans due to recent decreases in mortgage interest rates. Residential mortgage loans, which
totaled $673.6 million at December 31, 2018, increased $49.3 million or 8% since year-end 2017. Exclusive of $81.6 million of
residential mortgage loans acquired from Signature Bancshares, Inc. and First Bank Lubbock Bancshares, Inc. in 2018,
residential mortgage loans organically decreased $32.3 million or 5% from year-end 2017.
Agricultural and agricultural real estate loans, which totaled $533.1 million at December 31, 2019, decreased $32.3 million or
6% in 2019 from $565.4 million at December 31, 2018, and increased $53.8 million or 11% in 2018 from $511.6 million at
December 31, 2017. Excluding $6.6 million of agricultural and agricultural real estate loans classified as held for sale during
the first quarter of 2019 and $1.8 million of loans acquired in the Blue Valley Ban Corp. transaction, agricultural and
agricultural real estate loans organically decreased $27.5 million or 5% since December 31, 2018. Excluding $28.6 million of
agricultural and agricultural loans acquired in the First Bank Lubbock Bancshares, Inc. transaction in 2018, agricultural and
agricultural real estate loans organically increased $25.2 million or 5% since year-end 2017. Approximately 77% of Heartland's
agricultural loans at year-end 2019 were to borrowers located in the Midwest. The agricultural loan portfolio is well diversified
among loans relating to grain crops, dairy cows, hogs and cattle.
Consumer loans, which totaled $452.2 million at December 31, 2019, increased $12.1 million or 3% in 2019 from $440.2
million at December 31, 2018, and decreased $7.3 million or 2% in 2018 from $447.5 million at December 31, 2017. Excluding
55 $8.6 million of loans classified as held for sale during the first quarter of 2019 and $54.7 million of loans acquired in the Blue
Valley Ban Corp. and Rockford Bank and Trust Company transactions, consumer loans organically decreased $33.9 million or
8% since December 31, 2018. Exclusive of $65.3 million of consumer loans acquired from Signature Bancshares, Inc. and First
Bank Lubbock Bancshares, Inc. and $73.4 million of loans transferred to held for sale, consumer loans organically increased
$800,000 or less than 1% since December 31, 2017.
Excluding loans acquired in the fourth quarter of 2019, loans secured by real estate, either fully or partially, totaled $5.20
billion or 62% of gross loans at December 31, 2019 and $4.80 billion or 65% of total loans at December 31, 2018.
Approximately 50% of the non-farm, nonresidential loans are owner occupied. The largest categories within our real estate
secured loans are listed below, in thousands:
LOANS SECURED BY REAL ESTATE
As of December 31,
2018
2019
Residential real estate, excluding residential construction and residential lot loans
$ 1,076,032
$ 1,119,942
Industrial, manufacturing, business and commercial
Agriculture
Retail
Office
Land development and lots
Hotel, resort and hospitality
Multi-family
Food and beverage
Warehousing
Health services
Residential construction
All other
Total loans secured by real estate
663,859
291,067
515,547
591,061
238,706
361,781
335,969
145,533
220,558
289,079
164,959
309,256
805,265
270,023
435,680
485,262
216,665
233,735
311,319
130,981
186,436
182,882
171,116
255,145
$ 5,203,407
$ 4,804,451
Although repayment risk exists on all loans, different factors influence repayment risk for each type of loan. The primary risks
associated with commercial and agricultural loans are the quality of the borrower’s management and the health of national and
regional economies. Additionally, repayment of commercial and agricultural real estate loans may be influenced by fluctuating
property values and concentrations of loans in a specific type of real estate. Repayment on loans to individuals, including those
secured by residential real estate, are dependent on the borrower’s continuing financial stability as well as the value of the
collateral underlying these credits, and thus are more likely to be affected by adverse personal circumstances and deteriorating
economic conditions. These risks are described in more detail in Item 1A. "Risk Factors" of this Annual Report on Form 10-K.
We monitor loan concentrations and do not believe we have excessive concentrations in any specific industry.
Our strategy with respect to the management of these types of risks, whether loan demand is weak or strong, is to encourage the
Banks to follow tested and prudent loan policies and underwriting practices, which include: (i) making loans on a sound and
collectible basis; (ii) verifying that primary and secondary sources of repayment are adequate in relation to the amount of the
loan; (iii) administering loan policies through a board of directors; (iv) developing and maintaining adequate diversification of
the loan portfolio as a whole and of the loans within each loan category; and (v) appropriately documenting each loan and
augmenting government guaranteed lending programs and adequate insurance.
We regularly monitor and continue to develop systems to oversee the quality of our loan portfolio. Under our internal loan
review program, loan review officers are responsible for reviewing existing loans, testing loan ratings assigned by loan officers,
identifying potential problem loans and monitoring the adequacy of the allowance for loan losses at the Banks. An integral part
of our loan review program is a loan rating system, under which a rating is assigned to each loan within the portfolio based on
the borrower’s financial position, repayment ability, collateral position and repayment history.
56 The table below presents the amounts of nonperforming loans and other nonperforming assets on the dates indicated, in
thousands:
NONPERFORMING ASSETS
Nonaccrual loans
Loans contractually past due 90 days or more
Total nonperforming loans
Other real estate
Other repossessed assets
Total nonperforming assets
Restructured loans(1)
Nonperforming loans to total loans receivable
Nonperforming assets to total loans receivable plus
repossessed property
Nonperforming assets to total assets
As of December 31,
2019
2018
2017
2016
2015
$76,548
$71,943
$62,581
$64,299
$39,655
4,105
80,653
6,914
11
$87,578
$ 3,794
726
72,669
6,153
459
$79,281
$ 4,026
830
63,411
10,777
411
$74,599
$ 6,617
86
64,385
9,744
663
$74,792
$10,380
—
39,655
11,524
485
$51,664
$11,075
0.96 %
0.98 %
0.99 %
1.20 %
0.79 %
1.05 %
0.66 %
1.07 %
0.69 %
1.17 %
0.76 %
1.39 %
0.91 %
1.03 %
0.67 %
(1) Represents accruing restructured loans performing according to their restructured terms.
The tables below summarize the changes in Heartland's nonperforming assets, including other real estate owned ("OREO")
during 2019 and 2018, in thousands:
December 31, 2018
Loan foreclosures
Net loan charge offs
New nonperforming loans
Acquired nonperforming assets
Reduction of nonperforming loans(1)
OREO/Repossessed sales proceeds
OREO/Repossessed assets write-downs, net
Net activity at Citizens Finance Parent Co.
Nonperforming
Loans
$
72,669
$
(8,287)
(8,225)
49,571
2,130
(27,205)
—
—
—
Other
Real Estate
Owned
Other
Repossessed
Assets
Total
Nonperforming
Assets
6,153
$
8,066
$
459
221
—
—
1,362
—
(7,660)
(1,007)
—
—
—
—
—
(184)
(39)
(446)
79,281
—
(8,225)
49,571
3,492
(27,205)
(7,844)
(1,046)
(446)
87,578
December 31, 2019
$
80,653
$
6,914
$
11
$
(1) Includes principal reductions and transfers to performing status.
57 Nonperforming
Loans
Other
Real Estate
Owned
Other
Repossessed
Assets
Total
Nonperforming
Assets
December 31, 2017
Loan foreclosures
Net loan charge offs
New nonperforming loans
Acquired nonperforming assets
Reduction of nonperforming loans(1)
OREO/Repossessed sales proceeds
OREO/Repossessed assets write-downs, net
Net activity at Citizens Finance Parent Co.
$
63,411
$
10,777
$
411
$
(7,954)
(17,736)
59,097
9,246
(33,395)
—
—
—
7,866
—
—
1,186
—
(11,578)
(2,098)
—
88
—
—
—
—
(74)
(27)
61
December 31, 2018
$
72,669
$
6,153
$
459
$
(1) Includes principal reductions and transfers to performing status.
74,599
—
(17,736)
59,097
10,432
(33,395)
(11,652)
(2,125)
61
79,281
Nonperforming loans were $80.7 million or 0.96% of total loans at December 31, 2019, compared to $72.7 million or 0.98% of
total loans at December 31, 2018. Excluding $2.1 million of acquired nonperforming loans, nonperforming loans increased $5.9
million or 8% from year-end 2018. Included in the increase at year-end 2019 was one $2.7 million commercial relationship that
was paid off in early 2020.
Approximately 52%, or $41.9 million, of Heartland's nonperforming loans at December 31, 2019, had individual loan balances
exceeding $1.0 million, the largest of which was $7.5 million. At December 31, 2018, approximately 50%, or $36.2 million, of
Heartland's nonperforming loans had individual loan balances exceeding $1.0 million, the largest of which was $7.2 million.
The portion of Heartland's nonresidential real estate nonperforming loans covered by government guarantees was $18.1 million
at December 31, 2019, compared to $7.7 million at December 31, 2018.
Delinquencies in each of the loan portfolios continue to be well-managed. Loans delinquent 30 to 89 days as a percent of total
loans were 0.33% at December 31, 2019, compared to 0.21% at December 31, 2018, and 0.27% at December 31, 2017.
Other real estate owned was $6.9 million at December 31, 2019, compared to $6.2 million at December 31, 2018, and $10.8
million at December 31, 2017. Liquidation strategies have been identified for all the assets held in other real estate owned.
Management continues to market these properties through a systematic liquidation process instead of an immediate liquidation
process in order to avoid discounts greater than the projected carrying costs. Proceeds from the sale of other real estate owned
totaled $7.7 million in 2019 compared to $11.6 million in 2018 and $10.4 million in 2017.
In certain circumstances, we may modify the terms of a loan to maximize the collection of amounts due. In most cases, the
modification is either a reduction in interest rate, conversion to interest only payments, extension of the maturity date or a
reduction in the principal balance. Generally, the borrower is experiencing financial difficulties or is expected to experience
difficulties in the near-term, so a concessionary modification is granted to the borrower that would otherwise not be considered.
Restructured loans accrue interest as long as the borrower complies with the revised terms and conditions and has demonstrated
repayment performance at a level commensurate with the modified terms over several payment cycles. Although many of our
loan restructurings occur on a case-by-case basis in connection with ongoing loan collection processes, we have also
participated in certain restructuring programs for residential real estate borrowers. In general, certain residential real estate
borrowers facing an interest rate reset that are current in their repayment status are allowed to retain the lower of their existing
interest rate or the market interest rate as of their interest reset date.
We had an aggregate balance of $7.6 million in restructured loans at December 31, 2019, of which $3.8 million were classified
as nonaccrual and $3.8 million were accruing according to the restructured terms. At December 31, 2018, we had an aggregate
balance of $8.1 million in restructured loans, of which $4.1 million were classified as nonaccrual and $4.0 million were
accruing according to the restructured terms.
At December 31, 2019, $247.1 million or 55% of the consumer loan portfolio were in home equity lines of credit ("HELOCs")
compared to $240.6 million or 55% at December 31, 2018. Under our policy guidelines for the underwriting of these lines of
credit, the customer may generally receive advances of up to 80% of the value of the property.
58 The Banks have not been active in the origination of subprime loans. Consistent with our community banking model, which
includes meeting the legitimate credit needs within the communities served, the Banks may make loans to borrowers possessing
subprime characteristics if there are mitigating factors present that reduce the potential default risk of the loan.
Allowance For Loan Losses
The process we use to determine the appropriateness of the allowance for loan losses is considered a critical accounting practice
for Heartland and has remained consistent over the past several years. The allowance for loan losses represents management’s
estimate of identified and unidentified probable losses in the existing loan portfolio. For additional details on the specific factors
considered, refer to the critical accounting policies section of this report.
The allowance for loan losses at December 31, 2019, was 0.84% of loans and 87.28% of nonperforming loans compared to
0.84% of loans and 85.27% of nonperforming loans at December 31, 2018, and 0.87% of loans and 87.82% of nonperforming
loans at December 31, 2017. Exclusive of acquired loans, for which a valuation reserve is recorded, the allowance for loan
losses at December 31, 2019, was 1.06% of loans in comparison with 1.03% of loans at December 31, 2018, and 1.13% of
loans at December 31, 2017. The provision for loan losses was $16.7 million during 2019 compared to $24.0 million during
2018 and $15.6 million during 2017. The allowance for loan losses on impaired loans represented $8.2 million at December 31,
2019, in comparison with $7.6 million at December 31, 2018, and $4.8 million at December 31, 2017. The allowance on non-
impaired loans was $62.2 million at December 31, 2019, in comparison with $54.4 million at December 31, 2018, and $50.9
million at December 31, 2017. The allowance on non-impaired loans is 0.75% at December 31, 2019 compared to 0.74% of
non-impaired loans at December 31, 2018 and 0.81% at December 31, 2017. Heartland had $1.80 billion of acquired loans,
which had $46.9 million of remaining valuation reserves that were not subject to the allowance at December 31, 2019. At
December 31, 2018, Heartland had $1.63 billion of acquired loans, which had $40.9 million of remaining valuation reserves
that were not subject to the allowance.
The amount of net charge-offs was $8.2 million during 2019 compared to $17.7 million during 2018 and $14.2 million during
2017. As a percentage of average loans, net charge-offs were 0.11% during 2019 compared to 0.25% during 2018 and 0.24%
during 2017. Citizens Finance Parent Co., our consumer finance subsidiary, experienced net charge-offs of $6.4 million during
2018 and $4.7 million during 2017. The Citizens' loan portfolios were recorded at fair value at year-end 2018 due to the held for
sale classification, which resulted in a charge-off of $3.1 million in the fourth quarter of 2018. Historically, the Citizens' loan
portfolios have accounted for approximately 6 to 8 basis points of net charge-offs.
59 The table below summarizes activity in the allowance for loan losses for the years indicated, including amounts of loans
charged off, amounts of recoveries, additions to the allowance charged to income, additions related to acquisitions and the ratio
of net charge-offs to average loans outstanding, in thousands:
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Allowance at beginning of year
$ 61,963
$ 55,686
$ 54,324
$ 48,685
$ 41,449
As of December 31,
2019
2018
2017
2016
2015
Charge-offs:
Commercial
Commercial real estate
Residential real estate
Agricultural and agricultural real estate
Consumer
Total charge-offs
Recoveries:
Commercial
Commercial real estate
Residential real estate
Agricultural and agricultural real estate
Consumer
Total recoveries
Net charge-offs(1)
Provision for loan losses
Allowance at end of year
7,294
272
407
2,656
2,961
13,590
1,743
1,391
73
536
1,622
5,365
8,225
16,657
7,916
1,977
372
1,437
9,583
4,640
2,712
800
2,916
6,803
21,285
17,871
978
1,047
96
13
1,415
3,549
17,736
24,013
811
1,192
358
18
1,291
3,670
14,201
15,563
1,348
2,868
346
214
6,618
11,394
930
3,327
29
10
1,043
5,339
6,055
11,694
1,887
1,368
241
551
4,967
9,014
1,167
1,200
183
32
971
3,553
5,461
12,697
$ 70,395
$ 61,963
$ 55,686
$ 54,324
$ 48,685
Net charge-offs to average loans
0.11 %
0.25 %
0.24 %
0.11 %
0.12 %
(1) Includes net charge-offs (recoveries) at Citizens Finance Parent Co. of $(631) for 2019, $6,397 for 2018, $4,673 for 2017,
$4,280 for 2016, and $2,902 for 2015.
The table below shows our allocation of the allowance for loan losses by types of loans, in thousands:
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
As of December 31,
2019
2018
2017
2016
2015
Loan
Category
to Gross
Loans
Loan
Category
to Gross
Loans
Loan
Category
to Gross
Loans
Loan
Category
to Gross
Loans
Amount
Receivable Amount
Receivable Amount
Receivable Amount
Receivable Amount
Loan
Category
to Gross
Loans
Receivable
Commercial
$ 27,744
28.90 % $ 24,505
27.26 % $ 18,098
25.76 % $ 14,765
24.04 % $ 16,095
25.56 %
Commercial real estate
Residential real estate
Agricultural and
agricultural real estate
Consumer
30,743
1,438
5,617
4,853
Total allowance for loan
losses
$ 70,395
52.19
7.14
6.37
5.40
25,538
1,785
4,953
5,182
50.08
9.09
7.63
5.94
21,950
2,224
4,258
9,156
49.48
9.76
8.00
7.00
24,319
2,263
4,210
8,767
47.42
11.54
9.14
7.86
19,532
1,934
3,887
7,237
46.50
10.78
9.43
7.73
$ 61,963
$ 55,686
$ 54,324
$ 48,685
Management allocates the allowance for loan losses by pools of risk within each loan portfolio. The allocation of the allowance
for loan losses by loan portfolio is made for analytical purposes and is not necessarily indicative of the trend of future loan
losses in any particular category. The total allowance for loan losses is available to absorb losses from any segment of the loan
portfolio.
60 Securities
The composition of Heartland's securities portfolio is managed to maximize the return on the portfolio while considering the
impact it has on Heartland's asset/liability position and liquidity needs. Securities represented 26% of Heartland's total assets at
December 31, 2019, compared to 24% at December 31, 2018, and 25% at December 31, 2017. Whenever possible,
management intends to use a portion of the proceeds from maturities, paydowns and sales of securities to fund loan growth and
paydown wholesale borrowings. Total securities carried at fair value as of December 31, 2019, were $3.31 billion, an increase
of $862.1 million or 35% since December 31, 2018. The increase includes $127.5 million of securities acquired in 2019. Total
securities carried at fair value as of December 31, 2018, were $2.45 billion, an increase of $234.0 million or 11% since
December 31, 2017. The increase includes $35.2 million of securities acquired in 2018.
The table below presents the composition of the securities portfolio, including carried at fair value, held to maturity and other,
by major category, in thousands:
SECURITIES PORTFOLIO COMPOSITION
2019
As of December 31,
2018
2017
Amount
% of
Portfolio
Amount
% of
Portfolio
Amount
U.S. government corporations and agencies
$
9,893
0.29 % $
31,951
1.18 % $
5,328
% of
Portfolio
0.21 %
Mortgage and asset-backed securities
2,577,278
Obligation of states and political subdivisions
798,514
75.02
23.24
0.54
0.91
2,026,698
611,257
17,086
28,396
74.64
22.51
0.63
1.05
1,753,736
694,565
16,674
22,563
70.35
27.86
0.67
0.91
18,435
31,321
$ 3,435,441
100.00 % $ 2,715,388
100.00 % $ 2,492,866
100.00 %
Equity securities
Other securities
Total securities
The percentage of Heartland's securities portfolio comprised of U.S. government corporations and agencies was less than 1% at
December 31, 2019, compared to 1% at December 31, 2018, and less than 1% at December 31, 2017. Mortgage and asset-
backed securities comprised 75% of Heartland's securities portfolio at December 31, 2019, compared to 75% at December 31,
2018, and 70% at December 31, 2017.
Heartland's securities portfolio had an expected modified duration of 6.17 years as of December 31, 2019, compared to 4.01
years as of December 31, 2018, and 4.71 years as of December 31, 2017.
At December 31, 2019, we had $31.3 million of other securities, including capital stock in the various Federal Home Loan
Banks ("FHLB") of which the Banks are members. All securities classified as other are held at cost.
61
The tables below present the contractual maturities for the debt securities in the securities portfolio at December 31, 2019, by
major category and classification as available for sale or held to maturity, in thousands. Expected maturities will differ from
contractual maturities, as borrowers may have the right to call or prepay obligations with or without call or prepayment
penalties.
SECURITIES AVAILABLE FOR SALE PORTFOLIO MATURITIES
Within
One Year
After One But
Within
Five Years
After Five But
Within
Ten Years
After
Ten Years
Mortgage and asset-
backed and
equity securities
Total
Amount Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
U.S. government
corporations and
agencies
Obligations of
states and political
subdivisions
Mortgage and
asset-backed
securities
Equity securities
$ 6,499
2.42 % $ 2,004
2.07 % $ 1,390
2.08 % $
—
— % $
—
— % $
9,893
2.30 %
5,672
2.86
26,430
2.99
76,552
3.38
598,536
2.99
—
—
707,190
3.03
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,577,278
3.05
2,577,278
3.05
18,435
—
18,435 —
Total
$ 12,171
2.62 % $ 28,434
2.93 % $ 77,942
3.36 % $ 598,536
2.99 % $ 2,595,713
3.05 % $3,312,796
3.04 %
SECURITIES HELD TO MATURITY PORTFOLIO MATURITIES
Within
One Year
After One But
Within
Five Years
After Five But
Within
Ten Years
After
Ten Years
Total
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Obligations of states and political
subdivisions
$ 2,443
3.64 % $ 17,604
4.95 % $
59,708
5.02 % $ 11,569
4.75 % $
91,324
4.94 %
Total
$ 2,443
3.64 % $ 17,604
4.95 % $
59,708
5.02 % $ 11,569
4.75 % $
91,324
4.94 %
The unrealized losses on Heartland's debt securities are the result of changes in market interest rates or widening of market
spreads subsequent to the initial purchase of the securities and not related to concerns regarding the underlying credit of the
issuers or the underlying collateral. For this reason and because we have the ability and intent to hold those investments until a
recovery of fair value, which may be maturity, we did not consider those investments to be other-than-temporarily impaired at
December 31, 2019. See Note 4, "Securities" of the consolidated financial statements for further discussion regarding
unrealized losses on our securities portfolio.
Deposits
The table below sets forth the distribution of our average deposit account balances and the average interest rates paid on each
category of deposits for the years indicated, in thousands:
AVERAGE DEPOSITS
2019
Percent
of
Deposits
Average
Deposits
Demand deposits
$ 3,384,341
33.74 %
Savings
Time deposits
Total deposits
5,530,503
1,115,785
55.14
11.12
For the Years Ended December 31,
Average
Interest
Rate
Average
Deposits
— % $ 3,265,532
4,779,977
0.85
1.49
1,058,769
2018
2017
Percent
of
Deposits
Average
Interest
Rate
Average
Deposits
Percent
of
Deposits
Average
Interest
Rate
35.87 %
— % $ 2,643,945
34.83 %
— %
52.50
11.63
0.53
1.00
4,044,032
53.28
902,255
$ 7,590,232
11.89
100.00 %
0.27
0.79
$10,030,629
100.00 %
$ 9,104,278
100.00 %
Total average deposits increased $926.4 million or 10% during 2019 to $10.03 billion, which includes approximately $432.7
million of deposits acquired in 2019. Total average deposits increased $1.51 billion or 20% to $9.10 billion during 2018, which
includes approximately $856.7 million of deposits acquired in 2018. Excluding acquired deposits, total average deposits
62 increased $493.7 million or 5% during 2019 and $657.3 million or 9% during 2018. The percentage of our total average deposit
balances attributable to branch banking offices in our Midwestern markets was 42% during 2019, 41% during 2018 and 46%
during 2017.
Average demand deposits increased $118.8 million or 4% to $3.38 billion during 2019 and $621.6 million or 24% to $3.27
billion during 2018. Exclusive of approximately $112.0 million of demand deposits acquired in 2019, average demand deposits
increased $6.8 million or less than 1%. Exclusive of approximately $213.7 million of demand deposits acquired in 2018,
average demand deposits increased $407.9 million or 15%. The mix of total deposits remains favorable, with demand deposits
representing 32% at December 31, 2019, and 35% at December 31, 2018.
Average savings deposit balances increased by $750.5 million or 16% to $5.53 billion during 2019 and $735.9 million or 18%
to $4.78 billion during 2018. Excluding approximately $240.0 million of average savings deposits acquired in 2019, average
savings deposits increased $510.9 million or 11%. Excluding approximately $428.7 million of average savings deposits
acquired in 2018, average savings deposits increased $307.3 million or 8%. At year-end 2019, saving deposits represented 57%
of total deposits compared to 54% at year-end 2018.
Average time deposits increased $57.0 million or 5% to $1.12 billion during 2019, and exclusive of approximately $81.1
million of time deposits acquired in 2019, average time deposits decreased $24.1 million or 2%. Average time deposits
increased $156.5 million or 17% to $1.06 billion during 2018, and exclusive of approximately $214.4 million of time deposits
acquired in 2018, average time deposits decreased $57.9 million or 6%. Excluding acquisitions, the decrease in time deposits
during both years was attributable to a continued emphasis on growing our customer base in non-maturity deposit products
instead of higher-cost certificates of deposit. The Banks priced time deposit products competitively to retain existing
relationship-based deposit customers, but not to retain certificate of deposit only customers or to attract new customers with
only certificate of deposit accounts. Additionally, due to the low interest rates, many certificate of deposit customers have
continued to elect to place their maturing balances in checking or savings accounts. Average brokered time deposits as a
percentage of total average deposits were less than 1% during 2019 and 2018, and 1% during 2017.
The following table sets forth the amount and maturities of time deposits of $100,000 or more at December 31, 2019, in
thousands:
TIME DEPOSITS $100,000 AND OVER
3 months or less
Over 3 months through 6 months
Over 6 months through 12 months
Over 12 months
Short-Term Borrowings
December 31, 2019
$
$
155,295
120,354
196,762
223,430
695,841
Short-term borrowings, which Heartland defines as borrowings with an original maturity of one year or less, were as follows as
of December 31, 2019, and 2018, in thousands:
Retail repurchase agreements
Federal funds purchased
Advances from the FHLB
Other short-term borrowings
Total
December 31, 2019
December 31, 2018
$
$
84,486
$
2,450
81,198
14,492
182,626
$
80,124
35,400
100,838
10,648
227,010
Short-term borrowings generally include federal funds purchased, securities sold under agreements to repurchase, short-term
FHLB advances and discount window borrowings from the Federal Reserve Bank. These funding alternatives are utilized in
varying degrees depending on their pricing and availability. All of the Banks own FHLB stock in one of the Chicago, Dallas,
Des Moines, San Francisco or Topeka FHLBs, enabling them to borrow funds from their respective FHLB for short- or long-
term purposes under a variety of programs. As of December 31, 2019, the amount of short-term borrowings was $182.6 million
compared to $227.0 million at year-end 2018, a decrease of $44.4 million or 20%.
63 All of the Banks provide retail repurchase agreements to their customers as a cash management tool, which sweep excess funds
from demand deposit accounts into these agreements. This source of funding does not increase the bank's reserve requirements.
Although the aggregate balance of these retail repurchase agreements is subject to variation, the account relationships
represented by these balances are principally local. The balances of retail repurchase agreements were $84.5 million at
December 31, 2019, compared to $80.1 million at December 31, 2018, an increase of $4.4 million or 5%.
Federal funds purchased totaled $2.5 million at December 31, 2019, and $35.4 million at December 31, 2018, which was a
decrease of $33.0 million or 93%.
Short-term FHLB advances totaled $81.2 million at December 31, 2019, compared to $100.8 million at December 31, 2018, a
decrease of $19.6 million or 19%.
Also included in short-term borrowings is a $30.0 million revolving credit line Heartland has with an unaffiliated bank,
primarily to provide liquidity to Heartland. No balance was outstanding on this line at December 31, 2019, and December 31,
2018.
The following table reflects average amounts outstanding and weighted average interest rates for our short-term borrowings as
of December 31, 2019, 2018, and 2017, in thousands:
SHORT-TERM BORROWINGS
Balance at end of period
Maximum month-end amount outstanding
Average month-end amount outstanding
Weighted average interest rate at year-end
Weighted average interest rate for the year
Other Borrowings
$
As of and For the Years Ended December 31,
2018
227,010
229,890
152,391
2017
324,691
324,691
182,846
2019
182,626
226,096
128,098
$
$
1.21 %
1.38 %
1.96 %
1.19 %
1.11 %
0.36 %
The outstanding balances of other borrowings, which Heartland defines as borrowings with an original maturity date of more
than one year, are shown in the table below, net of discount and issuance costs amortization, in thousands, as of December 31,
2019, and 2018:
Advances from the FHLB
Trust preferred securities
Senior notes
Note payable to unaffiliated bank
Contracts payable for purchase of real estate and other assets
Subordinated notes
Other borrowings
Total
December 31, 2019
December 31, 2018
$
$
2,835
$
145,343
—
51,417
1,892
74,286
—
275,773
$
3,399
130,913
5,000
58,417
1,953
74,143
1,080
274,905
Other borrowings include all debt arrangements Heartland and its subsidiaries have entered into with original maturities that
extend beyond one year, including long-term FHLB borrowings, borrowings under term notes, subordinated notes and senior
notes, convertible debt and obligations under trust preferred capital securities. As of December 31, 2019, the amount of other
borrowings was $275.8 million, an increase of $868,000 or less than 1% from $274.9 million as of year-end 2018. Heartland
acquired $6.9 million of subordinated debt in the Blue Valley Ban Corp. transaction that was simultaneously paid off with the
closing of the transaction.
Long-term FHLB borrowings with an original term beyond one year totaled $2.8 million at December 31, 2019, compared to
$3.4 million at December 31, 2018, a decrease of $564,000 or 17%. Total long-term FHLB borrowings at December 31, 2019,
had an average interest rate of 4.08% and an average remaining maturity of 3.8 years.
64 Heartland had $145.3 million of trust preferred securities net of deferred issuance costs outstanding at December 31, 2019,
compared to $130.9 million net of deferred issuance costs at December 31, 2018, which was an increase of $14.4 million or
11%. This increase includes $16.1 million of trust preferred securities acquired at fair value in the Blue Valley Ban Corp.
transaction.
A schedule of Heartland's trust preferred offerings outstanding as of December 31, 2019, is as follows, in thousands:
TRUST PREFERRED OFFERINGS
Amount
Issued
Issuance
Date
Interest
Rate
Heartland Financial Statutory Trust IV
$
10,310
03/17/2004
2.75% over LIBOR
Heartland Financial Statutory Trust V
20,619
01/27/2006
1.33% over LIBOR
Heartland Financial Statutory Trust VI
20,619
06/21/2007
1.48% over LIBOR
Heartland Financial Statutory Trust VII
18,042
06/26/2007
1.48% over LIBOR
Morrill Statutory Trust I
Morrill Statutory Trust II
9,088
12/19/2002
3.25% over LIBOR
8,754
12/17/2003
2.85% over LIBOR
Sheboygan Statutory Trust I
6,528
09/17/2003
2.95% over LIBOR
CBNM Capital Trust I
Citywide Capital Trust III
Citywide Capital Trust IV
Citywide Capital Trust V
OCGI Statutory Trust III
OCGI Capital Trust IV
BVBC Capital Trust II
BVBC Capital Trust III
Total trust preferred offerings
Less: deferred issuance costs
4,409
09/10/2004
3.25% over LIBOR
6,438
12/19/2003
2.80% over LIBOR
4,296
09/30/2004
2.20% over LIBOR
11,748
05/31/2006
1.54% over LIBOR
2,996
06/27/2002
3.65% over LIBOR
5,342
09/23/2004
2.50% over LIBOR
7,197
04/10/2003
3.25% over LIBOR
9,047
07/29/2005
1.60% over LIBOR
145,433
(90)
$ 145,343
Interest
Rate as of
12/31/19(1)
4.65 % (2)
(3)
3.32
(4)
(5)
(6)
(7)
3.37
3.39
5.20
4.75
4.85
5.14
4.74
4.11
3.43
5.48
4.39
5.16
3.54
Maturity
Date
Callable
Date
03/17/2034
03/17/2020
04/07/2036
04/07/2020
09/15/2037
03/15/2020
09/01/2037
03/01/2020
12/26/2032
03/26/2020
12/17/2033
03/17/2020
09/17/2033
03/17/2020
12/15/2034
03/15/2020
12/19/2033
04/23/2020
09/30/2034
05/23/2020
07/25/2036
03/15/2020
09/30/2032
03/30/2020
12/15/2034
03/15/2020
04/24/2033
04/24/2020
09/30/2035
03/30/2020
(1) Effective weighted average interest rate as of December 31, 2019, was 4.80% due to interest rate swap transactions as discussed in Note
12 to Heartland's consolidated financial statements.
(2) Effective interest rate as of December 31, 2019, was 5.01% due to an interest rate swap transaction as discussed in Note 12 to
Heartland's consolidated financial statements.
(3) Effective interest rate as of December 31, 2019, was 4.69% due to an interest rate swap transaction as discussed in Note 12 to
Heartland's consolidated financial statements.
(4) Effective interest rate as of December 31, 2019, was 3.87% due to an interest rate swap transaction as discussed in Note 12 to
Heartland's consolidated financial statements.
(5) Effective interest rate as of December 31, 2019, was 3.83% due to an interest rate swap transaction as discussed in Note 12 to
Heartland's consolidated financial statements.
(6) Effective interest rate as of December 31, 2019, was 5.53% due to an interest rate swap transaction as discussed in Note 12 to
Heartland's consolidated financial statements.
(7) Effective interest rate as of December 31, 2019, was 4.37% due to an interest rate swap transaction as discussed in Note 12 to
Heartland's consolidated financial statements.
Heartland has a non-revolving credit facility with an unaffiliated bank to provide borrowing capacity not to exceed $70.0
million. At December 31, 2019, $51.4 million was outstanding on the note payable with an unaffiliated bank compared to $58.4
million at December 31, 2018. This non-revolving credit facility is being amortized over five years, and the balance is due in
April 2021. At December 31, 2019, Heartland had $14.8 million of available borrowing capacity, of which no balance was
outstanding.
At December 31, 2018 Heartland had $5.0 million of senior notes outstanding, all of which matured in 2019. There are no
balances outstanding on any senior notes at December 31, 2019.
65
In 2014, Heartland issued $75.0 million of subordinated notes with a maturity date of December 30, 2024. The notes were
issued at par with an underwriting discount of $1.1 million. The interest rate on the notes is fixed at 5.75% per annum payable
semi-annually. The notes were sold to qualified institutional buyers, and the proceeds were used for general corporate purposes.
For regulatory purposes, $74.3 million of the subordinated notes qualified as Tier 2 capital as of December 31, 2019.
CAPITAL RESOURCES
The Federal Reserve has adopted capital adequacy guidelines that are used to assess the adequacy of capital in supervising a
bank holding company. Under Basel III, Heartland must hold a conservation buffer above the adequately capitalized risk-based
capital ratios; however the transition provision related to the conservation buffer have been extended indefinitely.
The most recent notification from the FDIC categorized Heartland and each of its banks as well capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events since that notification that management believes
have changed the categorization of any of these entities.
Heartland's capital ratios are calculated in accordance with Federal Reserve Board instructions and are required regulatory
financial measures. The following table illustrates Heartland's capital ratios and the Federal Reserve's current capital adequacy
guidelines for the dates indicated, in thousands:
December 31, 2019
Minimum capital requirement
Well capitalized requirement
Minimum capital requirement, including fully-phased
in capital conservation buffer
Risk-weighted assets
Average assets
December 31, 2018
Minimum capital requirement
Well capitalized requirement
Minimum capital requirement, including fully-phased
in capital conservation buffer (2019)
Risk-weighted assets
Average assets
December 31, 2017
Minimum capital requirement
Well capitalized requirement
Minimum capital requirement, including fully-phased
in capital conservation buffer (2019)
Risk-weighted assets
Average assets
Total
Capital
(to Risk-
Weighted
Assets)
Tier 1
Capital
(to Risk-
Weighted
Assets)
Common
Equity
Tier 1
(to Risk-
Weighted
Assets)
13.75 %
8.00 %
10.00 %
12.31 %
6.00 %
8.00 %
10.88 %
4.50 %
6.50 %
10.50 %
8.50 %
7.00 %
$ 10,098,515
$ 10,098,515
$ 10,098,515
Tier 1
Capital
(to Average
Assets)
10.10 %
4.00 %
5.00 %
N/A
N/A
N/A
N/A
N/A $ 12,318,135
13.72 %
8.00 %
10.00 %
12.16 %
6.00 %
8.00 %
10.66 %
4.50 %
6.50 %
10.50 %
8.50 %
7.00 %
$ 8,756,130
$ 8,756,130
$ 8,756,130
9.73 %
4.00 %
5.00 %
N/A
N/A
N/A
N/A
N/A $ 10,946,440
13.45 %
8.00 %
10.00 %
11.70 %
6.00 %
8.00 %
10.07 %
4.50 %
6.50 %
10.50 %
8.50 %
7.00 %
$ 7,511,544
$ 7,511,544
$ 7,511,544
9.20 %
4.00 %
5.00 %
N/A
N/A
N/A
N/A
N/A $ 9,552,227
On May 10, 2019, Heartland completed the acquisition of Blue Valley Ban Corp. and its wholly-owned subsidiary, Bank of
Blue Valley, headquartered in Overland Park, Kansas. Under the terms of the definitive merger agreement, Heartland acquired
Blue Valley Ban Corp. in a transaction valued at approximately $92.3 million, which was paid by delivery of 2,060,258 shares
of Heartland common stock.
66 On November 30, 2019, Heartland's Illinois Bank & Trust subsidiary acquired substantially all of the assets and assumed
substantially all of the deposits and other certain liabilities of Rockford Bank and Trust Company in an all-cash transaction
valued at approximately $46.6 million.
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.
On May 18, 2018, Heartland completed the acquisition of Lubbock, Texas based First Bank Lubbock Bancshares, Inc., 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 First Bank Lubbock Bancshares, Inc. 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 February 11, 2020, Heartland announced the planned acquisition of AIM Bancshares, Inc., which had $1.78 billion in assets
as of December 31, 2019. With the completion of this pending acquisition, Heartland is expected to exceed $15.0 billion in
assets, and Heartland will no longer be able to include its trust preferred securities as Tier 1 Capital. However, Heartland
expects to remain well-capitalized under all regulatory capital ratio requirements after its assets exceed $15.0 billion.
On August 8, 2019, Heartland filed a universal shelf registration statement with the SEC to register debt or equity securities.
This shelf registration statement, which was effective immediately, provided Heartland with the ability to raise capital, subject
to market conditions and SEC rules and limitations, if Heartland's board of directors decided to do so. This registration
statement permitted Heartland, from time to time, in one or more public offerings, to offer debt securities, subordinated notes,
common stock, preferred stock, rights or any combination of these securities. The amount of securities that may have been
offered was not specified in the registration statement, and the terms of any future offerings were to be established at the time of
the offering.
Common stockholders' equity was $1.58 billion at December 31, 2019, compared to $1.33 billion at year-end 2018. Book value
per common share was $43.00 at December 31, 2019, compared to $38.44 at year-end 2018. Changes in common stockholders'
equity and book value per common share are the result of earnings, dividends paid, stock transactions and mark-to-market
adjustments for unrealized gains and losses on securities available for sale. Heartland's unrealized gains and losses on securities
available for sale, net of applicable taxes, reflected an unrealized gain of $969,000 at December 31, 2019, compared to an
unrealized loss of $32.5 million at December 31, 2018.
COMMITMENTS, CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGMENTS
Commitments and Contractual Obligations
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established
in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a
fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Banks evaluate the creditworthiness of customers to which they extend a
credit commitment on a case-by-case basis and may require collateral to secure any credit extended. The amount of collateral
obtained is based upon management's credit evaluation of the counterparty. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment and income-producing commercial properties. Standby letters of credit and
financial guarantees written are conditional commitments issued by the Banks to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk
involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. At
December 31, 2019, and December 31, 2018, commitments to extend credit aggregated $2.97 billion and $2.47 billion, and
standby letters of credit aggregated $79.5 million and $71.9 million, respectively.
67 The following table summarizes our significant contractual obligations and other commitments as of December 31, 2019, in
thousands:
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
Contractual obligations:
Time certificates of deposit
Long-term debt obligations
Operating lease obligations
Purchase obligations
Other long-term liabilities
Total contractual obligations
Other commitments:
Lines of credit
Standby letters of credit
Total other commitments
Total
Less than
One Year
Payments Due By Period
Three to
Five Years
One to
Three
Years
More than
Five Years
$ 1,193,043
$
802,410
$
332,599
$
45,718
$
12,316
275,773
24,617
22,332
3,580
8,705
5,002
5,461
451
29,339
80,474
157,255
8,599
9,147
393
4,221
7,724
93
6,795
—
2,643
$ 1,519,345
$
822,029
$
380,077
$
138,230
$
179,009
$ 2,973,736
$ 2,099,029
79,534
75,383
$ 3,053,270
$ 2,174,412
$
$
389,147
2,686
391,833
$
$
145,550
771
146,321
$
$
340,010
694
340,704
On a consolidated basis, Heartland maintains a large balance of short-term securities that, when combined with cash from
operations, Heartland believes are adequate to meet its funding obligations.
At the parent company level, routine funding requirements consist primarily of dividends paid to stockholders, debt service on
revolving credit arrangements and trust preferred securities issuances, repayment requirements under other debt obligations and
payments for acquisitions. The parent company obtains the funding to meet these obligations from dividends collected from its
subsidiaries and the issuance of debt securities. At December 31, 2019, Heartland’s revolving credit agreement with an
unaffiliated bank provided a maximum borrowing capacity of $30.0 million, of which no balance was outstanding. Heartland
also has a non-revolving credit line with the same unaffiliated bank. At December 31, 2019, $14.8 million was available on this
non-revolving credit line. These credit agreements contain specific financial covenants, all of which Heartland was in
compliance with as of December 31, 2019.
The ability of Heartland to pay dividends to its stockholders is dependent upon dividends paid by its subsidiaries. The Banks
are subject to statutory and regulatory restrictions on the amount they may pay in dividends. To maintain acceptable capital
ratios in the Heartland banks, certain portions of their retained earnings are not available for the payment of dividends. Retained
earnings that could be available for the payment of dividends to Heartland under the regulatory capital requirements to remain
well-capitalized totaled approximately $331.5 million as of December 31, 2019.
We continue to explore opportunities to expand our footprint of independent community banks, and these acquisitions may be
financed from dividends collected from our subsidiaries, the issuance of equity or debt securities, drawing on our existing lines
of credit or other sources of funding. Future expenditures relating to expansion efforts, in addition to those identified above,
cannot be estimated at this time.
68 Off-Balance Sheet Arrangements
Through PrimeWest Mortgage Corporation, we enter into mortgage banking derivatives, which are classified as free standing
derivatives. These derivatives include interest rate lock commitments provided to customers to fund certain mortgage loans to
be sold into the secondary market and forward commitments for the future delivery of such loans. We enter into forward
commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order
to economically hedge the effect of future interest rate changes on the commitments to fund the loans as well as on the
residential mortgage loans available for sale. See Note 12, "Derivative Financial Instruments," to the consolidated financial
statements for additional information on our derivative financial instruments.
We also enter into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs
of our customers. These financial instruments include commitments to extend credit and standby letters of credit, and are
information on these
described in Note 15, "Commitments," to the consolidated financial statements for additional
commitments.
LIQUIDITY
Liquidity refers to our ability to maintain a cash flow that is adequate to meet maturing obligations and existing commitments,
to withstand fluctuations in deposit levels, to fund operations and to provide for customers’ credit needs. The liquidity of
Heartland principally depends on cash flows from operating activities, investment in and maturity of assets, changes in balances
of deposits and borrowings and its ability to borrow funds in the money or capital markets.
Management of investing and financing activities, and market conditions, determine the level and the stability of net interest
cash flows. Management attempts to mitigate the impact of changes in market interest rates to the extent possible, so that
balance sheet growth is the principal determinant of growth in net interest cash flows.
Our short-term borrowing balances are dependent on commercial cash management and smaller correspondent bank
relationships and, as a result, will normally fluctuate. We believe these balances, on average, to be stable sources of funds;
however, we intend to rely primarily on deposit growth and additional FHLB borrowings as needed in the future.
In the event of short-term liquidity needs, the Banks may purchase federal funds from each other or from correspondent banks
and may also borrow from the Federal Reserve Bank. Additionally, the Banks' FHLB memberships give them the ability to
borrow funds for short- and long-term purposes under a variety of programs, and at December 31, 2019, Heartland had $1.56
billion of borrowing capacity under these programs.
At December 31, 2019, Heartland’s revolving credit agreement with an unaffiliated bank provided a maximum borrowing
capacity of $30.0 million, of which no balance was outstanding. Heartland also has a non-revolving credit facility with the same
unaffiliated bank. At December 31, 2019, $14.8 million was available on this non-revolving credit facility, of which no balance
was outstanding.
Heartland has filed a universal shelf registration statement with the SEC that provides Heartland the ability to raise both debt
and capital, subject to SEC rules and limitations, if Heartland's board of directors decides to do so. This registration statement
expires in August 2022.
EFFECTS OF INFLATION
Consolidated financial data included in this report has been prepared in accordance with U.S. GAAP. Presently, these principles
require reporting of financial position and operating results in terms of historical dollars, except for available for sale securities,
trading securities, derivative instruments, certain impaired loans and other real estate which require reporting at fair value.
Changes in the relative value of money due to inflation or recession are generally not considered.
In management’s opinion, changes in interest rates affect the financial condition of a financial institution to a far greater degree
than changes in the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do not change
at the same rate or in the same magnitude as the inflation rate. Rather, interest rate volatility is based on changes in the expected
rate of inflation, as well as on changes in monetary and fiscal policies. A financial institution’s ability to be relatively
unaffected by changes in interest rates is a good indicator of its capability to perform in today’s volatile economic environment.
Heartland seeks to insulate itself from interest rate volatility by ensuring that rate-sensitive assets and rate-sensitive liabilities
respond to changes in interest rates in a similar time frame and to a similar degree. See Item 7A of this Annual Report on Form
10-K for a discussion on the process Heartland utilizes to mitigate market risk.
69 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market prices and rates. Heartland's market risk is comprised
primarily of interest rate risk resulting from its core banking activities of lending and deposit gathering. Interest rate risk
measures the impact on earnings from changes in interest rates and the effect on current fair market values of Heartland's assets,
liabilities and off-balance sheet contracts. The objective is to measure this risk and manage the balance sheet to avoid
unacceptable potential for economic loss.
Management continually develops and applies strategies to mitigate market risk. Exposure to market risk is reviewed on a
regular basis by the asset/liability committees of Heartland's bank subsidiaries and, on a consolidated basis, by Heartland's
executive management and board of directors. At least quarterly, a detailed review of the balance sheet risk profile is performed
for Heartland and each of its bank subsidiaries. Included in these reviews are interest rate sensitivity analyses, which simulate
changes in net interest income in response to various interest rate scenarios. These analyses consider current portfolio rates,
existing maturities, repricing opportunities and market interest rates, in addition to prepayments and growth under different
interest rate assumptions. Selected strategies are modeled prior to implementation to determine their effect on Heartland's
interest rate risk profile and net interest income. Heartland believes its primary market risk exposures did not change
significantly in 2019 when compared to 2018.
The core interest rate risk analysis utilized by Heartland examines the balance sheet under increasing and decreasing interest
rate scenarios that are neither too modest nor too extreme. All rate changes are ramped over a 12-month horizon based upon a
parallel shift in the yield curve and then maintained at those levels over the remainder of the simulation horizon. Using this
approach, management is able to see the effect that both a gradual change of rates (year 1) and a rate shock (year 2 and beyond)
could have on Heartland's net interest income. Starting balances in the model reflect actual balances on the "as of" date,
adjusted for material and significant transactions. Pro-forma balances remain static. This methodology enables interest rate risk
embedded within the existing balance sheet structure to be isolated from the interest rate risk often caused by growth in assets
and liabilities. Due to the low interest rate environment, the simulations under a decreasing interest rate scenario were prepared
using a 100 basis point shift in rates. The most recent reviews at December 31, 2019, and 2018, provided the results below, in
thousands.
Year 1
Down 100 Basis Points
Base
Up 200 Basis Points
Year 2
Down 100 Basis Points
Base
Up 200 Basis Points
2019
2018
Net Interest
Margin
% Change
From Base
Net Interest
Margin
% Change
From Base
$
$
$
$
$
$
420,402
433,232
458,911
400,891
431,503
483,419
(2.96)% $
$
5.93 % $
(7.47)% $
(0.40)% $
11.58 % $
440,218
452,284
471,792
426,429
459,871
502,386
(2.67)%
4.31 %
(5.72)%
1.68 %
11.08 %
We use derivative financial instruments to manage the impact of changes in interest rates on our future interest income or
interest expense. We are exposed to credit-related losses in the event of nonperformance by the counterparties to these
derivative instruments, but believe we have minimized the risk of these losses by entering into the contracts with large, stable
financial institutions. The estimated fair market values of these derivative instruments are presented in Note 12 to the
consolidated financial statements.
We enter into financial instruments with off balance sheet risk in the normal course of business to meet the financing needs of
our customers. These financial instruments include commitments to extend credit and standby letters of credit. These
instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheets. Commitments to extend credit are agreements to lend to a customer as long as there is no violation
of any condition established in the contract relating to the commitment. Commitments generally have fixed expiration dates and
may require collateral from the borrower. Standby letters of credit are conditional commitments issued by Heartland to
guarantee the performance of a customer to a third party up to a stated amount and with specified terms and conditions. These
commitments to extend credit and standby letters of credit are not recorded on the balance sheet until the loan is made or the
letter of credit is issued. Heartland periodically holds a securities trading portfolio that would also be subject to elements of
market risk. These securities are carried on the balance sheet at fair value. At both December 31, 2019, and December 31, 2018,
Heartland held no securities in its securities trading portfolio.
70
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
ASSETS
Cash and due from banks
Interest bearing deposits with other banks and other short-term investments
Cash and cash equivalents
Time deposits in other financial institutions
Securities:
Carried at fair value (cost of $3,311,433 at December 31, 2019, and cost of $2,492,620 at December 31, 2018)
Held to maturity, at cost (fair value of $100,484 at December 31, 2019, and $245,341 at December 31, 2018)
Other investments, at cost
Loans held for sale
Loans receivable:
Held to maturity
Allowance for loan losses
Loans receivable, net
Premises, furniture and equipment, net
Premises, furniture and equipment held for sale
Other real estate, net
Goodwill
Core deposit intangibles and customer relationship intangibles, net
Servicing rights, net
Cash surrender value on life insurance
Other assets
TOTAL ASSETS
LIABILITIES AND EQUITY
LIABILITIES:
Deposits:
Demand
Savings
Time
Total deposits
Deposits held for sale
Short-term borrowings
Other borrowings
Accrued expenses and other liabilities
TOTAL LIABILITIES
STOCKHOLDERS' EQUITY:
Preferred stock (par value $1 per share; authorized 17,604 shares; none issued or outstanding at both December
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 December 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 December 31, 2019, and December 31, 2018, none issued or outstanding at both December 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 December 31, 2019, and December 31, 2018; no shares issued or outstanding at December 31,
2019, and December 31, 2018)
Common stock (par value $1 per share; 60,000,000 shares authorized at December 31, 2019 and 40,000,000 at
December 31, 2018; issued 36,704,278 shares at December 31, 2019, and 34,477,499 shares at December 31,
2018)
Capital surplus
Retained earnings
Accumulated other comprehensive loss
TOTAL STOCKHOLDERS' EQUITY
TOTAL LIABILITIES AND EQUITY
See accompanying notes to consolidated financial statements.
Notes
As of December 31,
2018
2019
3
$
4
4
4
5
5, 6
7
2
2, 8
8
8
9
10
11
16, 17, 18
$
206,607
172,127
378,734
3,564
223,135
50,495
273,630
4,672
3,312,796
2,450,709
91,324
31,321
26,748
236,283
28,396
119,801
8,367,917
(70,395)
8,297,522
197,558
2,967
6,914
446,345
48,688
6,736
171,625
186,755
$ 13,209,597
7,407,697
(61,963)
7,345,734
187,418
7,258
6,153
391,668
47,479
31,072
162,892
114,841
$ 11,408,006
$ 3,543,863
6,307,425
1,193,043
11,044,331
—
182,626
275,773
128,730
11,631,460
$ 3,264,737
5,107,962
1,023,730
9,396,429
106,409
227,010
274,905
78,078
10,082,831
—
—
—
—
—
—
—
—
36,704
34,477
839,857
702,502
(926)
1,578,137
$ 13,209,597
743,095
579,252
(31,649)
1,325,175
$ 11,408,006
71
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
INTEREST INCOME:
Interest and fees on loans
Interest on securities:
Taxable
Nontaxable
Interest on federal funds sold
Interest on interest bearing deposits in other financial institutions
TOTAL INTEREST INCOME
INTEREST EXPENSE:
Interest on deposits
Interest on short-term borrowings
Interest on other borrowings (includes $170, $179, and $1,290 of interest expense related to
derivatives reclassified from accumulated other comprehensive income (loss) for the years ended
December 31, 2019, 2018, and 2017, respectively)
TOTAL INTEREST EXPENSE
NET INTEREST INCOME
Provision for loan losses
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
NONINTEREST INCOME:
Service charges and fees
Loan servicing income
Trust fees
Brokerage and insurance commissions
Securities gains, net (includes $7,659, $1,085, and $6,764 of net security gains reclassified from
accumulated other comprehensive income (loss) for the years ended December 31, 2019, 2018,
and 2017, respectively)
Unrealized gain on equity securities, net
Net gains on sale of loans held for sale
Valuation allowance on servicing rights
Income on bank owned life insurance
Other noninterest income
TOTAL NONINTEREST INCOME
NONINTEREST EXPENSES:
Salaries and employee benefits
Occupancy
Furniture and equipment
Professional fees
Advertising
Core deposit intangibles and customer relationship intangibles amortization
Other real estate and loan collection expenses
(Gain) loss on sales/valuations of assets, net
Restructuring expenses
Other noninterest expenses
TOTAL NONINTEREST EXPENSES
INCOME BEFORE INCOME TAXES
Income taxes (includes $1,890, $165, and $2,042 of income tax expense reclassified from
accumulated other comprehensive income (loss) for the years ended December 31, 2019, 2018,
and 2017, respectively)
NET INCOME
Preferred dividends
Interest expense on convertible preferred debt
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS
EARNINGS PER COMMON SHARE - BASIC
EARNINGS PER COMMON SHARE - DILUTED
CASH DIVIDENDS DECLARED PER COMMON SHARE
See accompanying notes to consolidated financial statements.
For the Years Ended December 31,
2018
2019
2017
Notes
5
$ 424,615
$ 393,871
$ 304,006
73,147
9,868
4
6,695
514,329
54,131
14,120
—
3,698
465,820
38,365
19,698
42
1,547
363,658
9
63,734
1,748
35,667
1,696
18,279
678
11, 12
5, 6
21
8
21
21
4
4
8
14, 16
15, 23
7
8
15,118
80,600
433,729
16,657
417,072
52,157
4,843
19,399
3,786
7,659
525
15,555
(911)
3,785
9,410
116,208
200,541
25,450
12,100
50,022
10,028
11,972
1,035
(19,422)
3,227
54,208
349,161
184,119
14,503
51,866
413,954
24,013
389,941
48,706
7,292
18,393
4,513
1,085
212
21,450
(46)
2,793
4,762
109,160
196,118
25,328
12,529
43,510
9,565
9,355
3,038
2,208
2,564
49,673
353,888
145,213
14,393
33,350
330,308
15,563
314,745
39,183
5,636
15,818
4,033
6,973
—
22,251
21
2,772
5,335
102,022
171,407
22,244
11,061
36,474
7,229
6,077
2,461
2,475
—
38,247
297,675
119,092
13
34,990
28,215
149,129
—
—
$ 149,129
4.14
$
4.14
$
0.68
$
116,998
(39)
—
$ 116,959
3.54
$
3.52
$
0.59
$
$
$
$
$
1
1
43,820
75,272
(58)
12
75,226
2.67
2.65
0.51
72
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
NET INCOME
OTHER COMPREHENSIVE INCOME (LOSS)
Securities:
Net change in unrealized gain (loss) on securities
Reclassification adjustment for net gains realized in net income
Income taxes
Other comprehensive income (loss) on securities
Derivatives used in cash flow hedging relationships:
Net change in unrealized gain (loss) on derivatives
Reclassification adjustment for net losses on derivatives realized in net income
Income taxes
Other comprehensive income (loss) on cash flow hedges
Other comprehensive income (loss)
TOTAL COMPREHENSIVE INCOME
See accompanying notes to consolidated financial statements.
For the Years Ended December 31,
2019
2018
2017
$
149,129
$
116,998
$
75,272
52,557
(7,659)
(11,429)
33,469
(3,639)
170
723
(2,746)
30,723
(9,568)
(1,085)
2,731
(7,922)
816
431
(220)
1,027
(6,895)
$
179,852
$
110,103
$
23,778
(6,764)
(6,670)
10,344
210
1,290
(765)
735
11,079
86,351
73 HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(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
$
1,357
$
26,120
$ 328,376
$ 416,109
$
(31,046) $
— $ 740,916
Balance at January 1, 2017
Comprehensive income (loss)
Reclassification of certain income tax effects from
accumulated other comprehensive income (loss)
Cash dividends declared:
Series D Preferred,$70.00 per share
Common, $0.51 per share
11,079
(4,507)
75,272
4,507
(58)
(14,499)
Redemption of Series D preferred stock
(419)
Purchase of 13,066 shares of treasury stock
Issuance of 3,846,493 shares of common stock
3,833
171,265
Stock based compensation
Balance at December 31, 2017
Balance at January 1, 2018
Comprehensive income (loss)
4,068
$
$
938
938
$
$
29,953
$ 503,709
$ 481,331
29,953
$ 503,709
$ 481,331
Reclassification of unrealized net gain on equity
securities
Series D Preferred, $52.50 per share
Common, $0.59 per share
Conversion of Series D preferred stock
(938)
Purchase of 1,761 shares of treasury stock
Issuance of 4,525,904 shares of common stock
116,998
280
(39)
(19,318)
4,524
234,881
4,505
Stock based compensation
Balance at December 31, 2018
Balance at January 1, 2019
Comprehensive income (loss)
Retained earnings adjustment for adoption of
leasing standard
Cash dividends declared:
Common, $0.68 per share
$
$
— $
34,477
$ 743,095
$ 579,252
— $
34,477
$ 743,095
$ 579,252
149,129
(1,272)
(24,607)
Issuance of 2,226,779 shares of common stock
2,227
Stock based compensation
90,692
6,070
$
$
$
$
(24,474) $
(24,474) $
(6,895)
(280)
(31,649) $
(31,649) $
30,723
86,351
—
(58)
(14,499)
(419)
(625)
175,723
4,068
(625)
625
— $ 991,457
— $ 991,457
110,103
—
(39)
(19,318)
(938)
(97)
239,502
4,505
(97)
97
— $1,325,175
— $1,325,175
179,852
(1,272)
(24,607)
92,919
6,070
Balance at December 31, 2019
$
— $
36,704
$ 839,857
$ 702,502
$
(926) $
— $1,578,137
See accompanying notes to consolidated financial statements.
74
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the Years Ended December 31,
2018
2017
2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$
149,129
$
116,998
$
75,272
Depreciation and amortization
Provision for loan losses
Net amortization of premium on securities
Provision for deferred taxes
Securities gains, net
Unrealized gain on equity securities, net
Stock based compensation
(Gain) loss on sales/valuations of assets, net
Loans originated for sale
Proceeds on sales of loans held for sale
Net gains on sales of loans held for sale
(Increase) decrease in accrued interest receivable
(Increase) decrease in prepaid expenses
Increase (decrease) in accrued interest payable
Gain on extinguishment of debt
Capitalization of servicing rights
Valuation adjustment on servicing rights
Net excess tax benefit from stock based compensation
Other, net
NET CASH PROVIDED BY OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of time deposits in other financial institutions
Proceeds from the sale of securities available for sale
Proceeds from the sale, maturity of and principal paydowns on other investments
Proceeds from the redemption of time deposits in other financial institutions
Proceeds from the maturity of and principal paydowns on securities available for sale
Proceeds from the maturity of and principal paydowns on securities held to maturity
Proceeds from the maturity of and principal paydowns on time deposits in other
financial institutions
Purchase of securities available for sale
Purchase of other investments
Net (increase) decrease in loans
Purchase of bank owned life insurance policies
Proceeds from bank owned life insurance policies
Proceeds from sale of mortgage servicing rights
Capital expenditures and investments
Net cash and cash equivalents received in acquisitions
Net cash expended in divestitures
Proceeds from sale of equipment
Proceeds on sale of OREO and other repossessed assets
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES
30,797
16,657
20,326
(414)
(7,659)
(525)
6,070
(8,394)
(384,603)
396,290
(14,661)
1,301
(8,566)
421
(375)
(1,011)
911
266
(34,786)
161,174
(258)
1,628,467
10,325
—
402,946
3,158
1,216
(2,577,106)
(6,446)
(90,749)
(28)
1,402
35,017
(17,928)
76,071
(49,264)
903
8,304
(573,970)
30,791
24,013
25,142
2,760
(1,085)
(212)
4,505
2,208
(646,019)
714,259
(16,404)
(3,368)
2,364
(2)
—
(5,160)
46
674
(8,760)
242,750
(1,000)
727,895
1,618
8,767
237,747
15,953
6,993
(1,197,822)
(3,731)
(132,401)
(2,228)
—
—
(12,742)
212,197
—
2,972
11,562
(124,220)
30,144
15,563
26,961
13,263
(6,973)
—
4,068
2,475
(728,681)
760,484
(15,102)
(593)
576
34
(1,280)
(7,358)
(21)
1,246
(14,148)
155,930
—
1,456,750
2,790
12,171
222,656
10,621
34,904
(1,816,564)
(1,116)
22,109
(2,000)
—
6,290
(8,113)
71,089
—
4,867
10,844
27,298
75
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Dollars in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits
Net increase (decrease) in savings accounts
Net decrease in time deposit accounts
Proceeds on short-term revolving credit line
Repayments on short-term revolving credit line
Net decrease in short-term borrowings
Proceeds from short term FHLB advances
Repayments of short term FHLB advances
Proceeds from other borrowings
Repayments of other borrowings
Payment for the redemption of debt
Purchase of treasury stock
Proceeds from issuance of common stock
Dividends paid
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
CASH AND CASH EQUIVALENTS AT END OF PERIOD
Supplemental disclosures:
Cash paid for income/franchise taxes
Cash paid for interest
Loans transferred to OREO
Transfer of premises from premises, furniture and equipment held for sale to
premises, furniture and equipment, net
Purchases of securities available for sale, accrued, not paid
Transfer of premises from premises, furniture and equipment, net to premises,
furniture and equipment held for sale
Securities transferred from held to maturity to available for sale
Conversion of convertible debt to common stock
Conversion/redemption of Series D preferred stock to common stock
Loans transferred to held for sale
Deposits transferred to held for sale
Stock consideration granted for acquisitions
See accompanying notes to consolidated financial statements.
For the Years Ended December 31,
2018
2017
2019
51,178
680,641
(81,251)
—
—
(51,314)
512,085
(546,725)
50
(20,693)
(2,125)
—
661
(24,607)
517,900
105,104
273,630
378,734
37,609
80,238
8,066
4,306
11,106
$
$
$
$
$
$
4,655
148,030
$
$
— $
— $
32,111
76,968
92,258
$
$
$
8,052
318,697
(221,980)
25,000
(25,000)
(158,519)
462,940
(402,102)
30,131
(59,157)
—
(97)
489
(19,357)
(40,903)
77,627
196,003
273,630
17,085
51,868
7,866
$
$
$
$
81
$
— $
7,660
$
— $
— $
938
96,027
106,409
238,075
$
$
$
$
154,394
(166,733)
(79,733)
20,000
(20,000)
(25,847)
251,139
(241,505)
—
(9,645)
(13,800)
(625)
963
(14,557)
(145,949)
37,279
158,724
196,003
15,817
33,316
5,293
2,372
1,017
3,442
—
558
419
—
—
175,196
$
$
$
$
$
$
$
$
$
$
$
$
$
76
HEARTLAND FINANCIAL USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ONE
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - Heartland Financial USA, Inc. ("Heartland") is a multi-bank holding company with locations in Iowa,
Illinois, Wisconsin, New Mexico, Arizona, Colorado, Montana, Minnesota, Kansas, Missouri, Texas and California. The
principal services of Heartland, which are provided through its subsidiaries, are FDIC-insured deposit accounts and related
services, and loans to businesses and individuals. The loans consist primarily of commercial and commercial real estate,
agricultural and agricultural real estate, residential real estate and consumer loans.
Principles of Presentation - The consolidated financial statements include the accounts of Heartland and its subsidiaries:
Dubuque Bank and Trust Company; Illinois Bank & Trust; Wisconsin Bank & Trust; New Mexico Bank & Trust; Arizona
Bank & Trust; Rocky Mountain Bank; Citywide Banks; Minnesota Bank & Trust; Bank of Blue Valley; Premier Valley Bank;
First Bank & Trust; Citizens Finance Parent Co.; PrimeWest Mortgage Corporation; DB&T Insurance, Inc.; DB&T Community
Development Corp.; Heartland Community Development, Inc.; Heartland Financial USA, Inc. Insurance Services; Citizens
Finance Co.; Citizens Finance of Illinois Co.; Heartland Financial Statutory Trust IV; Heartland Financial Statutory Trust V;
Heartland Financial Statutory Trust VI; Heartland Financial Statutory Trust VII; Morrill Statutory Trust I; Morrill Statutory
Trust II; Sheboygan Statutory Trust I, CBNM Capital Trust I, Citywide Capital Trust III, Citywide Capital Trust IV, Citywide
Capital Trust V, OCGI Statutory Trust III, OCGI Capital Trust IV, BVBC Capital Trust II, and BVBC Capital Trust III. All of
Heartland’s subsidiaries are wholly-owned as of December 31, 2019.
The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles
("GAAP") and prevailing practices within the banking industry. In preparing such financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities as of the date of the balance sheets and revenues and expenses for the years then ended. Actual results could
differ significantly from those estimates. A material estimate that is particularly susceptible to significant change relates to the
determination of the allowance for loan losses.
Business Combinations - Heartland applies the acquisition method of accounting in accordance with the Financial Accounting
Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 805, Business Combinations. Under the
acquisition method, Heartland recognizes assets acquired, including identified intangible assets, and the liabilities assumed in
acquisitions at fair value as of the acquisition date, with the acquisition-related transaction costs expensed in the period
incurred. Determining the fair value of assets acquired and liabilities assumed often involves estimates based on third-party
valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques that
may include estimates of attrition, inflation, asset growth rates, discount rates, multiples of earnings or other relevant factors. In
addition, the determination of the useful lives over which an intangible asset will be amortized is subjective.
Cash and Cash Equivalents - For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts
due from banks, interest bearing deposits held at the Federal Reserve Bank, federal funds sold to other banks and other short-
term investments. Generally, federal funds are purchased and sold for one-day periods.
Trading Securities - Trading securities represent those securities Heartland intends to actively trade and are stated at fair value
with changes in fair value reflected in noninterest income. Heartland had no trading securities at both December 31, 2019 and
2018.
Debt Securities Available for Sale and Equity Securities - Available for sale securities consist of those securities not classified
as held to maturity or trading, which management intends to hold for indefinite periods of time or that may be sold in response
to changes in interest rates, prepayments or other similar factors. Available for sale securities are stated at fair value with any
unrealized gain or loss, net of applicable income tax, reported as a separate component of stockholders’ equity. Security
premiums and discounts are amortized/accreted using the interest method over the period from the purchase date to the
expected maturity or call date of the related security. Declines in the fair value of investment securities available for sale (with
certain exceptions for debt securities noted below) that are deemed to be other-than-temporary are charged to earnings as a
realized loss, and a new cost basis for the securities is established. In evaluating whether impairment is other-than-temporary,
Heartland considers the length of time and extent to which the fair value has been less than cost, the financial condition and
near-term prospects of the issuer, and the intent and ability of Heartland to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value in the near term. Declines in the fair value of debt securities below
amortized cost are deemed to be other-than-temporary in circumstances where: (1) Heartland has the intent to sell a security;
77 (2) it is more likely than not that Heartland will be required to sell the security before recovery of its amortized cost basis; or
(3) Heartland does not expect to recover the entire amortized cost basis of the security. If Heartland intends to sell a security or
if it is more likely than not that Heartland will be required to sell the security before recovery, an other-than-temporary
impairment write-down is recognized in earnings equal to the difference between the security’s amortized cost basis and its fair
value. If Heartland does not intend to sell the security and it is not more likely than not that it will be required to sell the
security before recovery, the other-than-temporary impairment write-down is separated into an amount representing credit loss,
which is recognized in noninterest
income, and an amount related to all other factors, which is recognized in other
comprehensive income. Realized securities gains or losses on securities sales (using specific identification method) and declines
in value judged to be other-than-temporary are included in impairment loss on securities in the consolidated statements of
income.
Equity securities include Community Reinvestment Act mutual funds with readily determinable fair values and are carried at
fair value. Certain equity securities do not have readily determinable fair values, such as Federal Reserve Bank stock and
Federal Home Loan Bank stock, which are held for debt and regulatory purposes and are carried at cost minus impairment, if
any, plus or minus changes resulting from observable price changes for the identical or similar investment of the same issuer.
Heartland has not recorded any impairment or other adjustments to the carrying amount of these investments during 2019.
Securities Held to Maturity - Securities which Heartland has the ability and positive intent to hold to maturity are classified as
held to maturity. Such securities are stated at amortized cost, adjusted for premiums and discounts that are amortized/accreted
using the interest method over the period from the purchase date to the expected maturity or call date of the related security.
Unrealized losses determined to be other-than-temporary are charged to noninterest income.
Loans - Interest on loans is accrued and credited to income based primarily on the principal balance outstanding. 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.
Under Heartland’s credit policies, 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 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, at the observable market price of the loan or the fair value of the collateral if the loan is collateral dependent.
Net nonrefundable loan origination fees and certain direct costs associated with the lending process are deferred and recognized
as a yield adjustment over the life of the related loan.
Acquired Loans - The FASB ASC Topic 310-30 establishes accounting standards for acquired loans with deteriorated credit
quality. Heartland reviews acquired loans for differences between contractual cash flows and cash flows expected to be
collected from initial investment in the acquired loans to determine if those differences are attributable, at least in part, to credit
quality. If those differences are attributable to credit quality, the contractually required payments received in excess of the
amount of its cash flows expected at acquisition, or nonaccretable discount, is not accreted into income. FASB ASC 310-30
requires that the excess of all cash flows expected at acquisition over the initial investment in the loan be recognized as interest
income using the interest method over the term of the loan. This excess is referred to as accretable discount and is recorded as a
reduction of the loan balance.
When a loan is paid off, the excess of any cash received over the net investment is recorded as interest income. In addition to
the amount of purchase discount that is recognized at that time, income may include interest owed by the borrower prior to the
acquisition of the loan, interest collected if on nonperforming status, prepayment fees and other loan fees.
At acquisition, for purchased loans not subject to ASC 310-30, the purpose of the loan (e.g., business, agricultural or personal),
the type of borrower (e.g., business or individual) and the type of collateral for the loan (e.g., commercial real estate, residential
real estate, general business assets or unsecured) of each loan are considered in order to assign purchased loans into one of the
following five loan pools: commercial, commercial real estate, agricultural and agricultural real estate, residential real estate
78 and consumer. These five pools are separately maintained and tracked for each acquisition, and they are consistent with the five
loan categories presented in Note 5, "Loans."
For purchased loans not subject to ASC 310-30, the discount, if any, representing the excess of the amount of reasonably
estimable and probable discounted future cash collections over the purchase price, is accreted into interest income using the
interest method over the weighted average remaining contractual life of the loan pool. Because Heartland uses the pool method
as described above, no adjustment is made to the discount of an individual loan on the specific date of a credit event with
respect to such loan. Additionally, the discount is not accreted on nonperforming loans.
Loans not subject to ASC 310-30 migrate from the purchased loan pools to the regular loan portfolio when the borrower
requests to refinance the loan prior to maturity or renews the loan at maturity, and, in either event, signs a new loan agreement.
In conjunction with the refinancing or renewal process, the new loan is evaluated in accordance with Heartland’s underwriting
standards, and a credit decision is made with respect to whether the new loan should be extended.
Troubled Debt Restructured Loans - Loans are considered troubled debt restructured loans ("TDR") if concessions have been
granted to borrowers that are experiencing financial difficulty. The concessions granted generally involve the modification of
terms of the loan, such as changes in payment schedule or interest rate, which generally would not otherwise be considered.
TDRs can involve loans remaining on nonaccrual, moving to nonaccrual, or continuing on accrual status, depending on the
individual facts and circumstances of the borrower. Nonaccrual TDRs are included and treated consistently with all other
nonaccrual loans. In addition, all accruing TDRs are reported and accounted for as impaired loans. Generally, TDRs remain on
nonaccrual until the customer has attained a sustained period of repayment performance under the modified loan terms
(generally a minimum of six months). However, performance prior to the restructuring, or significant events that coincide with
the restructuring, are considered in assessing whether the borrower can meet the new terms and whether the loan should be
returned to or maintained on accrual status. If the borrower’s ability to meet the revised payment schedule is not reasonably
assured, the loan remains on nonaccrual status.
A loan that is a TDR that has an interest rate consistent with market rates at the time of restructuring and is in compliance with
its modified terms in the calendar year after the year in which the restructuring took place is no longer considered a TDR but
remains an impaired loan. To be considered in compliance with its modified terms, a loan that is a TDR must be in accrual
status and must be current or less than 30 days past due under the modified repayment terms; however, the loan will continue to
be considered impaired. A loan that has been modified at a below market rate will remain classified as a TDR and an impaired
loan. If the borrower’s financial conditions improve to the extent that the borrower qualifies for a new loan with market terms,
the new loan will not be considered a TDR or impaired if Heartland's credit analysis shows the borrower's ability to perform
under scheduled terms.
Loans Held for Sale - Loans held for sale are stated at the lower of cost or fair value on an aggregate basis. Gains or losses on
sales are recorded in noninterest income. Direct loan origination costs and fees are deferred at origination of the loan. These
deferred costs and fees are recognized in noninterest income as part of the gain or loss on sales of loans upon sale of the loan.
At December 31, 2019, loans held for sale primarily consisted of 1-4 family residential mortgages. At December 31, 2018,
loans held for sale consisted of 1-4 family residential mortgages, loans held for sale in conjunction with pending branch sales,
and the loan portfolios of Heartland's consumer finance subsidiaries.
Deposits Held for Sale - Deposits held for sale are stated at the lower of cost or fair value on an aggregate basis.
Mortgage Servicing and Transfers of Financial Assets - Heartland regularly sells residential mortgage loans to others,
primarily government sponsored entities, on a non-recourse basis. Sold loans are not
included in the accompanying
consolidated balance sheets. Heartland generally retains the right to service the sold loans for a fee. During 2019, the mortgage
servicing rights of Dubuque Bank and Trust Company were sold. PrimeWest Mortgage Corporation, a wholly-owned
subsidiary of Heartland's First Bank and Trust subsidiary, serviced mortgage loans primarily for government sponsored entities
with aggregate unpaid principal balance of $616.7 million and $648.9 million, at December 31, 2019 and 2018, respectively.
Allowance for Loan Losses - The allowance for loan losses is maintained at a level estimated by management to provide for
known and inherent risks in the loan portfolios. The allowance is based upon a continuing review of past loan loss experience,
current economic conditions, volume growth, the underlying collateral value of the loans and other relevant factors. Loans
which are deemed uncollectible are charged off and deducted from the allowance. Provisions for loan losses and recoveries on
previously charged-off loans are added to the allowance.
79 Reserve for Unfunded Commitments - This reserve is maintained at a level that, in the opinion of management, is appropriate
to absorb probable losses associated with Heartland’s commitment to lend funds under existing agreements such as letters or
lines of credit. Management determines the appropriateness of the reserve for unfunded commitments based upon reviews of
delinquencies, current economic conditions, the risk characteristics of the various categories of commitments and other relevant
factors. The reserve is based on estimates, and ultimate losses may vary from the current estimates. These estimates are
evaluated on a regular basis and, as adjustments become necessary, they are reported in earnings in the periods in which they
become known. Provisions for unfunded commitment losses are added to the reserve for unfunded commitments, which is
included in the Accrued Expenses and Other Liabilities section of the consolidated balance sheets.
Premises, Furniture and Equipment, net - Premises, furniture and equipment are stated at cost less accumulated depreciation.
The provision for depreciation of premises, furniture and equipment is determined by straight-line and accelerated methods over
the estimated useful lives of 18 to 39 years for buildings, 15 years for land improvements and 3 to 7 years for furniture and
equipment.
Premises, Furniture and Equipment Held for Sale - Premises, furniture and equipment are stated at the estimated fair value
less disposal costs. Subsequent write-downs and gains or losses on the sales are recorded to loss on sales/valuation of assets,
net.
Other Real Estate - Other real estate represents property acquired through foreclosures and settlements of loans. Property
acquired is recorded at the estimated fair value of the property less disposal costs. The excess of carrying value over fair value
less disposal costs is charged against the allowance for loan losses. Subsequent write downs estimated on the basis of later
valuations and gains or losses on sales are charged to loss on sales/valuation of assets, net. Expenses incurred in maintaining
such properties are charged to other real estate and loan collection expenses.
Goodwill - Goodwill represents the excess of the purchase price of acquired subsidiaries’ net assets over their fair value at the
purchase date. Heartland assesses goodwill for impairment annually, and more frequently if events occur which may indicate
possible impairment, and assesses goodwill at the reporting unit level, also giving consideration to overall enterprise value as
part of that assessment. In evaluating goodwill for impairment, Heartland first assesses qualitative factors to determine whether
it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying
amount. If Heartland concludes that it is more likely than not that the fair value of a reporting unit is more than its carrying
value, then no further testing of goodwill assigned to the reporting unit is required. However, if Heartland concludes that it is
more likely than not that the fair value of a reporting unit is less than its carrying value, then Heartland performs a two-step
goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment to
recognize, if any. In the first step, the fair value of a reporting unit is compared to its carrying amount, including goodwill. If
the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered impaired and it is not necessary to
continue to step two of the impairment process. If the fair value of the reporting unit is less than the carrying amount, step two
is performed. In step two, the implied fair value of goodwill is compared to the carrying value of the reporting unit's goodwill.
The implied fair value of goodwill is computed as a residual value after allocating the fair value of the reporting unit to its
assets and liabilities. Heartland estimates the fair value of its reporting units using market multiples of comparable entities,
including recent transactions, or a combination of market multiples and discounted cash flow methodology. These methods
incorporate assumptions specific to the entity, such as the use of financial forecasts.
Core Deposit Intangibles and Customer Relationship Intangibles, Net - Core deposit intangibles are amortized over 8 to 18
years on an accelerated basis. Customer relationship intangibles are amortized over 22 years on an accelerated basis. Annually,
Heartland reviews these intangible assets for events or circumstances that may indicate a change in the recoverability of the
underlying basis.
Servicing Rights, Net - Mortgage and commercial servicing rights associated with loans originated and sold, where servicing is
retained, are initially capitalized at fair value and recorded on the consolidated statements of income as a component of gains on
sale of loans held for sale. The values of these capitalized servicing rights are amortized as an offset to the loan servicing
income earned in relation to the servicing revenue expected to be earned.
The carrying values of these rights are reviewed quarterly for impairment based on the calculation of their fair value as
performed by an outside third party. For purposes of measuring impairment, the rights are stratified into certain risk
characteristics including loan type and loan term. As of December 31, 2019, a valuation allowance of $114,000 was required on
Heartland's mortgage servicing rights with an original term of 15 years, and a valuation allowance of $797,000 was required on
Heartland's mortgage servicing rights with an original term of 30 years. At December 31, 2018, a valuation allowance of
80 $20,000 was required on Heartland's mortgage servicing rights with an original term of 15 years, and a valuation allowance of
$38,000 was required on Heartland's mortgage servicing rights with an original term of 30 years.
Cash Surrender Value on Life Insurance - Heartland and its subsidiaries have purchased life insurance policies on the lives of
certain officers. The one-time premiums paid for the policies, which coincide with the initial cash surrender value, are recorded
as an asset. Increases or decreases in the cash surrender value, other than proceeds from death benefits, are recorded as
noninterest income in income on bank owned life insurance. Proceeds from death benefits first reduce the cash surrender value
attributable to the individual policy and then any additional proceeds are recorded in other noninterest income.
Income Taxes - Heartland and its subsidiaries file a consolidated federal income tax return and separate or combined income or
franchise tax returns as required by the various states. Heartland recognizes certain income and expenses in different time
periods for financial reporting and income tax purposes. The provision for deferred income taxes is based on an asset and
liability approach and represents the change in deferred income tax accounts during the year, including the effect of enacted tax
rate changes. A valuation allowance is provided to reduce deferred tax assets if their expected realization is deemed not to be
more likely than not.
A tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax
examination. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on
examination. Heartland recognizes interest and penalties related to income tax matters in income tax expense.
Derivative Financial Instruments - Heartland uses derivative financial instruments as part of its interest rate risk management,
which includes interest rate swaps, certain interest rate lock commitments and forward sales of securities related to mortgage
banking activities. FASB ASC Topic 815 establishes accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging activities. As required by ASC 815, Heartland
records all derivatives on the consolidated balance sheets at fair value. The accounting for changes in the fair value of
derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure
to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. To
qualify for hedge accounting, Heartland must comply with the detailed rules and documentation requirements at the inception
of the hedge, and hedge effectiveness is assessed at inception and periodically throughout the life of each hedging relationship.
Hedge ineffectiveness, if any, is measured periodically throughout the life of the hedging relationship.
For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially
reported in other comprehensive income (loss) and subsequently reclassified to interest income or expense when the hedged
transaction affects earnings, while the ineffective portion of changes in the fair value of the derivative, if any, is recognized
immediately in other noninterest income. Heartland assesses the effectiveness of each hedging relationship by comparing the
cumulative changes in cash flows of the derivative hedging instrument with the cumulative changes in cash flows of the
designated hedged item or transaction. No component of the change in the fair value of the hedging instrument is excluded from
the assessment of hedge effectiveness.
Heartland has fair value hedging relationships at December 31, 2019. Heartland uses hedge accounting in accordance with ASC
815, with the unrealized gains and losses, representing the change in fair value of the derivative and the change in fair value of
the risk being hedged on the related loan, being recorded in the consolidated statements of income. The ineffective portions of
the unrealized gains or losses, if any, are recorded in interest income and interest expense in the consolidated statements of
income. Heartland uses statistical regression to assess hedge effectiveness, both at the inception of the hedge as well as on a
continual basis. The regression analysis involves regressing the periodic change in fair value of the hedging instrument against
the periodic changes in the fair value of the asset being hedged due to changes in the hedge risk.
Heartland does not use derivatives for trading or speculative purposes. Derivatives not designated as hedges are not speculative
and are used to manage Heartland’s exposure to interest rate movements and other identified risks, but do not meet the strict
hedge accounting requirements of ASC 815.
Mortgage Derivatives - Heartland uses interest rate lock commitments to originate residential mortgage loans held for sale and
forward commitments to sell residential mortgage loans and mortgage backed securities. These commitments are considered
derivative instruments. The fair value of these commitments is recorded on the consolidated balance sheets with the changes in
fair value recorded in the consolidated statements of income as a component of gains on sale of loans held for sale. These
derivative contracts are designated as free standing derivative contracts and are not designated against specific assets and
liabilities on the consolidated balance sheets or forecasted transactions and therefore do not qualify for hedge accounting
treatment.
81 Fair Value Measurements - Fair value represents the estimated price at which an orderly transaction to sell an asset or transfer
a liability would take place between market participants at the measurement date under current market conditions (i.e. an exit
price concept). Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values
are measured using discounted cash flow or other valuation techniques. Inputs into the valuation methods are subjective in
nature, involve uncertainties, and require significant judgment and therefore cannot be determined with precision. Accordingly,
the derived fair value estimates presented herein are not necessarily indicative of the amounts Heartland could realize in a
current market exchange. Assets and liabilities are categorized into three levels based on the markets in which the assets and
liabilities are traded and the reliability of the assumptions used to determine the fair value. In instances where the determination
of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value
hierarchy in which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value
measurement in its entirety. Heartland's assessment of the significance of a particular input to the fair value measurement in its
entirety requires judgment and considers factors specific to the asset or liability. Below is a brief description of each fair value
level:
Level 1 — Valuation is based upon quoted prices for identical instruments in active markets.
Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, or similar instruments in
markets that are not active, and model-based valuation techniques for which all significant assumptions are observable
in the market.
Level 3 — Valuation is generated from model-based techniques that use at least one significant assumption not
observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants
would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash
flow models and similar techniques.
Treasury Stock - Treasury stock is accounted for by the cost method, whereby shares of common stock reacquired are recorded
at their purchase price. When treasury stock is reissued, any difference between the sales proceeds, or fair value when issued for
business combinations, and the cost is recognized as a charge or credit to capital surplus.
Trust Department Assets - Property held for customers in fiduciary or agency capacities is not included in the accompanying
consolidated balance sheets because such items are not assets of the Heartland banks.
Earnings Per Share - Basic earnings per share is determined using net income available to common stockholders and weighted
average common shares outstanding. Diluted earnings per share is computed by dividing net income available to common
stockholders by the weighted average common shares and assumed incremental common shares issued. Amounts used in the
determination of basic and diluted earnings per share for the years ended December 31, 2019, 2018 and 2017, are shown in the
table below:
(Dollars and number of shares in thousands, except per share data)
2019
2018
2017
Net income attributable to Heartland
Preferred dividends
Interest expense on convertible preferred debt
Net income available to common stockholders
$
149,129
$
116,998
$
75,272
—
—
(39)
—
$
149,129
$
116,959
$
Weighted average common shares outstanding for basic earnings per share
Assumed incremental common shares issued upon vesting of restricted stock
units
Weighted average common shares for diluted earnings per share
35,991
71
36,062
33,012
201
33,213
Earnings per common share — basic
Earnings per common share — diluted
$
$
4.14
4.14
$
$
3.54
3.52
$
$
(58)
12
75,226
28,168
258
28,426
2.67
2.65
82 Subsequent Events - Heartland has evaluated subsequent events that may require recognition or disclosure through the filing
date of this Annual Report on Form 10-K with the SEC.
On February 11, 2020, Heartland entered into a definitive merger agreement to acquire AIM Bancshares, Inc., and its wholly-
owned subsidiary, AimBank, headquartered in Levelland, Texas. See Note 2, "Acquisitions," for further details regarding this
acquisition.
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 established 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 are classified as financing or operating, with
classification affecting the pattern and classification of expense recognition in the income statement. The amendment was
effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and was to be
applied on a modified retrospective basis. Heartland leases certain properties and equipment under operating leases that resulted
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 included a number of
optional practical expedients that entities may elect to apply. These practical expedients related 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 was 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 could have elected not to recast the comparative periods presented when transitioning to the new leasing
standard, and lessors could have elected not to separate lease and non-lease components when certain conditions are met. The
amendments had 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 has not restated 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, and a net deferred tax asset of $440,000 on January 1, 2019. The difference
between the lease assets, lease liabilities and net deferred tax assets, which was $1.3 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 23,
"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 adopted the accounting
standard on January 1, 2020, as required. In April 2019, the FASB also issued ASU 2019-04, "Codification Improvements to
Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments."
As it relates to current expected credit losses, this guidance amends certain provisions contained in ASU 2016-13, particularly
with regards to the inclusion of accrued interest in the definition of amortized cost, as well as clarifying the extension and
renewal options that are not unconditionally cancelable by the entity that are included in the original or modified contract
should be considered in the entity's determination of expected credit losses. 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's preparation for the adoption of this standard included:
•
•
Entering into an agreement with a third party vendor for consulting services and a technology solution.
Implementing a technology solution and producing quarterly parallel runs in 2019.
83 •
Entering into an agreement with a third party to validate the new expected loss rate model, completing the first phase
of this validation including implementing recommended changes, and starting the second phase of model validation,
which includes methodology documentation review and internal controls testing.
Management currently expects the adoption of ASU 2016-13 will result in an increase of $17.6 million to $28.2 million in the
allowance for loan losses and the reserve for unfunded commitments. Because management is finalizing and refining its
controls and processes, the ultimate impact of the adoption of ASU 2016-13 as of January 1, 2020, could differ from the current
expectation. The expected increase is a result of changing from an "incurred loss" model, which encompasses an allowance for
current known and inherent losses within the portfolio to an "expected loss" model, which encompasses allowances for losses
expected to be incurred over the life of the portfolio including unused loan commitments, as well as establishing an allowance
for $1.80 billion of gross loans covered under purchase accounting valuations at December 31, 2019. Furthermore, ASU
2016-13 requires that an allowance for expected credit losses for certain debt securities and other financial assets is established;
however management does not expect these allowances to be significant. The adoption of ASU 2016-13 is not expected to have
a significant impact on Heartland's regulatory capital ratios.
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 was 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 applied 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 determined these amendments 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. 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. Entities are also allowed to elect early adoption for the
84 eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until their effective date.
Heartland intends to adopt this ASU in 2020, as required, and because the ASU only revises disclosure requirements, the
adoption of this ASU will not have a material impact on Heartland's results of operations, financial position and liquidity.
In August 2018, the FASB issued ASU 2018-15, "Intangible-Goodwill and Other-Internal Use Software (Subtopic 350-40):
Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract." The
amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service
contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The
amendments in this update require an entity in a hosting arrangement that is a service contract to follow the guidance in
Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which
costs to expense. The amendments also require the entity to expense the capitalized implementation costs of a hosting
arrangement that is a service contract over the term of the hosting arrangement. The amendment is effective for fiscal years
beginning after December 15, 2019, and interim periods within those fiscal years, and the amendment can be applied either
retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption was permitted.
Heartland early adopted this ASU using the prospective approach in the second quarter of 2019, and the adoption did not have a
material impact on its results of operations, financial position and liquidity.
In October 2018, the FASB issued ASU 2018-16, "Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight
Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting." In the United
States, eligible benchmark interest rates under Topic 815 are interest rates on direct Treasury obligations of the U.S.
government ("UST"), the London Interbank Offered Rate ("LIBOR") swap rate, and the Overnight Index Swap ("OIS") Rate
based on the Fed Funds Effective Rate. When the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted
Improvements to Accounting for Hedging Activities, in August 2017, it introduced the Securities Industry and Financial Markets
Association ("SIFMA") Municipal Swap Rate as the fourth permissible U.S. benchmark rate. The new ASU adds the OIS rate
based on the Secured Overnight Financing Rate ("SOFR") as a U.S. benchmark interest rate to facilitate the LIBOR to SOFR
transition and provide sufficient lead time for entities to prepare for changes to interest rate risk hedging strategies for both risk
management and hedge accounting purposes. The amendments in this update became effective for fiscal years beginning after
December 15, 2018, and interim periods within those fiscal years and the financial statement impact immediately upon adoption
was immaterial. The future financial statement impact will depend on any new contracts entered into using new benchmark
rates, as well as any existing contracts that get migrated from LIBOR to new benchmark interest rates. Heartland is currently
evaluating the impact of the transition from LIBOR as an interest rate benchmark to other potential alternative reference rates,
including but not limited to the SOFR. Currently, Heartland has adjustable rate loans, several debt obligations and derivative
instruments in place that reference LIBOR-based rates. The transition from LIBOR is estimated to take place at the end of 2021,
and management will continue to actively assess the related opportunities and risks involved in this transition.
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740) - Simplifying the Accounting for Income
Taxes." The guidance issued in this update simplifies the accounting for income taxes by eliminating certain exceptions to the
guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an
interim period and the recognition for deferred tax liabilities for outside basis differences. ASU 2019-12 also simplifies aspects
of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that
result in a step-up in the tax basis of goodwill. Heartland intends to adopt this ASU on January 1, 2021, as required, and the
adoption is not expected to have a material impact on its results of operations, financial position and liquidity.
85 TWO
ACQUISITIONS
Pending Acquisition
AIM Bancshares, Inc.
On February 11, 2020, Heartland entered into a definitive merger agreement to acquire AIM Bancshares, Inc., and its wholly-
owned subsidiary, AimBank, headquartered in Levelland, Texas. As of the announcement date, the shares of Heartland
common stock to be issued in the transaction along with cash to be paid to holders of AIM Bancshares, Inc. common stock and
the cash to be paid to holders of in-the-money options to purchase AIM Bancshares, Inc. common stock, had an aggregate value
of approximately $280.4 million. Simultaneous with the closing of the transaction, AimBank will merge into Heartland's Texas-
based subsidiary, First Bank & Trust, and the combined entity will operate as First Bank & Trust. 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. As of December 31, 2019, AimBank had total assets of $1.78 billion,
$1.16 billion of net loans outstanding, and $1.54 billion of deposits. Because the merger agreement was signed on February 11,
2020, and the transaction is expected to close in the third quarter of 2020, the transaction has no impact on Heartland's 2019
consolidated financial statements.
Rockford Bank and Trust Company
On November 30, 2019, Heartland's Illinois Bank & Trust subsidiary completed its acquisition of substantially all of the assets
and substantially all of the deposits and certain other liabilities of Rockford Bank and Trust Company, headquartered in
Rockford, Illinois. Rockford Bank and Trust Company was a wholly-owned subsidiary of Moline, Illinois-based QCR
Holdings, Inc. As of the closing date, Rockford Bank and Trust Company had, at fair value, total assets of $495.7 million,
which included $354.0 million of gross loans held to maturity, and $430.3 million of deposits. The all-cash payment was
approximately $46.6 million.
Blue Valley Ban Corp.
On May 10, 2019, Heartland completed the acquisition of Blue Valley Ban Corp. and its wholly-owned subsidiary, Bank of
Blue Valley, headquartered in Overland Park, Kansas. Based on Heartland's closing common stock price of $44.78 per share on
May 10, 2019, the aggregate consideration paid to Blue Valley Ban Corp. common shareholders was $92.3 million, which was
paid by delivery of 2,060,258 shares of Heartland common stock. On the closing date, in addition to this merger consideration,
Heartland provided Blue Valley Ban Corp. the funds necessary to repay outstanding debt of $6.9 million, and Heartland
assumed $16.1 million of trust preferred securities at fair value. Immediately following the closing of the transaction, Bank of
Blue Valley was merged with and into Heartland's wholly-owned Kansas subsidiary, Morrill & Janes Bank and Trust Company,
and the combined entity operates under the Bank of Blue Valley brand. As of the closing date, Blue Valley Ban Corp. had, at
fair value, total assets of $766.2 million, total loans held to maturity of $542.0 million, and total deposits of $617.1 million. The
transaction was a tax-free reorganization with respect to the stock consideration received by the stockholders of Blue Valley
Ban Corp.
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.
First Bank Lubbock Bancshares, Inc.
On May 18, 2018, Heartland completed the acquisition of Lubbock, Texas based First Bank Lubbock Bancshares, Inc., 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 First Bank Lubbock
Bancshares, Inc. 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
First Bank Lubbock Bancshares Inc.'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
86
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 First Bank Lubbock Bancshares, Inc.
The assets and liabilities of First Bank Lubbock Bancshares, Inc. were recorded on the consolidated balance sheet at the
estimated fair value on the acquisition date. The following table represents, in thousands, the amounts recorded on the
consolidated balance sheet as of May 18, 2018:
As of May 18, 2018
Fair value of consideration paid:
Common stock (3,350,664 shares)
Cash
Total consideration paid
Fair value of assets acquired
Cash and cash equivalents
Securities:
Carried at fair value
Other securities
Loans held for sale
Loans held to maturity
Premises, furniture and equipment, net
Other real estate, net
Mortgage servicing rights
Core deposit intangibles and customer relationships, net
Cash surrender value on life insurance
Other assets
Total assets
Fair value of liabilities assumed
Deposits
Other borrowings
Other liabilities
Total liabilities assumed
Fair value of net assets acquired
Goodwill resulting from acquisition
$
$
184,454
5,451
189,905
212,105
1,788
3,268
31,050
681,080
23,271
379
6,995
13,908
14,997
7,185
996,026
893,827
12,077
21,580
927,484
68,542
121,363
Heartland recognized $121.4 million of goodwill in conjunction with the acquisition of First Bank Lubbock Bancshares, Inc.,
which is calculated as the excess of both the consideration exchanged and the liabilities assumed as compared to the fair value
of identifiable assets acquired. Goodwill resulted from the expected operational synergies, enhanced market area, cross-selling
opportunities and expanded business lines. See Note 6 for further information on goodwill.
Heartland incurred $1.1 million of pre-tax merger related expenses in the year ended December 31, 2018, associated with the
First Bank Lubbock Bancshares, Inc. acquisition. The merger expenses are reflected on the consolidated statements of income
for the applicable period and are reported primarily in the categories of professional fees and other noninterest expenses.
Acquired loans were preliminarily recorded at fair value based on a discounted cash flow valuation methodology that considers,
among other things, projected default rates, loss given defaults and recovery rates. No allowance for credit losses was carried
over from the acquisition. The balance of nonaccrual loans on the acquisition date was $7.6 million.
87 THREE
CASH AND DUE FROM BANKS
The Heartland banks are required to maintain certain average cash reserve balances as a non-member bank of the Federal
Reserve System. The reserve balance requirements at December 31, 2019 and 2018, were $46.8 million and $15.2 million,
respectively.
FOUR
SECURITIES
The amortized cost, gross unrealized gains and losses and estimated fair values of debt securities available for sale and equity
securities with a readily determinable fair value as of December 31, 2019, and December 31, 2018, are summarized in the table
below, in thousands:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
December 31, 2019
U.S. government corporations and agencies
$
9,844
$
49
$
— $
9,893
Mortgage and asset-backed securities
Obligations of states and political subdivisions
Total debt securities
Equity securities with a readily determinable fair value
Total
December 31, 2018
U.S. government corporations and agencies
Mortgage and asset-backed securities
Obligations of states and political subdivisions
Total debt securities
Equity securities
Total
2,579,081
704,073
3,292,998
18,435
$ 3,311,433
$
32,075
2,061,358
382,101
2,475,534
17,086
$
$
17,200
12,516
29,765
—
29,765
3
3,740
919
4,662
—
$
$
(19,003)
2,577,278
(9,399)
707,190
(28,402)
3,294,361
—
18,435
(28,402) $ 3,312,796
(127) $
31,951
(38,400)
2,026,698
(8,046)
374,974
(46,573)
2,433,623
—
17,086
$ 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.
Equity securities include money market accounts that totaled $18.4 million at carrying value and $18.4 million at fair value at
December 31, 2019. The portion of unrealized net gains on equity securities recognized in current earnings during 2019, which
related to securities still held at December 31, 2019, totaled $525,000.
The amortized cost, gross unrealized gains and losses and estimated fair values of held to maturity securities as of
December 31, 2019, and December 31, 2018, are summarized in the table below, in thousands:
December 31, 2019
Obligations of states and political subdivisions
Total
December 31, 2018
Obligations of states and political subdivisions
Total
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
$
$
91,324
91,324
$ 236,283
$ 236,283
$
$
$
$
9,160
9,160
9,554
9,554
$
$
$
$
— $ 100,484
— $ 100,484
(496) $ 245,341
(496) $ 245,341
No transfers from available for sale to held to maturity were made in 2019 or 2018.
88
The amortized cost and estimated fair value of investment securities carried at fair value at December 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.
Due in 1 year or less
Due in 1 to 5 years
Due in 5 to 10 years
Due after 10 years
Total debt securities
Mortgage and asset-backed securities
Equity securities with a readily determinable fair value
Total investment securities
December 31, 2019
Amortized Cost
Estimated Fair Value
12,121
$
28,111
76,299
597,386
713,917
2,579,081
18,435
3,311,433
$
12,171
28,434
77,942
598,536
717,083
2,577,278
18,435
3,312,796
$
$
The amortized cost and estimated fair value of debt securities held to maturity at December 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.
Due in 1 year or less
Due in 1 to 5 years
Due in 5 to 10 years
Due after 10 years
Total investment securities
December 31, 2019
Amortized Cost
Estimated Fair Value
$
$
2,443
$
17,604
59,708
11,569
91,324
$
2,472
18,153
64,775
15,084
100,484
As of December 31, 2019, securities with a carrying value of $509.6 million were pledged to secure public and trust deposits,
short-term borrowings and for other purposes as required and permitted by law.
Gross gains and losses realized related to sales of securities carried at fair value for the years ended December 31, 2019, 2018
and 2017 are summarized as follows, in thousands:
Available for Sale Securities sold:
Proceeds from sales
Gross security gains
Gross security losses
2019
2018
2017
$
$ 1,628,467
11,774
4,115
727,895
3,661
2,576
$ 1,456,750
10,585
3,812
89
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 December 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 or more months. The reference point for determining how long an investment was in an unrealized loss
position was December 31, 2019, and December 31, 2018, 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
December 31, 2019
U.S. government corporations and agencies $
— $
— $
— $
— $
— $
—
Mortgage and asset-backed securities
Obligations of states and political
subdivisions
Total temporarily impaired securities
December 31, 2018
1,231,732
(14,189)
241,232
(4,814)
1,472,964
(19,003)
387,534
(9,399)
—
—
387,534
(9,399)
$1,619,266
$ (23,588) $ 241,232
$
(4,814) $1,860,498
$ (28,402)
U.S. government corporations and agencies $
24,902
$
(83) $
4,577
$
(44) $
29,479
$
(127)
Mortgage and asset-backed securities
Obligations of states and political
subdivisions
733,826
(9,060)
805,089
(29,340)
1,538,915
(38,400)
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
December 31, 2019
Obligations of states and political
subdivisions
Total temporarily impaired securities
December 31, 2018
Obligations of states and political
subdivisions
Total temporarily impaired securities
$
$
$
$
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
—
—
10,802
10,802
$
$
(17) $
19,508
(17) $
19,508
$
$
(479) $
30,310
(479) $
30,310
$
$
(496)
(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.
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 periods ended December 31, 2019, 2018, and 2017.
Included in other securities were shares of stock in each Federal Home Loan Bank (the "FHLB") of Des Moines, Chicago,
Dallas, San Francisco and Topeka at an amortized cost of $16.8 million at December 31, 2019 and $16.6 million at
December 31, 2018.
90
The Heartland banks are required to maintain FHLB stock as members of the various FHLBs as required by these institutions.
These equity securities are "restricted" in that they can only be sold back to the respective institutions or another member
institution at par. Therefore, they are less liquid than other marketable equity securities and their fair value approximates
amortized cost. 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
December 31, 2019, did not consider the investments to be other than temporarily impaired.
FIVE
LOANS
Loans as of December 31, 2019, and December 31, 2018, were as follows, in thousands:
Loans receivable held to maturity:
Commercial
Commercial real estate
Agricultural and agricultural real estate
Residential real estate
Consumer
Gross loans receivable held to maturity
Unearned discount
Deferred loan fees
Total net loans receivable held to maturity
Allowance for loan losses
Loans receivable, net
December 31, 2019
December 31, 2018
$
$
2,419,909
4,370,549
533,064
597,742
452,233
8,373,497
(680)
(4,900)
8,367,917
(70,395)
8,297,522
$
$
2,020,231
3,711,481
565,408
673,603
440,158
7,410,881
(1,624)
(1,560)
7,407,697
(61,963)
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. See Note 1 for Heartland's
accounting policy for 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, 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 December 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 changes to the accounting for the allowance for loan losses policy during 2019 or
2018.
91
Allowance For Loan Losses
Ending
Balance
Under
ASC
310-10-35
Ending
Balance
Under
ASC
450-20
Total
Gross Loans Receivable
Held to Maturity
Ending
Balance
Evaluated
for
Impairment
Under ASC
450-20
Ending
Balance
Evaluated
for
Impairment
Under ASC
310-10-35
Total
December 31, 2019
Commercial
Commercial real estate
Agricultural and agricultural real
estate
Residential real estate
Consumer
Total
December 31, 2018
Commercial
Commercial real estate
Agricultural and agricultural real
estate
Residential real estate
Consumer
Total
$
$
$
$
$
6,245
451
$
21,499
30,292
$
27,744
30,743
24,438
18,652
$ 2,395,471
4,351,897
$ 2,419,909
4,370,549
916
110
450
8,172
5,733
218
686
168
749
7,554
$
$
$
4,701
1,328
4,403
62,223
18,772
25,320
4,267
1,617
4,433
54,409
$
$
$
5,617
1,438
4,853
70,395
24,505
25,538
4,953
1,785
5,182
61,963
$
$
$
22,686
16,740
4,536
87,052
510,378
581,002
447,697
$ 8,286,445
533,064
597,742
452,233
$ 8,373,497
24,202
14,388
$ 1,996,029
3,697,093
$ 2,020,231
3,711,481
15,951
20,251
7,004
81,796
549,457
653,352
433,154
$ 7,329,085
565,408
673,603
440,158
$ 7,410,881
The following table presents nonaccrual loans, accruing loans past due 90 days or more and troubled debt restructured loans at
December 31, 2019, and December 31, 2018, in thousands:
Nonaccrual loans
Nonaccrual troubled debt restructured loans
Total nonaccrual loans
Accruing loans past due 90 days or more
Performing troubled debt restructured loans
December 31, 2019
December 31, 2018
$
$
$
$
72,754
3,794
76,548
4,105
3,794
$
$
$
$
67,833
4,110
71,943
726
4,026
Heartland had $7.6 million of troubled debt restructured loans at December 31, 2019, of which $3.8 million were classified as
nonaccrual and $3.8 million were accruing according to the restructured terms. Heartland had $8.1 million of troubled debt
restructured loans at December 31, 2018, of which $4.1 million were classified as nonaccrual and $4.0 million were accruing
according to the restructured terms.
92 The following table provides information on troubled debt restructured loans that were modified during the years ended
December 31, 2019, and December 31, 2018, in thousands:
For the Years Ended
December 31, 2019
December 31, 2018
Pre-
Modification
Recorded
Investment
Post-
Modification
Recorded
Investment
Number
of Loans
Number
of Loans
Pre-
Modification
Recorded
Investment
Post-
Modification
Recorded
Investment
1
—
1
—
6
—
7
$
$
40
—
40
—
623
—
$
663
$
40
—
40
—
649
—
689
—
—
—
—
16
—
16
$
— $
—
—
—
2,843
—
$
2,843
$
—
—
—
—
2,559
—
2,559
Commercial
Commercial real estate
Total commercial and commercial real estate
Agricultural and agricultural real estate
Residential real estate
Consumer
Total
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 troubled debt restructured loans is due to principal deferment collected from government guarantees and capitalized
interest and escrow. At December 31, 2019, there were no commitments to extend credit to any of the borrowers with an
existing TDR.
The following table provides information on troubled debt restructured loans for which there was a payment default during the
years ended December 31, 2019, and December 31, 2018, in thousands, that had been modified during the 12-month period
prior to the default:
Commercial
Commercial real estate
Total commercial and commercial real estate
Agricultural and agricultural real estate
Residential real estate
Consumer
Total
With Payment Defaults During the Following Periods
For the Years Ended
December 31, 2019
December 31, 2018
Number of
Loans
—
—
—
—
2
—
2
$
$
Recorded
Investment
—
—
—
—
210
—
210
Number of
Loans
—
—
—
—
7
—
7
Recorded
Investment
—
—
—
—
1,036
—
1,036
$
$
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 financial trends due to borrower specific or systemic conditions that, if left uncorrected, threaten its 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 sound net worth and paying capacity of the borrower and 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 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 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 an operating entity. Specific pending events, such as capital injections, liquidations or perfection of liens on
93
additional collateral, may strengthen the credit, thus deferring classification of the loan as loss until exact status can be
determined. The "loss" rating is assigned to loans considered uncollectible. As of December 31, 2019, Heartland had no loans
classified as doubtful and no loans classified as loss. 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 December 31, 2019, and December 31, 2018, in thousands:
Pass
Nonpass
Total
December 31, 2019
Commercial
Commercial real estate
Total commercial and commercial real estate
Agricultural and agricultural real estate
Residential real estate
Consumer
Total gross loans receivable held to maturity
December 31, 2018
Commercial
Commercial real estate
Total commercial and commercial real estate
Agricultural and agricultural real estate
Residential real estate
Consumer
$
2,251,115
$
168,794
$
$
$
4,141,436
6,392,551
415,455
569,401
439,321
7,816,728
1,880,579
3,524,344
5,404,923
471,642
645,478
425,451
$
$
229,113
397,907
117,609
28,341
12,912
556,769
139,652
187,137
326,789
93,766
28,125
14,707
$
$
2,419,909
4,370,549
6,790,458
533,064
597,742
452,233
8,373,497
2,020,231
3,711,481
5,731,712
565,408
673,603
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 60% special mention and 40% substandard as of
December 31, 2019. The percentage of nonpass loans on nonaccrual status as of December 31, 2019, was 14%. As of
December 31, 2018, the nonpass category in the table above was comprised of approximately 52% special mention and 48%
substandard. The percentage of nonpass loans on nonaccrual status as of December 31, 2018, was 16%. Loans delinquent 30-89
days as a percentage of total loans were 0.33% at December 31, 2019, and 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 December 31, 2019, Heartland had $2.7 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.
94 The following table sets forth information regarding Heartland's accruing and nonaccrual loans at December 31, 2019, and
December 31, 2018, in thousands:
December 31, 2019
Commercial
Commercial real estate
Total commercial and commercial real
estate
Agricultural and agricultural real estate
Residential real estate
Consumer
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
$
5,075
$
726
$
3,899
$
9,700
$ 2,384,637
$
25,572
$ 2,419,909
9,457
1,012
84
10,553
4,348,672
11,324
4,370,549
14,532
1,738
3,983
20,253
6,733,309
3,734
4,382
2,674
209
72
482
26
96
—
3,969
4,550
3,156
504,419
582,257
445,036
36,896
24,676
10,935
4,041
6,790,458
533,064
597,742
452,233
Total gross loans receivable held to maturity $ 25,322
$
2,501
$
4,105
$ 31,928
$ 8,265,021
$
76,548
$ 8,373,497
December 31, 2018
Commercial
Commercial real estate
Total commercial and commercial real
estate
Agricultural and agricultural real estate
Residential real estate
Consumer
Total gross loans receivable held to maturity $ 15,363
$
$
2,574
$
205
$
— $
2,779
$ 1,991,525
$
25,927
$ 2,020,231
4,819
7,393
99
5,147
2,724
—
205
—
49
307
561
726
726
—
—
—
5,545
3,694,259
11,677
3,711,481
8,324
5,685,784
99
5,196
3,031
549,376
655,329
431,799
37,604
15,933
13,078
5,328
5,731,712
565,408
673,603
440,158
$
726
$ 16,650
$ 7,322,288
$
71,943
$ 7,410,881
95 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 December 31, 2019, and December 31, 2018, the outstanding loan balance recorded on the consolidated
balance sheets at December 31, 2019, and December 31, 2018, any related allowance recorded for those loans as of
December 31, 2019, and December 31, 2018, the average outstanding loan balance recorded on the consolidated balance sheets
during the years ended December 31, 2019, and December 31, 2018, and the interest income recognized on the impaired loans
during the year ended December 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
December 31, 2019
Impaired loans with a related
allowance:
Commercial
Commercial real estate
Total commercial and commercial real
estate
Agricultural and agricultural real estate
Residential real estate
Consumer
Total loans held to maturity
Impaired loans without a related
allowance:
Commercial
Commercial real estate
Total commercial and commercial real
estate
Agricultural and agricultural real estate
Residential real estate
Consumer
Total loans held to maturity
Total impaired loans held to maturity:
Commercial
Commercial real estate
Total commercial and commercial real
estate
Agricultural and agricultural real estate
Residential real estate
Consumer
$
11,696
$
11,679
$
6,245
$
11,757
$
$
$
$
$
1,319
1,319
13,015
2,750
927
1,029
12,998
2,237
927
1,027
451
6,696
916
110
450
1,435
13,192
2,739
1,116
1,170
17,721
$
17,189
$
8,172
$
18,217
$
15,180
$
12,759
$
— $
12,831
$
17,413
17,333
$
$
32,593
23,245
15,824
3,509
75,171
26,876
18,732
45,608
25,995
16,751
4,538
30,092
20,449
15,813
3,509
69,863
24,438
18,652
43,090
22,686
16,740
4,536
—
—
—
—
—
$
$
— $
6,245
$
451
6,696
916
110
450
16,798
29,629
16,837
17,073
4,182
67,721
24,588
18,233
42,821
19,576
18,189
5,352
$
$
6
22
28
—
—
11
39
740
471
1,211
60
280
45
1,596
746
493
1,239
60
280
56
Total impaired loans held to maturity
$
92,892
$
87,052
$
8,172
$
85,938
$
1,635
96 December 31, 2018
Impaired loans with a related
allowance:
Commercial
Commercial real estate
Total commercial and commercial real
estate
Agricultural and agricultural real estate
Residential real estate
Consumer
Total loans held to maturity
Impaired loans without a related
allowance:
Commercial
Commercial real estate
Total commercial and commercial real
estate
Agricultural and agricultural real estate
Residential real estate
Consumer
Total loans held to maturity
Total impaired loans held to maturity:
Commercial
Commercial real estate
Total commercial and commercial real
estate
Agricultural and agricultural real estate
Residential real estate
Consumer
$
$
$
$
$
Total impaired loans held to maturity
$
Unpaid
Principal
Balance
Loan
Balance
Related
Allowance
Recorded
Year-to-Date
Avg. Loan
Balance
Year-to-Date
Interest
Income
Recognized
$
12,376
891
$
12,366
891
13,267
1,718
647
1,373
17,005
13,616
13,578
27,194
16,836
19,604
5,631
69,265
25,992
14,469
40,461
18,554
20,251
7,004
86,270
$
$
$
$
$
13,257
1,718
647
1,373
16,995
11,836
13,497
25,333
14,233
19,604
5,631
64,801
24,202
14,388
38,590
15,951
20,251
7,004
81,796
$
$
$
$
$
5,733
218
5,951
686
168
749
7,554
$
$
— $
—
—
—
—
—
— $
5,733
218
5,951
686
168
749
7,554
$
$
$
4,741
4,421
9,162
2,165
1,138
2,934
15,399
10,052
13,000
23,052
14,781
23,950
5,117
66,900
14,793
17,421
32,214
16,946
25,088
8,051
82,299
$
$
$
$
$
33
25
58
2
12
29
101
299
249
548
5
308
97
958
332
274
606
7
320
126
1,059
On November 30, 2019, Heartland completed the acquisition of substantially all of the assets and substantially all of the
deposits and certain other liabilities of Rockford Bank and Trust Company, headquartered in Rockford, Illinois. As of
November 30, 2019, Rockford Bank and Trust Company had gross loans of $366.6 million, and the estimated fair value of the
loans acquired was $354.0 million.
On May 10, 2019, Heartland completed the acquisition of Blue Valley Ban Corp., parent company of Bank of Blue Valley,
headquartered in Overland Park, Kansas. As of May 10, 2019, Blue Valley Ban Corp. had gross loans of $558.2 million, and
the estimated fair value of the loans acquired was $542.0 million.
On May 18, 2018, Heartland completed the acquisition of First Bank Lubbock Bancshares, Inc., parent company of First Bank
& Trust, headquartered in Lubbock, Texas. As of May 18, 2018, First Bank Lubbock Bancshares, Inc. had gross loans of
$696.9 million, and the estimated fair value of the loans acquired was $681.1 million.
On February 23, 2018, Heartland acquired Signature Bancshares, Inc., parent company of Signature Bank, based in
Minnetonka, Minnesota. As of February 23, 2018, Signature Bancshares, Inc. had gross loans of $335.1 million and the
estimated fair value of the loans acquired was $324.5 million. Included in loans acquired from Signature Bancshares, Inc. was a
lease portfolio with a fair value of $16.0 million on the acquisition date. The lease portfolio is included with the commercial
loan category for disclosure purposes.
97 Heartland uses the acquisition method of accounting for purchased loans in accordance with ASC 805, "Business
Combinations." Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date,
but the purchaser cannot carry over the related allowance for loan losses. Purchased loans are accounted for under ASC 310-30,
"Loans and Debt Securities with Deteriorated Credit Quality," when the loans have evidence of credit deterioration since
origination, and when at the date of the acquisition, it is probable that Heartland will not collect all contractually required
principal and interest payments. Evidence of credit quality deterioration at the purchase date includes statistics such as past due
and nonaccrual status. Generally, acquired loans that meet Heartland’s definition for nonaccrual status fall within the scope of
ASC 310-30. The difference between contractually required payments at acquisition and the cash flows expected to be collected
at acquisition is referred to as the nonaccretable difference, which is included in the carrying value of the loans. Subsequent
decreases to the expected cash flows of the loan will generally result in a provision for loan losses. Subsequent increases in cash
flows result in a reversal of the provision for loan losses to the extent of prior charges, or a reclassification of the difference
from nonaccretable to accretable with a positive impact on future interest income. Further, any excess of cash flows expected at
acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the
remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.
The carrying amount of the acquired loans at December 31, 2019, and December 31, 2018, consisted of purchased impaired and
nonimpaired purchased loans as summarized in the following table, in thousands:
December 31, 2019
Non
Impaired
Purchased
Loans
Impaired
Purchased
Loans
Total
Purchased
Loans
Impaired
Purchased
Loans
December 31, 2018
Non
Impaired
Purchased
Loans
Total
Purchased
Loans
Commercial
Commercial real estate
Agricultural and agricultural real estate
Residential real estate
Consumer loans
Total Covered Loans
$
7,181
$ 317,689
$ 324,870
$
3,801
$ 243,693
$ 247,494
4,581
1,145,027
1,149,608
—
—
569
9,434
181,453
82,700
9,434
181,453
83,269
158
—
231
—
1,098,171
1,098,329
27,115
184,389
75,773
27,115
184,620
75,773
$
12,331
$1,736,303
$1,748,634
$
4,190
$1,629,141
$ 1,633,331
Changes in accretable yield on acquired loans with evidence of credit deterioration at the date of acquisition for the years ended
December 31, 2019, and December 31, 2018, are presented in the table below, in thousands:
Balance at beginning of year
Original yield discount, net, at date of acquisitions
Accretion
Reclassification from nonaccretable difference(1)
Balance at end of year
For the Years Ended
December 31, 2019
December 31, 2018
$
$
227
$
64
(2,479)
2,581
393
$
57
508
(1,743)
1,405
227
(1) Represents increases in estimated cash flows expected to be received, primarily due to lower estimated credit losses.
For loans acquired since January 2015, on the acquisition dates the preliminary estimate of the contractually required payments
receivable for all loans with evidence of credit deterioration since origination was $50.0 million and the estimated fair value of
the loans was $31.6 million. At December 31, 2019, a majority of these loans were valued based upon the liquidation value of
the underlying collateral, because the expected cash flows are primarily based on the liquidation of underlying collateral and the
timing and amount of the cash flows could not be reasonably estimated. There was an allowance for loan losses of $86,000 and
$57,000, at December 31, 2019, and December 31, 2018, respectively, related to these ASC 310-30 loans. Provision expense of
$29,000 and $719,000 was recorded for the years ended December 31, 2019, and 2018, respectively, related to these ASC
310-30 loans.
For loans acquired since January 2015, the preliminary estimate on the acquisition dates of the contractually required payments
receivable for all nonimpaired loans acquired was $4.59 billion and the estimated fair value of the loans was $4.47 billion.
98
Loans are made in the normal course of business to directors, officers and principal holders of equity securities of Heartland.
The terms of these loans, including interest rates and collateral, are similar to those prevailing for comparable transactions and
do not involve more than a normal risk of collectability. Changes in such loans during the years ended December 31, 2019 and
2018, were as follows, in thousands:
Balance at beginning of year
Advances
Repayments
Balance at end of year
SIX
ALLOWANCE FOR LOAN LOSSES
2019
124,983
91,287
(31,702)
184,568
$
$
2018
115,673
44,771
(35,461)
124,983
$
$
Changes in the allowance for loan losses for the years ended December 31, 2019, 2018 and 2017 were as follows, in thousands:
Balance at beginning of year
Provision for loan losses
Recoveries on loans previously charged-off
Loans charged-off
Balance at end of year
2019
2018
2017
$
61,963
$
55,686
$
16,657
5,365
24,013
3,549
54,324
15,563
3,670
(13,590)
(21,285)
(17,871)
$
70,395
$
61,963
$
55,686
Changes in the allowance for loan losses by loan category for the years ended December 31, 2019, and December 31, 2018,
were as follows, in thousands:
Balance at December 31, 2018
$
24,505
$
25,538
$
4,953
$
1,785
$
5,182
$
61,963
Commercial
Commercial
Real Estate
Agricultural
Residential
Real Estate
Consumer
Total
Charge-offs
Recoveries
Provision
(7,294)
1,743
8,790
(272)
1,391
4,086
(2,656)
536
2,784
(407)
73
(13)
Balance at December 31, 2019
$
27,744
$
30,743
$
5,617
$
1,438
$
4,853
$
(2,961)
(13,590)
1,622
1,010
5,365
16,657
70,395
Balance at December 31, 2017
$
18,098
$
21,950
$
4,258
$
2,224
$
9,156
$
55,686
Commercial
Commercial
Real Estate
Agricultural
Residential
Real Estate
Consumer
Total
Charge-offs
Recoveries
Provision
(7,916)
978
13,345
(1,977)
1,047
4,518
(1,437)
13
2,119
(372)
96
(163)
Balance at December 31, 2018
$
24,505
$
25,538
$
4,953
$
1,785
$
5,182
$
(9,583)
(21,285)
1,415
4,194
3,549
24,013
61,963
Management allocates the allowance for loan losses by pools of risk within each loan portfolio. The allocation of the allowance
for loan losses by loan portfolio is made for analytical purposes and is not necessarily indicative of the trend of future loan
losses in any particular category. The total allowance for loan losses is available to absorb losses from any segment of the loan
portfolio.
99
SEVEN
PREMISES, FURNITURE AND EQUIPMENT
Premises, furniture and equipment, excluding those held for sale, as of December 31, 2019, and December 31, 2018, were as
follows, in thousands:
Land and land improvements
Buildings and building improvements
Furniture and equipment
Total
Less accumulated depreciation
Premises, furniture and equipment, net
2019
$
60,444
176,838
65,617
302,899
(105,341)
$ 197,558
$
2018
52,442
170,160
66,941
289,543
(102,125)
$ 187,418
Depreciation expense on premises, furniture and equipment was $12.0 million, $11.7 million and $11.1 million for 2019, 2018
and 2017, respectively. Depreciation expense on buildings and building improvements of $6.2 million, $5.8 million and $5.2
million for the years ended December 31, 2019, 2018, and 2017, respectively, is recorded in occupancy expense on the
consolidated statements of income. Depreciation expense on furniture and equipment of $5.8 million, $6.0 million and $6.0
million for the years ended December 31, 2019, 2018, and 2017, respectively, is recorded in furniture and equipment expense
on the consolidated statements of income.
EIGHT
GOODWILL, CORE DEPOSIT INTANGIBLES AND OTHER INTANGIBLE ASSETS
Heartland had goodwill of $446.3 million at December 31, 2019, and $391.7 million at December 31, 2018. Heartland conducts
its annual internal assessment of the goodwill both collectively and at its subsidiaries as of September 30. There was no
goodwill impairment as of the most recent assessment.
Heartland recorded $19.2 million of goodwill and $1.8 million of core deposit intangibles in connection with the acquisition of
substantially all of the assets and substantially all of the deposits and certain other liabilities of Rockford Bank and Trust
Company, headquartered in Rockford, Illinois on November 30, 2019.
Heartland recorded $35.4 million of goodwill and $11.4 million of core deposit intangibles in connection with the acquisition of
Blue Valley Ban Corp., parent company of Bank of Blue Valley, headquartered in Overland Park, Kansas on May 10, 2019.
Heartland recorded $121.4 million of goodwill and $13.9 million of core deposit intangibles in connection with the acquisition
of First Bank Lubbock Bancshares, Inc., parent company of First Bank & Trust Company, headquartered in Lubbock, Texas on
May 18, 2018.
Heartland recorded $33.7 million of goodwill and $7.7 million of core deposit intangibles in connection with the acquisition of
Signature Bancshares, Inc., parent company of Signature Bank, headquartered in Minnetonka, Minnesota on February 23, 2018.
The core deposit intangibles recorded with the Blue Valley Ban Corp., First Bank Lubbock Bancshares, Inc., and Signature
Bancshares, Inc. acquisitions are not deductible for tax purposes and are expected to be amortized over a period of 10 years on
an accelerated basis.
Goodwill related to the Blue Valley Ban Corp., First Bank Lubbock Bancshares, Inc., and Signature Bancshares, Inc.
acquisitions resulted from expected operational synergies, increased market presence, cross-selling opportunities, and expanded
business lines and is not deductible for tax purposes.
The core deposit intangibles and goodwill recorded with the Rockford Bank and Trust Company acquisition of substantially all
of the assets and substantially all of the deposits and certain other liabilities, is deductible for tax purposes and the core deposit
intangibles are expected to be amortized over a period of 10 years on an accelerated basis.
100
Other intangible assets consist of core deposit intangibles, mortgage servicing rights, customer relationship intangible and
commercial servicing rights. The gross carrying amount of other intangible assets and the associated accumulated amortization
at December 31, 2019, and December 31, 2018, are presented in the table below, in thousands:
Amortizing intangible assets:
Core deposit intangibles
Customer relationship intangible
Mortgage servicing rights
Commercial servicing rights
Total
December 31, 2019
December 31, 2018
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
$ 96,821
1,177
7,886
6,952
$ 112,836
$
$
48,338
972
2,265
5,837
57,412
$ 48,483
205
5,621
1,115
$ 55,424
$ 83,640
1,177
42,228
6,834
$ 133,879
$
$
36,403
935
12,865
5,125
55,328
$ 47,237
242
29,363
1,709
$ 78,551
On April 30, 2019, Dubuque Bank and Trust Company closed on the sale of substantially all of its servicing rights portfolio,
which contained loans with an unpaid principal balance of $3.31 billion to PNC Bank, N.A. The transaction qualified as a sale,
and $20.6 million of mortgage servicing rights were de-recognized on the consolidated balance sheet as of June 30, 2019. Cash
of approximately $36.6 million was received during 2019, and Heartland recorded a gain on the sale of this portfolio of
approximately $14.5 million. In the agreement, which included customary terms and conditions, Dubuque Bank and Trust
Company provided interim servicing of the loans until the transfer date, which was August 1, 2019.
The following table shows the estimated future amortization expense for amortizable intangible assets, in thousands:
Year ending December 31,
2020
2021
2022
2023
2024
Thereafter
Total
Core
Deposit
Intangibles
Customer
Relationship
Intangible
Mortgage
Servicing
Rights
Commercial
Servicing
Rights
Total
$
$
10,577
8,691
7,102
6,201
5,108
10,804
48,483
$
$
37
35
34
34
33
32
205
$
$
1,405
1,205
1,004
803
602
602
5,621
$
$
301
267
235
155
86
71
1,115
$
$
12,320
10,198
8,375
7,193
5,829
11,509
55,424
Projections of amortization expense for mortgage servicing rights are based on existing asset balances and the existing interest
rate environment as of December 31, 2019. Heartland's actual experience may be significantly different depending upon
changes in mortgage interest rates and market conditions. Mortgage loans serviced for others at First Bank & Trust were $616.7
million and $648.9 million as of December 31, 2019, and December 31, 2018, respectively. Custodial escrow balances
maintained in connection with the mortgage loan servicing portfolio at First Bank & Trust were approximately $5.0 million and
$5.9 million as of December 31, 2019, and December 31, 2018, respectively.
The fair value of Heartland's mortgage servicing rights at First Bank & Trust was estimated at $5.6 million and $7.0 million at
December 31, 2019, and December 31, 2018, respectively, and is comprised of loans serviced for the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
Heartland transferred custodial escrow balances totaling $22.9 million to PNC Bank, N.A. in conjunction with the transfer of
the mortgage servicing rights portfolio on August 1, 2019. Custodial escrow balances maintained in connection with the
mortgage loan servicing portfolio at Dubuque Bank and Trust Company totaled $17.7 million at December 31, 2018.
The fair value of mortgage servicing rights is calculated based upon a discounted cash flow analysis. Cash flow assumptions,
including prepayment speeds, servicing costs and escrow earnings of First Bank & Trust's mortgage servicing rights are
considered in the calculation. The average constant prepayment rate was 14.20% as of December 31, 2019 compared to 10.30%
for the December 31, 2018 valuation. The discount rate was 9.03% for both the December 31, 2019 and December 31, 2018
valuations. The average capitalization rate for 2019 ranged from 80 to 103 basis points compared to a range of 93 to 117 basis
101
points for 2018 since acquisition on May 18, 2018. Fees collected for the servicing of mortgage loans for others were $4.9
million, $9.9 million and $11.6 million for the years ended December 31, 2019, 2018 and 2017, respectively.
The following table summarizes, in thousands, the changes in capitalized mortgage servicing rights for the twelve months
ended December 31, 2019, and December 31, 2018:
Balance at January 1
Originations
Amortization
Sale of mortgage servicing rights
Acquired mortgage servicing rights
Valuation allowance on servicing rights
Balance at December 31
Fair value of mortgage servicing rights
Mortgage servicing rights, net to servicing portfolio
$
$
$
2019
29,363
893
(3,168)
(20,556)
—
(911)
5,621
5,621
0.91 %
$
$
$
2018
23,248
5,045
(5,867)
—
6,995
(58)
29,363
48,680
0.72 %
Heartland's commercial servicing portfolio is comprised of loans guaranteed by the Small Business Administration and United
States Department of Agriculture that have been sold with servicing retained by Heartland, which totaled $82.1 million at
December 31, 2019, and $107.4 million at December 31, 2018. The commercial servicing rights portfolio is separated into two
tranches at the respective Heartland subsidiary, loans with a term of less than 20 years and loans with a term of more than 20
years. Fees collected for the servicing of commercial loans for others were $1.0 million and $1.6 million for the years ended
December 31, 2019 and 2018, respectively.
The fair value of each commercial servicing rights portfolio is calculated based upon a discounted cash flow analysis. Cash
flow assumptions, including prepayment speeds and servicing costs, are considered in the calculation. The range of average
constant prepayment rates for the portfolio valuations was 14.25% and 18.08% as of December 31, 2019, compared to 11.01%
and 13.50% as of December 31, 2018. The discount rate range was 10.65% and 13.94% for the December 31, 2019, valuations
compared to 13.44% and 16.96% for the December 31, 2018 valuations. The capitalization rate ranged from 310 to 445 basis
points at both December 31, 2019 and 2018. The total fair value of Heartland's commercial servicing rights portfolios was
estimated at $1.6 million as of December 31, 2019, and $2.1 million as of December 31, 2018.
The following table summarizes, in thousands, the changes in capitalized commercial servicing rights for the twelve months
ended December 31, 2019, and December 31, 2018:
Balance at January 1,
Originations
Amortization
Purchased commercial servicing rights
Valuation allowance on servicing rights
Balance at December 31,
Fair value of commercial servicing rights
Commercial servicing rights, net to servicing portfolio
$
$
$
2019
2018
$
$
$
1,709
118
(712)
—
—
1,115
1,594
1.36 %
2,609
115
(1,027)
—
12
1,709
2,134
1.59 %
Mortgage and commercial servicing rights are initially recorded at fair value in net gains on sale of loans held for sale when
they are acquired through loan sales. Fair value is based on market prices for comparable servicing contracts, when available, or
based on a valuation model that calculates the present value of estimated future net servicing income.
Mortgage and commercial servicing rights are subsequently measured using the amortization method, which requires the asset
to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of
the underlying loans. Servicing rights are evaluated for impairment at each Heartland subsidiary based upon the fair value of the
assets as compared to the carrying amount. Impairment is recognized through a valuation allowance for specific tranches to the
extent that fair value is less than carrying amount at each Heartland subsidiary. At December 31, 2019, a valuation allowance of
$114,000 was required on the mortgage servicing rights 15-year tranche and a $797,000 valuation allowance was required on
the mortgage servicing rights 30-year tranche. At December 31, 2018, a $20,000 valuation allowance was required on the 15-
102
year tranche and a $38,000 valuation was required on the 30-year tranche for mortgage servicing rights. At both December 31,
2019 and December 31, 2018, no valuation allowance was required on commercial servicing rights with an original term of less
than 20 years and no valuation allowance was required on commercial servicing rights with an original term of greater than 20
years.
The following table summarizes, in thousands, the book value, the fair value of each tranche of the mortgage servicing rights
and any recorded valuation allowance at each respective subsidiary at December 31, 2019, and December 31, 2018:
December 31, 2019
Dubuque Bank and Trust
Company
First Bank & Trust
Total
December 31, 2018
Dubuque Bank and Trust
Company
First Bank & Trust
Total
Book Value
15-Year
Tranche
Fair Value
15-Year
Tranche
Impairment
15-Year
Tranche
Book Value
30-Year
Tranche
Fair Value
30-Year
Tranche
Impairment
30-Year
Tranche
$
$
$
$
— $
— $
— $
— $
— $
1,482
1,368
1,482
$
1,368
$
114
114
5,050
4,253
$
5,050
$
4,253
$
2,195
1,685
3,880
$
$
4,636
1,665
6,301
$
$
— $
20
20
$
20,025
5,516
25,541
$
$
36,901
5,478
42,379
$
$
—
797
797
—
38
38
The following table summarizes, in thousands, the book value, the fair value of each tranche of the commercial servicing rights
and any recorded valuation allowance at each respective subsidiary at December 31, 2019, and December 31, 2018:
Book Value-
Less than
20 Years
Fair Value-
Less than
20 Years
Impairment-
Less than
20 Years
Book Value-
More than
20 Years
Fair Value-
More than
20 Years
Impairment-
More than
20 Years
December 31, 2019
Citywide Banks
Premier Valley Bank
Wisconsin Bank & Trust
Total
December 31, 2018
Citywide Banks
Premier Valley Bank
Wisconsin Bank & Trust
Total
NINE
DEPOSITS
$
$
$
$
— $
— $
— $
— $
— $
1
128
129
1
45
249
295
$
$
$
13
272
285
6
74
411
491
$
$
$
—
—
— $
— $
—
—
135
851
986
18
178
1,218
$
$
161
1,148
1,309
20
184
1,439
$
$
— $
1,414
$
1,643
$
—
—
—
—
—
—
—
—
At December 31, 2019, the scheduled maturities of time certificates of deposit were as follows, in thousands:
2020
2021
2022
2023
2024
Thereafter
$
802,410
268,777
63,822
24,963
20,755
12,316
$ 1,193,043
The aggregate amount of time certificates of deposit in denominations of $100,000 or more as of December 31, 2019, and
December 31, 2018, were $695.8 million and $585.7 million, respectively. The aggregate amount of time certificates of deposit
in denominations of $250,000 or more as of December 31, 2019, and December 31, 2018 were $329.1 million and $307.1
million, respectively.
103
Interest expense on deposits for the years ended December 31, 2019, 2018, and 2017, was as follows, in thousands:
Savings and money market accounts
Time certificates of deposit in denominations of $100,000 or more
Other time deposits
Interest expense on deposits
2019
2018
2017
$
$
47,069
9,344
7,321
63,734
$
$
25,123
4,789
5,755
35,667
$
$
11,107
3,016
4,156
18,279
TEN
SHORT-TERM BORROWINGS
Short-term borrowings, which Heartland defines as borrowings with an original maturity of one year or less, as of
December 31, 2019, and 2018, were as follows, in thousands:
Retail repurchase agreements
Federal funds purchased
Advances from the FHLB
Other short-term borrowings
Total
2019
2018
84,486
2,450
81,198
14,492
182,626
$
$
80,124
35,400
100,838
10,648
227,010
$
$
At December 31, 2019, Heartland had one non-revolving credit facility with an unaffiliated bank, which provided a borrowing
capacity not to exceed $70.0 million when combined with the outstanding balance on the amortizing term loan discussed in
Note 11. The credit facility is non-revolving at a rate of 2.75% over LIBOR, and any outstanding balance is due on June 14,
2020. Heartland renewed its $30.0 million revolving credit line agreement with the same unaffiliated bank on June 14, 2019.
This revolving credit line agreement is included in short-term borrowings, and the primary purpose of this credit line agreement
is to provide liquidity to Heartland. Heartland had no advances on this line during 2019, and the outstanding balance was $0 at
both December 31, 2019, and December 31, 2018.
The agreement with the unaffiliated bank for the credit facility contains specific financial covenants, all of which Heartland was
in compliance with at December 31, 2019, and December 31, 2018.
All retail repurchase agreements as of December 31, 2019, and 2018, were due within twelve months.
Average and maximum balances and rates on aggregate short-term borrowings outstanding during the years ended
December 31, 2019, December 31, 2018 and December 31, 2017, were as follows, in thousands:
Maximum month-end balance
Average month-end balance
Weighted average interest rate for the year
Weighted average interest rate at year-end
2019
$ 226,096
128,098
2018
$ 229,890
152,391
2017
$ 324,691
182,846
1.38 %
1.21 %
1.19 %
1.96 %
0.36 %
1.11 %
Dubuque Bank and Trust Company and Bank of Blue Valley are participants in the Borrower-In-Custody of Collateral Program
at the Federal Reserve Bank of Chicago and the Federal Reserve Bank of Kansas City, respectively, which provides the
capability to borrow short-term funds under the Discount Window Program. Advances under this program are collateralized by
a portion of the commercial loan portfolio of Dubuque Bank and Trust Company in the amount of $85.9 million at
December 31, 2019, and $96.2 million at December 31, 2018. Advances collateralized by a portion of Bank of Blue Valley's
commercial loan portfolio were $19.7 million at December 31, 2019, and $16.2 million at December 31, 2018. There were no
borrowings under the Discount Window Program outstanding at year-end 2019 and 2018.
104
ELEVEN
OTHER BORROWINGS
Other borrowings, which Heartland defines as borrowings with an original maturity date of more than one year, outstanding at
December 31, 2019 and 2018, are shown in the table below, net of discount and issuance costs amortization, in thousands:
Advances from the FHLB; weighted average interest rates were 4.08% and 4.03% at December
31, 2019 and 2018, respectively
$
Trust preferred securities
Senior notes
Note payable to unaffiliated bank
Contracts payable for purchase of real estate and other assets
Subordinated notes
Other borrowings
Total
2019
2018
2,835
$
3,399
145,343
130,913
—
51,417
1,892
74,286
—
5,000
58,417
1,953
74,143
1,080
$
275,773
$
274,905
The Heartland banks are members of the FHLB of Des Moines, Chicago, Dallas, San Francisco and Topeka. At December 31,
2019, none of Heartland's FHLB advances had call features. The advances from the FHLB are collateralized by a portion of the
Heartland banks' investments in FHLB stock of $11.3 million and $13.3 million at December 31, 2019 and 2018, respectively.
In addition, the FHLB advances are collateralized with pledges of one- to four-family residential mortgages, commercial and
agricultural mortgages and securities totaling $4.11 billion at December 31, 2019, and $3.71 billion at December 31, 2018. At
December 31, 2019, Heartland had $1.56 billion of remaining FHLB borrowing capacity.
At December 31, 2019, Heartland had fifteen wholly-owned trust subsidiaries that were formed to issue trust preferred
securities, which includes trust subsidiaries acquired in acquisitions since 2013. The proceeds from the offerings were used to
purchase junior subordinated debentures from Heartland and were in turn used by Heartland for general corporate purposes.
Heartland has the option to shorten the maturity date to a date not earlier than the callable date. Heartland may not shorten the
maturity date without prior approval of the Board of Governors of the Federal Reserve System, if required. Early redemption is
permitted under certain circumstances, such as changes in tax or regulatory capital rules. Heartland repurchased and retired $2.6
million of Heartland Statutory Trust VII in 2019. In connection with these offerings of trust preferred securities, the balance of
deferred issuance costs included in other borrowings was $90,000 as of December 31, 2019. These deferred costs are amortized
on a straight-line basis over the life of the debentures. The majority of the interest payments are due quarterly. A schedule of
Heartland’s trust preferred offerings outstanding, as of December 31, 2019, were as follows, in thousands:
105
Amount
Issued
Interest
Rate
Interest Rate as
of 12/31/19(1)
Maturity
Date
Callable
Date
Heartland Financial Statutory Trust IV
$
10,310
2.75% over LIBOR
4.65%
Heartland Financial Statutory Trust V
20,619
1.33% over LIBOR
Heartland Financial Statutory Trust VI
20,619
1.48% over LIBOR
Heartland Financial Statutory Trust VII
Morrill Statutory Trust I
Morrill Statutory Trust II
Sheboygan Statutory Trust I
CBNM Capital Trust I
Citywide Capital Trust III
Citywide Capital Trust IV
Citywide Capital Trust V
OCGI Statutory Trust III
OCGI Capital Trust IV
BVBC Capital Trust II
BVBC Capital Trust III
Total trust preferred offerings
Less: deferred issuance costs
18,042
9,088
1.48% over LIBOR
3.25% over LIBOR
8,754
6,528
4,409
6,438
4,296
2.85% over LIBOR
2.95% over LIBOR
3.25% over LIBOR
2.80% over LIBOR
2.20% over LIBOR
11,748
1.54% over LIBOR
2,996
5,342
7,197
9,047
3.65% over LIBOR
2.50% over LIBOR
3.25% over LIBOR
1.60% over LIBOR
145,433
(90)
$ 145,343
3.32
3.37
3.39
5.20
4.75
4.85
5.14
4.74
4.11
3.43
5.48
4.39
5.16
3.54
(2)
(3)
(4)
(5)
03/17/2034
03/17/2020
04/07/2036
04/07/2020
09/15/2037
03/15/2020
09/01/2037
12/26/2032
03/01/2020
03/26/2020
12/17/2033
03/17/2020
09/17/2033
03/17/2020
12/15/2034
03/15/2020
12/19/2033
04/23/2020
09/30/2034
05/23/2020
07/25/2036
03/15/2020
(6)
(7)
09/30/2032
03/30/2020
12/15/2034
03/15/2020
04/24/2033
04/24/2020
09/30/2035
03/30/2020
(1) Effective weighted average interest rate as of December 31, 2019, was 4.80% due to interest rate swap transactions as
discussed in Note 12 to Heartland's consolidated financial statements.
(2) Effective interest rate as of December 31, 2019, was 5.01% due to an interest rate swap transaction as discussed in Note 12
to Heartland's consolidated financial statements.
(3) Effective interest rate as of December 31, 2019, was 4.69% due to an interest rate swap transaction as discussed in Note 12
to Heartland's consolidated financial statements.
(4) Effective interest rate as of December 31, 2019, was 3.87% due to an interest rate swap transaction as discussed in Note 12
to Heartland's consolidated financial statements.
(5) Effective interest rate as of December 31, 2019, was 3.83% due to an interest rate swap transaction as discussed in Note 12
to Heartland's consolidated financial statements.
(6) Effective interest rate as of December 31, 2019, was 5.53% due to an interest rate swap transaction as discussed in Note 12
to Heartland's consolidated financial statements.
(7) Effective interest rate as of December 31, 2019, was 4.37% due to an interest rate swap transaction as discussed in Note 12
to Heartland's consolidated financial statements.
For regulatory purposes, $145.2 million and $130.9 million of the trust preferred securities qualified as Tier 1 capital as of
December 31, 2019 and 2018, respectively.
All of the remaining senior notes matured in 2019. Total senior notes outstanding were $0 at December 31, 2019, and $5.0
million on December 31, 2018.
In addition to the credit line described in Note 10, "Short-Term Borrowings," Heartland entered into another non-revolving
credit facility with the same unaffiliated bank, which provided a borrowing capacity not to exceed $70.0 million when
combined with the outstanding balance on its then existing amortizing term loan with the same unaffiliated bank. The
borrowing capacity was reduced to $70.0 million from $75.0 million on June 14, 2018. On May 10, 2016, $40.0 million of this
variable rate non-revolving credit facility was swapped to a fixed rate of 2.50% over LIBOR with an amortizing term of five
years, which is due in April 2021, and was reclassified as long-term debt. At December 31, 2019, a balance of $51.4 million
was outstanding on this term debt compared to $58.4 million at December 31, 2018. At December 31, 2019, $14.8 million was
available on the non-revolving credit facility, of which no balance was outstanding.
On December 17, 2014, Heartland issued $75.0 million of subordinated notes with a maturity date of December 30, 2024. The
notes were issued at par with an underwriting discount of $1.1 million. The interest rate on the notes is fixed at 5.75% per
106
annum, payable semi-annually. The notes were sold to qualified institutional buyers, and the proceeds are being used for
general corporate purposes. For regulatory purposes, $74.3 million of the subordinated notes qualified as Tier 2 capital as of
December 31, 2019. In connection with the sale of the notes, the balance of deferred issuance costs included in other
borrowings was $189,000 at December 31, 2019, and $227,000 at December 31, 2018. These deferred costs are amortized on a
straight-line basis over the life of the notes.
Future payments at December 31, 2019, for other borrowings follow in the table below, in thousands. FHLB advances,
wholesale repurchase agreements, convertible debt and subordinated debt are included in the table at their call date.
2020
2021
2022
2023
2024
Thereafter
Total
$
$
8,705
24,682
4,657
3,037
77,437
157,255
275,773
TWELVE
DERIVATIVE FINANCIAL INSTRUMENTS
Heartland uses derivative financial instruments as part of its interest rate risk management strategy. As part of the strategy,
Heartland considers the use of interest rate swaps, caps, floors and collars and certain interest rate lock commitments and
forward sales of securities related to mortgage banking activities. Heartland's current strategy includes the use of interest rate
swaps, interest rate lock commitments and forward sales of mortgage securities. In addition, Heartland is facilitating back-to-
back loan swaps to assist customers in managing interest rate risk. Heartland's objectives are to add stability to its net interest
margin and to manage its exposure to movement in interest rates. The contract or notional amount of a derivative is used to
determine, along with the other terms of the derivative, the amounts to be exchanged between the counterparties. Heartland is
exposed to credit risk in the event of nonperformance by counterparties to financial instruments. Heartland minimizes this risk
by entering into derivative contracts with large, stable financial institutions. Heartland has not experienced any losses from
nonperformance by these counterparties. Heartland monitors counterparty risk in accordance with the provisions of ASC 815.
In addition, interest rate-related derivative instruments generally contain language outlining collateral pledging requirements for
each counterparty. Collateral must be posted when the market value exceeds certain threshold limits which are determined by
credit ratings of each counterparty. Heartland was required to pledge $1.9 million of cash as collateral at December 31, 2019,
and no cash at December 31, 2018. At December 31, 2019, no collateral was required to be pledged by Heartland's
counterparties compared to $770,000 collateral at December 31, 2018.
Heartland's derivative and hedging instruments are recorded at fair value on the consolidated balance sheets. See Note 20, "Fair
Value," for additional fair value information and disclosures.
Cash Flow Hedges
Heartland has variable rate funding which creates exposure to variability in interest payments due to changes in interest rates.
To manage the interest rate risk related to the variability of interest payments, Heartland has entered into various interest rate
swap agreements. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to
interest expense as interest payments are received or made on Heartland's variable-rate liabilities. For the twelve months ended
December 31, 2019, the change in net unrealized losses on cash flow hedges reflects changes in the fair value of the swaps and
reclassification from accumulated other comprehensive income to interest expense totaling $197,000. For the next twelve
months, Heartland estimates that cash payments and reclassification from accumulated other comprehensive income to interest
expense will total $406,000.
Heartland entered into six forward-starting interest rate swap transactions to effectively convert Heartland Financial Statutory
Trust IV, V, VI, and VII, which total $85.0 million, as well as Morrill Statutory Trust I and II, which total $20.0 million, from
variable rate subordinated debentures to fixed rate debt. For accounting purposes, these six swap transactions are designated as
cash flow hedges of the changes in LIBOR, the benchmark interest rate being hedged, associated with the interest payments
made on $105.0 million of Heartland's subordinated debentures that reset quarterly on a specified reset date. At inception,
Heartland asserted that the underlying principal balance would remain outstanding throughout the hedge transaction making it
probable that sufficient LIBOR-based interest payments would exist through the maturity date of the swaps. During the first
107 quarter of 2019, the interest rate swap transactions associated with Morrill Statutory Trust I and II, totaling $20.0 million,
matured and the fixed rate debt has been converted to variable rate subordinated debentures.
Heartland entered into an interest rate swap transaction on May 10, 2016, to effectively convert $40.0 million of amortizing
term debt from variable rate debt to fixed rate debt. For accounting purposes, this swap is designated as a cash flow hedge of
the changes in LIBOR, the benchmark interest rate being hedged, associated with the interest payments on the amortizing term
debt that resets monthly on a specified reset date. The swap expires on May 10, 2021.
On May 18, 2018, in connection with the acquisition of First Bank Lubbock Bancshares, Inc., Heartland acquired cash flow
hedges related to OCGI Statutory Trust III and OCGI Capital Trust IV with notional amounts of $3.0 million and $6.0 million,
respectively. The cash flow hedges effectively convert OCGI Statutory Trust III and OGCI Capital Trust IV from variable rate
subordinated debentures to fixed rate debt. These swaps are designated as cash flow hedges of the changes in LIBOR, the
benchmark interest rate being hedged, associated with the interest payments made on $9.0 million of Heartland's subordinated
debentures that reset quarterly on a specified reset date.
The table below identifies the balance sheet category and fair values of Heartland's derivative instruments designated as cash
flow hedges at December 31, 2019, and December 31, 2018, in thousands:
December 31, 2019
Interest rate swap
Interest rate swap
Interest rate swap
Interest rate swap
Interest rate swap
Interest rate swap
Interest rate swap
Interest rate swap
December 31, 2018
Interest rate swap
Interest rate swap
Interest rate swap
Interest rate swap
Interest rate swap
Interest rate swap
Interest rate swap
Interest rate swap
Interest rate swap
Interest rate swap
Notional
Amount
Fair
Value
Balance Sheet
Category
Receive
Rate
Weighted
Average
Pay Rate
Maturity
$
25,000
$
(167) Other Liabilities
1.900 %
2.255 % 03/17/2021
20,000
25,667
25,750
20,000
20,000
6,000
3,000
(67) Other Liabilities
135
Other Assets
(1,384) Other Liabilities
(614) Other Liabilities
(561) Other Liabilities
(15) Other Liabilities
(9) Other Liabilities
2.043
4.215
4.280
1.894
1.907
1.894
1.831
3.355
3.674
5.425
2.390
2.352
1.866
1.878
01/07/2020
05/10/2021
07/24/2028
06/15/2024
03/01/2024
06/15/2021
06/30/2021
$
25,000
$
191
Other Assets
2.788 %
2.255 % 03/17/2021
20,000
10,000
10,000
29,667
28,750
20,000
20,000
6,000
3,000
(177) Other Liabilities
29
28
763
Other Assets
Other Assets
Other Assets
(572) Other Liabilities
157
185
105
51
Other Assets
Other Assets
Other Assets
Other Assets
2.408
2.822
2.788
4.887
5.004
2.788
2.738
2.788
2.787
3.355
1.674
1.658
3.674
5.425
2.390
2.352
1.866
1.878
01/07/2020
03/26/2019
03/18/2019
05/10/2021
07/24/2028
06/15/2024
03/01/2024
06/15/2021
06/30/2021
108
The table below identifies the gains and losses recognized on Heartland's derivative instruments designated as cash flow hedges
for the years ended December 31, 2019, and December 31, 2018, in thousands:
Recognized in
OCI
Amount of Gain
(Loss)
Effective Portion
Reclassified from AOCI into
Income
Ineffective Portion
Recognized in Income on
Derivatives
Category
Amount of
Gain (Loss)
Category
Amount of
Gain (Loss)
$
$
(3,442)
Interest expense
995
Interest Expense
$
$
(197)
Other income
(179)
Other Income
$
$
—
—
December 31, 2019
Interest rate swap
December 31, 2018
Interest rate swap
Fair Value Hedges
Heartland uses interest rate swaps to convert certain long term fixed rate loans to floating rates to hedge interest rate risk
exposure. Heartland uses hedge accounting in accordance with ASC 815, with the unrealized gains and losses, representing the
change in fair value of the derivative and the change in fair value of the risk being hedged on the related loan, being recorded in
the consolidated statements of income. The ineffective portions of the unrealized gains or losses, if any, are recorded in interest
income and interest expense in the consolidated statements of income. Heartland uses statistical regression to assess hedge
effectiveness, both at the inception of the hedge as well as on a continual basis. The regression analysis involves regressing the
periodic change in the fair value of the hedging instrument against the periodic changes in the fair value of the asset being
hedged due to changes in the hedge risk.
Heartland was required to pledge $3.4 million and $2.5 million of cash as collateral for these fair value hedges at December 31,
2019, and December 31, 2018, respectively.
The table below identifies the notional amount, fair value and balance sheet category of Heartland's fair value hedges at
December 31, 2019, and December 31, 2018, in thousands:
Notional Amount
Fair Value
Balance Sheet Category
December 31, 2019
Fair value hedges
Fair value hedges
December 31, 2018
Fair value hedges
Fair value hedges
$
$
$
— $
$
$
21,250
19,820
15,064
—
Other assets
(1,253)
Other liabilities
74
(339)
Other assets
Other liabilities
The table below identifies the gains and losses recognized on Heartland's fair value hedges for the years ended December 31,
2019, and December 31, 2018, in thousands:
Amount of Gain (Loss)
Income Statement Category
December 31, 2019
Fair value hedges
December 31, 2018
Fair value hedges
$
$
(988)
Interest income
734
Interest income
Embedded Derivatives
Heartland has fixed rate loans with embedded derivatives. The loans contain terms that affect the cash flows or value of the loan
similar to a derivative instrument, and therefore are considered to contain an embedded derivative. The embedded derivatives
are bifurcated from the loans because the terms of the derivative instrument are not clearly and closely related to the loans. The
embedded derivatives are recorded at fair value on the consolidated balance sheets as a part of other assets, and changes in the
fair value are a component of noninterest income. The table below identifies the notional amount, fair value and balance sheet
category of Heartland's embedded derivatives as of December 31, 2019, and December 31, 2018, in thousands:
109
December 31, 2019
Embedded derivatives
Embedded derivatives
December 31, 2018
Embedded derivatives
Embedded derivatives
Notional Amount
Fair Value
Balance Sheet Category
$
$
$
9,627
$
— $
11,266
$
2,231
465
—
453
(54)
Other assets
Other liabilities
Other assets
Other liabilities
The table below identifies the gains and losses recognized on Heartland's embedded derivatives for the years ended
December 31, 2019 and December 31, 2018, in thousands:
Amount of Gain (Loss)
Income Statement Category
December 31, 2019
Embedded derivatives
December 31, 2018
Embedded derivatives
$
$
66
Other noninterest income
339
Other noninterest income
Back-to-Back Loan Swaps
Heartland has interest rate swap loan relationships with customers to meet their financing needs. Upon entering into these loan
swaps, Heartland enters into offsetting positions with counterparties in order to minimize interest rate risk. These back-to-back
loan swaps qualify as free standing financial derivatives with the fair values reported in other assets and other liabilities on the
consolidated balance sheets. Heartland was required to post $20.2 million and $2.0 million as of December 31, 2019, and
December 31, 2018, respectively, as collateral related to these back-to-back swaps. Heartland's counterparties were required to
pledge $0 and $680,000 as of December 31, 2019 and December 31, 2018, respectively, related to these back-to-back swaps.
Any gains and losses on these back-to-back swaps are recorded in noninterest income on the consolidated statements of income,
and for the years ended December 31, 2019, and December 31, 2018, no gains or losses were recognized. The table below
identifies the balance sheet category and fair values of Heartland's derivative instruments designated as loan swaps at
December 31, 2019 and 2018, in thousands:
December 31, 2019
Customer interest rate swaps
Customer interest rate swaps
December 31, 2018
Customer interest rate swaps
Customer interest rate swaps
Notional
Amount
Fair
Value
Balance Sheet
Category
$
374,191
$
16,927
Other Assets
374,191
(16,927) Other Liabilities
$
211,246
$
4,449
Other Assets
211,246
(4,449) Other Liabilities
Weighted
Average
Receive
Rate
Weighted
Average
Pay
Rate
4.68 %
4.05 %
5.10 %
4.96 %
4.05 %
4.68 %
4.96 %
5.10 %
Other Free Standing Derivatives
Heartland has entered into interest rate lock commitments to originate residential mortgage loans held for sale and forward
commitments to sell residential mortgage loans and mortgage backed securities that are considered derivative instruments.
Heartland enters into forward commitments for the future delivery of residential mortgage loans when interest rate lock
commitments are entered into in order to economically hedge the effect of future changes in interest rates on the commitments
to fund the loans as well as on residential mortgage loans available for sale. The fair value of these commitments is recorded on
the consolidated balance sheets with the changes in fair value recorded in the consolidated statements of income as a component
of gains on sale of loans held for sale. These derivative contracts are designated as free standing derivative contracts and are not
designated against specific assets and liabilities on the consolidated balance sheets or forecasted transactions and therefore do
not qualify for hedge accounting treatment. Heartland was required to pledge $0 and $35,000 at December 31, 2019, and
December 31, 2018, respectively, as collateral for these forward commitments. Heartland's counterparties were required to
pledge no cash as collateral at both December 31, 2019, and December 31, 2018, as collateral for these forward commitments.
110 Heartland acquired undesignated interest rate swaps in 2015. These swaps were entered into primarily for the benefit of
customers seeking to manage their interest rate risk and are not designated against specific assets or liabilities on the
consolidated balance sheet or forecasted transactions and therefore do not qualify for hedge accounting in accordance with ASC
815. These swaps are carried at fair value on the consolidated balance sheets as a component of other liabilities, with changes in
the fair value recorded as a component of other noninterest income.
The table below identifies the balance sheet category and fair values of Heartland's other free standing derivative instruments
not designated as hedging instruments at December 31, 2019, and December 31, 2018, in thousands:
Notional
Amount
Fair
Value
Balance Sheet
Category
December 31, 2019
Interest rate lock commitments (mortgage)
$
20,356
$
Forward commitments
Forward commitments
Undesignated interest rate swaps
Undesignated interest rate swaps
December 31, 2018
16,000
36,500
9,627
—
Interest rate lock commitments (mortgage)
$
22,451
$
Forward commitments
Forward commitments
Undesignated interest rate swaps
Undesignated interest rate swaps
—
51,500
11,266
2,231
681
15
Other Assets
Other Assets
(113) Other Liabilities
(465) Other Liabilities
—
Other Assets
725
—
Other Assets
Other Assets
(399) Other Liabilities
(453) Other Liabilities
54
Other Assets
The table below identifies the income statement category of the gains and losses recognized in income on Heartland's other free
standing derivative instruments not designated as hedging instruments for the years ended December 31, 2019, and
December 31, 2018, in thousands:
Income Statement Category
Year-to-Date
Gain (Loss)
Recognized
December 31, 2019
Interest rate lock commitments (mortgage)
Net gains on sale of loans held for sale
$
Forward commitments
Forward commitments
Undesignated interest rate swaps
December 31, 2018
Net gains on sale of loans held for sale
Net gains on sale of loans held for sale
Other noninterest income
18
15
287
(66)
Interest rate lock commitments (mortgage)
Net gains on sale of loans held for sale
$
(3,269)
Forward commitments
Forward commitments
Undesignated interest rate swaps
Net gains on sale of loans held for sale
Net gains on sale of loans held for sale
Other noninterest income
(170)
(161)
339
111
THIRTEEN
INCOME TAXES
The current income tax provision reflects the tax consequences of revenue and expenses currently taxable or deductible on
various income tax returns for the year reported. The deferred income tax provision generally reflects the net change in deferred
income tax assets and liabilities during the year, excluding any deferred income tax assets and liabilities of acquired businesses.
The components of the provision for income taxes for the years ended December 31, 2019, 2018, and 2017 were as follows, in
thousands:
Current:
Federal
State
Total current expense
Deferred:
Federal
State
Total deferred expense (benefit)
Total income tax expense
2019
2018
2017
$
$
$
$
$
$
$
$
24,106
11,298
35,404
760
(1,174)
(414) $
$
34,990
16,769
8,686
25,455
2,615
145
2,760
28,215
$
$
$
$
$
25,532
5,025
30,557
12,370
893
13,263
43,820
In response to the enactment of the Tax Cuts and Jobs Act on December 22, 2017, which reduced the corporate federal tax rate
from a graduated maximum 35% to a flat 21%, Heartland recorded $10.4 million of income tax expense in 2017 to adjust the
value of its deferred tax assets and liabilities.
Temporary differences between the amounts reported in the financial statements and the tax basis of assets and liabilities result
in deferred taxes. Deferred tax assets and liabilities at December 31, 2019 and 2018, were as follows, in thousands:
2019
2018
Deferred tax assets:
Tax effect of net unrealized loss on securities carried at fair value reflected in stockholders’
equity
$
— $
Tax effect of net unrealized loss on derivatives reflected in stockholders’ equity
Allowance for loan losses
Deferred compensation
Organization and acquisitions costs
Net operating loss carryforwards
Non-accrual loan interest
OREO write-downs
Tax credit projects
Other
Gross deferred tax assets
Valuation allowance
Gross deferred tax assets
563
17,686
8,071
337
18,459
853
921
4,252
2,643
53,785
(12,379)
$
41,406
$
11,148
—
16,682
7,042
319
14,495
863
1,469
5,254
1,961
59,233
(12,125)
47,108
112
Deferred tax liabilities:
Tax effect of net unrealized gain on securities carried at fair value reflected in stockholders’
equity
Tax effect of net unrealized gain on derivatives reflected in stockholders’ equity
Securities
Premises, furniture and equipment
Tax bad debt reserves
Purchase accounting
Prepaid expenses
Servicing rights
Deferred loan fees
Other
Gross deferred tax liabilities
Net deferred tax asset
$
(279) $
—
—
(4,240)
(6,232)
(422)
(7,824)
(2,176)
(1,421)
(3,342)
(160)
(2,332)
(6,514)
(427)
(6,339)
(203)
(7,933)
(3,321)
(1,870)
(27,806) $
$
13,600
(380)
(27,609)
19,499
$
$
The deferred tax assets (liabilities) related to net unrealized gains (losses) on securities available for sale and on derivatives had
no effect on income tax expense as these gains and losses, net of taxes, were recorded in other comprehensive income (loss),
other than for the effect of the federal tax rate. In 2017, the effect of the enacted change in the federal corporate tax rate resulted
in tax expense totaling $4.5 million to adjust the deferred tax assets (liabilities) related to net unrealized gains (losses) on
securities available for sale and on derivatives.
As a result of acquisitions, Heartland had net operating loss carryforwards for federal income tax purposes of approximately
$31.9 million at December 31, 2019, and $24.4 million at December 31, 2018. The associated deferred tax asset was $6.7
million at December 31, 2019, and $5.1 million at December 31, 2018. These net carryforwards expire during the period from
December 31, 2026, through December 31, 2039, and are subject to an annual limitation of approximately $6.8 million. Net
operating loss carryforwards for state income tax purposes were approximately $163.7 million at December 31, 2019, and
$121.1 million at December 31, 2018. The associated deferred tax asset, net of federal tax, was $11.8 million at December 31,
2019, and $9.4 million at December 31, 2018. These carryforwards have begun to expire and will continue to do so until
December 31, 2039.
A valuation allowance against the deferred tax asset due to the uncertainty surrounding the utilization of these state net
operating loss carryforwards was $10.1 million at December 31, 2019, and $8.1 million at December 31, 2018. During both
2019 and 2018, Heartland had book write-downs on investments that, for tax purposes, would generate capital losses upon
disposal. Due to the uncertainty of Heartland's ability to utilize the potential capital losses, a valuation allowance for these
potential losses totaled $2.3 million at December 31, 2019, and $4.0 million at December 31, 2018. In 2019, Heartland released
valuation allowances of $1.9 million on deferred tax assets for capital losses it expects to realize on the disposal of partnership
investments. Heartland generated capital gains from its 2019 strategic developments, which included various branch sales not
conducted in the ordinary course of its business strategy. As a result of its net capital gains, Heartland was able to realize the
benefit of its capital losses.
Realization of the deferred tax asset over time is dependent upon the existence of taxable income in carryback periods or the
ability to generate sufficient taxable income in future periods. In determining that realization of the deferred tax asset was more
likely than not, Heartland gave consideration to a number of factors, including its taxable income during carryback periods, its
recent earnings history, its expectations for earnings in the future and, where applicable, the expiration dates associated with its
tax carryforwards.
113 The actual income tax expense from continuing operations differs from the expected amounts for the years ended December 31,
2019, 2018, and 2017, (computed by applying the U.S. federal corporate tax rate of 21% for 2019 and 2018 income before
income taxes and 35% for 2017 income before income taxes) are as follows, in thousands:
Computed "expected" tax on net income
Increase (decrease) resulting from:
Nontaxable interest income
State income taxes, net of federal tax benefit
Tax credits
Valuation allowance
Excess tax benefit on stock compensation
Deferred tax adjustment due to Tax Cuts and Jobs Act enactment
Other
Income taxes
Effective tax rates
2019
2018
2017
$
38,665
$
30,495
$
41,682
(3,281)
8,509
(6,860)
(1,648)
(229)
—
(166)
(4,423)
6,976
(4,085)
23
(657)
—
(114)
(9,282)
3,846
(2,390)
405
(1,130)
10,396
293
$
34,990
$
28,215
$
43,820
19.0 %
19.4 %
36.8 %
Heartland's income taxes included solar energy credits totaling $4.0 million, $2.9 million, and $449,000 during 2019, 2018 and
2017, respectively. Federal historic rehabilitation tax credits included in Heartland's income taxes totaled $1.8 million during
2019, $0, and $713,000 in 2019, 2018, and 2017, respectively. Additionally, investments in certain low-income housing
partnerships totaled $6.1 million at December 31, 2019, $6.9 million at December 31, 2018, and $7.8 million at December 31,
2017. These investments generated federal low-income housing tax credits of $1.1 million during 2019 and $1.2 million for the
years ended December 31, 2018 and 2017. These investments are expected to generate federal low-income housing tax credits
of approximately $779,000 for 2020, $538,000 for 2021 through 2023, $322,000 for 2024, $86,000 for 2025 and $34,000 for
2026.
On December 31, 2019, the amount of unrecognized tax benefits was $657,000, including $69,000 of accrued interest and
penalties. On December 31, 2018, the amount of unrecognized tax benefits was $611,000, including $66,000 of accrued interest
and penalties. If recognized, the entire amount of the unrecognized tax benefits would affect the effective tax rate.
The tax years ended December 31, 2016, and later remain subject to examination by the Internal Revenue Service. For state
purposes, the tax years ended December 31, 2014, and later remain open for examination. Heartland does not anticipate any
significant increase or decrease in unrecognized tax benefits during the next twelve months.
FOURTEEN
EMPLOYEE BENEFIT PLANS
Heartland sponsors a defined contribution retirement plan covering substantially all employees. The plan includes matching
contributions and non-elective contributions. Matching contributions and non-elective contributions are limited to a maximum
amount of the participant's wages as defined by federal law.
Heartland's subsidiaries made matching contributions of up to 3% of participants' wages in 2019, 2018, and 2017. Costs
charged to operating expenses with respect to the matching contributions were $3.9 million, $3.5 million, and $3.3 million for
2019, 2018 and 2017, respectively.
Non-elective contributions to this plan are subject to approval by the Heartland Board of Directors. The Heartland subsidiaries
fund and record as an expense all approved contributions. Costs of these contributions, charged to operating expenses, were
$4.8 million, $4.0 million, and $4.1 million for 2019, 2018 and 2017, respectively.
FIFTEEN
COMMITMENTS AND CONTINGENT LIABILITIES
Heartland utilizes a variety of financial instruments in the normal course of business to meet the financial needs of customers
and to manage its exposure to fluctuations in interest rates. These financial instruments include lending related and other
commitments as indicated below as well as derivative instruments shown in Note 12, "Derivative Financial Instruments." The
Heartland banks make various commitments and incur certain contingent liabilities that are not presented in the accompanying
114
consolidated financial statements. The commitments and contingent liabilities include various guarantees, commitments to
extend credit and standby letters of credit.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established
in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a
fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Heartland banks evaluate each customer’s creditworthiness on a case-by-
case basis. The amount of collateral obtained, if deemed necessary by the Heartland banks upon extension of credit, is based
upon management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory,
property, plant and equipment and income-producing commercial properties. Standby letters of credit and financial guarantees
written are conditional commitments issued by the Heartland banks to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan facilities to customers. At December 31, 2019, and at
December 31, 2018, commitments to extend credit aggregated $2.97 billion and $2.47 billion, respectively, and standby letters
of credit aggregated $79.5 million and $71.9 million, respectively.
Heartland enters into commitments to sell mortgage loans to reduce interest rate risk on certain mortgage loans held for sale and
loan commitments, which were recorded in the consolidated balance sheets at their fair values. Heartland does not anticipate
any material loss as a result of the commitments and contingent liabilities. Residential mortgage loans sold to others are
predominantly conventional residential first lien mortgages originated under Heartland's usual underwriting procedures, and are
most often sold on a nonrecourse basis. Heartland's agreements to sell residential mortgage loans in the normal course of
business, primarily to GSE's, which usually require certain representations and warranties on the underlying loans sold, related
to credit information, loan documentation, collateral, and insurability, which if subsequently are untrue or breached, could
require Heartland to repurchase certain loans affected. Heartland had a recorded repurchase obligation of $313,000 at both
December 31, 2019, and December 31, 2018, respectively, which is included in other liabilities on the consolidated balance
sheets. Heartland had no new requests for repurchases during 2019 and 2018.
Heartland has a loss reserve for unfunded commitments, including loan commitments and letters of credit. At December 31,
2019, and December 31, 2018, the reserve for unfunded commitments, which is included in other liabilities on the consolidated
balance sheets, was approximately $248,000 and $172,000, respectively. The appropriateness of the reserve for unfunded
commitments is reviewed on a quarterly basis, based upon changes in the amounts of commitments, delinquencies and
economic conditions.
There are certain legal proceedings pending against Heartland and its subsidiaries at December 31, 2019, that are ordinary
routine litigation incidental to business. While the ultimate outcome of current legal proceedings cannot be predicted with
certainty, it is the opinion of management that the resolution of these legal actions should not have a material effect on
Heartland's consolidated financial position or results of operations.
SIXTEEN
STOCK-BASED COMPENSATION
Heartland may grant, through its Nominating and Compensation Committee (the "Compensation Committee") non-qualified
and incentive stock options, stock appreciation rights, stock awards, restricted stock, restricted stock units and other equity-
based incentive awards, under its 2012 Long-Term Incentive Plan (the "Plan"). The Plan was originally approved by
stockholders in May 2012 and was amended and restated effective March 8, 2016, to increase the number of shares of common
stock authorized for issuance and make certain other changes to the Plan. At December 31, 2019, 348,140 shares of common
stock were reserved for future issuance under awards that may be granted under the Plan to employees and directors of, and
service providers to, Heartland or its subsidiaries.
FASB ASC Topic 718, "Compensation-Stock Compensation" requires the measurement of the cost of employee services
received in exchange for an award of equity instruments based upon the fair value of the award on the grant date. The cost of
the award is based upon its fair value estimated on the date of grant and recognized in the consolidated statements of income
over the vesting period of the award. The fair market value of restricted stock and restricted stock units is based on the fair
value of the underlying shares of common stock on the date of grant. The fair value of stock options is estimated on the date of
grant using the Black-Scholes model. Forfeitures are accounted for as they occur.
The amount of tax benefit related to the exercise, vesting, and forfeiture of equity-based awards reflected as a tax benefit in
Heartland's income tax expense was $266,000 and $674,000 for the years ended December 31, 2019, and 2018, respectively.
115 Options
Although the Plan provides authority to the Compensation Committee to grant stock options, no options were granted during
the years ended December 31, 2019, 2018 and 2017. Prior to 2009, options were typically granted annually with an expiration
date 10 years after the date of grant. Vesting was generally over a five-year service period with portions of a grant becoming
exercisable at three years, four years and five years after the date of grant. The exercise price of stock options granted is
established by the Compensation Committee, but the exercise price for the stock options may not be less than the fair market
value of the shares on the date that the options are granted or, if greater, the par value of a share of common stock. A summary
of the status of Heartland's common stock options as of December 31, 2019, 2018 and 2017, and changes during the years
ended December 31, 2019, 2018 and 2017, follows:
Outstanding at January 1
Granted
Exercised
Forfeited
Outstanding at December 31
Options exercisable at December 31
2019
2018
2017
Weighted-
Average
Exercise
Price
Shares
Weighted-
Average
Exercise
Price
Shares
Weighted-
Average
Exercise
Price
Shares
— $
—
—
—
— $
— $
—
—
—
—
—
—
$
6,500
—
(6,500)
—
— $
— $
18.60
—
18.60
—
—
—
26,400
—
(19,400)
(500)
6,500
6,500
$
$
$
18.60
—
18.60
18.60
18.60
18.60
No shares under stock options vested during the year ended December 31, 2019. There were no compensation costs recorded
for stock options for the years ended December 31, 2019, 2018 and 2017. There are no unrecorded compensation costs related
to options at December 31, 2019.
Cash received from options exercised for the year ended December 31, 2019, was $0. Cash received from options exercised for
the year ended December 31, 2018, was $121,000.
Restricted Stock Units
The Plan permits the Compensation Committee to grant restricted stock units ("RSUs"). In the first quarter of 2019, the
Compensation Committee granted time-based RSUs with respect to 90,073 shares of common stock, and in the first quarter of
2018, the Compensation Committee granted time-based RSUs with respect to 52,153 shares of common stock to selected
officers and employees. The time-based RSUs, which represent the right, without payment, to receive shares of Heartland
common stock at a specified date in the future. The time-based RSUs granted in 2019 and 2018 vest over three years in equal
installments on March 6 of each of the three years following the year of the grant. The time-based RSUs may also vest upon
death or disability, upon a change in control or upon a "qualified retirement" (as defined in the RSU agreement). The retiree is
required to sign a non-solicitation agreement as a condition to vesting.
The Compensation Committee granted three-year performance-based RSUs with respect to 34,848 shares and 16,108 shares of
common stock in the first quarter of 2019 and 2018, respectively. These performance-based RSUs will be earned based upon
satisfaction of performance targets for the three-year performance period ended December 31, 2021, and December 31, 2020.
These performance-based RSUs or a portion thereof may vest
in 2022 and 2021, respectively, after measurement of
performance in relation to the performance targets.
In addition to the three-year performance-based RSUs referenced in the preceding paragraph, the Compensation Committee
granted one-year performance-based RSUs with respect to 18,988 shares of common stock in the first quarter of 2018. These
performance-based RSUs are earned based on satisfaction of performance targets for the fiscal year ended December 31, 2018,
and then fully vest on a specified date in the third calendar year following the year of the initial grant. No one-year performance
based RSUs were granted in 2019.
The one-year and three-year performance-based RSUs vest to the extent that they are earned upon death or disability or upon a
"qualified retirement." Upon a change in control, performance-based RSUs shall become vested at 100% of target if the RSU
obligations are not assumed by the successor company. If the successor company does assume the RSU obligations, the 2019
and 2018 performance-based RSUs will vest at 100% of target upon a "Termination of Service" within the period beginning six
months prior to a change in control and ending 24 months after a change in control.
All of Heartland's RSUs will be settled in common stock upon vesting and are not entitled to dividends until vested.
116
The Compensation Committee may grant RSUs under the Plan to directors as part of their compensation, to new management
level employees at the commencement of employment, and to other employees as incentives. During the years ended
December 31, 2019, 2018, and 2017, 37,544, 36,462 and 17,106 RSUs, respectively, were granted to directors and new
employees.
A summary of the status of RSUs as of December 31, 2019, 2018 and 2017, and changes during the years ended December 31,
2019, 2018, and 2017, follows:
Outstanding at January 1
Granted
Vested
Forfeited
Outstanding at December 31
2019
2018
2017
Weighted-
Average
Grant Date
Fair Value
43.89
$
45.09
39.27
49.20
46.76
$
Shares
266,995
162,465
(148,158)
(26,919)
254,383
Weighted-
Average
Grant Date
Fair Value
34.74
$
55.13
32.73
45.69
43.89
$
Weighted-
Average
Grant Date
Fair Value
27.61
$
47.22
26.66
34.02
34.74
$
Shares
346,817
109,373
(137,394)
(17,218)
301,578
Shares
301,578
123,711
(127,744)
(30,550)
266,995
Total compensation costs recorded for RSUs were $5.8 million, $4.4 million and $3.2 million, for 2019, 2018 and 2017,
respectively. As of December 31, 2019, there were $4.9 million of total unrecognized compensation costs related to the Plan for
RSUs which are expected to be recognized through 2022.
Employee Stock Purchase Plan
Heartland maintains an employee stock purchase plan (the "ESPP"), which was adopted in May 2016 and replaced the 2006
ESPP, that permits all eligible employees to purchase shares of Heartland common stock at a price of not less than 95% of the
fair market value (as determined by the Compensation Committee) on the determination date. Under ASC Topic 718,
compensation expense related to the ESPP of $222,000 was recorded in 2019, $91,000 was recorded in 2018, and $153,000 was
recorded in 2017 because the price of the shares purchased was set at the beginning of the year for the purchases at the end of
the year.
A maximum of 500,000 shares is available for purchase under the ESPP, and as of December 31, 2019, 412,521 shares remain
available for purchase. Beginning in 2017, Heartland began making ESPP purchases as soon as practicable after the last day of
the plan year. On January 2, 2020, 32,179 shares were purchased under the ESPP for the employee deferrals made during the
plan year ended December 31, 2019. On January 4, 2019, 32,331 shares were purchased under the ESPP for the employee
deferrals made during the plan year ended December 31, 2018. On January 2, 2018, 22,903 shares were purchased under the
ESPP for employee deferrals made during the plan year ended December 31, 2017.
SEVENTEEN
STOCKHOLDER RIGHTS PLAN
Heartland adopted an Amended and Restated Rights Agreement (the "Extended Rights Plan"), dated as of January 17, 2012,
which became effective upon approval by the stockholders on May 16, 2012. The primary purpose of the Extended Rights Plan
was to extend the term of the Rights Agreement dated as of June 7, 2002, for an additional ten years and to expand the
definition of beneficial owners to include certain forms of indirect ownership. Under the terms of the Extended Rights Plan, a
preferred share purchase right (a "Right") is automatically issued with each outstanding share of Heartland common stock and,
unless redeemed or unless there is a Distribution Date, as defined below, the Rights trade with the shares of common stock until
expiration of the Plan on January 17, 2022. Each Right entitles the holder to purchase from Heartland one-thousandth of a share
of Series A Junior Participating Preferred Stock, $1.00 value (the "Series A Preferred Stock"), at a price of $70.00 per one one-
thousandth of a share of Preferred Stock, subject to adjustment (the "Purchase Price"). The Rights are not currently exercisable,
and will not become exercisable until a Distribution Date.
The Series A Preferred Stock has a preferential quarterly dividend rate equal to the greater of $1.00 per share or 1,000 times the
dividend declared on one share of common stock, a preference over common stock in liquidation equal to the greater of $1,000
per share or 1,000 times the payment made on one share of common stock, 1,000 votes per share voting together with the
common stock, customary anti-dilution provisions and other rights that approximate the rights of one share of common stock.
The Rights separate from the common stock and become exercisable only on the tenth day (the "Distribution Date") following
the earlier of (i) a public announcement that a person or group of affiliated or associated persons (subject to certain exclusions,
117
"Acquiring Persons") has commenced an offer to acquire "beneficial ownership" of 15% or more of Heartland's outstanding
common stock, or (ii) actual acquisition of this level of beneficial ownership.
If any person or group of affiliated or associated persons becomes an Acquiring Person, each holder of a Right, other than
Rights that were or are beneficially owned by the Acquiring Person (which will thereafter be void), will have the right to
receive upon exercise that number of shares of common stock having a market value of two times the Purchase Price.
In 2002, when the Rights Plan was originally created, Heartland designated 16,000 shares, par value $1.00 per share, of Series
A Preferred Stock. There are no shares of Series A Preferred issued and outstanding, and Heartland does not anticipate issuing
any shares of such, except as may be required under the Extended Rights Plan.
EIGHTEEN
CAPITAL ISSUANCES
Common Stock
For a description of the issuance of shares of Heartland common stock in connection with acquisitions, see Note 2,
"Acquisitions," of the consolidated financial statements. For a description of the issuance of shares of Heartland common stock
in connection with the 2012 Long-Term Incentive Plan and the 2016 ESPP, see Note 16, "Stock-Based Compensation."
Shelf Registration
Heartland filed a universal shelf registration with the SEC to register debt or equity securities on August 8, 2019, that expires in
August 2022. This registration statement, which was effective immediately, provides Heartland the ability to raise capital,
subject to market conditions and SEC rules and limitations, if Heartland's board of directors decides to do so. This registration
statement permits Heartland, from time to time, in one or more public offerings, to offer debt securities, subordinated notes,
common stock, preferred stock, rights or any combination of these securities. The amount of securities that may have been
offered was not specified in the registration statement, and the terms of any future offerings were to be established at the time of
the offering.
NINETEEN
REGULATORY CAPITAL REQUIREMENTS AND RESTRICTIONS ON SUBSIDIARY DIVIDENDS
The Heartland banks are subject to various regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the Heartland banks’ financial statements. The regulations
prescribe specific capital adequacy guidelines that involve quantitative measures of a bank’s assets, liabilities and certain off
balance sheet items as calculated under regulatory accounting practices. Capital classification is also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Heartland banks to maintain minimum
amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets
(as defined), and of Tier 1 capital (as defined) to average assets (as defined).
The requirements to be categorized as well-capitalized under the Tier 1 leverage capital ratio is 4% for all banks. The minimum
requirement to be well-capitalized for the Tier 1 risk-based capital ratio is 8%. The total risk-based capital ratio minimum
requirement to be well-capitalized remained is 10%. Management believes, as of December 31, 2019 and 2018, that the
Heartland banks met all capital adequacy requirements to which they were subject.
As of December 31, 2019 and 2018, the FDIC categorized each of the Heartland banks as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized, the Heartland banks must maintain minimum
total risk-based, Tier 1 risk-based, Tier 1 common equity and Tier 1 leverage ratios as set forth in the following table. There are
no conditions or events since December 31, 2019, that management believes have changed each institution’s category.
118
The Heartland banks’ actual capital amounts and ratios are also presented in the tables below, in thousands:
As of December 31, 2019
Total Capital (to Risk-Weighted Assets)
Consolidated
Dubuque Bank and Trust Company
Illinois Bank & Trust
Wisconsin Bank & Trust
New Mexico Bank & Trust
Arizona Bank & Trust
Rocky Mountain Bank
Citywide Banks
Minnesota Bank & Trust
Bank of Blue Valley
Premier Valley Bank
First Bank & Trust
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Ratio
Amount
To Be Well Capitalized
Under Prompt
Corrective Action
Provisions
Amount
Ratio
$ 1,388,511
13.75 % $ 807,881
8.00 %
N/A
168,959
107,678
117,355
157,555
75,498
53,266
240,735
76,400
145,256
91,257
109,545
14.55
10.54
14.13
12.33
11.19
13.80
13.88
13.50
14.50
13.21
14.11
92,872
81,731
66,431
102,193
53,982
30,868
138,704
45,260
80,153
55,273
8.00
8.00
8.00
8.00
8.00
8.00
8.00
8.00
8.00
8.00
62,128 — 8.00
$ 116,090
102,164
10.00 %
10.00
83,039
127,741
67,477
38,585
173,380
56,575
100,191
69,091
77,660
10.00
10.00
10.00
10.00
10.00
10.00
10.00
10.00
10.00
119
As of December 31, 2019
Tier 1 Capital (to Risk-Weighted Assets)
Consolidated
Dubuque Bank and Trust Company
Illinois Bank & Trust
Wisconsin Bank & Trust
New Mexico Bank & Trust
Arizona Bank & Trust
Rocky Mountain Bank
Citywide Banks
Minnesota Bank & Trust
Bank of Blue Valley
Premier Valley Bank
First Bank & Trust
Common Equity Tier 1 (to Risk-Weighted Assets)
Consolidated
Dubuque Bank and Trust Company
Illinois Bank & Trust
Wisconsin Bank & Trust
New Mexico Bank & Trust
Arizona Bank & Trust
Rocky Mountain Bank
Citywide Banks
Minnesota Bank & Trust
Bank of Blue Valley
Premier Valley Bank
First Bank & Trust
Tier 1 Capital (to Average Assets)
Consolidated
Dubuque Bank and Trust Company
Illinois Bank & Trust
Wisconsin Bank & Trust
New Mexico Bank & Trust
Arizona Bank & Trust
Rocky Mountain Bank
Citywide Banks
Minnesota Bank & Trust
Bank of Blue Valley
Premier Valley Bank
First Bank & Trust
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Ratio
Amount
To Be Well Capitalized
Under Prompt
Corrective Action
Provisions
Amount
Ratio
$ 1,243,582
12.31 % $ 605,911
6.00 %
N/A
159,579
103,011
109,939
148,227
69,648
48,692
231,085
70,235
140,195
87,335
104,914
13.75
10.08
13.24
11.60
10.32
12.62
13.33
12.41
13.99
12.64
13.51
69,654
61,298
49,824
76,645
40,486
23,151
104,028
33,945
60,115
41,455
46,596
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
$
92,872
8.00 %
81,731
66,431
102,193
53,982
30,868
138,704
45,260
80,153
55,273
62,128
8.00
8.00
8.00
8.00
8.00
8.00
8.00
8.00
8.00
8.00
$ 1,098,428
10.88 % $ 454,433
4.50 %
N/A
159,579
103,011
109,939
148,227
69,648
48,692
231,085
70,235
140,195
87,335
104,914
13.75
10.08
13.24
11.60
10.32
12.62
13.33
12.41
13.99
12.64
13.51
52,241
45,974
37,368
57,484
30,365
17,363
78,021
25,459
45,086
31,091
4.50
4.50
4.50
4.50
4.50
4.50
4.50
4.50
4.50
4.50
34,947 — 4.50
$
75,459
6.50 %
66,407
53,976
83,032
43,860
25,080
112,697
36,774
65,124
44,909
50,479
6.50
6.50
6.50
6.50
6.50
6.50
6.50
6.50
6.50
6.50
$ 1,243,582
10.10 % $ 492,725
4.00 %
N/A
159,579
103,011
109,939
148,227
69,648
48,692
231,085
70,235
140,195
87,335
104,914
9.83
10.26
10.76
9.11
9.87
9.22
10.66
10.51
11.07
10.43
10.25
64,961
40,144
40,863
65,076
28,235
21,132
86,732
26,740
50,638
33,487
40,941
4.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
$
81,202
5.00 %
50,180
51,078
81,345
35,293
26,415
108,416
33,426
63,297
41,859
51,177
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
120
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Ratio
Amount
To Be Well Capitalized
Under Prompt
Corrective Action
Provisions
Amount
Ratio
As of December 31, 2018
Total Capital (to Risk-Weighted Assets)
Consolidated
Dubuque Bank and Trust Company
Illinois Bank & Trust
Wisconsin Bank & Trust
New Mexico Bank & Trust
Arizona Bank & Trust
Rocky Mountain Bank
Citywide Banks
Minnesota Bank & Trust
Bank of Blue Valley(1)
Premier Valley Bank
First Bank & Trust
$ 1,200,947
165,687
13.72 % $
14.10
700,490
93,975
74,657
115,318
150,261
63,606
51,982
235,691
69,002
72,520
85,710
102,795
13.02
13.90
12.92
11.90
14.26
13.46
12.99
16.14
13.71
13.48
45,884
66,351
93,063
42,766
29,160
140,117
42,493
35,937
50,017
61,004
Tier 1 Capital (to Risk-Weighted Assets)
Consolidated
Dubuque Bank and Trust Company
$ 1,064,669
155,391
12.16 % $
13.23
525,368
70,482
Illinois Bank & Trust
Wisconsin Bank & Trust
New Mexico Bank & Trust
Arizona Bank & Trust
Rocky Mountain Bank
Citywide Banks
Minnesota Bank & Trust
Bank of Blue Valley(1)
Premier Valley Bank
First Bank & Trust
70,470
108,193
141,161
59,993
48,428
226,645
63,633
67,975
82,321
100,884
12.29
13.04
12.13
11.22
13.29
12.94
11.98
15.13
13.17
13.23
34,413
49,763
69,797
32,075
21,870
105,088
31,870
26,953
37,513
45,753
8.00 %
N/A
8.00
8.00
8.00
8.00
8.00
8.00
8.00
8.00
8.00
8.00
8.00
6.00 %
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
$ 117,469
10.00 %
57,355
82,939
116,328
53,458
36,449
175,146
53,117
44,922
62,521
76,255
10.00
10.00
10.00
10.00
10.00
10.00
10.00
10.00
10.00
10.00
N/A
93,975
$
8.00 %
45,884
66,351
93,063
42,766
29,160
140,117
42,493
35,937
50,017
61,004
8.00
8.00
8.00
8.00
8.00
8.00
8.00
8.00
8.00
8.00
Common Equity Tier 1 (to Risk Weighted Assets)
Consolidated
Dubuque Bank and Trust Company
Illinois Bank & Trust
Wisconsin Bank & Trust
New Mexico Bank & Trust
Arizona Bank & Trust
Rocky Mountain Bank
Citywide Banks
Minnesota Bank & Trust
Bank of Blue Valley(1)
Premier Valley Bank
First Bank & Trust
Tier 1 Capital (to Average Assets)
Consolidated
Dubuque Bank and Trust Company
$
933,755
10.66 % $
394,026
4.50 %
N/A
155,391
70,470
108,193
141,161
59,993
48,428
226,645
63,633
67,975
82,321
13.23
12.29
13.04
12.13
11.22
13.29
12.94
11.98
15.13
13.17
52,861
25,810
37,323
52,348
24,056
16,402
78,816
23,903
20,215
28,134
4.50
4.50
4.50
4.50
4.50
4.50
4.50
4.50
4.50
4.50
100,884
13.23
34,315
4.50
$
76,355
6.50 %
37,281
53,910
75,613
34,748
23,692
113,845
34,526
29,199
40,639
49,566
6.50
6.50
6.50
6.50
6.50
6.50
6.50
6.50
6.50
6.5
$ 1,064,669
155,391
9.73 % $
9.97
437,858
62,317
4.00 %
4.00
$
N/A
77,897
5.00 %
121
Illinois Bank & Trust
Wisconsin Bank & Trust
New Mexico Bank & Trust
Arizona Bank & Trust
Rocky Mountain Bank
Citywide Banks
Minnesota Bank & Trust
Bank of Blue Valley(1)
Premier Valley Bank
First Bank & Trust
Actual
Amount
70,470
108,193
141,161
59,993
48,428
226,645
63,633
67,975
82,321
100,884
Ratio
8.56
10.47
9.58
9.20
9.82
10.53
10.00
11.31
10.53
10.13
For Capital
Adequacy Purposes
Ratio
Amount
4.00
32,941
41,317
58,958
26,089
19,730
86,129
25,445
24,041
31,285
39,846
4.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
To Be Well Capitalized
Under Prompt
Corrective Action
Provisions
Amount
41,177
51,647
73,697
32,611
24,662
107,662
31,806
30,052
39,106
49,807
Ratio
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
(1) Morrill & Janes Bank and Trust Company changed its name to Bank of Blue Valley upon the acquisition of Blue Valley Ban Corp. on
May 10, 2019.
The ability of Heartland to pay dividends to its stockholders is dependent upon dividends paid by its subsidiaries. The Heartland
banks are subject to certain statutory and regulatory restrictions on the amount they may pay in dividends. To maintain
acceptable capital ratios for the Banks, certain portions of their retained earnings are not available for the payment of dividends.
Retained earnings that could be available for the payment of dividends to Heartland totaled approximately $533.9 million as of
December 31, 2019, under the most restrictive minimum capital requirements. Retained earnings that could be available for the
payment of dividends to Heartland totaled approximately $331.5 million as of December 31, 2019, under the capital
requirements to remain well capitalized.
TWENTY
FAIR VALUE
Heartland utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair
value disclosures. Securities carried at fair value, which include available for sale, trading securities and equity securities with a
readily determinable fair value, and derivatives are recorded in the consolidated balance sheets at fair value on a recurring basis.
Additionally, from time to time, Heartland may be required to record at fair value other assets on a nonrecurring basis such as
loans held for sale, loans held to maturity and certain other assets including, but not limited to, mortgage servicing rights,
commercial servicing rights and other real estate owned. These nonrecurring fair value adjustments typically involve
application of lower of cost or fair value accounting or write-downs of individual assets.
Fair Value Hierarchy
Under ASC 820, assets and liabilities are grouped at fair value in three levels, based on the markets in which the assets and
liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1 — Valuation is based upon quoted prices for identical instruments in active markets.
Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, or similar instruments in
markets that are not active, and model-based valuation techniques for which all significant assumptions are observable
in the market.
Level 3 — Valuation is generated from model-based techniques that use at least one significant assumption not
observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants
would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash
flow models and similar techniques.
122
The following is a description of valuation methodologies used for assets and liabilities recorded at fair value on a recurring or
non-recurring basis.
Assets
Securities Available for Sale and Held to Maturity
Securities available for sale are recorded at fair value on a recurring basis. Securities held to maturity are generally recorded at
cost and are only recorded at fair value to the extent a decline in fair value is determined to be other-than-temporary. Fair value
measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using
independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted
for the security's credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities
include those traded on an active exchange, such as the New York Stock Exchange, as well as U.S. Treasury securities. Level 2
securities include U.S. government and agency securities, mortgage and asset-backed securities and private collateralized
mortgage obligations, municipal bonds, equity securities and corporate debt securities. On a quarterly basis, a secondary
independent pricing service is used for the securities portfolio to validate the pricing from Heartland's primary pricing service.
Equity Securities with a Readily Determinable Fair Value
Equity securities with a readily determinable fair value generally include Community Reinvestment Act mutual funds and are
classified as Level 2 due to the infrequent trading of these securities. The fair value is based on the price per share.
Loans Held for Sale
Loans held for sale are carried at the lower of cost or fair value on an aggregate basis. The fair value of loans held for sale is
based on what secondary markets are currently offering for portfolios with similar characteristics. As such, Heartland classifies
loans held for sale subjected to nonrecurring fair value adjustments as Level 2.
Prior to December 31, 2018, Heartland entered into an agreement with a third-party to sell the loan portfolios of its consumer
finance subsidiaries. The loan portfolios were classified as held for sale and recorded at fair value at December 31, 2018.
Heartland classified these loans as nonrecurring Level 3 in the fair value hierarchy because the negotiated sales price was
unobservable.
Loans Held to Maturity
Heartland does not record loans held to maturity at fair value on a recurring basis. However, from time to time, a loan is
considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and
principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan
is identified as individually impaired, management measures impairment in accordance with ASC 310. The fair value of
impaired loans is measured using one of the following impairment methods: 1) the present value of expected future cash flows
discounted at the loan's effective interest rate or 2) the observable market price of the loan or 3) the fair value of the collateral if
the loan is collateral dependent. In accordance with ASC 820, impaired loans measured at fair value are classified as
nonrecurring Level 3 in the fair value hierarchy.
Premises, Furniture and Equipment Held for Sale
Heartland values premises, furniture and equipment held for sale based on third-party appraisals less estimated disposal costs.
Heartland considers third party appraisals, as well as independent fair value assessments from Realtors or persons involved in
selling bank premises, furniture and equipment, in determining the fair value of particular properties. Accordingly, the valuation
of premises, furniture and equipment held for sale is subject to significant external and internal judgment. Heartland
periodically reviews premises, furniture and equipment held for sale to determine if the fair value of the property, less disposal
costs, has declined below its recorded book value and records any adjustments accordingly. Premises, furniture and equipment
held for sale are classified as nonrecurring Level 3 in the fair value hierarchy.
123 Mortgage Servicing Rights
Mortgage servicing rights assets represent the value associated with servicing residential real estate loans that have been sold to
outside investors with servicing retained. The fair value for servicing assets is determined through discounted cash flow
analysis and utilizes discount rates, prepayment speeds and delinquency rate assumptions as inputs. All of these assumptions
require a significant degree of management estimation and judgment. Mortgage servicing rights are subject to impairment
testing. The carrying values of these rights are reviewed quarterly for impairment based upon the calculation of fair value as
performed by an outside third party. For purposes of measuring impairment, the rights are stratified into certain risk
characteristics including note type and note term. If the valuation model reflects a value less than the carrying value, mortgage
servicing rights are adjusted to fair value through a valuation allowance. Heartland classifies mortgage servicing rights as
nonrecurring with Level 3 measurement inputs.
Commercial Servicing Rights
Commercial servicing rights assets represent the value associated with servicing commercial loans guaranteed by the Small
Business Administration and United States Department of Agriculture that have been sold with servicing retained by Heartland.
Heartland uses the amortization method (i.e., the lower of amortized cost or estimated fair value measured on a nonrecurring
basis), not fair value measurement accounting, to determine the carrying value of its commercial servicing rights. The fair value
for servicing assets is determined through market prices for comparable servicing contracts, when available, or through a
valuation model that calculates the present value of estimated future net servicing income. Inputs utilized include discount rates,
prepayment speeds and delinquency rate assumptions as inputs. All of these assumptions require a significant degree of
management estimation and judgment. Commercial servicing rights are subject to impairment testing, and the carrying values
of these rights are reviewed quarterly for impairment based upon the calculation of fair value as performed by an outside third
party. If the valuation model reflects a fair value less than the carrying value, commercial servicing rights are adjusted to fair
value through a valuation allowance. Heartland classifies commercial servicing rights as nonrecurring with Level 3
measurement inputs.
Derivative Financial Instruments
Heartland's current interest rate risk strategy includes interest rate swaps. The valuation of these instruments is determined using
widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative.
This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-
based inputs, including interest rate curves and implied volatilities. To comply with the provisions of ASC 820, Heartland
incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective
counterparty's nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the
effect of nonperformance risk, Heartland has considered the impact of netting any applicable credit enhancements, such as
collateral postings, thresholds, mutual puts, and guarantees.
Although Heartland has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair
value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of
current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of December 31, 2019,
and December 31, 2018, Heartland has assessed the significance of the impact of the credit valuation adjustments on the overall
valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall
valuation of its derivatives. As a result, Heartland has determined that its derivative valuations in their entirety are classified in
Level 2 of the fair value hierarchy.
Interest Rate Lock Commitments
Heartland uses an internal valuation model that relies on internally developed inputs to estimate the fair value of its interest rate
lock commitments which is based on unobservable inputs that reflect management's assumptions and specific information about
each borrower. Interest rate lock commitments are classified in Level 3 of the fair value hierarchy.
Forward Commitments
The fair value of forward commitments are estimated using an internal valuation model, which includes current trade pricing for
similar financial instruments in active markets that Heartland has the ability to access and are classified in Level 2 of the fair
value hierarchy.
Other Real Estate Owned
Other real estate owned ("OREO") represents property acquired through foreclosures and settlements of loans. Property
acquired is carried at the fair value of the property at the time of acquisition (representing the property's cost basis), plus any
acquisition costs, or the estimated fair value of the property, less disposal costs. Heartland considers third party appraisals, as
well as independent fair value assessments from realtors or persons involved in selling OREO, in determining the fair value of
particular properties. Accordingly, the valuation of OREO is subject to significant external and internal judgment. Heartland
124 periodically reviews OREO to determine if the fair value of the property, less disposal costs, has declined below its recorded
book value and records any adjustments accordingly. OREO is classified as nonrecurring Level 3 of the fair value hierarchy.
The table below presents Heartland's assets and liabilities that are measured at fair value on a recurring basis as of
December 31, 2019, and December 31, 2018, in thousands, aggregated by the level in the fair value hierarchy within which
those measurements fall:
Total Fair
Value
Level 1
Level 2
Level 3
December 31, 2019
Assets
Securities available for sale
U.S. government corporations and agencies
Mortgage and asset-backed securities
Obligations of states and political subdivisions
Equity securities with a readily determinable fair
value
Derivative financial instruments(1)
Interest rate lock commitments
Forward commitments
Total assets at fair value
Liabilities
Derivative financial instruments(2)
Forward commitments
Total liabilities at fair value
December 31, 2018
Assets
Securities available for sale
U.S. government corporations and agencies
Mortgage-backed securities
Obligations of states and political subdivisions
Equity securities
Derivative financial instruments(1)
Interest rate lock commitments
Forward commitments
Total assets at fair value
Liabilities
Derivative financial instruments(2)
Forward commitments
Total liabilities at fair value
$
$
$
$
$
$
$
$
9,893
2,577,278
707,190
18,435
17,527
681
15
3,331,019
21,462
113
21,575
31,951
2,026,698
374,974
17,086
6,539
725
—
2,457,973
6,044
399
6,443
$
$
$
$
$
$
$
$
8,503
—
—
—
—
—
—
8,503
$
$
1,390
2,577,278
707,190
18,435
17,527
—
15
3,321,835
— $
—
— $
21,462
113
21,575
25,414
—
—
—
—
—
—
25,414
$
$
6,537
2,026,698
374,974
17,086
6,539
—
—
2,431,834
— $
—
— $
6,044
399
6,443
$
$
$
$
$
$
$
$
—
—
—
—
—
681
—
681
—
—
—
—
—
—
—
—
725
—
725
—
—
—
(1) Includes embedded derivatives, back-to-back loan swaps, fair value hedges, free standing derivative instruments and cash
flow hedges.
(2) Includes cash flow hedges, fair value hedges, back-to-back loan swaps, embedded derivatives and free standing derivative
instruments.
125 The tables below present Heartland's assets that are measured at fair value on a nonrecurring basis, in thousands:
Fair Value Measurements at December 31, 2019
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Total
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(Gains)/
Losses
Collateral dependent impaired loans:
Commercial
Commercial real estate
Agricultural and agricultural real estate
Residential real estate
Consumer
Total collateral dependent impaired loans
Loans held for sale
Other real estate owned
Premises, furniture and equipment held for sale
Servicing rights
$
15,173
$
— $
— $
15,173
$
1,114
4,592
12,623
3,088
988
36,464
26,748
6,914
2,967
5,621
$
$
$
$
$
$
$
$
$
$
—
—
—
—
— $
— $
— $
— $
— $
—
—
—
—
4,592
12,623
3,088
988
72
1,254
10
—
— $
36,464
$
2,450
26,748
$
— $
(980)
— $
— $
— $
6,914
2,967
5,621
$
$
$
947
735
911
Fair Value Measurements at December 31, 2018
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Total
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(Gains)/
Losses
Collateral dependent impaired loans:
Commercial
Commercial real estate
Agricultural and agricultural real estate
Residential real estate
Consumer
Total collateral dependent impaired loans
Loans held for sale
Other real estate owned
Premises, furniture and equipment held for sale
Servicing rights
$
12,932
$
— $
— $
12,932
$
405
11,070
478
624
$
25,509
$ 119,801
$
$
$
6,153
7,258
7,143
$
$
$
$
$
—
—
—
—
— $
— $
— $
— $
— $
—
—
—
—
— $
52,577
$
— $
— $
— $
405
11,070
478
624
25,509
67,224
6,153
7,258
7,143
660
72
575
—
—
$
$
$
$
$
1,307
(1,870)
2,647
59
58
Heartland entered into an agreement to sell the loan portfolios of its consumer finance subsidiaries during the fourth quarter of
2018, which were recorded at fair value at December 31, 2018. The fair value of the portfolios was $67.2 million, and
Heartland recorded a benefit to provision for loan losses of $953,000 in 2018 associated with the transaction.
126 The following tables present additional quantitative information about assets measured at fair value on a recurring and
nonrecurring basis and for which Heartland has utilized Level 3 inputs to determine fair value, in thousands:
Fair Value at 12/31/19
Valuation Technique
Unobservable Input Range (Weighted Average)
$
681
Discounted cash flows
Closing ratio
0 - 99% (90%)(1)
Interest rate lock
commitments
Premises, furniture and
equipment held for sale
2,967 Modified appraised value Third party appraisal
Appraisal discount
Other real estate owned
6,914 Modified appraised value Third party appraisal
Appraisal discounts
Servicing rights
5,621
Discounted cash flows
Third party valuation
Collateral dependent
impaired loans:
Commercial
15,173 Modified appraised value Third party appraisal
Appraisal discount
Commercial real estate
4,592 Modified appraised value Third party appraisal
Agricultural and agricultural
real estate
12,623 Modified appraised value Third party appraisal
Appraisal discount
Appraisal discount
Residential real estate
3,088 Modified appraised value Third party appraisal
Appraisal discount
Consumer
988 Modified appraised value Third party valuation
Valuation discount
(2)
0-10%(3)
(2)
0-10%(3)
(4)
(2)
0-25%(3)
(2)
0-14%(3)
(2)
0-15%(3)
(2)
0-25%(3)
(2)
0-10%(3)
(1) The significant unobservable input used in the fair value measurement is the closing ratio, which represents the percentage of loans
currently in a lock position which management estimates will ultimately close. The closing ratio calculation takes into consideration
historical data and loan-level data.
(2) Third party appraisals are obtained and updated at least annually to establish the value of the underlying asset, but the disclosure of the
unobservable inputs used by the appraisers would not be meaningful because the range will vary widely from appraisal to appraisal.
(3) Discounts applied to the appraised values primarily include estimated sales costs, but also consider the age of the appraisal, changes in
local market conditions and changes in the current condition of the collateral.
(4) The significant unobservable input used in the fair value measurement are the value indices, which are weighted-average
spreads to LIBOR based on maturity groups.
127 Loans available for sale
Interest rate lock
commitments
Premises, furniture and
equipment held for sale
Other real estate owned
Fair Value at 12/31/18
67,224
$
Valuation Technique
Discounted cash flows
Unobservable Input Range (Weighted Average)
Sales contract
(1)
725
Discounted cash flows
Closing ratio
0 - 99% (91%)(2)
7,258 Modified appraised value
Third party appraisal
6,153 Modified appraised value
Third party appraisal
Appraisal discount
Appraisal discounts
Servicing rights
7,143
Discounted cash flows
Third party valuation
Collateral dependent
impaired loans:
Commercial
12,932 Modified appraised value
Third party appraisal
Appraisal discount
Commercial real estate
405 Modified appraised value
Third party appraisal
Agricultural and agricultural
real estate
Residential real estate
Consumer
Appraisal discount
11,070 Modified appraised value
Third party appraisal
Appraisal discount
478 Modified appraised value
Third party appraisal
Appraisal discount
624 Modified appraised value Third party valuation
Valuation discount
(3)
0-10%(5)
(3)
0-10%(5)
(4)
(3)
0-8%(5)
(3)
0-19%(5)
(3)
0-24%(5)
(3)
0-24%(5)
(3)
0-14%(5)
(1) The significant unobservable input related to the loans held for sale was the third party sales contract Heartland entered into prior to
December 31, 2018. The sale of these consumer loans closed on January 11, 2019.
(2) The significant unobservable input used in the fair value measurement is the closing ratio, which represents the percentage of loans
currently in a lock position which management estimates will ultimately close. The closing ratio calculation takes into consideration
historical data and loan-level data.
(3) Third party appraisals are obtained and updated at least annually to establish the value of the underlying asset, but the disclosure of the
unobservable inputs used by the appraisers would not be meaningful because the range will vary widely from appraisal to appraisal.
(4) The significant unobservable input used in the fair value measurement are the value indices, which are weighted-average spreads to
LIBOR based on maturity groups.
(5) Discounts applied to the appraised values primarily include estimated sales costs, but also consider the age of the appraisal, changes in
local market conditions and changes in the current condition of the collateral.
The changes in fair value of the interest rate lock commitments, which are Level 3 financial instruments and are measured on a
recurring basis, are summarized in the following table, in thousands: (1)
Balance at January 1,
Acquired interest rate lock commitments
Total gains (losses), net, included in earnings
Issuances
Settlements
Balance at period end,
For the Years Ended
December 31, 2019
December 31, 2018
$
$
725
$
—
18
10,702
(10,764)
681
$
1,738
1,383
(3,269)
2,962
(2,089)
725
Gains included in net gains on sale of loans held for sale attributable to interest rate lock commitments held at December 31,
2019, and December 31, 2018, were $681,000 and $725,000, respectively.
The table below is a summary of the estimated fair value of Heartland's financial instruments (as defined by ASC 825) as of
December 31, 2019, and December 31, 2018, in thousands. The carrying amounts in the following table are recorded in the
consolidated balance sheets under the indicated captions. In accordance with ASC 825, the assets and liabilities that are not
128 financial instruments are not included in the disclosure, including the value of the commercial and mortgage servicing rights,
premises, furniture and equipment, premises, furniture and equipment held for sale, OREO, goodwill, other intangibles and
other liabilities.
Heartland does not believe that the estimated information presented below is representative of the earnings power or value of
Heartland. The following analysis, which is inherently limited in depicting fair value, also does not consider any value
associated with either existing customer relationships or the ability of Heartland to create value through loan origination,
obtaining deposits or fee generating activities. Many of the estimates presented below are based upon the use of highly
subjective information and assumptions and, accordingly, the results may not be precise. Management believes that fair value
estimates may not be comparable between financial institutions due to the wide range of permitted valuation techniques and
numerous estimates which must be made. Furthermore, because the disclosed fair value amounts were estimated as of the
balance sheet date, the amounts actually realized or paid upon maturity or settlement of the various financial instruments could
be significantly different.
129 Fair Value Measurements at
December 31, 2019
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Carrying
Amount
Estimated
Fair
Value
Financial assets:
Cash and cash equivalents
$ 378,734
$ 378,734
$
378,734
$
Time deposits in other financial institutions
3,564
3,564
Securities:
Carried at fair value
Held to maturity
Other investments
Loans held for sale
Loans, net:
Commercial
Commercial real estate
Agricultural and agricultural real estate
Residential real estate
Consumer
Total Loans, net
Cash surrender value on life insurance
Derivative financial instruments(1)
Interest rate lock commitments
Forward commitments
Financial liabilities:
Deposits
Demand deposits
Savings deposits
Time deposits
Short term borrowings
Other borrowings
Derivative financial instruments(2)
Forward commitments
3,312,796
3,312,796
91,324
31,321
26,748
100,484
31,321
26,748
2,390,254
2,343,079
4,336,355
4,333,012
528,195
595,331
447,387
528,657
588,182
450,413
8,297,522
8,243,343
171,625
17,527
171,625
17,527
681
—
681
15
3,543,863
3,543,863
6,307,425
6,307,425
1,193,043
1,193,043
182,626
275,773
21,462
113
182,626
278,169
21,462
113
3,564
8,503
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
3,304,293
100,484
31,321
26,748
2,327,906
4,328,420
516,034
585,094
449,425
8,206,879
171,625
17,527
—
15
3,543,863
6,307,425
1,193,043
182,626
278,169
21,462
113
—
—
—
—
—
—
15,173
4,592
12,623
3,088
988
36,464
—
—
681
—
—
—
—
—
—
—
—
(1) Includes embedded derivatives, back-to-back loan swaps, fair value hedges, free standing derivative instruments and cash
flow hedges.
(2) Includes cash flow hedges, fair value hedges, back-to-back loan swaps, embedded derivatives and free standing derivative
instruments.
130 Fair Value Measurements at
December 31, 2018
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Carrying
Amount
Estimated
Fair
Value
Financial assets:
Cash and cash equivalents
$ 273,630
$ 273,630
$
273,630
$
Time deposits in other financial institutions
4,672
4,672
4,672
— $
—
Securities:
Carried at fair value
Held to maturity
Other investments
Loans held for sale
Loans, net:
Commercial
Commercial real estate
Agricultural and agricultural real estate
Residential real estate
Consumer
Total Loans, net
Cash surrender value on life insurance
Derivative financial instruments(1)
Interest rate lock commitments
Forward commitments
Financial liabilities:
Deposits
Demand deposits
Savings deposits
Time deposits
Deposits held for sale
Short term borrowings
Other borrowings
Derivative financial instruments(2)
Forward commitments
2,450,709
2,450,709
25,414
236,283
28,396
119,801
245,341
28,396
119,801
1,994,785
1,955,607
3,684,213
3,667,138
561,265
670,473
434,998
553,112
654,596
432,016
7,345,734
7,262,469
162,892
162,892
6,539
725
—
6,539
725
—
3,264,737
3,264,737
5,107,962
5,107,962
1,023,730
1,023,730
106,409
227,010
274,905
6,044
399
100,241
227,010
276,966
6,044
399
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,425,295
245,341
28,396
52,577
1,942,675
3,666,733
542,042
654,118
431,392
7,236,960
162,892
6,539
—
—
3,264,737
5,107,962
1,023,730
—
—
—
—
—
67,224
12,932
405
11,070
478
624
25,509
—
—
725
—
—
—
—
—
100,241
227,010
276,966
6,044
399
—
—
—
—
(1) Includes embedded derivatives, back-to-back loan swaps, fair value hedges, free standing derivative instruments and cash
flow hedges.
(2) Includes cash flow hedges, fair value hedges, back-to-back loan swaps, embedded derivatives and free standing derivative
instruments.
Cash and Cash Equivalents — The carrying amount is a reasonable estimate of fair value due to the short-term nature of these
instruments.
Time Deposits in Other Financial Institutions — The carrying amount is a reasonable estimate of the fair value due to the short-
term nature of these instruments.
Securities — For equity securities with a readily determinable fair value and debt securities either held to maturity, available for
131 sale or trading, fair value equals quoted market price if available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities. For Level 3 securities, Heartland utilizes independent pricing
provided by third
party vendors or brokers.
Other Investments — Fair value measurement of other investments, which consists primarily of FHLB stock, are based on their
redeemable value, which is at cost. The market for these securities is restricted to the issuer of the stock and subject to
impairment evaluation.
Loans — The fair value of loans were determined using an exit price methodology. The exit price estimation of fair value is
based on the present value of the expected cash flows. The projected cash flows are based on the contractual terms of the loans,
adjusted for prepayments and a discount rate based on the relative risk of the cash flows. Other considerations include the loan
type, remaining life of the loan and credit risk.
The fair value of impaired loans is measured using the fair value of the underlying collateral. The fair value of loans held for
sale is estimated using quoted market prices or sales contracts.
Cash surrender value on life insurance — Life insurance policies are held on certain officers. The carrying value of these
policies approximates fair value as it is based on the cash surrender value adjusted for other charges or amounts due that are
probable at settlement. As such, Heartland classifies the estimated fair value of the cash surrender value on life insurance as
Level 2.
Derivative Financial Instruments — The fair value of all derivatives is estimated based on the amount that Heartland would pay
or would be paid to terminate the contract or agreement, using current rates, and when appropriate, the current creditworthiness
of the counter-party.
Interest Rate Lock Commitments — The fair value of interest rate lock commitments is estimated using an internal valuation
model, which includes grouping the interest rate lock commitments by interest rate and terms, applying an estimated closing
ratio based on historical experience, and then multiplying by quoted investor prices determined to be reasonably applicable to
the loan commitment groups based on interest rate, terms, and rate lock expiration dates of the loan commitment group.
Forward Commitments — The fair value of these instruments is estimated using an internal valuation model, which includes
current trade pricing for similar financial instruments.
Deposits — The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on
demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using the rates currently
offered for deposits of similar remaining maturities. If the fair value of the fixed maturity certificates of deposit is calculated at
less than the carrying amount, the carrying value of these deposits is reported as the fair value.
Deposits Held for Sale — Prior to December 31, 2018, Heartland entered into agreements with third parties to sell the deposits
of five branch locations, which totaled $106.4 million as of December 31, 2018. The estimated fair value in the table above was
based on the carrying value of the deposits less the premium Heartland expected to receive in accordance with the sales contract
when the transactions are expected to be completed in 2019.
Short-term and Other Borrowings — Rates currently available to Heartland for debt with similar terms and remaining maturities
are used to estimate fair value of existing debt.
Commitments to Extend Credit, Unused Lines of Credit and Standby Letters of Credit — Based upon management's analysis of
the off balance sheet financial instruments, there are no significant unrealized gains or losses associated with these financial
instruments based upon review of the fees currently charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the counterparties.
TWENTY-ONE
REVENUE
On January 1, 2018, Heartland adopted ASU 2014-09, "Revenue from Contracts with Customers" (Topic 606), and all
subsequent ASUs that modified Topic 606. The implementation of the standard did not have a material impact on the
measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed
132 necessary. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period
amounts were not adjusted and continue to be reported in accordance with Topic 605.
Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In
addition, certain noninterest income streams such as fees associated with loan servicing income, bank owned life insurance,
derivatives and certain credit card fees are also not in scope of the guidance. Topic 606 is applicable to noninterest revenue
streams such as service charges and fees, trust fees, and brokerage and insurance commissions. However, the recognition of
these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of Heartland's revenue is
generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.
Service Charges and Fees
Service charges and fees consist of revenue generated from deposit account related service charges and fees, overdraft fees,
customer service fees, credit card fee income, debit card income and other service charges and fees.
Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public
checking accounts), monthly service fees, check orders and other deposit account related fees. Heartland's performance
obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the
period in which the service is provided. Check orders and other deposit account related fees, including overdraft fees, are
largely transactional based, and therefore, the performance obligation is satisfied, and related revenue recognized, at a point in
time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a
direct charge to customers’ accounts.
Customer service fees and other service charges include revenue from processing wire transfers, bill pay service, cashier’s
checks, and other services. Heartland's performance obligation for fees, exchange, and other service charges are largely
satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received
immediately or in the following month.
Credit card fee income and debit card income are comprised of interchange fees, ATM fees, and merchant services income.
Credit card fee income and debit card income are earned whenever the banks' debit and credit cards are processed through card
payment networks such as Visa. ATM fees are primarily generated when a bank cardholder uses an ATM that is not owned by
one of Heartland's banks or a non-bank cardholder uses Heartland-owned ATM. Merchant services income mainly represents
fees charged to merchants to process their debit and credit card transactions, in addition to account management fees.
Trust Fees
Trust fees are primarily comprised of fees earned from the management and administration of trusts and other customer assets.
Heartland's performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon
the average daily market value or month-end market value of the assets under management and the applicable fee rate. Payment
is generally received a few days before or after month end through a direct charge to customers’ accounts. Heartland does not
earn performance-based incentives. Optional services such as real estate sales and tax return preparation services are also
available to existing trust and asset management customers. Heartland's performance obligation for these transactional-based
services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly
after services are rendered.
Brokerage and Insurance Commissions
Brokerage commission primarily consist of commissions related to broker-dealer contracts. The contracts are between the
customer and the broker-dealer, and Heartland satisfies its performance obligation and earns commission when the transactions
are completed. The recognition of revenue is based on a defined fee schedule and does not require significant judgment.
Payment is received shortly after services are rendered. Insurance commissions are related to commissions received directly
from the insurance carrier. Heartland acts as an insurance agent between the customer and the insurance carrier. Heartland's
performance obligations and associated fee and commission income are defined with each insurance product with the insurance
company. When insurance payments are received from customers, a portion of the payment is recognized as commission
revenue.
133 The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the year
ended December 31, 2019, 2018, and 2017, in thousands:
For the Years Ended December 31,
2019
2018
2017
In-scope of Topic 606
Service charges and fees
Service charges and fees on deposit accounts
$
12,790
$
11,291
$
Overdraft fees
Customer service fees
Credit card fee income
Debit card income
Total service charges and fees
Trust fees
Brokerage and insurance commissions
Total noninterest income in-scope of Topic 606
Out-of-scope of Topic 606
Loan servicing income
Securities gains, net
Unrealized gain on equity securities, net
Net gains on sale of loans held for sale
Valuation adjustment on servicing rights
Income on bank owned life insurance
Other noninterest income
Total noninterest income out-of-scope of Topic 606
11,543
331
15,594
11,899
52,157
19,399
3,786
10,796
330
11,893
14,396
48,706
18,393
4,513
$
$
75,342
$
71,612
$
4,843
$
7,292
$
7,659
525
15,555
(911)
3,785
9,410
40,866
1,085
212
21,450
(46)
2,793
4,762
37,548
Total noninterest income
$
116,208
$
109,160
$
9,570
9,365
296
7,968
11,984
39,183
15,818
4,033
59,034
5,636
6,973
—
22,251
21
2,772
5,335
42,988
102,022
Contract Balances
A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration
(resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an
entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due)
from the customer. Heartland's noninterest revenue streams are largely based on transactional activity, or standard month-end
revenue accruals such as asset management fees based on month-end market values. Consideration is often received
immediately or shortly after Heartland satisfies its performance obligation and revenue is recognized. Heartland does not
typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract
balances. As of December 31, 2019, 2018 and 2017, Heartland did not have any significant contract balances.
Contract Acquisition Costs
In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense,
certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental
costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have
incurred if the contract had not been obtained (for example, sales commission). Heartland utilizes the practical expedient which
allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing
these costs would have been amortized in one year or less. Upon adoption of Topic 606, Heartland did not capitalize any
contract acquisition costs.
134 TWENTY-TWO
PARENT COMPANY ONLY FINANCIAL INFORMATION
Condensed financial information for Heartland Financial USA, Inc. is as follows:
BALANCE SHEETS
(Dollars in thousands)
Assets:
Cash and interest bearing deposits
Investment in subsidiaries
Other assets
Due from subsidiaries
Total assets
Liabilities and stockholders’ equity:
Other borrowings
Accrued expenses and other liabilities
Total liabilities
Stockholders’ equity:
Common stock
Capital surplus
Retained earnings
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
INCOME STATEMENTS
(Dollars in thousands)
Operating revenues:
Dividends from subsidiaries
Securities gains, net
Other
Total operating revenues
Operating expenses:
Interest
Salaries and employee benefits
Professional fees
Other operating expenses
Total operating expenses
Equity in undistributed earnings
Income before income tax benefit
Income tax benefit
Net income
Preferred dividends
Interest expense on convertible preferred debt
Net income available to common stockholders
December 31,
2019
2018
$
61,866
1,765,995
49,002
—
$ 1,876,863
$
39,666
1,538,766
30,321
6,000
$ 1,614,753
$
$
271,046
27,680
298,726
269,553
20,025
289,578
36,704
839,857
702,502
(926)
1,578,137
$ 1,876,863
34,477
743,095
579,252
(31,649)
1,325,175
$ 1,614,753
For the Years Ended December 31,
2017
2018
2019
$
$
137,000
—
893
137,893
15,044
4,072
3,029
15,559
37,704
34,307
134,496
14,633
149,129
—
—
149,129
$
$
$
85,000
—
493
85,493
14,371
3,639
2,841
12,510
33,361
52,570
104,702
12,296
116,998
(39)
—
116,959
$
70,850
3,021
2,292
76,163
13,269
3,146
2,379
7,889
26,683
16,212
65,692
9,580
75,272
(58)
12
75,226
135
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Undistributed earnings of subsidiaries
Security gains, net
Gain on extinguishment of debt
Increase (decrease) in accrued expenses and other liabilities
Increase in other assets
Excess tax benefits from stock based compensation
Other, net
Net cash provided by operating activities
Cash flows from investing activities:
Capital contributions to subsidiaries
Repayment of advances from subsidiaries
Proceeds from sales of available for sale securities
Proceeds from sale of other investments
Net assets acquired
Net cash used by investing activities
Cash flows from financing activities:
Proceeds on short-term revolving credit line
Proceeds from borrowings
Repayments on short-term revolving credit line
Repayments of borrowings
Payment for the redemption of debt
Cash dividends paid
Purchase of treasury stock
Proceeds from issuance of common stock
Net cash used by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure:
Conversion of convertible debt to common stock
Conversion/redemption of Series D preferred stock to common stock
Stock consideration granted for acquisitions
TWENTY-THREE
LEASES
For the Years Ended December 31,
2017
2018
2019
$
149,129
$
116,998
$
75,272
(34,307)
—
(375)
3,274
(12,248)
270
4,103
109,846
(46,583)
6,000
—
—
(594)
(41,177)
—
—
—
(20,023)
(2,500)
(24,607)
—
661
(46,469)
22,200
39,666
61,866
$
(52,570)
—
—
5,336
(1,559)
674
5,401
74,280
(30,696)
—
—
—
(13,504)
(44,200)
25,000
30,000
(25,000)
(25,759)
—
(19,357)
(97)
489
(14,724)
15,356
24,310
39,666
$
(16,212)
(3,021)
(1,200)
(4,160)
(567)
1,246
4,714
56,072
—
—
2,868
211
(62,813)
(59,734)
20,000
—
(20,000)
(9,016)
(13,800)
(14,557)
(625)
963
(37,035)
(40,697)
65,007
24,310
— $
— $
$
92,258
— $
$
938
$
238,075
558
419
175,196
$
$
$
$
A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or
equipment for a period of time in exchange for consideration. On January 1, 2019, Heartland adopted ASU 2016-02
"Leases" (Topic 842) and all subsequent ASUs that modified Topic 842. For Heartland, Topic 842 primarily affected the
accounting treatment for operating lease agreements in which Heartland is the lessee.
Lessee Accounting
136
Substantially all of the leases in which Heartland is the lessee are comprised of real estate property for branches, ATM
locations, and office space with terms extending through 2031. All of Heartland's leases are classified as operating leases, and
therefore, were previously not recognized on the consolidated balance sheets. With the adoption of Topic 842, operating lease
agreements are required to be recognized on the consolidated balance sheets as a right-of-use ("ROU") asset and a
corresponding lease liability.
Heartland elected not to include short-term leases (i.e., leases with initial terms of twelve months or less), or equipment leases
(deemed immaterial) on the consolidated balance sheets. The table below presents Heartland's ROU assets and lease liabilities
as of December 31, 2019, in thousands:
Operating lease right-of-use assets
Operating lease liabilities
Classification
Other assets
Accrued expenses and other liabilities
December 31, 2019
$
$
23,200
24,617
The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and
the discount rate used to present value the minimum lease payments. Heartland’s lease agreements often include one or more
options to renew at Heartland’s discretion. If at lease inception, Heartland considers the exercising of a renewal option to be
reasonably certain, Heartland will include the extended term in the calculation of the ROU asset and lease liability. Regarding
the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this
rate is rarely determinable, Heartland utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a
similar term. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019,
was used. The variable lease cost primarily represents variable payments such as common area maintenance and utilities. The
table below presents the lease costs and supplemental information as of December 31, 2019, in thousands:
Lease Cost
Operating lease cost
Variable lease cost
Total lease cost
Supplemental Information
Noncash reduction of ROU assets arising from
lease modifications
Noncash reduction lease liabilities arising from
lease modifications
Income Statement
Category
Occupancy expense
Occupancy expense
Occupancy expense
Occupancy expense
$
$
$
$
For the Year Ended
December 31, 2019
Supplemental balance sheet information
As of December 31, 2019
Weighted-average remaining operating lease term (in years)
6,031
145
6,176
1,771
1,789
6.61
Weighted-average discount rate for operating
leases
A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease
liabilities as of December 31, 2019 is as follows, in thousands:
3.00 %
137 Year ending December 31,
2020
2021
2022
2023
2024
Thereafter
Total lease payments
Less interest
Present value of lease liabilities
$
$
$
5,661
5,408
4,076
2,723
2,015
7,300
27,183
(2,566)
24,617
As defined by Topic 840, Heartland's minimum future rental commitments at December 31, 2018, for all non-cancelable leases
were as follows, in thousands:
2019
2020
2021
2022
2023
Thereafter
$
$
5,776
5,493
5,102
3,241
2,297
12,419
34,328
TWENTY-FOUR
SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(Dollars in thousands, except per share data)
As of and for the Quarter Ended
2019
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expense
Income taxes
Net income
December 31 September 30
111,321
$
5,201
106,120
112,745
4,903
107,842
$
28,030
92,866
5,155
37,851
29,400
92,967
7,941
34,612
$
$
106,708
4,918
101,790
32,061
75,098
13,584
45,169
June 30
March 31
102,955
1,635
101,320
26,717
88,230
8,310
31,497
31,497
37,851
$
34,612
$
45,169
$
Net income available to common stockholders
Per share:
Earnings per share-basic
Earnings per share-diluted
Cash dividends declared on common stock
Book value per common share
Weighted average common shares outstanding
Weighted average diluted common shares outstanding
$
$
$
1.03
1.03
0.18
43.00
$
0.94
0.94
0.18
42.62
$
1.26
1.26
0.16
41.48
0.91
0.91
0.16
39.65
36,758,025
36,840,519
36,692,381
35,743,986
34,564,378
36,835,191
35,879,259
34,699,839
138 (Dollars in thousands, except per share data)
2018
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expense
Income taxes
Net income
Preferred dividends
As of and for the Quarter Ended
December 31 September 30
110,678
$
5,238
105,440
110,283
9,681
100,602
$
27,045
88,821
6,685
32,141
—
29,765
92,539
8,956
33,710
(13)
June 30
March 31
$
$
101,409
4,831
96,578
27,634
88,882
7,451
27,879
91,584
4,263
87,321
24,716
83,646
5,123
23,268
(13)
(13)
Net income available to common stockholders
Per share:
Earnings per share-basic
Earnings per share-diluted
Cash dividends declared on common stock
Book value per common share
Weighted average common shares outstanding
Weighted average diluted common shares outstanding
$
$
32,141
$
33,697
$
27,866
$
23,255
$
0.93
0.93
0.19
38.44
$
0.98
0.97
0.14
37.14
$
0.85
0.85
0.13
36.44
0.76
0.76
0.13
33.81
34,474,336
34,670,180
34,452,377
32,620,775
30,441,776
34,644,187
32,830,751
30,645,212
139 Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Heartland Financial USA, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Heartland Financial USA, Inc. and
subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of
income, comprehensive income, changes in equity, and cash flows for each of the years in the three-
year period ended December 31, 2019, and the related notes (collectively, the consolidated financial
statements). In our opinion, the consolidated financial statements present fairly, in all material respects,
the financial position of the Company as of December 31, 2019 and 2018, and the results of its
operations and its cash flows for each of the years in the three-year period ended December 31, 2019,
in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December
31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February
26, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audits.
We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement, whether due to error or fraud. Our audits included
performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits provide a reasonable basis for our
opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the
consolidated financial statements that were communicated or required to be communicated to the audit
committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial
statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matters
140 below, providing separate opinions on the critical audit matters or on the accounts or disclosures to
which they relate.
Assessment of the allowance for loan losses related to loans collectively evaluated for
impairment
As discussed in Notes 1, 5 and 6 to the consolidated financial statements, the Company’s
allowance for loan losses related to loans collectively evaluated for impairment (ALLL) was
$62.2 million of a total allowance for loan losses of $70.4 million as of December 31, 2019. The
Company estimated the ALLL using (1) a historical loss methodology that estimates the
probability of default (PD) and loss given default (LGD), which are applied based on a dual risk
rating system, for certain commercial and agricultural loans, or (2) a historical loss rate
methodology for all other commercial and agricultural loans, residential real estate loans and
consumer loans based upon weighted average loss rates. Such amounts are adjusted for
certain qualitative factors.
We identified the assessment of the ALLL as a critical audit matter because it involved
significant measurement uncertainty requiring complex auditor judgment, and knowledge and
experience in the industry. In addition, auditor judgment was required to evaluate the
sufficiency of audit evidence obtained. The assessment of the ALLL encompassed the
evaluation of the ALLL methodology, including the methodologies used to estimate (1) the PD
and LGD and their key factors and assumptions, including the dual risk ratings for certain
commercial and agricultural loans, the historical observation period, the loss emergence period
and how loans with similar risk characteristics are pooled, (2) the historical loss rates and their
key factors and assumptions, including the pooling of loans with similar risk characteristics,
historical observation period, and loss emergence periods and (3) the qualitative factors.
The primary procedures we performed to address the critical audit matter included the
following. We tested certain internal controls over the Company’s ALLL process, including
controls related to the (1) development of the ALLL methodology, (2) determination of the key
factors and assumptions used to estimate the PD and LGD and the historical loss rates, (3)
development of the qualitative factors, and (4) analysis of the ALLL results, trends, and ratios.
We evaluated the Company’s process to develop the ALLL estimate by testing certain sources
of data, factors, and assumptions that the Company used, and considered the relevance and
reliability of such data, factors and assumptions. In addition, we involved credit risk
professionals with specialized industry knowledge and experience, who assisted in:
–
–
–
–
–
–
evaluating the Company’s ALLL methodology for compliance with U.S. generally
accepted accounting principles,
testing the historical observation period assumptions used in the PD and LGD and
historical loss rates methodologies,
determining whether loans are pooled by similar risk characteristics,
evaluating the methodology used to develop the resulting qualitative factors and the
effect of those factors on the ALLL compared with relevant credit risk factors and
consistency with credit trends,
testing the dual risk ratings for a selection of loans in the current year by evaluating the
financial performance of the borrower and the underlying collateral, and
evaluating the methodology used to develop the loss emergence periods.
We evaluated the collective results of the procedures performed to assess the sufficiency of the
audit evidence obtained related to the Company’s ALLL.
Initial measurement of the fair value of acquired loans and core deposit intangibles in business
combinations
As discussed in Notes 2 and 8 to the consolidated financial statements, on May 10, 2019, the
Company completed the acquisition of Blue Valley Banc Corp. (BVBC) and its wholly owned
subsidiary, Bank of Blue Valley. The Company records all assets and liabilities, including
intangibles, purchased in business combinations at fair value. As of the closing date, the
141 Company acquired, at fair value, total assets of BVBC of $766.2 million, total loans held to
maturity of $542.0 million, and total deposits of $617.1 million. In addition, on November 30,
2019, the Company completed the acquisition of substantially all of the assets and substantially
all of the deposits and certain other liabilities of Rockford Bank and Trust Company (RB&T). As
of the closing date, the Company acquired, at fair value, total assets of RB&T of $495.7 million,
total loans held to maturity of $354.0 million, and total deposits of $430.3 million. The fair value
of acquired loans for both BVBC and RB&T was based on a discounted cash flow methodology
that projected principal and interest payments using key assumptions related to the discount
rate and loss rates. The fair value of core deposit intangibles for both BVBC and RB&T was
based on the cost savings approach under a discounted cash flow methodology, whereby
projected net cash flow benefits were derived from estimating costs to carry deposits compared
to alternative funding costs, and included key assumptions related to the discount rate, deposit
attrition rates and net costs.
We identified the evaluation of the initial measurement of the fair value of acquired loans and
core deposit intangibles in the above noted business combinations as a critical audit matter.
These fair value measurements involved a high degree of measurement uncertainty and
subjectivity, which required industry knowledge and experience to evaluate the measurement.
Specifically, there was a high degree of subjectivity in applying and evaluating the fair value
measurement methodologies, including the acquired loan valuation key assumptions and core
deposit intangibles key assumptions. The fair value measurements of the acquired loans and
core deposit intangibles also included an evaluation of the mathematical accuracy of certain
calculations.
The primary procedures we performed to address the critical audit matter included the
following. We tested the Company’s internal controls over the (1) development of the overall
fair value measurement methodologies, (2) determination of the key assumptions used in the
acquired loan fair value and core deposit intangibles fair value estimates, and (3) calculation of
the fair value measurements. We involved valuation professionals with specialized skills and
knowledge, who assisted in evaluating:
–
–
–
the fair value measurement methodologies, including the key assumptions, for
compliance with U.S. generally accepted accounting principles,
the key assumptions used in the fair value measurements through (1) comparison to
internal historical data and publicly available data and (2) review of the underlying
support and methodologies for the development of the key assumptions, and
the mathematical accuracy of certain calculations of the fair value measurements.
We have served as the Company’s auditor since 1994.
/s/ KPMG LLP
Des Moines, Iowa
February 26, 2020
142 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Under the direction of our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under
the Securities and Exchange Act of 1934, as amended) as of December 31, 2019. Based on that evaluation, our management,
including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were
effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in
applicable rules and forms and that such information is accumulated and communicated to management, including our Chief
Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure.
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining effective internal control over financial reporting. Our internal
control system was designed to provide reasonable assurance to our management, board of directors and stockholders regarding
the reliability of financial reporting and the preparation and fair presentation of financial statements for external purposes in
accordance with U.S. generally accepted accounting principles. All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation. Our management, under the supervision and with the participation
of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our internal control over financial
reporting based upon the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control - Integrated Framework (2013). Based on our assessment, our internal control over financial
reporting was effective as of December 31, 2019.
Heartland's Illinois Bank & Trust subsidiary acquired substantially all of the assets and substantially all of deposits and certain
other liabilities of Rockford Bank and Trust Company on November 30, 2019. Rockford Bank and Trust which had assets of
$449.0 million as of December 31, 2019, and revenues of $1.0 million for the one-month period ended December 31, 2019, was
excluded from the scope of this report as allowed by the Securities and Exchange Commission. Rockford Bank and Trust's
assets comprised 3% of Heartland's assets at December 31, 2019, and Rockford Bank and Trust's 2019 revenues were less than
1% of Heartland's revenues for 2019.
KPMG LLP, the independent registered public accounting firm that audited Heartland’s consolidated financial statements as of
and for the year ended December 31, 2019, included herein, has issued a report on Heartland’s internal control over financial
reporting. This report follows management’s report.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no significant changes to Heartland's disclosure controls or internal controls over financial reporting during the
quarter ended December 31, 2019, that have materially affected or are reasonably likely to materially affect Heartland's internal
control over financial reporting.
143 Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Heartland Financial USA, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Heartland Financial USA, Inc. and subsidiaries’ (the Company) internal control over
financial reporting as of December 31, 2019, based on criteria established in Internal Control –
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission. In our opinion, the Company maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2019, based on criteria established in Internal Control –
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31,
2019 and 2018, and the related consolidated statements of income, comprehensive income, changes in
equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and
related notes (collectively, the consolidated financial statements), and our report dated February 26,
2020 expressed an unqualified opinion on those consolidated financial statements.
The Company’s Illinois Bank & Trust subsidiary acquired substantially all of the assets and assumed
substantially all of the deposits and certain other liabilities of Rockford Bank and Trust Company on
November 30, 2019. Management excluded from its assessment of the effectiveness of the Company’s
internal control over financial reporting as of December 31, 2019, Rockford Bank and Trust Company’s
internal control over financial reporting associated with total assets of $449.0 million as of December
31, 2019 and total revenues of $1.0 million for the one month period ended December 31, 2019. Our
audit of internal control over financial reporting of the Company also excluded an evaluation of the
internal control over financial reporting of Rockford Bank and Trust Company.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting, included
in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based
on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides
a reasonable basis for our opinion.
144 Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Des Moines, Iowa
February 26, 2020
145 ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information in the Proxy Statement for Heartland’s 2020 Annual Meeting of Stockholders to be held on May 20, 2020, (the
"2020 Proxy Statement") under the captions "Proposal 1-Election of Directors", "Security Ownership of Certain Beneficial
Owners and Management", "Delinquent Section 16(a) Reports," "Corporate Governance and the Board of Directors -
Stockholder Communications with the Board, Nomination and Proposal Procedures," "Corporate Governance and the Board of
Directors - Committees of the Board," and "Corporate Governance and the Board of Directors - Code of Business Conduct and
Ethics" is incorporated by reference. The information regarding executive officers is included in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
The information in our 2020 Proxy Statement, under the captions "Corporate Governance and the Board of Directors - Director
Compensation" and "Executive Officer Compensation" is incorporated by reference.
ITEM 12.
RELATED STOCKHOLDER MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
The information in our 2020 Proxy Statement, under the caption "Security Ownership of Certain Beneficial Owners and
Management" and "Equity Compensation Plan Information" is incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information in the 2020 Proxy Statement under the captions "Related Person Transactions" and "Corporate Governance and
the Board of Directors - Our Board of Directors - Director Independence" is incorporated by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information in the 2020 Proxy Statement under the caption "Relationship with Independent Registered Public Accounting
Firm" is incorporated by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The documents filed as a part of this Annual Report on Form 10-K are listed below:
1. Financial Statements
The consolidated financial statements of Heartland Financial USA, Inc. are included in Item 8 of this Annual
Report on Form 10-K.
2. Financial Statement Schedules
None.
3. Exhibits
The exhibits required by Item 601 of Regulation S-K are included along with this Annual Report on Form 10-K
and are listed on the "Index of Exhibits" immediately following Item 16 below.
ITEM 16. FORM 10-K SUMMARY
None.
146 INDEX OF EXHIBITS
2.1
2.2
2.3
2.4 (1)
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
3.10
Agreement and Plan of Merger between Heartland Financial USA, Inc. and First Bank Lubbock Bancshares, Inc.
dated December 12, 2017 (incorporated by reference to Exhibit 10.41 to the Registrant's Annual Report on Form
10-K filed on February 28, 2018).
Agreement and Plan of Merger between Heartland Financial USA, Inc. and Blue Valley Ban Corp., dated January
16, 2019 (incorporated by reference to Exhibit 10.27 to the Registrant's Annual Report on Form 10-K Filed on
February 27, 2019).
Purchase and Assumption Agreement between Illinois Bank & Trust, Rockford Bank and Trust Company and
QCR Holdings, Inc. dated August 13, 2019 (incorporated by reference to Exhibit 2.1 to the Registrant's Quarterly
Report on Form 10-Q filed on November 6, 2019).
Agreement and Plan of Merger between Heartland Financial USA, Inc. and AIM Bancshares, Inc. dated February
11, 2020.
Restated Certificate of Incorporation of Heartland Financial USA, Inc. and Certificate of Designation of Series A
Junior Participating Preferred Stock as filed with the Delaware Secretary of State on June 10, 2002 (incorporated
by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q filed on November 8, 2008).
Bylaws of Heartland Financial USA, Inc. (incorporated by reference to Exhibit 3.2 to the Registrant’s Annual
Report on Form 10-K filed on March 15, 2004).
Amendment to Certificate of Incorporation of Heartland Financial USA, Inc. as filed with the Delaware Secretary
of State on July 30, 2009 (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form
10-Q filed on August 10, 2009).
Certificate of Designation of Senior Non-Cumulative Perpetual Preferred Stock, Series C, as filed with the
Delaware Secretary of State on September 12, 2011 (incorporated by reference to Exhibit 3.1 to the Registrant’s
Current Report on Form 8-K filed on September 15, 2011).
Amendment to Certificate of Incorporation of Heartland Financial USA, Inc. filed with the Delaware Secretary of
State on May 28, 2015 (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-
Q filed on August 6, 2015).
Certificate of Designation of 7% Senior Non-Cumulative Perpetual Convertible Preferred Stock, Series D, as
filed with the Delaware Secretary of State on February 5, 2016 (incorporated by reference to Exhibit 3.1 to the
Registrant’s Current Report on Form 8-K filed on February 11, 2016).
Amendment to Certificate of Incorporation of Heartland Financial USA, Inc. as filed with the Delaware Secretary
of State on May 18, 2017 (incorporated by reference to Exhibit 3.4 to the Registrant's Amendment No. 2 to it
Form S-4 Registration Statement filed on May 18, 2017).
Amendment to Certificate of Incorporation of Heartland Financial USA, Inc. as filed with the Delaware Secretary
of State on August 28, 2018 (incorporated by reference to Exhibit 3.1 to the Registrant's Quarterly Report on
Form 10-Q filed on November 6, 2018).
Amendment to Certificate of Incorporation of Heartland Financial USA, Inc. as filed with the Delaware Secretary
of State on May 23, 2019 (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form
10-Q filed on August 7, 2019).
Amendment to Certificate of Incorporation of Heartland Financial USA, Inc. as filed with the Delaware Secretary
of State Amendment to Certificate of Incorporation of Heartland Financial USA, Inc. as filed with the Delaware
Secretary of State on June 6, 2019 (incorporated by reference to Exhibit 3.2 to the Registrant’s Quarterly Report
on Form 10-Q filed on August 7, 2019).
4.1
Form of Specimen Stock Certificate for Heartland Financial USA, Inc. common stock (incorporated by reference
to Exhibit 4.1 to Registrant’s Registration Statement on Form S-4 (File No. 33-76228) filed on May 4, 1994).
147
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12 (1)
10.1 (2)
10.2 (2)
10.3 (2)
Indenture by and between Heartland Financial USA, Inc. and Wells Fargo Bank, National Association, dated as
of January 31, 2006 (incorporated by reference to Exhibit 10.19 to the Registrant’s Annual Report on Form 10-K
filed on March 10, 2006).
Indenture by and between Heartland Financial USA, Inc. and U.S. Bank National Association dated as of March
17, 2004 (incorporated by reference to Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K filed on
March 16, 2007).
Indenture between Heartland Financial USA, Inc. and Wilmington Trust Company dated as of June 21, 2007
(incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on August 9,
2007).
Indenture between Heartland Financial USA, Inc. and Wilmington Trust Company dated as of June 26, 2007
(incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed on August 9,
2007).
Form of Senior Notes of Heartland Financial USA, Inc. (incorporated by reference to Exhibit 10.26 to the
Registrant's Annual Report on Form 10-K filed on March 16, 2011).
Rights Agreement, dated as of January 17, 2012, between Heartland Financial USA, Inc. and Dubuque Bank and
Trust Company, as Rights Agent (incorporated by reference to Exhibit 4.1 to Registrant’s Form 8-A filed on May
17, 2012).
Indenture by and between Morrill Bancshares, Inc. and State Street Bank and Trust Company of Connecticut,
National Association dated as of December 19, 2002 (incorporated by reference to Exhibit 10.34 to the
Registrant's Annual Report on Form 10-K filed on March 14, 2014).
Indenture by and between Morrill Bancshares, Inc. and U.S. Bank National Association dated as of December 17,
2003 (incorporated by reference to Exhibit 10.35 to the Registrant's Annual Report on Form 10-K filed on March
14, 2014).
Indenture between Heartland Financial USA, Inc. and U.S. Bank National Association dated as of December 17,
2014, as supplemented (including form of note) (incorporated by reference to Exhibit 4.1 and 4.2 to the
Registrant's Current Report on Form 8-K filed on December 18, 2014).
Form of Stock Certificate for 7% Senior Non-Cumulative Perpetual Convertible Preferred Stock, Series D
(incorporated by reference to Exhibit 4.4 to the Registrant's Annual Report on Form 10-K filed on March 11,
2016).
Description of Securities
Form of Split-Dollar Life Insurance Plan effective November 13, 2001, between the subsidiaries of Heartland
Financial USA, Inc. and their selected officers, including four subsequent amendments effective January 1, 2002,
May 1, 2002, September 16, 2003 and December 31, 2007. These plans are in place at Dubuque Bank and Trust
Company, Illinois Bank & Trust, Wisconsin Bank & Trust and New Mexico Bank & Trust (incorporated by
reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on May 12, 2008).
Form of Executive Supplemental Life Insurance Plan effective January 1, 2005, between the subsidiaries of
Heartland Financial USA, Inc. and their selected officers, including a subsequent amendment effective December
31, 2007. These plans are in place at Dubuque Bank and Trust Company, Illinois Bank & Trust, Wisconsin Bank
& Trust and New Mexico Bank & Trust (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly
Report on Form 10-Q filed on May 12, 2008).
Form of Executive Life Insurance Bonus Plan effective December 31, 2007, between Heartland Financial USA,
Inc. and selected officers of Heartland Financial USA, Inc. and its subsidiaries, including a subsequent
amendment effective December 31, 2007 (incorporated by reference to Exhibit 10.8 to the Registrant’s Annual
Report on Form 10-K filed on March 16, 2009).
148
10.4 (2)
10.5
10.6
10.7 (1)
Form of Split-Dollar Agreement effective November 1, 2008, between the subsidiaries of Heartland Financial
USA, Inc. and their selected officers. These plans are in place at Dubuque Bank and Trust Company, Illinois
Bank & Trust, Wisconsin Bank & Trust, New Mexico Bank & Trust, Arizona Bank & Trust, Citywide Banks,
Minnesota Bank & Trust and Citizens Finance Co. (incorporated by reference to Exhibit 10.9 to the Registrant’s
Annual Report on Form 10-K filed on March 16, 2009).
ISDA Confirmation Letter between Heartland Financial USA, Inc. and Bankers Trust Company dated April 5,
2011 (incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q filed on May
10, 2011).
Form of Time-Based Restricted Stock Unit Award Agreement for Heartland Financial USA, Inc. 2012 Long-
Term Incentive Plan for time-based awards vesting in the third, fourth and fifth years following the original grant
award (incorporated by reference to Exhibit 10.32 to the Registrant's Annual Report on Form 10-K filed on
March 14, 2014).
Form of Change In Control Agreements between Heartland Financial USA, Inc. and Lynn B. Fuller and Bruce K.
Lee and Bryan R. McKeag (as amended, compensation multiple of 3 and health benefits term of 18 months);
Michael J. Coyle, Brian J. Fox and Andrew E. Townsend (compensation multiple of 2 and health benefits term
of 12 months) (incorporated by reference to Exhibit 10.38 to the Registrant's Annual Report on Form 10-K filed
on March 13, 2015).
10.8 (1)(2) Form of Amendment to Change in Control Agreements.
10.9
Form of 6.5% subordinated Notes Due 2019, of CIC Bancshares, Inc. and Form of Amendment to, and
Assumption of Obligations under 6.5% Subordinated Notes Due 2019, of CIC Bancshares, Inc. (incorporated by
reference to Exhibit 10.39 to the Registrant's Annual Report on Form 10-K filed on March 11, 2016).
10.10 (2)
10.11 (2)
10.12
10.13
10.14 (2)
10.15 (2)
10.16 (2)
Heartland Financial USA, Inc. 2012 Long-Term Incentive Plan as Amended and Restated (incorporated by
reference to Exhibit 10.1 to Registrant's Current Report on Form 8-K filed on May 20, 2016).
Heartland Financial USA, Inc. 2016 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.2 to
Registrant's Current Report on Form 8-K filed on May 20, 2016).
Promissory Note and Third Amendment to Business Loan Agreement dated June 14, 2013, between Heartland
Financial USA, Inc. and Bankers Trust Company dated May 10, 2016 (incorporated by reference to Exhibit 10.3
to the Registrant's Quarterly Report on Form 10-Q filed on August 5, 2016).
Underwriting Agreement between Heartland Financial USA, Inc. and Raymond James & Associates, Inc. dated
November 2, 2016 (incorporated by reference to Exhibit 1.1 to the Registrant's Form 8-K filed on November 8,
2016).
Form of Time-Based Restricted Stock Unit Award Agreement under the Heartland Financial USA, Inc. 2012
Long-Term Incentive Plan for time-based awards vesting in the first, second and third years following the
original grant award (incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-
Q filed on May 8, 2018).
Form of Performance-Based Restricted Stock Unit Award Agreement Three-Year Performance Period under the
Heartland Financial USA, Inc. 2012 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q filed on May 8, 2018).
Form of Director Restricted Stock Unit Award Agreement under the Heartland Financial USA, Inc. 2012 Long-
Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-
Q filed on August 7, 2018).
10.17
Business Line Loan Agreement dated June 14, 2019, between Heartland Financial USA, Inc. and Bankers Trust
Company (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q filed on
August 7, 2019).
149
10.18
10.19
10.20
10.21
10.22
21.1
23.1
31.1
31.2
32.1
(2)
(1)
(1)
(1)
(1)
(1)
32.2
(1)
101 (1)
Promissory Note dated June 14, 2019 (issued under the non-revolving line of credit), and Change in Terms
Agreement dated July 15, 2019 between Heartland Financial USA, Inc. and Bankers Trust Company
(incorporated by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q filed on August 7,
2019).
Promissory Note dated June 14, 2019 (issued under the credit facility), and Change in Terms Agreement dated
July 15, 2019 between Heartland Financial USA, Inc. and Bankers Trust Company (incorporated by reference to
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q filed on August 7, 2019).
Promissory Note dated May 10, 2016 (updated to be issued under the Business Line Loan Agreement related to
the credit facility dated June 14, 2019), and Change in Terms Agreement dated June 14, 2019 between Heartland
Financial USA, Inc. and Bankers Trust Company (incorporated by reference to Exhibit 10.4 to the Registrant's
Quarterly Report on Form 10-Q filed on August 7, 2019
Promissory Note dated July 24, 2018 (updated to be issued under the Business Line Loan Agreement related to
the credit facility dated June 14, 2019), and Change in Terms Agreement dated June 14, 2019 between Heartland
Financial USA, Inc. and Bankers Trust Company (incorporated by reference to Exhibit 10.5 to the Registrant's
Quarterly Report on Form 10-Q filed on August 7, 2019).
Heartland Financial USA, Inc. Deferred Compensation Plan effective April 30, 2019 (incorporated by reference
to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on May 6, 2019
Subsidiaries of the Registrant.
Consent of KPMG LLP.
Certification of Chief Executive Officer pursuant to Rule 13a-14.
Certification of Chief Financial Officer pursuant to Rule 13a-14.
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
Financial statement formatted in Inline Extensible Business Reporting Language: (i) the Consolidated Balance
Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Cash Flows, (iv) the
Consolidated Statements of Changes in Equity and Comprehensive Income, and (v) the Notes to Consolidated
Financial Statements.
104 (1)
Cover page formatted in Inline Extensible Business Reporting Language
(1) Filed herewith.
(2) Management contracts or compensatory plans or arrangements.
Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, copies of certain instruments defining the rights of holders of long-term
debt are not filed. Heartland agrees to furnish copies of such instruments to the SEC upon request.
150
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized on February 26, 2020.
SIGNATURES
Heartland Financial USA, Inc.
By:
/s/ Bruce K. Lee
President and Chief Executive Officer
Date:
February 26, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities indicated on February 26, 2020.
By:
/s/ Bruce K. Lee
Bruce K. Lee
President and Chief Executive Officer
(Principal Executive Officer and Duly Authorized Officer)
/s/ Lynn B. Fuller
Lynn B. Fuller
Executive Operating Chairman and Director
(Principal Executive Officer)
/s/ Bryan R. McKeag
Bryan R. McKeag
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Janet M. Quick
Janet M. Quick
Executive Vice President and Deputy Chief Financial Officer
(Principal Accounting Officer)
/s/ Robert B. Engel
Robert B. Engel
Director
/s/ Thomas L. Flynn
Thomas L. Flynn
Director
/s/ R. Mike McCoy
R. Mike McCoy
Director
/s/ Barry H. Orr
Barry H. Orr
Director
/s/ John K. Schmidt
John K. Schmidt
Director
/s/ Duane E. White
Duane E. White
Director
/s/ Mark C. Falb
Mark C. Falb
Director
/s/ Jennifer K. Hopkins
Jennifer K. Hopkins
Director
/s/ Susan G. Murphy
Susan G. Murphy
Director
/s/ Kurt M. Saylor
Kurt M. Saylor
Director
/s/ Martin J. Schmitz
Martin J. Schmitz
Director
151 CORPORATE PROFILE
Founded in 1981, Heartland Financial USA, Inc. is a
multibank holding company with assets of over $13
billion offering uniquely different banking solutions
for business and personal clients.
Heartland’s independent community banks are in Arizona, California,
Colorado, Illinois, Iowa, Kansas, Minnesota, Missouri, Montana, New
Mexico, Texas and Wisconsin, with 115 banking locations serving 84
communities, as of December 31, 2019.
Heartland remains committed to its core commercial business,
which is supported by a strong retail operation. Spread across a
geographically diverse footprint, we have the robust capabilities of
the big banks, and our unique operating model of 11 bank brands
supports our mission of enriching lives, one customer, employee and
community at a time.
Heartland’s common stock is traded through the NASDAQ Global
Select Market System under the symbol “HTLF.” Complete information
about Heartland Financial USA, Inc. is available at HTLF.com.
Forbes ranked Heartland 40th among a nationwide group of 100 leading banking
organizations with assets ranging from $9 billion to over $2 trillion.
1 | Together, we are Heartland
T E X A S
(cid:31)(cid:30)(cid:29)(cid:28)(cid:27)(cid:28)(cid:26)(cid:28)(cid:25)(cid:24)(cid:30)(cid:25)(cid:23)(cid:30)(cid:22)(cid:28)(cid:21)(cid:26)(cid:20)(cid:19)(cid:18)(cid:24)(cid:17)(cid:30)(cid:16)(cid:30)(cid:15)(cid:21)(cid:14)(cid:26)(cid:20)
MINNESOTA
B A N K & T R U S T
VISION STATEMENT
– We will be a top-performing and
admired banking organization.
– We will actively contribute to the
vitality of the communities
where we live and work.
– We will deliver financial expertise
and excellent experiences.