2020 Annual Report
Strength. Insight.Growth. S T R E N G T H . I N S I G H T . G R O W T H .
Heartland Financial USA, Inc.
is now
Introducing HTLF. Our new brand reinforces
the Strength, Insight and Growth we bring to
our employees, customers, communities and
investors. HTLF honors Heartland’s rich history
and refects the company’s geographic diversity
and continued growth.
HTLF’s unique model powers its banks with
technology, efciency and strength. Decision
making is local and focused on customers and
relationships. This is community banking with the
scale to compete at any level.
D I S C O V E R M O R E A T H T L F A N N U A L R E P O R T . C O M
C O R P O R A T E P R O F I L E
HTLF’s geographically diverse group of banks are located
across the Midwest, Southwest and West regions of the
United States. HTLF has 141 banking locations serving more
than 100 communities in Arizona, California, Colorado,
Illinois, Iowa, Kansas, Minnesota, Missouri, Montana, New
Mexico, Texas and Wisconsin, as of December 31, 2020.
HTLF is committed to its core commercial business,
supported by a strong retail operation and provides a
diversifed line of fnancial services including residential
mortgage, wealth management, investment and insurance.
Our unique operating model and 11 banks support 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.”
Depository shares representing Heartland preferred stock
are also traded through the NASDAQ Global Select Market
System under the symbol “HTLFP.”
Complete information is available at HTLF.com.
H T L F . C O M
2
HTLF // 2020 Annual Report
Financial Highlights
For the years ended December 31, 2020, 2019 and 2018
Dollars in thousands, except per share data
F O R T H E Y E A R
2 0 2 0
%CHANGE
FROM 2019
TO 2020
2 0 1 9
2 0 1 8
Net income
$137,938
-7.50 %
$149,129
$116,998
Net income available to common stockholders
Cash dividends, common
133,487
29,468
-10.49
19.75
149,129
24,607
116,959
19,318
P E R S H A R E D ATA
Earnings per common share - diluted
Cash dividends, common
Book value at December 31
$3.57
0.80
46.77
-13.77 %
17.65
8.77
$4.14
0.68
43.00
$3.52
0.59
38.44
AT Y E A R E N D
Total assets
$17,908,339
35.57
%
$13,209,597
$11,408,006
Total loans receivable
10,023,051
Total deposits
14,979,905
Total common stockholders’ equity
1,968,526
19.78
35.63
24.74
8,367,917
7,407,697
11,044,331
9,396,429
1,578,137
1,325,175
F I N A N C I A L R AT I O S
Return on average total assets
0.90 %
-27.42 %
1.24 %
1.09%
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
8.06
12.28
3.65
3.69
11.21
14.71
11.85
10.92
9.02
-20.36
-21.93
-8.75
-8.66
-8.56
6.98
-3.74
0.37
-10.69
10.12
15.73
4.00
4.04
12.26
13.75
12.31
10.88
10.10
9.93
15.72
4.26
4.32
10.93
13.72
12.16
10.66
9.73
1 Refer to the “Reconciliation of Return on Average Tangible Common Equity (non-GAAP)” table on page 41 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 42 of the annual report on Form 10-K.
3
Bruce K. Lee
President and CEO
4
HTLF // 2020 Annual Report
To my fellow shareholders:
It’s my honor to introduce you to our new brand, HTLF. As
We continued to make investments in Operation
shareholders, you’re already familiar with the letters HTLF
Customer Compass, our multi-year strategic
as our stock ticker symbol. Now, we will use those same
initiative. We delivered new digital banking
four letters as the name of our company and to portray
capabilities for consumers, completed installation of
the strength we have today.
The bold type of the HTLF logo signifes Strength.
The letters are connected, like we are to our banks,
more than 100 new full-featured ATMs and enabled
our commercial teams with best-in-class technology
and processes.
clients and communities, giving us Insight to deliver
Consumer behaviors have changed and we
extraordinary banking experiences. The sharp edges
provided customers the in-person and digital
and angles represent our continued Growth and
options they want to interact with us. We continue
forward movement.
to rationalize our branch footprint to more efciently
We move forward as HTLF but must also refect upon
serve our customers.
2020, a year unlike any other. The Covid-19 pandemic
Financial highlights for the year include:
impacted and disrupted our lives in countless ways.
The teams across HTLF and our 11 banks not only met
the year’s challenges, but thrived in spite of them.
Increased total assets by 36 percent
to $17.9 billion
Delivered an efciency ratio of 56.65, a
Part of our mission is to enrich the lives of our employees,
585 basis point decrease from 2019
and in mid-March our focus quickly shifted to their health
Deposits grew by $3.9 billion
and safety. We implemented our pandemic management
plan, and the strategic investments we’d made in the
business enabled us to pivot and protect the health of
our employees while continuing to serve our customers
and communities.
HTLF is proud to have helped thousands of small
businesses in our communities obtain Paycheck
Protection Program (PPP) loans. During 2020, we
And we completed two acquisitions that further
diversifed our assets and increased our presence
in important growth markets of Phoenix and
West Texas.
These are lofty achievements in any year, much
less during a pandemic. We emerge even stronger
than before.
processed nearly 5,000 PPP loans totaling $1.2 billion,
Strength. Insight. Growth. It’s what we bring to our
which helped preserve more than 112,000 jobs.
customers and what our unique business model
In the initial months of the pandemic, we proactively
implemented relief programs for our consumer and
small business customers. We worked individually
and geographically diverse footprint brings to
our shareholders.
with our commercial customers to help them address
Sincerely,
fnancial challenges.
We were humbled to provide much-needed support
to our communities in 2020. We contributed $1.5 million
to nonproft organizations responding to challenges
created by Covid-19 and to high-needs schools for
student technology and personal protective equipment.
Bruce K. Lee
5
Lynn B. Fuller
Executive Operating Chairman
6
HTLF // 2020 Annual Report
HTLF shareholders and friends:
Although we’ve never experienced a worldwide
We continue to be recognized as a top-performing
pandemic like the one that crippled the U.S. and world
and admired banking organization. Not only did we
economy in 2020, we continued to serve our customers,
have a year of signifcant growth, but for the ffth
protected the health and safety of our employees and
provided our shareholders a respectable return on their
year in a row HTLF was recognized as a Forbes Best
Bank. Forbes ranked HTLF 52nd of the top 100 largest
equity in HTLF. Most notable for the year was HTLF’s
banks in the country based on proftability, growth,
incredible growth with assets reaching a record high at
credit quality and efciency. We honor Heartland’s
$17.9 billion and our efciency ratio reaching a record low
past while embracing an optimistic future focused on
at 56.65 percent.
In December 2020, we completed two acquisitions,
one of which was our largest to date, the AimBank
transaction in West Texas. AimBank merged with and into
strength, insight and growth. As HTLF, we embrace
the strength and vitality of our growing community of
banks and strategically position ourselves for future
investment and performance.
HTLF’s Lubbock-based subsidiary. With this acquisition,
In May 2020, Kurt Saylor retired from the HTLF Board
FirstBank & Trust is now our largest bank with more
while continuing as Chairman at Bank of Blue Valley.
than $3 billion in assets. This transaction is expected to
In December 2020, Christopher S. Hylen joined the
be approximately 10 percent accretive to our current
HTLF Board of Directors as an independent director.
shareholders’ earnings per share (EPS). Also, Arizona
Chris brings more than 25 years of experience in
Bank & Trust completed its purchase and assumption of
using technology to provide an extraordinary client
Johnson Bank’s four Phoenix branches. Our simultaneous
experience, delivering value to both clients and
virtual close and systems conversion went extremely well,
shareholders. I welcome Chris to the Board while
taking Arizona Bank & Trust’s total assets over $1.5 billion.
thanking Kurt for his years of dedicated service,
This transaction is expected to be approximately
insight and guidance.
5 percent accretive to our current shareholders’ EPS.
We remain focused on proftability and growth, with
customers, communities and shareholders for their
acquisitions contributing to several companywide goals.
ongoing support and dedication. We are truly grateful
We continue to prioritize both in-market and larger
for your continued investment in HTLF.
I would like to thank our leadership teams, employees,
acquisitions, which create greater market dominance and
EPS growth from substantial cost saves and synergies.
We continue to have a deep pipeline of attractive
prospects with a number of active opportunities.
Sincerely,
Ten of HTLF’s 11 banks have achieved our goal of more
than $1 billion in assets. The substantial increase in
asset size from accretive acquisitions, combined with
Operation Customer Compass’ more efcient and
Lynn B. Fuller
scalable operating platform, signifcantly contributed to
lowering our efciency ratio.
7
Strength.
8
HTLF // 2020 Annual Report
W E O F F E R S T R E N G T H
Strong corporate leadership
and innovative thinking have
uniquely positioned us in the
fnancial landscape. Our business
model and diverse geographic
footprint reduce risk and provide
our banks with size and efciency
to compete at scale. We are
purpose-driven to deliver strength
and generate performance.
9
We provide
strength
everywhere.
Working from home style!
10
HTLF // 2020 Annual Report
Customer-facing retail employees in banks and
call centers were paid a 20 percent premium.
P A N D E M I C
Our business model is designed
to endure challenging times.
HTLF’s fnancial strength, diverse geographic
We also recognized that our communities needed us
footprint, strong leadership and dedicated local talent
now more than ever and deepened our commitment
positioned us to care for our employees, provide relief
to sharing our time, talent and treasures. In April, HTLF
for our customers and help ease hardships facing
and its banks contributed $1.2 million to nonproft
our communities.
organizations leading the response to Covid-19
across the communities we serve. Recipients
As the pandemic emerged our leadership team was
included many community foundations, food banks,
quick to respond, meeting every day to evaluate the
YMCAs, fre, police and emergency services directly
situation and provide clear and decisive guidance. We
connecting community needs with our resources.
implemented our comprehensive pandemic plan and
took the necessary steps to ensure workplace safety
In the fall, we partnered with AdoptAClassroom.org,
for our employees and deliver products and services
donating more than $260,000 to high-needs schools
safely to our customers.
in our communities to purchase technology and PPE,
helping students continue to learn in a
HTLF made the health and safety of its employees our
safe environment.
top priority. Our IT team quickly enabled two-thirds of
our team to work from home. Customer-facing retail
Our fnancial strength enabled us to live our mission
employees in banks and call centers were paid a 20
of enriching our communities. Contributions totaled
percent premium. We introduced a pandemic time-of
$1.5 million as we responded to the challenges
program and committed to pay all employees at 100
created by Covid-19. These dollars and our
percent if they needed time of because of illness, to
employees’ volunteer hours made a meaningful
care for a sick family member or provide childcare due
diference and enriched lives in our communities.
to school closings. We also covered 100 percent of
any Covid-19-related medical expenses for testing or
treatment. Our annual merit cycle continued as planned.
Throughout an unprecedented year our team was
committed to serving customers and supporting
our communities. We proactively implemented relief
eforts for consumer, small business and commercial
customers. HTLF is proud to have helped thousands of
small businesses in our communities obtain Paycheck
Protection Program (PPP) loans. In 2020, we processed
nearly 5,000 PPP loans totaling $1.2 billion, which helped
preserve more than 112,000 jobs and provided a critical
lifeline in our communities. Six banks were top 10 PPP
Our IT team quickly enabled two-thirds
lenders in their respective markets.
of our team to work from home.
11
C O M M U N I T Y R E L A T I O N S
We ofer strength everywhere.
When we support one another, we unlock the
“We are extremely grateful for our partnership
potential in each and every one of us. At HTLF,
with Premier Valley Bank which extends well
we live out our mission of enriching lives one
beyond simply a business relationship. This
employee, customer and community at a time.
donation allows us to further our common
It’s never been more important to live our
community and comes at a time when we are
mission than in 2020 as our communities faced
seeing an unprecedented number of children
unprecedented challenges. HTLF is both proud
and families in need of our services.”
commitment to serve the most vulnerable in our
and grateful that our fnancial position allowed us
to ofer strength, talent and resources towards
the collective needs of our communities.
Matt Dildine
CEO, Fresno Rescue Mission
Uniting together under our mission, HTLF and its
“In a time of great need, Wisconsin Bank & Trust
banks signifcantly increased total contributions
stepped up. Their signifcant demonstration of
in 2020 to best meet the needs of each of our
support will immediately help many students who
communities and their unique challenges.
are facing fnancial hardships due to Covid-19.
We prioritized our contributions towards K-12
We are extremely grateful and appreciative of our
education and small businesses to improve
great partnership with Wisconsin Bank & Trust.”
equity and inclusion in underserved segments
of our communities.
More than $2M in total donations
to support our communities.
HTLF and its banks contributed $1.2 million to
nonproft organizations that work directly with
those impacted by Covid-19 in the states where
we live and work. Through this efort we provided
support for basic needs such as food and
housing, child care and youth activities, supporting
health personnel, frst responders and their families.
We were honored to provide support to the
organizations serving our communities, working
head-on to address the challenges so many
neighbors faced in the wake of Covid-19.
Joshua Boots
Assistant Vice Chancellor for Development and
Alumni Engagement, UW-Platteville
“The Santa Fe Community Foundation is proud
to partner with businesses in building a culture
of community philanthropy – especially when
collaboration and solidarity are what will enable
us to strengthen our many communities at this
critical time. We are honored to work with our
longtime partner New Mexico Bank & Trust.”
William (Bill) Smith
President and CEO,
Santa Fe Community Foundation
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HTLF // 2020 Annual Report
More than $260,000 donated
to schools in our communities.
To support our teachers and students during this
difficult time, HTLF and its banks donated more than
$260,000 to high-needs schools in our communities.
This provided teachers with money to purchase
needed items such as PPE, resources to motivate and
engage remote learners, technology, cleaning and
sanitation supplies.
HTLF recognized the daunting challenges the
education system faced and understood from
employees and community members how critical it
was for our children to continue to be educated in
a safe and productive way. As a result, we ignited a
partnership with AdoptAClassroom.org, a national
nonprofit organization dedicated to advancing equity in
education by providing teachers and schools access to
the resources they need.
“This donation means that the educators at Tahoka
Elementary can move closer to providing multiple
educational platforms that will benefit all the different
learning styles that the students display at the
elementary school. This donation is a game changer.”
Donald Scott
Tahoka Elementary, Texas
“This amazing gift has meant so much to the staff at
Fairview. The 2020-2021 school year has been the
most challenging in our careers, and this has been
the absolute highlight of our year.”
Andrew Demmitt
Fairview Elementary, Kansas
“Every teacher at Toki has been given some money
to improve and increase their classroom libraries.
The focus is on making sure our texts are accessible,
interesting and culturally relevant for students. We
want our students to see themselves everywhere,
including in the texts and literature they’re interacting
with every day. We’re able to do that now with the
donation from Wisconsin Bank & Trust.”
Kyle Walsh
Toki Middle School, Wisconsin
13
T H E P O W E R O F G R O W T H
We are focused on thoughtful, intentional and solid growth.
Growth fuels our ability to evolve and exceed our customers’
needs. It afords the opportunity to compete at any level
while providing unmatched experience. It’s how we achieve
our mission of enriching lives one customer, employee and
community at a time. Together, we are HTLF.
14 HTLF // 2020 Annual Report
Growth.
15
Powered by
16 HTLF // 2020 Annual Report
M E R G E R S A N D A C Q U I S I T I O N S
We seek growth everywhere.
F I R S T B A N K & T R U S T
A R I Z O N A B A N K & T R U S T
Our growth in 2020 was unprecedented. We closed
In early December, Arizona Bank & Trust completed
our largest acquisition ever, the AimBank transaction
its acquisition of Johnson Bank’s four banking
in West Texas. AimBank merged with HTLF’s
centers in Arizona. The transaction expands the
Lubbock-based FirstBank & Trust, making it our
number of Arizona Bank & Trust’s full-service banking
largest bank with more than $3 billion in assets.
centers in the East Valley of the Phoenix market.
“We are highly impressed with the people
Bruce K. Lee, HTLF’s President and CEO, added,
and performance of AimBank and the solid
“Johnson Bank’s Arizona locations are a natural
community banking franchise they have built,”
ft with the geographic footprint and culture of
said Lynn B. Fuller, Executive Operating Chairman
Arizona Bank & Trust. We look forward to growing
of HTLF. “AimBank is an outstanding addition to
our relationships in the Phoenix market.”
our organization.”
“We have tremendous respect for the team
Scott L. Wade, Chairman and CEO of AimBank,
at HTLF and their community banking values.
joined FirstBank & Trust as Vice Chairman of the
Arizona Bank & Trust’s culture is similar to
Board. “We are delighted to join such a high-
Johnson Bank’s in the way in which it engages its
quality organization. The combination of AimBank
employees, serves its customers and supports its
and FirstBank & Trust signifcantly increases
communities,” said Jim Popp, Johnson Financial
our lending capabilities and gives us access to
Group President and CEO.
products and services while preserving Aim’s
legacy as a locally-led community bank.”
Acquisitions contribute to
several companywide goals.
1
2
Increase overall asset size and earnings base
Expand geographic diversifcation
Currently, 10 of our 11 banks have assets
exceeding $1 billion and we continue to have
a deep pipeline of attractive prospects with
many active opportunities.
3 Contribute to operating efciency and scale
17
We gain strength everywhere.
N E W H T L F L E A D E R S H I P
Nathan Jones
Executive Vice President, Chief Credit Ofcer
Nathan brings more than 20 years of proven experience in managing large scale
credit and banking operations, while developing new business processes and
capabilities within global and regional fnancial institutions. As Chief Credit Ofcer,
he is responsible for leading the credit administration organization, an especially
important role given today’s dynamic credit environment. Nathan’s depth of
knowledge has allowed us to work with our customers and navigate the pandemic
while maintaining a diverse loan portfolio and solid credit metrics. Nathan remains
focused on building a strong credit culture and upholding the highest level of
fnancial stewardship for our customers.
N E W B A N K L E A D E R S H I P
Brent Giles
President and CEO
Brent has more than three decades of banking experience, which includes
commercial and consumer banking, strategic leadership and teambuilding.
He has an unwavering commitment to serving customers and a dedication to
community involvement, actively working with local boards. Brent works closely
with Wisconsin Bank & Trust customers to help build a stronger and more vibrant
future for Wisconsin families and businesses. His extensive banking background
and customer-focused approach suits him well as leader of Wisconsin Bank &
Trust. Brent is focused on thoughtful, intentional and solid growth that fuels the
ability to meet and exceed our customers’ needs.
18 HTLF // 2020 Annual Report
We invest for growth.
When the world shifted to a mostly virtual environment, HTLF had the solutions to meet
our customers’ needs, providing options for banking on their terms, in-person or digitally.
S TOM
S TOM
E
E
R
R
•
•
C
C
O P E R AT I O N C U S T O M E R C O M PA S S strives to create
exceptional customer experiences. Strategic investments over the past
two years have empowered our people, evolved our processes and
enhanced our technology.
•C U
•C U
N
N
O
O
I
I
T
T
A
A
R
R
O
O
M
M
PASS
PASSOPE
OPE
2 0 2 0 K E Y I N I T I A T I V E S
Commercial Services
New Technology
Deliver best-in-class services and
Adoption of Salesforce CRM and
processes for our commercial customers
nCino loan origination platform. These
as they shifted their business operations.
tools deliver efciency, speed and an
Launched integrated payables,
enhancing our electronic accounts
payable product suite, providing a single
solution for all payment types.
Advanced our lock box capability,
automating the process of securely
collecting check payments while
improved internal and external customer
experience while supporting business
development eforts.
Video Banking
Launched an innovative
video banking platform,
decreasing the potential for error or fraud.
providing customers a
Improved eDeposit products, a software
solution that remotely captures and
manages deposits, giving greater
security and compatibility from almost
any device.
way to transact business,
open accounts and apply
for loans via video with a
live banker.
ATM Upgrade
Digital Wallets
Upgraded our ATM network, installing
Implemented digital wallets
more than 100 new state of-the-art
-
featuring Apple Pay, Google
ATMs that ofer signifcantly more
Pay and Samsung Pay, allowing
convenience and fraud protection.
customers to make secure,
contactless purchases with
their mobile device.
Based upon our proven success of implementing best-in-class technology, streamlining
processes, increasing capacity and improving operations to provide enhanced customer
experiences, all while achieving an all-time low efciency ratio, we continue to make
strategic investments in Operation Customer Compass.
19
C O M P R E H E N S I V E I N S I G H T S
We are a team of fnancial experts,
analysts and thought leaders.
We are committed to providing our
customers with insights that go
beyond basic economic and market
advice. We believe dedicated local
talent ofers unique perspective
on regional markets and a true
understanding of the customers
we serve. It is from this comprehensive
view that we provide smart,
evidence-based insights that
drive real results.
20 HTLF // 2020 Annual Report
Insight.
21
F L E X S T E E L
Steely resolve manufactures
strong results.
Like many organizations in 2020, Flexsteel was
“The team at DB&T was highly responsive to
confronted with tough questions and business
engaging in the potential opportunity to support
decisions that would impact the longevity
Flexsteel and was very collaborative throughout
of the company. Flexsteel manufactures
the loan agreement,” said Schmidt. “Inventory
furniture that is “built to last,” and as a publicly
is crucial to supporting aggressive growth
traded company with more than 1,600 global
aspirations and DB&T could provide short-term
associates, it needed to make difcult decisions
funding to support strategic inventory investments.”
to remain durable through the pandemic and
into the future.
As retail stores began to re-open in June, demand
for furniture surged. And because of their tenacity
The uncertainty could have been insurmountable
and commitment to fnancial strength, Flexsteel
for some organizations. But, with steely resolve
was uniquely positioned to capture that demand.
and determination, Flexsteel’s leadership team
acted swiftly and decisively. They cut existing
Schmidt acknowledges DB&T’s support to help
non-core business lines, rationalized their product
Flexsteel grow the business in an uncertain time.
ofering, closed underutilized facilities and found
“We will continue to look for opportunities to
ways to shed additional fxed structure costs.
expand our partnership,” said Schmidt. “At the
end of the day, people and relationships make the
“This experience renewed our commitment and
diference. If there is an issue or I have an urgent
strengthened our focus on our core business,”
need, I know I can trust the DB&T team to be part
said Derek P. Schmidt, Chief Financial Ofcer
of the solution. They will do the right thing that is
and Chief Operating Ofcer. “We have become
in our best interest. It’s their people, their integrity
fnancially stronger and more agile. At the same
and their character – that’s what they bring and
time, we renewed our commitment to becoming
what sets them apart.”
an omni-channel company and accelerated our
focus on growing our e-commerce business,
The results are speaking for themselves. Flexsteel
which experienced a surge in demand.”
is outperforming its industry, gaining market
share and aggressively investing in new areas
During this timeframe Flexsteel decided to
for future growth.
seek a new fnancial partner that could provide
the solutions and the support they needed
for growth. That partnership was found with
Dubuque Bank and Trust (DB&T).
22 HTLF // 2020 Annual Report
DEREK P. SCHMIDT
Chief Financial Ofcer and
Chief Operating Ofcer, Flexsteel
“If there is an issue or I have an urgent need, I know
I can trust the DB&T team to be part of the solution.
They will do the right thing that is in our best interest.
It’s their people, their integrity and their character –
that’s what they bring and what sets them apart.”
2323
“Illinois Bank & Trust believed in our
idea and they wanted to be there to
help, to see it through, starting on day
one. That was unique and they made
these things possible”
SARAH-EVA MA RCHESE
Founder, Floracracy
24 HTLF // 2020 Annual Report
F L O R A C R A C Y
Insights fourish into
something beautiful.
When Sarah-Eva Marchese frst met with Illinois Bank
This support enabled managing investors in a
& Trust, her business was just a budding idea driven by
way they may not have been aforded without the
the passion of wanting to help people communicate
bank’s partnership.
stories of love, sorrow and everything in between
through the language of fowers.
“Illinois Bank & Trust believed in our idea and they
wanted to be there to help, to see it through, starting
After planning for both her wedding and her
on day one. That was unique and they made these
grandmother’s funeral simultaneously, Marchese’s
things possible,” said Marchese. “Starting a company is
vision to revolutionize the fower-buying experience
terrifying and lonely and having someone give us that
and to put meaning and signifcance back into what
kind of respect was special.”
had become a mostly commoditized experience, was
born. Her goal was to become fuent in the language
Floracracy and Illinois Bank & Trust look forward to
of fowers and to allow people to truly express their
continuing to develop fourishing ideas. “When I came
feelings for every moment and milestone life ofers.
to Rockford I believed and had hoped we’d be met by
the support of the community. Because for us, we’re
As Marchese’s idea and vision began to bloom, one
about more than just fowers. We’re about community
of the frst pieces of advice she received was to fnd a
too,” said Marchese. “There are amazing partners here.
friend in the banking business, one who could be a true
By building our location downtown and the decisions
partner. As she looked to the Rockford community to
we’re making for the business and the community …
put down roots and create a home for her business she
Illinois Bank & Trust has been a part of this and we’re
was introduced to Illinois Bank & Trust.
excited to build for the future. The exciting pieces
are yet to come.”
Illinois Bank & Trust provided mentorship, insights and
guidance that helped Floracracy establish banking
needs, make introductions to key people, secure
access to capital, and “when the pandemic hit and so
many others were waiting and didn’t have a resource
for Paycheck Protection Program loans, that didn’t
happen to us,” said Marchese. “We had a resource and
were treated with the same respect as a big company.”
25
M A R A T H O N M E D I C A L
Partners who grow together,
stay together.
Marathon Medical was founded in 2002 by John
St. Leger cites a story about a VA hospital in the
St. Leger, a Vietnam veteran inspired by the
South that was at risk of shutting its operations
values he acquired through his time in the service:
because it didn’t have the right surface
honor, integrity and character. His goal was to
disinfectant. “We had just received a shipment,”
provide excellence in the health care supply chain
St. Leger recalls. It was a Thursday, close to the
with a veteran patient-frst approach.
end of business when he got the call. “They
For St. Leger, his work is all about relationships.
50 by 8:30 a.m. the next day and have the rest
He believes there is an aspect of combining both
there by Monday morning. They said that would
business and personal that allows for trusted
be a miracle. By having some special operations
partnerships to form, a foundation from which
and being fexible, it allows us to do those kinds
needed 500 cases. I told them I could overnight
you can grow and do great things, together. This
of things.”
was the high bar he set for his fnancial partner,
and Citywide Banks has met that expectation for
The partnership with Citywide Banks has grown
almost 20 years.
through the years, as have both organizations.
“We started at $3 million in sales and this year
Marathon Medical has partnered with Citywide
we will have grown to over $50 million. They have
Banks since its inception. “One of the reasons
treated us the same way, every single day, and
I cherish the partnership is how good they
we appreciate it,” said St. Leger.
were to us in the beginning, when we were frst
growing,” St. Leger said. “They were interested
Lyn St. Leger, Marathon Medical Chief Financial
and attentive to the challenges we were facing.
Ofcer, adds, “We’ve both grown and the
They provided the partnership, relationship, and
partnership has grown with it. We’re doing
the amount of attention we needed then, and
things now we never dreamt we’d be doing.
along the way.”
For example, the card program. We love the
card program. It’s been so simple to use, and it
St. Leger’s high-touch approach expands to his
has amazed me how well it’s been received by
manufacturing and business partnerships as
our suppliers. They like to be paid this way. It’s
well. “We try to pay attention to what’s going on,
also been another revenue source, and way to
and to be nimble and quick.”
manage accounts payables without setting up
other banking challenges.”
When the pandemic hit and the country needed
ventilators, syringes and needles, Marathon
“Anytime there is something the company needs
Medical was ready and equipped to meet
I know I can call Citywide Banks and they’ll take
the needs of both health care organizations
care of it. There’s security in knowing that. We’re
and patients.
customers for life,” Lyn St. Leger concludes.
26 HTLF // 2020 Annual Report
“Anytime there is something the company
needs I know I can call Citywide Banks and
they’ll take care of it. There’s security in
knowing that. We’re customers for life.”
Health and Human Services Secretary Alex Azar visits
Marathon Medical, which supplied over $27 million worth of
syringes and needles for the Operation Warp Speed efort
to take on the Covid 19 pandemic.
-
From Left to Right:
J O N L AND I S COO, Marathon Medical
A LE X A Z AR HHS Secretary
J O HN ST. L EG ER CEO, Marathon Medical
LYN ST. L EGE R CFO, Marathon Medical
27
Goodwill
Fresno Rescue Mission
Goodwill’s mission is to support and strengthen
“When our citizens are not thriving, neither
the community, so when its stores closed due to
is our community. It means investing in each
the pandemic it was devastating. Arizona Bank
person. We offer love, guidance, structure and
& Trust, Goodwill’s financial and community
accountability; a way out of their situation. We
partner offered the insights, solutions and the
take them from one step to the next. Premier
backing through an extended line of credit that
Valley Bank is unique. Their staff personally
ultimately allowed Goodwill to reopen its doors
contributes time and energy to help us care for
as an essential business. With Arizona Bank &
the community of Fresno by providing for those
Trust’s support, Goodwill could bring its full team
in need.” – Matt Dildine, CEO
back and focus on what was most important –
the neighbors who needed career development
resources, training and hope to get back on their
feet and build a better future.
Premier Valley Bank is proud to be the financial
partner that can support this incredible
organization. During Covid-19, Premier Valley
Bank provided additional strength through
donations that enabled Fresno Rescue Mission
to continue supplying hot meals, safe and clean
beds, clothing, showers and hygiene items,
access to medical care and other critical
resources during the pandemic.
28 HTLF // 2020 Annual Report
Docs Who Care
Falling Colors
Whether in the shadow of a pandemic or in
Falling Colors partners with governments, nonprofits
the everyday existence of a rural community
and other organizations to promote human thriving
hospital, Docs Who Care is in the business of
and well-being through investment in innovative
finding quality healthcare providers to serve
programs. Their unique software platform allows
rural communities in their time of need. The
organizations to manage funds, track costs, measure
organization takes great pride in its personal
effectiveness and drive improvements.
relationships with the hospitals it serves and the
providers committed to serving in these areas.
New Mexico Bank & Trust built a trusting partnership
with Falling Colors, providing strength, insight and
Docs Who Care has that same level of personal
growth through a CRE loan, line of credit, commercial
relationship with their local Bank of Blue Valley
card and treasury services.
team. Bank of Blue Valley provided a Paycheck
Protection Program loan and a line of credit,
allowing Docs Who Care to continue to serve
in rural communities when local staff were
overloaded with patients or quarantined
due to Covid-19.
“Whether our needs are big or small, New Mexico
Bank & Trust helps us immediately so we can focus
on our tasks at hand. This level of comfort and
confidence in our banking partner just can’t be
overestimated in terms of its impact on our bottom
line,” said Mindy Hale, Chief Financial Officer
29
Wrought Washer
Summit Resources International
For more than a century Wrought Washer has
Summit Resources International (SRI) seeks to
been providing the nation’s leading industries
be an amazing place to work in Bozeman and
high-quality washers for a broad range of
best-in-class in the design, manufacturing, and
markets including automotive, agricultural,
global distribution of apparel and accessories.
electrical, appliance, construction equipment
Today, SRI manages each of these for
and material handling.
Caterpillar, Inc, with distribution in 107 countries.
“Wisconsin Bank & Trust is a strong bonded
“Rocky Mountain Bank provides an asset-
partner we can rely on to support our daily
based revolving line of credit for our main
financing needs. They are willing and able to
operating business. We’ve been doing business
assist us with capital expenditures or potential
together for over 15 years and have a strong
acquisition funding needs. The team at
working relationship. Most importantly, the bank
Wisconsin Bank & Trust put trust in Wrought
has taken the time to understand the global
Washer to turn a corner, they truly believed in us
nature of our business, and the intricacies of
and that sets them apart. That’s when I knew
a consumer products business with a global
they weren’t just a banking source but they
supply chain.” - KC Tolliver, CEO
were a true partner of Wrought Washer.”
- Chad VanDenLangenberg, Chief Financial Officer
30 HTLF // 2020 Annual Report
TreeHouse
Abilene Christian University
“TreeHouse is on a mission to end hopelessness
Abilene Christian University (ACU) is a hub of
among teens. Community partnerships are a
rigorous academic excellence and devoted
key component of the TreeHouse approach
community. Their mission is to educate students
and we rely on passionate community members
for Christian leadership and service throughout
to lead the charge. Community leaders like
the world.
Minnesota Bank & Trust support TreeHouse in
many ways, from a critical donation in a time of
need to sponsoring events and volunteering, all
while being a trusted banking partner. It’s their
people who truly make a diference. Mental health
has proven to be a major challenge for teens
as their world has been fipped upside down
by the pandemic. The demand for our services
has increased dramatically. Minnesota Bank &
Trust’s insight and guidance during the pandemic
supported our ability to meet the new mental
health challenges teens are facing at a critical
time when funding was a big question mark.”
- Kari Boyce, VP of Finance, Chief Financial Ofcer
With the help of HTLF Specialized Industries,
FirstBank & Trust could provide strength through
a competitive fnance package on all of ACU’s
upcoming projects including bond and real
estate fnancing. FirstBank & Trust’s fnancial
backing allowed ACU to purchase property for
new housing, while also ofering a cash-out for
deferred maintenance and improvements.
31
Powered by
32 HTLF // 2020 Annual Report
D I V E R S I T Y , E Q U I T Y A N D I N C L U S I O N
We look for insight everywhere.
The events of 2020 highlighted the need for deeper conversations, introspection and
internal assessment around where we, as an organization, can do better and do more
to support our people and our communities.
Enriching lives in our communities is an important part of our mission. Our values are
rooted in the belief that respect, equity and inclusiveness make us stronger. With
insights from our refections, we have taken actionable steps towards creating a safer,
more inclusive and diverse organization that refects the markets and the communities
we serve.
As HTLF we are a diverse and unique group. It’s the variety of experiences and
lifestyles we bring to work every day that allow us to provide greater insights to help us
better understand each other and our customers. It is our individual backgrounds and
experiences that shape who we are and allow us to fully embrace our values.
Diversity, Equity and Inclusion are a journey and not a
destination. As we look ahead into 2021, we are focused on:
Strengthening our recruiting and onboarding practices to build diverse talent.
Further development of our Ieadership program to recruit high-caliber, recent
college graduates and young professionals; our recent leadership program
classes have been 60% diverse.
Investing in our employees through diversity and inclusion training to maximize the
experiences on our teams.
Launching a Diversity Advisory Council to guide on key initiatives across HTLF and
our banks. The council will provide educational opportunities and foster strategic
guidance, alignment and integration of DEI eforts.
Continuing to improve diversity and inclusion in all levels of our company.
33
E X E C U T I V E M A N A G E M E N T A N D D I R E C T O R S
As of December 31, 2020
EXECUTIVE MANAGEMENT
Bruce K. Lee
President and CEO
Lynn B. Fuller
Executive Operating Chairman
—
Deborah K. Deters
Executive Vice President,
Chief Human Resources Ofcer
Lynn H. “Tut” Fuller, M.D.
Executive Vice President,
Regional President
Laura J. Hughes
Executive Vice President,
Chief Marketing Ofcer
Nathan R. Jones
Executive Vice President,
Chief Credit Ofcer
Jay L. Kim
Executive Vice President,
General Counsel
Kevin C. Karrels
Executive Vice President,
Head of Consumer Banking
R. Greg Leyendecker
Executive Vice President,
Regional President
Bryan R. McKeag
Executive Vice President,
Chief Financial Ofcer
Dennis J. Mochal
Executive Vice President,
Chief Information Ofcer
Tamina L. O’Neill
Executive Vice President,
Chief Risk Ofcer
J. Daniel Patten
Executive Vice President,
Finance and Corporate
Strategy
David A. Prince
Executive Vice President,
Head of Commercial Banking
Janet M. Quick
Executive Vice President,
Deputy Chief Financial Ofcer,
Principal Accounting Ofcer
Christopher S. Hylen
Board Member and CEO
Reltio, Inc.
Redwood City, CA
R. Michael McCoy
Chairman, Ex-Ofcio President
and CEO
McCoy Group
Dubuque, IA
Susan G. Murphy
Principal
The Grace Alliance, LLC
Denver, CO
Barry H. Orr
Director and CEO
FirstBank & Trust
Lubbock, TX
John K. Schmidt
Senior Vice President and
Chief Financial Ofcer
A.Y. McDonald
Dubuque, IA
Martin J. Schmitz
Chairman
Citywide Banks
Greenwood Village, CO
Duane E. White
Executive Vice President and
Chief Product Ofcer
Medecision
Minneapolis, MN
Kevin G. Quinn
Executive Vice President,
Regional President
Daniel C. Stevens
Executive Vice President,
Head of ITOPS
Steven E. Ward
Executive Vice President,
Regional President
BOARD OF DIRECTORS
Lynn B. Fuller
Executive Operating Chairman
HTLF
Dubuque, IA
Bruce K. Lee
President and CEO
HTLF
Dubuque, IA
Robert B. Engel
Managing Director and CEO
BLT Advisory Services, LLC
Naples, FL
Mark C. Falb
Chairman and CEO
Kendall Hunt Publishing
Company and Westmark
Enterprises, Inc.
Dubuque, IA
Thomas L. Flynn
Past President and CEO
Flynn Ready-Mix Concrete Co.
Dubuque, IA
Jennifer K. Hopkins
Managing Partner
Crescendo Capital Partners
Centennial, CO
34 HTLF // 2020 Annual Report
ROCKY MOUNTAIN
BANK
Lynn B. Fuller
Board Chair
Tod M. Petersen
President and CEO
—
Catherine Bergman
Michael Johns
Pamela K. Mower
Gerald Pearsall
Kevin G. Quinn
WISCONSIN BANK &
TRUST
J. Cory Recknor
Board Chair
Brent Giles
President and CEO
—
John K. Faust
Lynn B. Fuller
Erik A. Huschitt
Ramesh C. Kapur
Jack R. Liebl
Stephan J. Nickels
Steven F. Stref
Paul W. Sweeney
Steven E. Ward
Thomas J. Wilkinson
S U B S I D I A R Y D I R E C T O R S A N D P R E S I D E N T S
As of December 31, 2020
ARIZONA BANK & TRUST
John D. Benton
Board Chair
William H. Callahan
President and CEO
—
David M. Adame
Lynn B. Fuller
R. Greg Leyendecker
Paul F. Muscenti
Christian Roe
R. Randy Stolworthy
Dr. Philip To
Frank E. Walter
BANK OF BLUE VALLEY
Kurt M. Saylor
Chairman
Robert D. Regnier
Executive Chairman
and CEO
Wendy Reynolds
President
—
Lynn B. Fuller
Thomas A. McDonnell
Rhonda S. McHenry
Kent P. Saylor
Anne D. St. Peter
Robert D. Taylor
Steven E. Ward
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, M.D.
President and CEO
—
Chad M. Chandlee
Richard C. Cody
David C. Davis
James R. Etheredge
Donnelle M. Fuerste
Lynn B. Fuller
Charles D. Glab
Timothy W. Hodge
Douglas J. Horstmann
Robert D. McDonald II
James C. Mulgrew
John B. (J.B.) Priest
John K. Schmidt
John Tallent
FIRSTBANK & TRUST
Barry H. Orr
Chairman and CEO
Greg Garland
President
—
Troy Allcorn
Barry Brown
Lynn B. Fuller
Ricky Green
Bruce K. Lee
Fred Locker
R. Bruce Orr
Gary Rothwell
Scott Wade
ILLINOIS BANK & TRUST
Frank E. Walter
Board Chair
Jefrey S. Hultman
CEO
Thomas D. Budd
President
—
Charles E. Box
Michael K. Broski
Todd B. Colin
Craig A. Erdmier
Monica B. Glenny
Damon C. Heim
Dana S. Kiley, Jr.
Pamela R. Maher
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
Lynn B. Fuller
Board Chair
R. Greg Leyendecker
President and CEO
—
Robert W. Eaton
Cole Flanagan
Sherman McCorkle
Michael Mechenbier
Ben F. Spencer
PREMIER VALLEY BANK
Thomas G. Richards
Board Chair
Lo B. Nestman
President and CEO
—
Linda F. East
Marvell French
Lynn B. Fuller
Richard H. Lehman
J. Mike McGowan
Kevin G. Quinn
35
Corporate and
Investor Information
A N N U A L M E E T I N G
P R O F I L E
In accordance with local, state and national pandemic guidance
MAILING ADDRESS
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 19, 2021 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/HTLF2021.
Prior to the meeting, you will be able to vote at www.proxyvote.com.
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 Jay Kim,
Heartland Financial USA, Inc.
1398 Central Avenue
P.O. Box 778
Dubuque, Iowa 52004-0778
563.589.2100
INDEPENDENT AUDITORS
KPMG LLP
Des Moines, Iowa
CORPORATE COUNSEL
Dorsey & Whitney LLP
Minneapolis, Minnesota
Executive Vice President, General Counsel, Heartland Financial USA,
Inc., 1398 Central Avenue, P.O. Box 778, Dubuque, Iowa 52004-0778.
STOCK LISTING
The Form 10-K is also available on the Heartland website under the
Heartland’s common stock is
heading Investor Relations. Securities analysts and other investors
traded through the NASDAQ
seeking additional information about Heartland should contact Bryan
Global Select Market System
R. McKeag, Executive Vice President, Chief Financial Ofcer, at the
under the symbol “HTLF.”
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. ofers 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
Depository shares representing
Heartland preferred stock are
also traded through the NASDAQ
Global Select Market System
under the symbol “HTLFP.”
Complete information is
available at HTLF.com.
optional cash purchases to acquire additional shares. They may elect
to reinvest dividends on either all or a portion of the shares they hold.
TRANSFER AGENT/
STOCKHOLDER SERVICES
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.
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.
36 HTLF // 2020 Annual Report
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, 2020
☐ 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
Depositary Shares, each representing 1/400th interest in
a share of 7.00% Fixed-Rate Reset Non-Cumulative
Perpetual Preferred Stock, Series E
HTLFP
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 ☑
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.
Non-accelerated filer ☐
Smaller reporting company ☐
Accelerated filer ☐
Indicate by check mark whether the registrant has filed a report on or attestation to its management's assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public
accounting firm that prepared or issued its audit report. ☑
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, 2020, the last business day of the registrant's most
recently completed second fiscal quarter, was approximately $1,161,388,720.
As of February 24, 2021, the Registrant had issued and outstanding 42,096,266 shares of common stock, $1.00 par value per share.
Portions of the Proxy Statement for the 2021 Annual Meeting of Stockholders, which will be filed no later than 120 days after December 31,
2020, 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
Human Capital
Supervision and Regulation
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
Information About Our Executive Officers
Part II
Selected Financial Data
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9.
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.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14.
Part IV
Principal Accountant Fees and Services
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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 any information incorporated herein by reference) contains, and future oral and
written statements of Heartland Financial USA, Inc. ("Heartland") and its management may contain, forward-looking
statements within the meaning of such term in Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") with respect to the business,
financial condition, results of operations, plans, objectives and future performance of Heartland. Any statements about
Heartland's expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may
be forward-looking. Forward-looking statements may include information about possible or assumed future results of
Heartland's operations or performance, and may be based upon beliefs, expectations and assumptions of Heartland's
management. These forward-looking statements, are generally identifiable by the use of words such as "believe," "expect,"
"anticipate," "plan," "intend," "estimate," "project," "may," "will," "would," "could," "should," "view," "opportunity."
"potential," or other similar expressions. Although Heartland has made these statements based on management's experience and
best estimate of future events, the ability of Heartland to predict results or the actual effect or outcomes of plans or strategies is
inherently uncertain, and there may be events or factors that management has not anticipated. Therefore, the accuracy and
achievement of such forward-looking statements and estimates are subject to a number of risks, many of which are beyond the
ability of management to control or predict, that could cause actual results to differ materially from those in its forward-looking
statements. These factors, which Heartland currently believes could have a material adverse effect on its operations and future
prospects are detailed in the "Risk Factors" section included under Item 1A. of Part I of this Annual Report on Form 10-K,
include, among others:
• COVID-19 Pandemic Risks, including risks related to the ongoing COVID-19 pandemic and measures enacted by the
U.S. federal and state governments and adopted by private businesses in response to the COVID-19 pandemic;
• Economic and Market Conditions Risks, including risks related to the deterioration of the U.S. economy in general and
in the local economies in which Heartland conducts its operations;
• Credit Risks, including risks of increasing credit losses due to deterioration in the financial condition of Heartland's
borrowers, based on declining oil prices and asset and collateral values, which may continue to increase the provision
for credit losses and net charge-offs ;
• Liquidity and Interest Rate Risks, including the impact of capital market conditions and changes in monetary policy on
our borrowings and net interest income;
• Operational Risks, including processing, information systems, cybersecurity, vendor, business interruption, and fraud
risks;
Strategic and External Risks, including economic, political, and competitive forces impacting our business;
•
• Legal, Compliance and Reputational Risks, including regulatory and litigation risks; and
• Risks of Owning Stock in Heartland, including stock price volatility and dilution as a result of future equity offerings
and acquisitions.
However, there can be no assurance that other factors not currently anticipated by Heartland will not materially and adversely
affect Heartland’s business, financial condition and results of operations. In addition, many of these risks and uncertainties are
currently amplified by and may continue to be amplified by the COVID-19 pandemic and the impact of varying governmental
responses that affect Heartland’s customers and the economies where they operate. Additionally, all statements in this Annual
Report on Form 10-K, including forward-looking statements, speak only as of the date they are made. Heartland does not
undertake and specifically disclaims any obligation to publicly release the results of any revisions which may be made to any
forward-looking statement to reflect events or circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events or to otherwise update any statement in light of new information or future events. Further
information concerning Heartland and its business, including additional factors that could materially affect Heartland’s financial
results, is included in Heartland’s filings with the Securities and Exchange Commission (the "SEC").
1 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 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 2021
Annual Shareholders Meeting to be held on May 19, 2021, will be available electronically via a link on our website at
www.htlf.com.
At December 31, 2020, Heartland had total assets of $17.91 billion, total loans held to maturity of $10.02 billion and total
deposits of $14.98 billion. Heartland’s total stockholders' equity as of December 31, 2020, was $2.08 billion. Net income
available to common stockholders for 2020 was $133.5 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 insured and regulated by 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 133 banking locations:
Illinois Bank & Trust, Rockford, Illinois, is chartered under the laws of the state of Illinois.
• Dubuque Bank and Trust Company, Dubuque, Iowa, is chartered under the laws of the state of Iowa.
•
• 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.
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.
In addition, as of December 31, 2020, 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, 2020.
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 banking relationships with customers through value-added product offerings, competitive market
2
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 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, retirement plan 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.
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 and referrals
•
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, risk management, 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, risk 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. We also have a stock
compensation plan and an employee stock purchase plan.
We are deeply committed to our communities by encouraging the active participation of our employees, officers and board
members in local charitable, civic, school, religious and community development activities.
3 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, Southwestern and Western regions of the
United States. Our strategy is to balance the growth in our Southwestern and Western markets with the stability of our
Midwestern markets. The following table provides information about the implementation of Heartland's expansion strategy:
Name
Citizens Finance Co.(1)
Year
1988
1989 Key City Bank
1991 Farley State Bank
1992 Galena State Bank & Trust Co.
First Community Bank(2)
1994
Riverside Community Bank(3)
1995
Cottage Grove State Bank(4)
1997
1998 New Mexico Bank & Trust
1999 Bank One Monroe (branch)
2000 First National Bank of Clovis
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 First National Bank Platteville
2012 Heritage Bank, N.A.
2013 Morrill & Janes Bank and Trust Company
2013
2015 Community Bank & Trust (Sheboygan)
2015 Community Bank (Santa Fe)
2015 First Scottsdale Bank, N.A.
2015 Premier Valley Bank
Centennial Bank(5)
2016
2017 Founders Community Bank
2017 Citywide Banks
2018 Signature Bank
2018 First Bank & Trust
2019 Bank of Blue Valley
2019 Rockford Bank and Trust Company
Johnson Bank (4 branches)
2020
2020 AimBank
Freedom Bank(7)
De Novo Acquisition
Merged Into or Assets Purchased By
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
X
X
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
Arizona Bank & Trust
First Bank & Trust(10)
(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.
(10) In the first quarter of 2021, seven of the twenty-five AimBank branches were transferred to New Mexico Bank & Trust.
4
For a description of the AimBank and Johnson Bank branch acquisitions, refer to "2020 Developments" under Item 7.
"Management’s Discussion and Analysis of Financial Condition and Results of Operations."
Through acquisition and organic growth, our goal is to reach at least $1 billion in assets in each of our charters. As of December
31, 2020, we have achieved this goal in ten of our eleven charters. Dubuque Bank and Trust Company, Illinois Bank & Trust,
Wisconsin Bank & Trust, New Mexico Bank & Trust, Arizona Bank & Trust, Citywide Banks, Minnesota Bank & Trust, Bank
of Blue Valley, Premier Valley Bank and First Bank & Trust each have assets over $1 billion.
Due to changes in the competitive landscape and our customers' banking behaviors, we have selectively sold, consolidated and
closed branches recently. We 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. 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 credit offerings, along with treasury management and retirement plan 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, 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. Commercial real estate loans,
which include owner occupied and non-owner occupied loans, are generally term loans originated 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 and commercial real estate 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 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.
Bank
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
SBA
Express
Lender
X
X
X
X
X
X
X
X
X
X
X
SBA
Preferred
Lender
SBA
Export
Express
USDA
Certified
Lender
X
X
X
X
X
X
X
X
X
X
X
Our Banks participate in the Paycheck Protection Program ("PPP"), originally created by the Coronavirus Aid, Relief and
Economic Security Act (the "CARES Act") and later expanded with the adoption of the Paycheck Protection Program
Flexibility Act (the "PPFA") and the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the "Economic
Aid Act"). PPP loans provide small businesses with funding to maintain payroll and cover certain other overhead expenses. PPP
loans are 100% SBA guaranteed and borrowers may be eligible to have an amount up to the entire principal balance forgiven
and paid by the SBA. PPP loans also carry a zero-risk rating for regulatory capital purposes, and the Federal Reserve has made
available a liquidity facility to facilitate funding of PPP loans held by banks.
Our commercial and commercial real estate 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
and commercial real estate loans are that the cash flow of the borrowers may be unpredictable, and the collateral securing these
loans may fluctuate in value.
With the oversight of our centralized credit administration group, our credit risk management process is governed by our loan
policy which establishes our framework for credit and underwriting standards across the company and our Banks. Our loan
policy provides the underlying standards in alignment with safe and sound credit decision making and in accordance with
regulatory guidelines as applicable to our portfolio (e.g., Real Estate Lending Standards, Supervisory Loan-to-Value Limits).
Centralized staff in credit administration assist our Bank commercial and agricultural lending officers in the analysis,
underwriting of credit and facilitation of the credit approval process.
In addition to the lending personnel of the Banks reporting to their respective boards of directors, our internal loan review
validates credit risk rating accuracy and analyzes the credit risk of the Banks. 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. In 2020, we added additional personnel and
resources to the special assets group in response to the economic changes caused by the COVID-19 pandemic. 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
6
electronic banking services, as well as retirement plan 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 7% of our total loan portfolio at December 31, 2020. Dubuque Bank and Trust Company and
Wisconsin Bank & Trust 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.
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
With our acquisition in 2018 of First Bank & Trust in Lubbock, Texas, we acquired its wholly owned mortgage subsidiary,
PrimeWest Mortgage Corporation ("PrimeWest"). PrimeWest, which was merged into First Bank & Trust in April 2020,
provides mortgage loans to customers in Texas and has expanded to also serve the mortgage needs of our customers in many of
our markets. First Bank & Trust services the loans it sells into the secondary market, and at December 31, 2020, residential real
estate mortgage loans serviced, primarily for government sponsored entities ("GSE"), totaled $743.3 million.
Heartland fully outsourced its remaining legacy residential real estate mortgage lending business in 2018 by entering into
arrangements with third parties to offer residential mortgage loans to customers in many of our markets not served by First
Bank & Trust. Additionally, in 2019, Heartland's Dubuque Bank and Trust Company subsidiary sold substantially all of its
mortgage servicing rights portfolio. Residential mortgage loans originated through third parties are not being serviced by us.
Retail Banking
A wide variety of retail banking services are delivered through our banking centers. Services include checking, savings, money
market accounts, certificates of deposit, individual retirement accounts ("IRAs") 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 online account opening and mobile banking. Our retail customers receive high-touch service in our banking
center locations and further enjoy the convenience of online bill pay, 24-hour ATM availability, mobile deposit, and 24-hour
access to account detail. As technology advances, we are committed to offering our customers the convenience of online, ATM
and mobile delivery channels with the security they expect.
Wealth Management and Retirement Plan Services
In most markets where the Banks operate, wealth management, trust, securities brokerage and retirement plan services are
offered to customers in the community. In some cases, these services are offered using an individual Bank's trust powers and in
others the trust powers and personnel of a sister Bank with trust powers are utilized. As of December 31, 2020, total trust assets
under management were $3.42 billion. Heartland also specializes in retirement plan services, offering qualified retirement plan
recordkeeping, administration and advice to business clients, including 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, individual retirement products, education savings products, and brokerage services. Vehicle,
7
property and casualty, life and disability insurance is also offered by Heartland through DB&T Insurance, Inc. and Heartland
Financial USA, Inc. Insurance Services.
B. MARKET AREAS
Heartland is a geographically diversified company with a Midwestern, Western and Southwestern 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 and Southwest as offering greater opportunities for growth accompanied by the potential of wider economic swings.
The following table sets forth certain information about the offices and total deposits of each of the Banks as of December 31,
2020, (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
CO
Citywide Banks
MN
KS
Minnesota Bank & Trust
Bank of Blue Valley
Banking
Locations
6
2
2
6
3
1
5
1
2
1
9
2
3
2
1
10
2
2
1
1
1
1
1
11
4
2
2
1
1
1
1
2
7
1
2
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
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
Total
Deposits
1,456,908
1,338,677
1,057,369
$
$
$
$
1,749,963
$
$
1,357,158
538,012
$
2,181,511
$
$
789,555
1,138,264
8
Charter
State
CA
Bank
Name
Premier Valley Bank
TX
First Bank & Trust
Total
Deposits
$
836,984
$
2,622,716
Banking
Locations
1
1
1
4
1
9
1
1
1
1
1
2
1
1
1
1
1
1
2
1
1
2
1
2
1
Market Areas
Served
Fresno MSA
Madera County
Mariposa County
San Luis Obispo County
Tuolumne County
Lubbock, TX MSA
Bailey County
Dallam County
Ector County
Gray County
Hockley County
Lamb County
Midland County
Mitchell County
Parmer County
Potter County
Mitchell County
Roberts County
Scurry County
Taylor County
Yoakum County
Colfax County, NM
Guadalupe County, NM
Quay County, NM
Union County, NM
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 online 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.
9
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.
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. HUMAN CAPITAL
The attraction and retention of qualified employees is critical to Heartland’s success. At December 31, 2020, Heartland
employed 2,013 full-time equivalent employees. In 2020, our employee engagement scores increased to their highest level, with
93% of employees responding.
COVID-19 Relief
As the COVID-19 pandemic advanced throughout the year, our employees' and customers' health and safety remained top of
mind as our employees rose to the challenges of serving our customers.
• Heartland instituted "pandemic pay" to ensure employees did not experience financial hardships when they needed to
stay remote due to COVID-19 exposures.
• Heartland provides preventative health care coverage at 100% and employees were enabled to seek medical care
virtually to make sure they stayed healthy while social distancing.
• We successfully pivoted to deliver all employee onboarding and training virtually, which enabled our new hires to be
engaged faster.
• Demonstrating the care and commitment to our customers have come to expect, many employees worked countless
hours, often late into the evening, to assist in the processing of PPP loans and other customer needs.
• Our employee teams also continued to serve our communities and Heartland donated $264,000 in support of High
Need Schools, which helped teachers and schools purchase needed equipment and supplies for their students.
Competitive Compensation and Benefits
We remain focused on providing market level compensation and benefit packages. We benchmark our compensation programs
annually and continually analyze incentive arrangements to ensure that we reward talent appropriately in exchange for their
efforts in adding value for our customers. Heartland continues to support employees with matching contributions to their 401(k)
(over 90% employee participation), an employee stock purchase plan, and buy down of student debt in exchange for unused
paid time off. Employees are also active participants in our wellness platform, which include a weight loss program, a program
offering tips on how to stay healthy and resources for home schooling.
Investment in Employee Development
We invest in our talent and provide meaningful development opportunities. Employees participated in over 2,100 hours of
training, in addition to compliance training. In 2020, we graduated 10 employees from our leadership program which is
comprised of a diverse group of recent college graduates. The program focuses on the development and understanding of basic
banking and line of business skills that prepare the candidates for their next role in the Company. This diverse group of talent is
being deployed into key roles across our banks and lines of business.
Diversity and Inclusion
Heartland is committed to seeking diversity at all levels of the organization. Heartland adopted the following diversity
statement which reflects our current culture as well as what we aspire to be:
Heartland is unique and so are you. We all come from different backgrounds and experience that help shape our
company values. Our values are rooted in the belief that respect, equality, and inclusiveness make us stronger
together. The variety of experiences and lifestyles we bring to work every day provides insights that help us better
understand each other and our customers.
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In furtherance of our diversity initiatives, executive leadership participated in diversity, equity and inclusion "listen and learn"
sessions, and senior leadership will participate in similar sessions in 2021. We are in the process of implementing additional
diversity training for all employees in 2021, updating the onboarding process to enhance employee dialogue and establishing a
diversity advisory council.
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.
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.
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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,
since the Banks are under the common control of Heartland, the FDIC may look to the assets of the Banks to offset losses
incurred as a result of the failure of one or more of the other Banks. Under the Dodd-Frank Act, the FDIC also 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.
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
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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 federal law and 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
capital, the allowance for credit 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
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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 $17.91 billion of assets as of December 31, 2020, and reclassified $146.3 million of
trust preferred securities from Tier 1 capital to Tier 2 capital.
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, 2020, Heartland had regulatory capital in excess of the Federal Reserve requirements for
well-capitalized bank holding companies
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 the Dodd-Frank Act stress test regulations or any requirement to
publish the results of stress testing. Despite elimination of this requirement, Heartland continues 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
the prospective rate of earnings retention appears consistent with its capital needs, asset quality, and overall financial condition.
In addition, the payment of dividends to holders of Heartland's common stock is subject to the payment of any preferred
dividends payable to holders of Heartland's preferred stock. 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.
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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. 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.
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 2020,
the Banks paid supervisory assessments totaling $1.3 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.
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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, 2020: (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
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.
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, including the Banks, 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, 2020.
As of December 31, 2020, approximately $500.9 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.
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"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.
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,
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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 the guidance, 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.
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 to replace the 2011
proposed rule. While the 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.
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 was 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.
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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 First Bank & Trust 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.
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 First Bank & Trust, 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 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.
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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
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.
COVID-19 Pandemic Risks
The ongoing COVID-19 pandemic and measures intended to prevent its spread have adversely affected, and may continue to
adversely affect our business activities, financial condition, and results of operations and such effects will depend on future
developments, which are highly uncertain and difficult to predict.
Global health concerns relating to the COVID-19 pandemic and related government actions taken to reduce the spread of the
virus have negatively impacted the macroeconomic environment, and the pandemic has significantly increased economic
uncertainty and abruptly reduced economic activity. The extent to which the COVID-19 pandemic impacts our business, results
of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to
predict, including, but not limited to, the duration and spread of the pandemic, its severity, the actions to contain the virus or
treat its impact, and how quickly and to what extent normal economic and operating conditions can resume.
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The pandemic has resulted in government authorities implementing numerous measures to try to contain the virus, including the
declaration of a federal National Emergency; multiple cities’ and states’ declarations of states of emergency; school and
business closings; limitations on social or public gatherings and other social distancing measures, such as working remotely;
travel restrictions, quarantines and shelter-in-place orders. Such measures have significantly contributed to rising
unemployment and negatively impacted consumer and business spending, borrowing needs and saving habits. The federal
government has taken measures to address the economic and social consequences of the pandemic, including the passage of the
CARES Act and later with the adoption of the PPFA and the Economic Aid Act. The CARES Act, as supplemented by the
PPFA and Economic Aid Act, among other things, provides certain measures to support individuals and businesses in
maintaining solvency through monetary relief, including in the form of financing, loan forgiveness and automatic forbearance.
There can be no assurance, however, that the steps taken by the worldwide community or the U.S. government will be sufficient
to address the negative economic effects of COVID-19 or avert severe and prolonged reductions in economic activity.
We may experience adverse financial consequences due to a number of factors, including, but not limited to:
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negative effects on net interest income and net interest margins as a result of the low interest rate environment;
increased credit losses due to financial strain on our customers as a result of the pandemic and governmental actions,
specifically on loans to borrowers in the lodging, retail trade, retail properties, restaurants and bars and oil and gas;
increases in our provision for credit losses and net charge-offs resulting from increased credit losses;
declines in collateral values;
an impairment of goodwill or core deposit and customer relationship intangibles that could result in charges being
recorded and restrictions on the ability of certain Banks to pay dividends to us;
loan modifications and loan payment deferrals resulting in reduced earnings;
increased demand on our liquidity as we meet borrowers’ needs and cover expenses related to the pandemic
management plan;
negative effects on capital and leverage ratios as a result of reduced liquidity which, although not currently
contemplated, could reduce or force suspension of dividends;
stock price volatility;
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illness, quarantines, government actions, or other restrictions in connection with the pandemic;
third-party disruptions, including negative effects on network providers and other suppliers, which may affect their
ability to perform under the terms of agreements or provide essential services;
increased cyber and payment fraud risk due to increased online and remote activity; and
other operational failures due to changes in our normal business practices because of the pandemic and governmental
actions to contain it.
These factors may remain prevalent for a significant period of time and may continue to adversely affect our business, results of
operations and financial condition even after the COVID-19 pandemic has subsided. There are no comparable recent events that
provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact
of the pandemic is highly uncertain and subject to change.
Our participation in the Paycheck Protection Program and other regulatory and governmental actions to mitigate the impact
of the COVID-19 could result in reputational harm, claims and litigation.
Our Banks are participating lenders in the PPP, a loan program administered through the Small Business Administration
("SBA") that was created under the CARES Act, and modified by the PPFA and Economic Aid Acts, to help eligible
businesses, organizations and self-employed persons fund their operational costs during the COVID-19 pandemic. Under this
program, the SBA guarantees 100% of the amounts of fixed, low interest rate loans that are subject to numerous other
regulatory requirements. Borrowers are also eligible to apply to the SBA for forgiveness of their PPP loan obligations, and most
are expected to do so. Because of the short windows between the passing of the authorizing legislation and the opening of the
PPP, there was and continues to be some ambiguity in the laws, rules and guidance regarding the operation of the PPP.
Subsequent rounds of legislation and associated agency guidance have not provided necessary clarity and have created potential
additional inconsistencies and ambiguities. Accordingly, the Banks are exposed to risks relating to compliance with the PPP
requirements, including reputational harm. Additionally, since the launch of the PPP, several other larger banks have been
subject to litigation regarding the process and procedures used in processing applications for the PPP. If PPP borrowers fail to
qualify for loan forgiveness, the Banks face a heightened risk of holding these loans at unfavorable interest rates for an
extended period of time. The Banks have credit risk on PPP loans if a determination is made by the SBA that there is a
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deficiency in the manner in which the loan was originated, funded, or serviced. If a deficiency is identified, the SBA may deny
forgiveness, take action against borrowers and, in some instances, deny its liability under the guaranty, reduce the amount of the
guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Banks.
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 and may be impacted by the effects of past and future civil unrest and domestic
disturbances in the communities that we serve. 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 are 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.
Changes in interest rates and other conditions could negatively impact net interest income and net interest margin.
Market interest rates have declined significantly since the beginning of the COVID-19 pandemic as a result of actions taken by
the Federal Reserve. In March 2020, the Federal Reserve reduced the target federal funds rate and announced a $700 billion
quantitative easing program in response the expected economic impact of the COVID-19 pandemic. In addition, the Federal
Reserve reduced the interest rate it pays on excess reserves. We expect that these reductions in interest rates, especially if
prolonged, could continue to adversely affect our net interest income and margins and our profitability.
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.
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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, variable rate loans and other financial instruments with attributes that are either
directly or indirectly dependent on the LIBOR. In 2017, the United Kingdom Financial Conduct Authority ("FCA"), which
regulates LIBOR, announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021.
On November 30, 2020, the ICE Benchmarks Administration ("IBA"), which compiles and oversees LIBOR, announced a
consultation on its intention to cease publication of one-week and two-month LIBOR at the end of 2021 and to continue
publishing other LIBOR tenors until June 2023. It is unknown whether any banks will continue to voluntarily submit rates for
the calculation of LIBOR or whether LIBOR will continue to be published by the IBA after these dates based on these
submissions or on any other basis.
The transition from LIBOR to SOFR or a different alternative reference rate is complex and could have a range of adverse
impacts on us. In particular, any such transition could, among other things, (i) adversely effect the value of, return on and
trading for financial assets or liabilities that are linked to LIBOR, including securities, loans or derivatives; (ii) require
renegotiation of outstanding financial assets and liabilities; (iii) result in additional inquiries or other actions from regulators in
respect to our preparation and readiness for the LIBOR transition; (iv) increase the risks of disputes or litigation and/or increase
expenses related to the transition; (v) adversely impact our reputation as we work with customers to transition loans and
financial instruments from LIBOR; (vi) require successful system and analytics development and operationalization to
transition to our systems, loan portfolio and risk management processes away from LIBOR, which will require reliance on
third-party vendors; and (vii) cause disruption in financial markets that are relevant to our business.
In March 2020, the Financial Accounting Standards Board ("FASB") issued ASU 2020-04 "Reference Rate Reform" which
addresses the effect of the anticipated transfer away from LIBOR towards new interest rate benchmarks under GAAP. We have
formed a working group that continues to actively assess the impacts of ASU 2020-04 and the related opportunities and risks
involved in the LIBOR transition. However, there can be no assurance that actions taken by us and third parties to address these
risks or otherwise prepare for the transition from LIBOR will be successful.
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, 2020, we had goodwill of $576.0 million, representing approximately 28% of
stockholders’ equity.
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 $62.7 million of deferred tax assets at December 31, 2020, 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
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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.
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 tax rates will remain at current levels or that presently anticipated benefits will be realized in future
years’ financial performance.
Our business and financial performance could be adversely affected, directly or indirectly, by natural disasters, climate
change, pandemics, terrorist activities, domestic disturbances or international hostilities
Neither the occurrence nor the potential impact of natural disasters, climate change, pandemics, terrorist activities, domestic
disturbances or international hostilities can be predicted. However, these occurrences could impact us directly (for example, by
interrupting the ours systems, which could prevent the us from obtaining deposits, originating loans and processing and
controlling the flow of business; causing significant damage to our facilities; or otherwise preventing us from conducting
business in the ordinary course), or indirectly as a result of their impact on our borrowers, depositors, other customers, vendors
or other counterparties (for example, by damaging properties pledged as collateral for our loans or impairing the ability of
certain borrowers to repay their loans). We could also suffer adverse consequences to the extent that natural disasters, climate
change, pandemics, terrorist activities, domestic disturbances or international hostilities affect the financial markets or the
economy in general or in any particular region. These types of impacts could lead, for example, to an increase in delinquencies,
bankruptcies or defaults that could result in higher levels of nonperforming assets, net charge- offs and provisions for credit
losses.
Our ability to mitigate the adverse consequences of these occurrences is in part dependent on the quality of our resiliency
planning, and our ability, if any, to anticipate the nature of any such event that occurs. The adverse impact of natural disasters,
climate change, pandemics, terrorist activities, domestic disturbances or international hostilities also could be increased to the
extent that there is a lack of preparedness on the part of national or regional emergency responders or on the part of other
organizations and businesses that we transact with, particularly those that we depend upon, but have no control over.
Additionally, the force and frequency of natural disasters are increasing as the climate changes.
Our framework for managing risks may not be effective in mitigating risk and losses.
Our risk management framework seeks to mitigate risk and loss. We have established processes and procedures intended to
identify, measure, monitor, report, and analyze the types of risk to which we are subject, including liquidity risk, credit risk,
market risk, interest rate risk, compliance risk, strategic risk, reputation risk, and operational risk related to our employees,
systems and vendors, among others. However, as with any risk management framework, there are inherent limitations to our
risk management strategies as there may exist, or develop in the future, risks that it has not appropriately anticipated or
identified. We must also develop and maintain a culture of risk management among our employees, as well as manage risks
associated with third parties, and could fail to do so effectively. If our risk management framework proves ineffective, we could
incur litigation and negative regulatory consequences, and suffer unexpected losses that could affect its financial condition or
results of operations.
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:
risks resulting from changes in economic and industry conditions;
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risks inherent in dealing with individual borrowers;
uncertainties as to the future value of collateral; and
the risk of non-payment of loans.
24 Although we attempt to minimize our credit risk through prudent loan underwriting procedures and by monitoring
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 credit losses and our financial condition,
results of operations and liquidity.
We are subject to lending concentration risks.
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. As a result of the current economic environment caused by the COVID-19 pandemic, we
are engaging in more frequent communication with borrowers to better understand their creditworthiness and the challenges
faced. These communications should allow Heartland to respond proactively as borrower needs and issues arise. 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 real estate construction loans,
represents a large portion of our commercial loan portfolio. 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. We believe that the effect of and response to the COVID-19
pandemic (as separately described above) will have some impact on all commercial real estate loans and more heavily impact
lodging, retail trade, and retail properties, in particular those retail properties dependent on restaurants and bars, and the oil and
gas, segments.
Real estate construction 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
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
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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.
The ability of a borrower to repay agricultural loans may be especially affected by many factors outside of the borrower’s
control.
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 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.
Economic disruption resulting from the COVID-19 pandemic may make it difficult for some customers to repay their loans,
resulting in increased credit losses.
The effect of and response to the COVID-19 pandemic (as separately described above) will make it difficult for some customers
to make timely payments on their loans in accordance with their terms. We believe that the COVID-19 pandemic will have
some impact on all customers and more heavily impact the lodging, retail trade, retail properties, restaurants and bars and oil
and gas segments. As of December 31, 2020, Heartland's aggregate loan exposure to borrowers in these segments was $1.82
billion or 14% of total loan exposure.
In keeping with guidance from regulators, we have actively worked with COVID-19 affected borrowers to defer their
payments, interest, and fees. Beginning in March of 2020, we offered certain customers the opportunity to modify the terms of
existing loans, resulting in interest only payments or the deferment of principal and interest payments for a set period of time,
typically 90 days. In accordance with regulatory guidance, these modifications are not considered or reported as troubled debt
restructurings. While interest and fees will still accrue to income, through normal GAAP accounting, should eventual credit
losses on these deferred payments occur, interest income and fees accrued would need to be reversed. In such a scenario,
interest income and net interest margin could be negatively impacted in future periods. Upon completion of these initial deferral
periods, it is anticipated that some loans will return to normal repayment and other may require further modifications. As of
December 31, 2020, approximately $122.8 million of the modifications made by us remained in some form of payment deferral
as a result of these modifications.
These loan deferrals are intended to increase the likelihood that the affected borrowers will operate through and recover
following the COVID-19 pandemic, after which their loans will return to a normal repayment schedule and perform in
accordance with their original terms. There can be no assurance, however, that these efforts will be successful and may instead
only result in a delay rather than avoidance of deterioration or losses on loans to the affected borrowers. If economic conditions
worsen, we could be required to further increase our allowance for credit losses and record additional credit loss expense. Our
asset quality measures could worsen during future measurement periods if the effects of the COVID-19 pandemic are
prolonged.
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Government programs established in response to the COVID-19 pandemic may delay but not avoid the realization of credit
losses.
Pursuant to the CARES Act, beginning at the end of March 2020, the SBA made up to six months of principal and interest
payments on behalf of borrowers on certain qualifying SBA guaranteed loans. Pursuant to the Economic Aid Act, beginning in
February of 2021 the SBA began making an additional three months of such principal and interest payments.
The CARES Act also established the PPP (as further described above). PPP loans are also in payment deferral, requiring no
principal or interest payments until the loan forgiveness process is completed. Pursuant to the Economic Aid Act, in January of
2021, the PPP loan program was re-opened for new PPP borrowers and expanded to allow certain previous PPP borrowers to
receive a second draw PPP loan. Second draw PPP loans are also 100% SBA guaranteed, eligible for up to 100% forgiveness
by the SBA and will be in payment deferral, requiring no principal or interest payments until the loan forgiveness process is
completed.
The foregoing programs are intended to increase the likelihood that the affected borrowers operate through and recover
following the COVID-19 pandemic, after which their loans will return to a normal repayment schedule and perform in
accordance with their original terms or in the case of PPP loans, will be forgiven. There can be no assurance, however, that
these programs will be successful and may instead result in a delay rather than avoidance of deterioration or losses on loans to
the affected borrowers. In addition, while the implementation and success of these programs is highly dependent on the SBA
and other governmental bodies, these programs also expose the participating financial institutions, including Heartland, to
reputational risks.
Our allowance for credit losses may prove to be insufficient to absorb losses in our loan portfolio.
We establish our allowance for credit losses in consultation with management of the Banks and maintain it at a level considered
appropriate by management to absorb current expected credit losses and risks inherent in the portfolio. While the level of
allowance for credit 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, 2020, our allowance for credit losses as a percentage of total
loans was 1.31% and as a percentage of total nonperforming loans was approximately 149%. Although we believe that the
allowance for credit losses is appropriate to absorb current expected credit 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 credit 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. Credit losses in excess of our
reserves may adversely affect our business, financial condition and results of operations.
In June 2016, the FASB issued an accounting standard update, "Financial Instruments-Credit Losses (Topic 326), Measurement
of Credit Losses on Financial Instruments," which replaced the "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 on January 1, 2020. 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. CECL also requires that an allowance for credit losses be established for any unfunded loan commitments that are not
cancelable. 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,
including anticipated losses resulting from deteriorating economic conditions as a result of events such as the COVID-19
pandemic. 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 delayed recognition
until it is probable a loss has been incurred. Accordingly, the adoption of the CECL model materially affected how we
determine our allowance for credit 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 credit losses. If we are required to
materially increase our level of allowance for credit 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.
While the fiscal stimulus and relief programs enacted in response to the COVID-19 pandemic have mitigated credit losses in the
near term, once these programs have run their course, we may experience changes in the value of collateral securing
outstanding loans, deterioration in the credit quality of borrowers, and the inability of borrowers to repay loans in accordance
with their loan terms causing credit losses.
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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.
The required accounting treatment of loans we acquire through acquisitions 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 GAAP, we are required to record loans acquired through acquisitions, 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 net 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 fluctuate due to the net 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 net
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
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 and preferred stock and to pay interest and principal on our debt.
Dividends payable on common shares are also subject to quarterly dividends payable on outstanding preferred shares at the
applicable dividend rate.
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Reduction in the value, or impairment of our investment securities, can impact our earnings and common stockholders'
equity.
We maintained a balance of $6.29 billion, or 35% of our assets, in investment securities at December 31, 2020. 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 may have to record provision expense to establish an allowance for credit losses on our
carried at fair value debt securities, and 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. In
addition, the COVID-19 pandemic has accelerated the need to implement technological changes as a result of modifications to
our business practices implemented in order to address governmental restriction and requirements to address the needs,
preferences and best interests of our employees, customers and business partners.
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. In addition, the COVID-19
pandemic has increased the risk of third-party disruptions, including negative effects on network providers and other suppliers,
which have been, and may further be, affected by, stay-at-home orders, market volatility and other factors that increase their
risks of business disruption or that may otherwise affect their ability to perform under the terms of any agreements with us or
provide essential services. 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.
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 providers 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.
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
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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
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. In addition, the COVID-19 pandemic has increased cyber and payment fraud risk due to
increased online and remote activity. 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 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
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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
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 rely 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 analytical and forecasting models may be improper or ineffective.
The processes we use to estimate our current expected credit 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
credit 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.
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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.
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.
32
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.
It is uncertain whether and to what extent the current administration will increase the regulatory burden on community banks,
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.
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.
We are becoming subject to additional regulatory requirements as our total assets increase, and these additional
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
33
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.
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
Heartland's outstanding stock (with certain limited exceptions) without the permission of our board of directors. The
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, 2020, Heartland had no unresolved staff comments.
34
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, 2020:
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
9816 Slide Road
Lubbock, TX 79424
Main Facility
Square Footage Owned or Leased
Main Facility
65,000
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
13
17
10
9
23
2
11
8
32
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.
ITEM 3. LEGAL PROCEEDINGS
The information required by this item is set forth in Part II, Item 8, Financial Statements and Supplementary Data, under Note
15,"Commitments, Off-Balance Sheet Arrangements, and Legal Proceedings."
35
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
Bruce K. Lee
Bryan R. McKeag
Janet M. Quick
Deborah K. Deters
Lynn H. Fuller
Nathan R. Jones
Jay L. Kim
Age Position with Heartland and Subsidiaries and Principal Occupation
71 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
60 Chief Executive Officer, President and Director of Heartland; Director of Citywide Banks,
Bank of Blue Valley and First Bank & Trust; President of Heartland Financial USA, Inc.
Insurance Services
60 Executive Vice President, Chief Financial Officer of Heartland; Treasurer of Citizens Finance
Parent Co.; Director of Heartland Financial USA, Inc. Insurance Services
55 Executive Vice President, Deputy Chief Financial Officer, Principal Accounting Officer of
Heartland
56 Executive Vice President, Chief Human Resources Officer, of Heartland
37 President and Chief Executive Officer of Dubuque Bank and Trust Company
48 Executive Vice President, Chief Credit Officer of Heartland
57 Executive Vice President, Corporate Secretary, Senior General Counsel, of Heartland;
Secretary of Heartland Financial USA, Inc. Insurance Services
Tamina L. O'Neill
David A. Prince
Daniel C. Stevens
51 Executive Vice President, Chief Risk Officer of Heartland
50 Executive Vice President, Commercial Banking, of Heartland
65 Executive Vice President, Operations, 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. Mr. Fuller was the Chief Executive Officer of Heartland from
1999 to 2018 and was President of Heartland from 1990 to 2015. Mr. Fuller currently serves as a Director on the following
Heartland subsidiary boards: 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, Bank of
Blue Valley since 2013, Heartland Financial USA, Inc. Insurance Services since 2015, Premier Valley Bank since 2015 and
First Bank & Trust since 2018. 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. He was a Director of Galena State Bank & Trust Co. from 1992 to 2004 and of Illinois Bank & Trust from 1995
until 2004 and Heritage Bank, N.A. from 2012 until its merger with Arizona Bank & Trust in 2013. 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 currently serves as a Director on the following Heartland subsidiary boards:
Heartland Financial USA, Inc. Insurance Services since 2015, Citywide Banks since 2017, First Bank & Trust since 2018 and
Bank of Blue Valley since 2019. 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. 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. Mr. Lee was a
Director of Rocky Mountain Bank from 2015 to 2018.
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.
36
Janet M. Quick was named Executive Vice President, Deputy Chief Financial Officer and Principal Accounting Officer in
2016. Ms. Quick had served as Senior Vice President, Deputy Chief Financial Officer since 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.
Deborah K. Deters joined Heartland in 2017 as Executive Vice President, Chief Human Resource Officer where she oversees
Organizational Development, Talent Management, Total Rewards, Payroll, and Employee Relations. Prior to Heartland Ms.
Deters served as the Senior Vice President and Chief Human Resources Officer at HUB International, LTD., a North American
insurance brokerage based in Chicago, Illinois. 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, 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 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, where he
led his team in providing expert advice on client issues and industry topics and recommended solutions.
Nathan R. Jones joined Heartland in July 2020 as Executive Vice President, Chief Credit Officer. Prior to joining Heartland,
Mr. Jones was the Chief Credit Officer for Fulton Financial Corporation, a regional financial holding company based in
Lancaster, Pennsylvania from 2018 until joining Heartland. Mr. Jones previously served as the Executive Vice President Credit
Administration and Analytics for First Horizon National Corporation, a regional financial holding company based in Memphis,
Tennessee from 2011 to 2018. Mr. Jones has managed large scale credit and banking operations while developing and
delivering new business processes and capabilities within global and regional financial institutions. He has previously worked
for Bank of America and BMO Harris primarily in the risk management areas.
Jay L. Kim joined Heartland in January 2020 as Executive Vice President, General Counsel and was named as Corporate
Secretary in October 2020. Mr. Kim was most recently a partner with Dorsey & Whitney LLP, based in Minneapolis,
Minnesota, in their Banking and Financial Services Industry group and 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. Mr. Kim rejoined Dorsey & Whitney LLP in 2017 after serving as
Executive Vice President, General Counsel and Director of Corporate Development for Alerus Financial Corporation
headquartered in Grand Forks, North Dakota from 2012 to 2017. His responsibilities at Alerus included oversight of the risk
management, audit and compliance functions as well as acquisitions and investor relations. Prior to joining Alerus in 2012, he
was a partner at Dorsey & Whitney LLP and another Minneapolis law firm, and he also served as Senior Vice President and
General Counsel with Marquette Financial Companies.
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.
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.
Daniel C. Stevens joined Heartland in 2019 as Executive Vice President, Operations. He most recently served as the Chief
Operating Officer for Rabobank, NA based in Roseville, California from 2014 through 2019 and its Chief Financial Officer
from 2008 through 2014. Mr. Stevens has over 35 years of financial services experience, which includes serving as a Chief
Financial Officer, Chief Accounting Officer, and Chief Operating Officer. Mr. Stevens started his professional career at Arthur
Andersen & Co. in Chicago, Illinois. He is an inactive holder of the certified public accountant certification.
37
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 16, 2021, and approximately
16,160 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.
On March 17, 2020, Heartland's board of directors authorized management to acquire and hold up to 5% of capital or $98.4
million as of December 31, 2020, as treasury shares at any one time. Heartland and its affiliated purchasers made no purchases
of its common stock during the quarter ended December 31, 2020.
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, 2015, 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
12/31/2017
12/31/2016
12/31/2015
$
100.00 $
100.00
100.00
100.00
155.16 $
108.87
138.65
126.25
175.28 $
141.13
145.97
148.45
145.16 $
137.12
123.04
123.32
12/31/2018
12/31/2019
166.74 $
187.44
154.47
166.67
12/31/2020
138.45
271.64
132.56
144.61
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
ASSUMES $100 INVESTED ON DECEMBER 31, 2015
* Total return assumes reinvestment of dividends
Index ValueTotal Return PerformanceHeartland Financial USA, Inc.Nasdaq Composite IndexSNL U.S. Bank Nasdaq IndexSNL Bank and Thrift Index12/31/1512/31/1612/31/1712/31/1812/31/1912/31/2010015020025030038
ITEM 6. SELECTED FINANCIAL DATA
The following tables contain selected historical financial data for Heartland for the years ended December 31, 2020, 2019,
2018, 2017 and 2016. 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."
39
SELECTED FINANCIAL DATA (Dollars in thousands, except per share data)
STATEMENT OF INCOME DATA
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit 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)
As of and For the Years Ended December 31,
2020
2019
2018
2017
2016
$ 536,612
44,883
491,729
67,066
424,663
120,291
370,963
36,053
137,938
(4,451)
—
$ 133,487
$ 514,329
80,600
433,729
16,657
417,072
116,208
349,161
34,990
149,129
—
—
$ 149,129
$ 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
$
$
3.57
0.80
22.41 %
46.77
$
$
32.07
37,356,524
$
$
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
7.81 %
8.52 %
8.08 %
7.53 %
7.28 %
Reconciliation of Tangible Book Value Per Common Share (non-GAAP)
Common equity (GAAP)
Less goodwill
Less core deposit intangibles and customer relationship intangibles, net
$ 1,968,526
$ 1,578,137
$ 1,325,175
$ 990,519
$ 739,559
576,005
42,383
446,345
48,688
391,668
47,479
236,615
35,203
127,699
22,775
Tangible common equity (non-GAAP)
$ 1,350,138
$ 1,083,104
$ 886,028
$ 718,701
$ 589,085
Common shares outstanding, net of treasury stock
42,093,862
36,704,278
34,477,499
29,953,356
26,119,929
Common equity (book value) per share (GAAP)
Tangible book value per common share (non-GAAP)
$
$
46.77
32.07
$
$
43.00
29.51
$
$
38.44
25.70
$
$
33.07
23.99
$
$
28.31
22.55
Reconciliation of Tangible Common Equity Ratio (non-GAAP)
Total assets (GAAP)
Less goodwill
$ 17,908,339
$ 13,209,597
$ 11,408,006
$ 9,810,739
$ 8,247,079
576,005
446,345
391,668
236,615
127,699
Less core deposit intangibles and customer relationship intangibles, net
42,383
48,688
47,479
35,203
22,775
Total tangible assets (non-GAAP)
Tangible common equity ratio (non-GAAP)
$ 17,289,951
$ 12,714,564
$ 10,968,859
$ 9,538,921
$ 8,096,605
7.81 %
8.52 %
8.08 %
7.53 %
7.28 %
(1) Refer to the "Non-GAAP Financial Measures" section after these financi
GAAP measures, and refer to these tables for reconciliations to the most direc
al tables for additional information on the usage and presentation of these non-
tly comparable GAAP measures.
40
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 credit losses-loans
Total assets
Total deposits(1)
Long-term obligations
Preferred equity
Common stockholders’ equity
EARNINGS PERFORMANCE DATA
Annualized return on average assets
Annualized adjusted return on average assets (non-GAAP)(2)
Annualized return on average common equity
Annualized return on average tangible common equity (non-GAAP)(2)
Annualized adjusted return on average tangible common equity (non-
GAAP)(2)
Annualized net interest margin
Annualized 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
Earnings to fixed charges 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 credit losses to total loans
Allowance for credit 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
2020
$ 6,292,067
57,949
10,023,051
131,606
17,908,339
14,979,905
457,042
110,705
1,968,526
As of and For the Years Ended December 31,
2018
2017
2019
$ 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
2016
$ 2,131,086
61,261
5,351,719
54,324
8,247,079
6,847,411
288,534
1,357
0.90 %
0.93
8.06
12.28
12.65
3.65
3.69
56.65
8.24x
3.80
0.53 %
0.88
0.32
1.31
149.37
11.59 %
11.21
14.71
11.85
10.92
9.02
1.24 %
1.28
10.12
15.73
16.25
4.00
4.04
62.50
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 %
1.14
9.93
15.72
16.48
4.26
4.32
62.59
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
990,519
739,559
0.83 %
0.88
8.63
12.05
12.64
4.04
4.22
64.05
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 %
1.00
11.80
15.84
16.16
3.95
4.13
65.61
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
Reconciliation of Annualized Return on Average Tangible Common
Equity (non-GAAP)
Net income available to common stockholders (GAAP)
Plus core deposit and customer intangibles amortization, net of tax(3)
Adjusted net income available to common stockholders (non-GAAP)
$ 133,487
$ 149,129
$ 116,959
8,429
$ 141,916
9,458
$ 158,587
7,391
$ 124,350
$
$
75,226
3,950
79,176
$
80,108
3,660
83,768
$
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)
$ 1,656,708
456,854
44,298
$ 1,155,556
$ 1,473,396
415,841
49,377
$ 1,008,178
$ 1,177,346
340,352
46,206
$ 790,788
$ 871,683
184,554
30,109
$ 657,020
$ 678,989
125,724
24,553
$ 528,712
8.06 %
12.28 %
10.12 %
15.73 %
9.93 %
15.72 %
8.63 %
12.05 %
11.80 %
15.84 %
(1) Includes deposits held for sale
(2) Refer to the "Non-GAAP Financial Measures" for additional information on the usage and presentation of these non-GAAP measures, and refer to these
financial tables for the most directly comparable GAAP measures.
(3) Computed on a tax equivalent basis using an effective tax rate of 21% beginning January 1, 2018 and 35% for all prior periods.
41
SELECTED FINANCIAL DATA (Continued) (Dollars in thousands, except per share data)
2020
As of and For the Years Ended December 31,
2018
2019
2017
2016
Reconciliation of Annualized Adjusted Return on Average Assets (non-
GAAP)
Net income available to common stockholders (GAAP)
Acquisition, integration and restructuring costs(1)
Adjusted net income (non-GAAP)
Average assets (GAAP)
Adjusted return on average assets (non-GAAP)
Reconciliation of Annualized Adjusted Return on Average Tangible
Common Equity (non-GAAP)
Adjusted net income (non-GAAP)
Plus core deposit and customer relationship intangibles amortization, net
of tax(1)
Adjusted net income excluding intangible amortization (non-GAAP)
Average tangible common equity (GAAP)
Annualized adjusted return on average tangible common equity (non-
GAAP)
Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent
(non-GAAP)
Net interest income (GAAP)
Plus tax-equivalent adjustment(1)
Net interest income, fully tax-equivalent (non-GAAP)
Average earning assets
Net interest margin (GAAP)
Net interest margin, fully tax-equivalent (non-GAAP)
Reconciliation of Efficiency Ratio (non-GAAP)
Net interest income (GAAP)
Plus tax-equivalent adjustment(1)
Net interest income, fully tax-equivalent
Noninterest income
Securities gains, net
Unrealized gain on equity securities, net
Gain on extinguishment of debt
Valuation adjustment on servicing rights
Adjusted revenue (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
Acquisition, integration and restructuring expenses
Adjusted noninterest expenses (non-GAAP)
Efficiency ratio, fully tax-equivalent (non-GAAP)
Acquisition, integration and restructuring costs
Salaries and employee benefits
Occupancy
Furniture and equipment
Professional fees
Advertising
(Gain)/loss on sales/valuations of assets, net
Other noninterest expenses
Total acquisition, integration and restructuring costs
$ 133,487
4,251
$ 137,738
$ 14,782,605
$ 149,129
5,198
$ 154,327
$ 12,021,917
$ 116,959
5,976
$ 122,935
$ 10,772,297
$
75,226
3,884
$
79,110
$ 9,009,625
$
80,108
1,671
$
81,779
$ 8,172,576
0.93 %
1.28 %
1.14 %
0.88 %
1.00 %
$ 137,738
$ 154,327
$ 122,935
$
79,110
$
81,779
8,429
$ 146,167
$ 1,155,556
9,458
$ 163,785
$ 1,008,178
7,391
$ 130,326
$ 790,788
3,950
$
83,060
$ 657,020
3,660
$
85,439
$ 528,712
12.65 %
16.25 %
16.48 %
12.64 %
16.16 %
$ 491,729
5,466
$ 497,195
$ 13,481,613
$ 433,729
4,929
$ 438,658
$ 10,845,940
$ 413,954
6,228
$ 420,182
$ 9,718,106
$ 330,308
15,139
$ 345,447
$ 8,181,914
$ 294,666
12,919
$ 307,585
$ 7,455,217
3.65 %
3.69 %
4.00 %
4.04 %
4.26 %
4.32 %
4.04 %
4.22 %
3.95 %
4.13 %
$ 491,729
5,466
497,195
120,291
(7,793)
(640)
—
1,778
$ 433,729
4,929
438,658
116,208
(7,659)
(525)
(375)
911
$ 413,954
6,228
420,182
109,160
(1,085)
(212)
—
46
$ 330,308
15,139
345,447
102,022
(6,973)
—
(1,280)
(21)
$ 294,666
12,919
307,585
113,601
(11,340)
—
—
33
$ 610,831
$ 547,218
$ 528,091
$ 439,195
$ 409,879
$ 370,963
$ 349,161
$ 353,888
$ 297,675
$ 279,668
10,670
11,972
9,355
6,077
5,630
3,801
5,101
5,381
$ 346,010
8,030
(19,422)
6,580
$ 342,001
4,233
2,208
7,564
$ 330,528
1,860
2,475
5,975
$ 281,288
1,051
1,478
2,571
$ 268,938
56.65 %
62.50 %
62.59 %
64.05 %
65.61 %
$
$
398
—
958
3,399
143
—
483
5,381
$
$
816
1,215
87
2,365
203
1,003
891
6,580
$
$
1,331
—
602
2,096
49
2,352
1,134
7,564
$
$
147
285
369
3,380
143
902
749
5,975
$
$
125
6
218
921
166
—
1,135
2,571
(1) Computed on a tax-equivalent basis using an effective tax rate of 21% beginning January 1, 2018 and 35% for all prior periods.
42
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 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 the reconciliation contained in this Annual
Report on Form 10-K.
• Net interest income, fully tax equivalent, is net income adjusted for the tax-favored status of certain loans and
securities. Management believes this measure enhances the comparability of net interest income arising from taxable
and tax-exempt sources.
• Tangible book value per common share is total common equity less goodwill and core deposit and customer
relationship intangibles, net, divided by common shares outstanding, net of treasury. This measure is included as it is
considered to be a critical metric to analyze and evaluate use of equity, financial condition and capital strength.
• Tangible common equity ratio is total common equity less goodwill and core deposit and customer relationship
intangibles, net, divided by total assets less goodwill and core deposit and customer relationship intangibles, net. This
measure is included as it is considered to be a critical metric to analyze and evaluate financial condition and capital
strength.
• Annualized return on average tangible common equity is net income excluding intangible amortization calculated as
(1) net income excluding tax-effected core deposit and customer relationship intangibles amortization, divided by (2)
average common equity less goodwill and core deposit and customer relationship intangibles, net. This measure is
included as it is considered to be a critical metric to analyze and evaluate use of equity, financial condition and capital
strength.
• Annualized adjusted return on average tangible common equity excludes tax-effected acquisition, integration and
restructuring costs. Management believes the presentation of this non-GAAP measure is useful to compare return on
average tangible common equity excluding the variability of acquisition, integration and restructuring costs.
• Annualized adjusted return on average assets is net income available to common stockholders plus acquisition,
integration and restructuring costs, net of tax, divided by average assets. Management believes this measure is useful
to compare the return on average assets excluding the variability of acquisition, integration and restructuring costs.
• 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, PPP loans 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.
43 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 2018 results of operations, including a discussion of the financial results for the fiscal year ended December
31, 2019, compared to the fiscal year ended December 31, 2018, refer to Part I, Item 7 of our Annual Report on Form 10-K,
which was filed with the SEC on February 26, 2020.
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 Credit Losses
The process utilized by Heartland to estimate the allowance for credit losses is considered a critical accounting policy for
Heartland. The allowance for credit losses represents management’s estimate of identified and unidentified current expected
credit losses in the existing loan portfolio. Therefore, the accuracy of this estimate could have a material impact on Heartland’s
earnings.
For certain commercial and agricultural loans and any related unfunded loan commitments, the expected credit losses are
calculated on a pool basis through a transition matrix model derived life of loan probability of default and loss given default
methodology. The probability of default and loss given default methodology have been developed using Heartland’s historical
loss experience over the look back period, currently over the most recent 12 years. For smaller commercial and agricultural
loans, residential real estate loans and consumer loans and any related unfunded loan commitments, a lifetime average historical
loss rate is established for each pool of loans based upon an average loss rate calculated using Heartland historical loss
experience over the look back-period. The loss rates used in the allowance calculation are periodically re-evaluated and
adjusted to reflect changes in historical loss levels or other risks.
If a loan no longer shares similar risk characteristics with other loans in the pool, it is evaluated on an individual basis and is not
included in the collective evaluation. All individually assessed loan calculations are completed at least semi-annually.
Heartland's allowance methodology also has a qualitative component, the purpose of which is to provide management with a
means to take into consideration changes in current conditions that could potentially have an effect, up or down, on the level of
recognized loan losses, that, for whatever reason, may not be represented in the quantitative analysis performed in determining
its base loan loss rates.
Additionally, our allowance calculation utilizes an overlay approach for its economic forecasting component, similar to the
method utilized for the qualitative factors. The length of the reasonable and supportable forecast period is a judgmental
determination based on the level to which Heartland can reasonably support its forecast of economic conditions that drive its
estimate of expected loss.
The appropriateness of the allowance for credit losses is monitored on an ongoing basis by the credit administration group, loan
review staff, executive and senior management and the boards of directors of Heartland and each Bank. There can be no
assurances that the allowance for credit losses will be adequate to cover all current expected credit losses, but management
believes that the allowance for credit losses was appropriate at December 31, 2020. While management uses available
44
information to provide for credit 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 financial difficulty, and the level of nonperforming loans, charge-offs, and delinquencies could rise
and require further increases in the provision for credit losses. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the allowance for credit 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 133 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 credit 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.
2020 Overview
Net income available to common stockholders was $133.5 million, or $3.57 per diluted common share, for the year ended
December 31, 2020, compared to $149.1 million, or $4.14 per diluted common share, earned during the prior year. Return on
average common equity was 8.06% and return on average assets was 0.90% for 2020, compared to 10.12% and 1.24%,
respectively, for 2019.
Total assets of Heartland were $17.91 billion at December 31, 2020, an increase of $4.70 billion or 36% from $13.21 billion at
year-end 2019. Included in this increase, at fair value, were $1.97 billion of assets acquired in the AimBank transaction and
$419.7 million of assets acquired in the Johnson Bank branch transaction. Exclusive of these transactions, total assets increased
$2.31 billion or 17% since December 31, 2019. Securities represented 35% of Heartland's total assets at December 31, 2020,
compared to 26% at year-end 2019.
45
Total loans held to maturity were $10.02 billion at December 31, 2020, compared to $8.37 billion at year-end 2019, an increase
of $1.66 billion or 20%. This change includes $1.24 billion of total loans held to maturity acquired at fair value in the AimBank
and Johnson Bank branch transactions, which included $53.1 million of PPP loans. Excluding the loans acquired in the
AimBank and Johnson Bank branch transactions and legacy PPP loans of $904.7 million, total loans held to maturity
organically decreased $487.3 million or 6% since December 31, 2019.
Total deposits were $14.98 billion as of December 31, 2020, compared to $11.04 billion at year-end 2019, an increase of $3.94
billion or 36%. This increase includes $2.09 billion of deposits acquired at fair value in the AimBank and Johnson Bank branch
transactions. Exclusive of the deposits acquired at fair value in the AimBank and Johnson Bank branch transactions, total
deposits organically grew $1.85 billion or 17% since December 31, 2019.
Common stockholders' equity was $1.97 billion at December 31, 2020, compared to $1.58 billion at year-end 2019. Book value
per common share was $46.77 at December 31, 2020, compared to $43.00 at year-end 2019. Heartland's unrealized gains and
losses on securities available for sale, net of applicable taxes, reflected an unrealized gain of $76.8 million at December 31,
2020, compared to an unrealized gain of $969,000 at December 31, 2019.
2020 Developments
Adoption of ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)"
On January 1, 2020, Heartland adopted ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)," commonly referred
to as "CECL." The impact of Heartland's adoption of CECL on January 1, 2020 ("Day 1") resulted in the following:
•
•
•
an increase of $12.1 million to the allowance for credit losses related to loans, which included a reclassification of $6.0
million of purchased credit impaired loan discount on previously acquired loans, and a cumulative-effect adjustment to
retained earnings totaling $4.6 million, net of taxes of $1.5 million;
an increase of $13.6 million to the allowance for unfunded commitments and a cumulative-effect adjustment to
retained earnings totaling $10.2 million, net of taxes of $3.4 million, and
established an allowance for credit losses for Heartland's held to maturity debt securities of $158,000 and a
cumulative-effect adjustment to retained earnings totaling $118,000, net of taxes of $40,000.
The allowance calculation under CECL is an expected loss model, which encompasses expected losses over the life of the loan
and held to maturity securities portfolios, including expected losses due to changes in economic conditions and forecasts, such
as those caused by the COVID-19 pandemic. For more information, see Note 1, "Basis of Presentation" and Note 6, "Allowance
for Credit Losses" to the consolidated financial statements contained herein.
COVID-19
In March 2020, the outbreak of the novel Coronavirus Disease 2019 ("COVID-19") was recognized as a pandemic by the
World Health Organization. The spread of COVID-19 has created a global public health crisis that has resulted in
unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer
activity in the United States, as well as globally. Governmental responses to the pandemic have included orders closing
businesses not deemed essential and directing individuals to restrict their movements, observe social distancing and shelter in
place. These actions, together with responses to the pandemic by businesses and individuals, have resulted in rapid decreases in
commercial and consumer activity, temporary closures of many businesses, which have led to a loss of revenues and a rapid
increase in unemployment, material decreases in commodity prices and business valuations, disruptions in global supply chains,
market downturns and volatility, changes in consumer behavior related to pandemic fears, emergency response legislation and
an expectation that the Federal Reserve will maintain a low interest rate environment for the foreseeable future.
In the first quarter of 2020, Heartland implemented and continues to operate under its pandemic management plan to assure
workplace and employee safety and business resiliency. Relief and support provided to employees, customers and communities
facing challenges from the impacts of COVID-19 included the following measures:
•
•
•
employees who can work from home continue to do so, and those employees who are working in bank offices have
been placed on rotating teams to limit potential exposure to COVID-19;
all in-person events and large meetings are canceled and have transitioned to virtual meetings;
employees receive an increase in time off and enhanced health care coverage related to testing and treatments for
COVID-19;
• Heartland has installed and requires the use of personal protective equipment in bank offices;
46 • Heartland implemented a 20% wage premium for certain customer-facing employees through August 2020, and
pandemic pay for employees unable to work due to exposure or contraction of the virus;
• Heartland participates in the Paycheck Protection Program ("PPP"), originally created by the Coronavirus Aid, Relief
and Economic Security Act (the "CARES Act") and later expanded with the adoption of the Paycheck Protection
Program Flexibility Act (the "PPFA") and the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues
Act (the "Economic Aid Act"). PPP loans are 100% SBA guaranteed and borrowers may be eligible to have an amount
up to the entire principal balance forgiven and paid by the SBA. Heartland originated $1.2 billion of PPP loans during
2020 and continues to originate PPP loans under the first and second draw programs that were established under the
Economic Aid Act.
• Heartland has participated in the CARES Act SBA loan payment and deferral program for existing SBA loans; and
• Heartland has contributed $1.5 million to support communities served by Heartland and its subsidiary banks, including
donations of $264,000 to local schools.
While the measures described above remain in effect, Heartland's pandemic management plan continues to evolve in response
to the recent developments relating to the COVID-19 pandemic.
The ultimate impact of the COVID-19 pandemic on Heartland's financial condition and results of operations will depend on the
severity and duration of the pandemic, related restrictions on business and consumer activity, efficacy and distribution of
vaccines and the availability of government programs to alleviate the economic stress of the pandemic. See Heartland's "Safe
Harbor Statement" in Part I of this Annual Report on Form 10-K.
Issued $115.0 Million of Preferred Equity
On June 26, 2020, Heartland issued and sold 4.6 million depositary shares, each representing a 1/400th interest in a share of
7.00% Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, Series E. The depositary shares are listed on The Nasdaq
Global Select Market under the symbol "HTLFP." The net proceeds of $110.7 million are being used for general corporate
purposes, which may include organic and acquired growth, financing investments, capital expenditures, investments in wholly-
owned subsidiaries as regulatory capital and repayment of debt.
Branch Optimization
In the second half of 2020, Heartland's member banks approved plans to consolidate eight branch locations, which included two
branches in the Midwest region, five branches in the Western region and one in the Southwestern region, and resulted in $1.2
million and $2.3 million of fixed asset write-downs in the third and fourth quarters of 2020, respectively. The branch
consolidations are expected to be completed in early 2021. Heartland continues to review its branch network for optimization
and consolidation opportunities, which may result in additional write-downs of fixed assets in future periods.
Johnson Bank Arizona Operations Purchase and Assumption
On December 4, 2020, Arizona Bank & Trust ("AB&T"), Heartland's wholly-owned subsidiary headquartered in Phoenix,
Arizona, acquired certain assets and assumed substantially all of the deposits and certain other liabilities of Johnson Bank’s
Arizona operations, which included four banking centers. Johnson Bank is a wholly-owned subsidiary of Johnson Financial
Group, Inc. headquartered in Racine, Wisconsin. As of the closing date, AB&T acquired, at fair value, total assets of $419.7
million, which included gross loans of $150.7 million, and deposits of $415.5 million. The systems conversion occurred
simultaneously with the closing of the transaction.
AimBank Acquisition
On December 4, 2020, Heartland completed the acquisition of AimBank, headquartered in Levelland, Texas. Based on
Heartland's closing common stock price of $41.89 on December 4, 2020, the aggregate consideration paid to AimBank common
shareholders was $264.5 million, which was paid by delivery of common stock of $217.2 million and cash of $47.3 million,
subject to certain hold-back provisions of the merger agreement relating to the cash consideration. AimBank was merged with
and into Heartland's wholly-owned Texas subsidiary, First Bank and Trust, and the combined entity operates as First Bank and
Trust. As of the closing date, AimBank had, at fair value, total assets of $1.97 billion, which included gross loans of $1.09
billion, and deposits of $1.67 billion. The systems conversion for this transaction occurred in February 2021.
47 2019 Developments
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 2018. 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.
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 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 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.
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.
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.
48 • 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 were:
•
•
•
a project called Operation Customer Compass, which was 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.
The integration between nCino and Salesforce improved back office functions and shortened the sales cycle, and these two
projects were completed in 2020.
RESULTS OF OPERATIONS
Net Interest Margin and Net Interest Income
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.
Our success in maintaining competitive net interest margin despite the low-interest rate environment 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, 2020, 2019 and 2018, our net interest margin included 12 basis points, 18 basis points and 22 basis points,
respectively, of purchase accounting discount amortization.
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.
Net interest margin, expressed as a percentage of average earning assets, was 3.65% (3.69% on a fully tax-equivalent basis)
during 2020, compared to 4.00% (4.04% on a fully tax-equivalent basis) during 2019 and 4.26% (4.32% on a fully tax-
equivalent basis) during 2018.
49 Total interest income and average earning asset changes for 2020 compared to 2019 were:
• Total interest income increased $22.3 million or 4% to $536.6 million from $514.3 million due to an increase in
average earning assets, which was partially offset by a decrease in the average rate on earning assets.
• Total interest income on a tax-equivalent basis (non-GAAP) was $542.1 million compared to $519.3 million, which
was an increase of $22.8 million or 4%.
• Average earning assets increased $2.64 billion or 24% to $13.48 billion from $10.85 billion, which was primarily
attributable to recent acquisitions, increases in securities and loan growth, including PPP loans.
• The average rate on earning assets decreased 77 basis points to 4.02% compared to 4.79%, which was primarily due to
recent decreases in market interest rates and the lower yield on PPP loans, which was 3.25%.
Total interest expense and average interest bearing liability changes for 2020 compared to 2019 were:
• Total interest expense decreased $35.7 million or 44% to $44.9 million compared to $80.6 million.
• The average rate paid on Heartland's interest bearing liabilities decreased to 0.54% compared to 1.14%, which was
primarily due to recent decreases in market interest rates.
• Average interest bearing deposits increased $1.16 billion or 17% to $7.81 billion from $6.65 billion, which was
primarily attributable to recent acquisitions and deposit growth, including deposits from government stimulus
payments and other COVID-19 relief programs.
• The average rate paid on Heartland's interest bearing deposits decreased 57 basis points to 0.39% compared to 0.96%,
which was primarily attributable to recent decreases in market interest rates.
• Average borrowings increased $135.9 million or 34% to $538.2 million from $402.3 million. The average interest rate
paid on Heartland's borrowings was 2.71% compared to 4.19%.
Net interest income changes for 2020 compared to 2019 were:
• Net interest income totaled $491.7 million compared to $433.7 million, which was an increase of $58.0 million or
13%.
• Net interest income on a tax equivalent basis (non-GAAP) totaled $497.2 million compared to $438.7 million, which
was an increase of $58.5 million or 13%.
Total interest income and average earning asset changes for 2019 compared to 2018 were:
• Total interest income increased $48.5 million or 10% to $514.3 million from $465.8 million.
• Total interest income on a tax-equivalent basis was $519.3 million, an increase of $47.2 million or 10% from $472.0
million.
• Average earning assets increased $1.13 billion or 12% to $10.85 billion compared to $9.72 billion, which was
primarily attributable to acquisitions completed during 2019 and 2018.
• The average rate earned on average earning assets was 4.79% during 2019 compared to 4.86% during 2018, which was
a decrease of seven basis points.
Total interest expense and average interest bearing liability changes for 2019 compared to 2018 were:
• Total interest expense increased $28.7 million or 55% during 2019 to $80.6 million from $51.9 million during 2018.
• The average interest rate paid on Heartland's interest bearing liabilities was 1.14% in 2019 compared to 0.83% in
2018.
• Average interest bearing deposits increased $807.5 million or 14% to $6.65 billion from $5.84 billion.
• The average rate paid on Heartland's interest bearing deposits increased to 0.96% from 0.61%, which was 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 changes for 2019 compared to 2018 were:
• Net interest income totaled $433.7 million compared to $414.0 million, which was an increase of $19.8 million or 5%.
• Net interest income on a tax equivalent basis (non-GAAP) totaled $438.7 million compared to $420.2 million, which
was an increase of $18.5 million or 4%.
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
50 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.
51
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%. 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.
2020
For the Year Ended December 31,
2019
2018
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)(3)
Commercial and industrial(1)
PPP loans
Owner occupied commercial real estate
Non-owner occupied commercial real
estate
Real estate construction
Agricultural and agricultural real estate
Residential real estate
Consumer
Less: allowance for credit losses
Net loans
Total earning assets
Nonearning Assets
Total Assets
Interest Bearing Liabilities(4)
Savings
Time deposits
Short-term borrowings
Other borrowings
Total interest bearing liabilities
Noninterest Bearing Liabilities(4)
Noninterest bearing deposits
Accrued interest and other liabilities
Total noninterest bearing liabilities
Stockholders' Equity
Total Liabilities and 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
$ 3,901,202
424,199
4,325,401
$ 98,263
15,802
114,065
2.52 % $ 2,522,365
313,197
3.73
2,835,562
2.64
$ 73,147
12,491
85,638
2.90 % $ 1,999,321
439,894
3.99
2,439,215
2.95
$ 54,131
17,873
72,004
2.71 %
4.06
2.95
225,024
107
924
—
0.41
—
313,373
138
6,695
4
2.14
2.90
197,562
430
3,698
—
1.87
—
2,437,183
779,183
118,513
25,285
4.86
3.25
2,445,552
—
127,796
—
5.23
—
2,169,841
—
123,634
—
5.70
—
1,480,109
72,215
4.88
1,337,910
74,853
5.59
1,222,651
61,289
5.01
1,589,932
1,007,086
538,646
793,821
410,013
(104,892)
8,931,081
13,481,613
1,300,992
$ 14,782,605
$ 6,718,413
1,088,185
155,467
382,733
8,344,798
4,554,479
169,450
4,723,929
1,713,878
$ 14,782,605
78,178
4.92
1,173,233
73,067
6.23
1,097,350
46,785
4.65
25,713
4.77
947,933
563,944
52,668
5.56
29,625
5.25
38,210
22,190
—
427,089
542,078
4.81
5.41
—
4.78
4.02 %
862,663
429,856
(64,224)
7,696,867
10,845,940
1,175,977
$ 12,021,917
42,876
26,036
—
426,921
519,258
4.97
6.06
—
5.55
4.79 %
731,870
563,277
888,760
466,490
(59,340)
7,080,899
9,718,106
1,054,191
$ 10,772,297
62,311
5.68
38,271
5.23
28,427
5.05
44,351
38,063
—
396,346
472,048
4.99
8.16
—
5.60
4.86 %
$ 16,560
13,727
610
13,986
44,883
0.25 % $ 5,530,503
1,115,785
1.26
126,337
0.39
275,982
3.65
7,048,607
0.54 %
$ 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
6,253,586
1.14 %
$ 25,123
10,544
1,696
14,503
51,866
0.53 %
1.00
1.19
5.32
0.83 %
3,384,341
115,573
3,499,914
1,473,396
$ 12,021,917
3,265,532
75,224
3,340,756
1,177,955
$ 10,772,297
$ 497,195
$ 438,658
$ 420,182
3.48 %
3.69 %
3.65 %
4.04 %
4.03 %
4.32 %
(1) Computed on a tax-equivalent basis using an effective tax rate of 21%.
(2) Nonaccrual loans and loans held for sale are included in the average loans outstanding.
(3) In conjunction with the adoption of ASU 2016-13, Heartland reclassified loan balances to more closely align with FDIC codes. All prior period balances
have been adjusted.
(4) 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.
52
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.
For the Years Ended December 31,
2020 Compared to 2019
Change Due to
Rate
Net
Volume
2019 Compared to 2018
Change Due to
Rate
Net
Volume
Earning Assets/Interest Income
Investment securities:
Taxable
Nontaxable
(1)
(1)(2)
Interest bearing deposits
Federal funds sold
Loans
Total earning assets
Liabilities/Interest Expense
Interest bearing deposits
(3):
Savings
Time deposits
Short-term borrowings
Other borrowings
Total interest bearing liabilities
Net interest income
4,181
(1,493)
(1)
$ 35,749 $ (10,633) $ 25,116 $ 14,953 $ 4,063 $ 19,016
(5,382)
2,997
4
(3,620) 30,575
47,210
(870)
(4,278)
(3)
(63,215)
168
(78,999) 22,820
(5,059)
2,415
—
34,195
46,504
3,311
(5,771)
(4)
(323)
582
4
63,383
101,819
706
8,443
(403)
333
(38,952) (30,509)
(2,938)
(1,138)
(2,535)
(1,471)
4,439
595
(203)
17,507
5,526
255
21,946
6,121
52
(5,933)
615
4,801
13,174
28,734
$ 88,645 $ (30,108) $ 58,537 $ 41,488 $ (23,012) $ 18,476
(1,132)
(48,891) (35,717)
430
23,718
185
5,016
(1) Computed on a tax-equivalent basis using an effective tax rate of 21%.
(2) Nonaccrual loans and loans held for sale are included in average loans outstanding.
(3) Includes deposits held for sale.
PROVISION FOR CREDIT LOSSES
A provision for credit losses is charged to expense to provide, in Heartland management’s opinion, an appropriate allowance for
credit losses. The following table shows the components of Heartland's provision for credit losses for the years ended December
31, 2020, 2019 and 2018, in thousands:
For the Years Ended December 31,
2020
2019
2018
Provision for credit losses-loans
Provision for credit losses-unfunded commitments
(1)
Provision for credit losses-held to maturity securities
(2)
Total provision expense
$
$
65,745 $
16,657 $
24,013
1,428
(107)
—
—
—
—
67,066 $
16,657 $
24,013
(1) Prior to the adoption of ASU 2016-13, the provision for unfunded commitments was immaterial and therefore, prior
periods are not presented.
(2) Prior to the adoption of ASU 2016-13, there was no requirement to record provision for credit losses for held to maturity
securities.
The provision for credit losses was $67.1 million during 2020 compared to $16.7 million during 2019 and $24.0 million during
2018. Loans covered by the allowance totaled $10.02 billion as of December 31, 2020, compared to $6.57 billion as of
December 31, 2019, and $5.73 billion as of December 31, 2018.
Provision expense for credit losses for loans increased $49.1 million during 2020 to $65.7 million compared to $16.7 million
for the year ended December 31, 2019. The increase in 2020 was primarily attributable to a deteriorated economic outlook due
53
to the COVID-19 pandemic. The following items contributed to the remainder of the increase during 2020:
•
Provision expense of $11.6 million was recorded for one owner-occupied commercial real estate fracking sand
company that was individually assessed for allowance for credit losses.
Provision expense of $5.9 million was recorded for one commercial and industrial loan that was fully charged off.
•
• Heartland recorded $9.6 million of provision expense for non-PCD loans acquired in the fourth quarter.
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.
At December 31, 2020, the allowance for credit losses for loans was 1.31% of total loans and 149.37% of nonperforming loans
compared to 0.84% of loans and 87.28% of nonperforming loans at December 31, 2019, and 0.84% of loans and 85.27% of
nonperforming loans at December 31, 2018.
Given the size of Heartland's loan portfolio, the level of organic loan growth, changes in credit quality and the variability that
can occur in the factors, such as economic conditions, considered when determining the appropriateness of the allowance for
credit losses, Heartland's provision for credit losses will vary from year to year. For additional details on the specific factors
considered in establishing the allowance for credit losses, refer to the discussion under the captions "Critical Accounting
Policies," "Provision for Credit Losses" and "Allowance for Credit Losses" in Item 7 of this Annual Report on Form 10-K, and
the information in Note 1, "Basis of Presentation," and Note 6, "Allowance for Credit Losses" to the consolidated financial
statements contained herein.
Heartland believes the allowance for credit losses as of December 31, 2020, was at a level commensurate with the overall risk
exposure of the loan portfolio. However, if current economic conditions resulting from COVID-19 continue or further
deteriorate, 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 credit losses. Due to the uncertainty of future economic conditions
resulting from the COVID-19 pandemic, the provision for credit losses could remain elevated.
NONINTEREST INCOME
The table below summarizes Heartland's noninterest income for the years indicated, in thousands:
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
$
2020
For the Years Ended December 31,
2019
52,157 $
4,843
19,399
3,786
7,659
525
15,555
(911)
3,785
9,410
2018
48,706
7,292
18,393
4,513
1,085
212
21,450
(46)
2,793
4,762
$ 120,291 $ 116,208 $ 109,160
47,467 $
2,977
20,862
2,756
7,793
640
28,515
(1,778)
3,554
7,505
% Change
2020/2019 2019/2018
7 %
(9) %
(39)
8
(27)
2
22
83
(95)
(6)
(20)
4 %
(34)
5
(16)
606
148
(27)
(1,880)
36
98
6 %
Noninterest income was $120.3 million in 2020 compared to $116.2 million in 2019, an increase of $4.1 million or 4%. This
increase is the result of higher net gains on sale of loans held for sale, which was partially offset by reduced service charges and
fees, loan servicing income and other noninterest income. During 2019, noninterest income was $116.2 million 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.
54
Service Charges and Fees
The following table summarizes the changes in service charges and fees for the years ended indicated, in thousands:
Service charges and fees on deposit accounts
Overdraft fees
Customer service fees
Credit card fee income
Debit card income
Total service charges and fees
For the Years Ended December 31,
2018
2019
2020
$
14,441 $
12,790 $
9,166
177
16,026
7,657
11,543
331
15,594
11,899
$
47,467 $
52,157 $
11,291
10,796
330
11,893
14,396
48,706
% Change
2020/2019 2019/2018
13 %
7
13 %
(21)
(47)
3
(36)
(9) %
—
31
(17)
7 %
Total service charges and fees were $47.5 million in 2020, which was a decrease of $4.7 million or 9% from $52.2 million in
2019. The reduction was primarily attributable to lower debit card income and overdraft fees, the effects of which were partially
offset by increased service charges and fees on deposit accounts. Total service charges and fees in 2019 were $52.2 million,
which was an increase of $3.5 million or 7% from $48.7 million in 2018.
Service charges and fees on deposit accounts totaled $14.4 million during 2020 compared to $12.8 million during 2019 and
$11.3 million during 2018. The increases in service charges and fees on deposit accounts are primarily attributable to a larger
customer base.
Overdraft fees totaled $9.2 million during 2020, $11.5 million during 2019 and $10.8 million during 2018. The decrease in
overdraft fees for 2020 was primarily attributable to reduced customer activity due to the COVID-19 pandemic. The increase in
overdraft fees for 2019 were primarily attributable to a larger customer base.
Credit card fee income totaled $16.0 million during 2020 compared to $15.6 million during 2019 and $11.9 million in 2018.
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.
Interchange revenue from activity on bank debit cards, along with surcharges on ATM activity, resulted in debit card income of
$7.7 million during 2020, $11.9 million during 2019 and $14.4 million during 2018. The decrease in 2020 was primarily
attributable to reduced volume due to the COVID-19 pandemic and the impact of the Durbin Amendment, which restricts the
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, which was effective for Heartland on
July 1, 2019, also negatively impacted the interchange revenue recorded during the second half of 2019, resulting in the
decrease in debit card income in 2019 compared to 2018.
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,
2019
2018
2020
Commercial and agricultural loan servicing fees
(1)
$
3,287 $
3,110 $
3,229
Residential mortgage servicing fees
Mortgage servicing rights amortization
Total loan servicing income
(2)
1,726
4,901
9,931
(2,036)
(3,168)
(5,868)
$
2,977 $
4,843 $
7,292
% Change
2020/2019 2019/2018
(4) %
(51)
6 %
(65)
(36)
(39) %
(46)
(34) %
(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 $743.3 million, $616.7 million and $4.10 billion as of December 31, 2020,
2019 and 2018, respectively.
55
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 $3.0 million for 2020 compared to $4.8 million for 2019 and $7.3 million for 2018.
Loan servicing income related to the servicing of commercial and agricultural loans totaled $3.3 million during 2020 compared
to $3.1 million during 2019 and $3.2 million during 2018.
Fees collected for the servicing of mortgage loans, primarily for GSEs, were $1.7 million during 2020 compared to $4.9 million
during 2019 and $9.9 million during 2018. Included in and offsetting loan servicing income is the amortization of capitalized
servicing rights, which was $2.0 million during 2020 compared to $3.2 million during 2019 and $5.9 million during 2018. The
decreases in mortgage loan servicing income and the amortization of servicing rights in 2020 and 2019 were primarily due to
the sale of Dubuque Bank and Trust Company's mortgage servicing portfolio on April 30, 2019.
The portfolio of mortgage loans serviced by Heartland, primarily for GSEs, totaled $743.3 million at December 31, 2020,
compared to $616.7 million at December 31, 2019, and $4.10 billion at December 31, 2018. The decrease in the mortgage
servicing portfolio in 2020 and 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 $28.5 million during 2020 compared to $15.6 million during 2019 and $21.5
million during 2018. 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. The increase during 2020 was primarily due to an increase in
residential mortgage loan refinancing activity in response to recent declines in mortgage interest rates. Due to the closure of
Heartland's legacy mortgage lending business in early 2019, net gains on sales of residential mortgage loans primarily reflected
First Bank & Trust mortgage production in 2020 and 2019.
Other Noninterest Income
Other noninterest income was $7.5 million during 2020 compared to $9.4 million during 2019 and $4.8 million during 2018,
which was a decrease of $1.9 million or 20% during 2020 and an increase of $4.6 million or 98% during 2019. Commercial
swap fee income decreased $1.3 million or 55% to $1.1 million during 2020 compared to an increase of $1.4 million or 142%
to $2.4 million for 2019. 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 2020 was $854,000 of death benefits on
bank owned life insurance compared to $1.3 million in 2019. Additionally in 2019, Heartland recorded $266,000 of noninterest
income for a recovery on an acquired loan that was charged off prior to acquisition and $375,000 of other noninterest income
for the gain on extinguishment of debt. There were no similar items recorded in 2020.
NONINTEREST EXPENSES
The following table summarizes Heartland's noninterest expenses for the years indicated, in thousands:
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
Acquisition, integration and restructuring costs
Partnership investment in tax credit projects
Other noninterest expenses
Total noninterest expenses
For the Years Ended December 31,
2019
$ 202,668 $ 200,341 $ 195,362
2018
2020
26,554
12,514
54,068
5,235
25,429
12,013
47,697
9,825
10,670
11,972
1,340
5,101
5,381
3,801
1,035
(19,422)
6,580
8,030
25,328
11,927
41,414
9,516
9,355
3,038
1,845
7,564
4,233
43,631
44,306
$ 370,963 $ 349,161 $ 353,888
45,661
% Change
2020/2019 2019/2018
3 %
—
1 %
4
4
13
(47)
(11)
29
126
(18)
(53)
(4)
6 %
1
15
3
28
(66)
(1,153)
(13)
90
3
(1) %
56
Noninterest expenses totaled $371.0 million in 2020 compared to $349.2 million in 2019, a $21.8 million or 6% increase, with
the most significant increases in professional fees and losses on sales/valuations of assets, net, which were partially offset by
decreases in advertising, acquisition, integration and restructuring costs and partnership investment in tax credit projects.
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 and core deposit intangibles and customer relationship intangibles
amortization, which were offset by net gains on sales/valuations of assets.
Salaries and Employee Benefits
The largest component of noninterest expense, salaries and employee benefits, increased $2.3 million or 1% to $202.7 million
in 2020 and $5.0 million or 3% to $200.3 million in 2019. Full-time equivalent employees totaled 2,013 on December 31, 2020,
compared to 1,908 on December 31, 2019, and 2,045 on December 31, 2018. The increase in full-time equivalent employees as
of December 31, 2020 was primarily due to the acquisitions completed in the fourth quarter of 2020. 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 $6.4 million or 13% to $54.1 million during 2020 and $6.3 million or 15% to $47.7 million during
2019. Included in professional fees for 2020 was $5.7 million of FDIC insurance assessments compared to $860,000 in 2019.
The increase for 2020 was due to the expiration of small bank credits, which were applied to FDIC assessments for the year
ended December 31, 2019. Professional fees recorded in 2019 related to Heartland's strategic initiatives totaled $4.7 million.
The remainder of the increases for 2019 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.
Advertising
Advertising expense decreased $4.6 million or 47% to $5.2 million during 2020 and increased $309,000 or 3% to $9.8 million
during 2019. The decrease for the year ended December 31, 2020 was primarily attributable to a reduction of in-person
customer events and an overall managed reduction in marketing spend in response to operational environment changes caused
by the COVID-19 pandemic.
Core Deposit Intangibles and Customer Relationship Intangibles Amortization
Core deposit intangibles and customer relationship intangibles amortization totaled $10.7 million during 2020 compared to
$12.0 million during 2019 and $9.4 million in 2018, which was a decrease of $1.3 million or 11% and an increase of $2.6
million or 28%. 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. No
comparable transactions were recorded in 2020. The remainder of the changes for the years ended December 31, 2020 and 2019
were attributable to recent acquisitions.
Net Gains/Losses on Sales/Valuations of Assets
Net losses on sales/valuations of assets totaled $5.1 million during 2020 compared to gains of $19.4 million during 2019 and
losses of $1.8 million during 2018. During the second half of 2020, Heartland recorded $3.5 million of fixed asset write-downs
related to eight branch consolidations. In 2019, Heartland recorded $24.5 million of gains associated with the branch sales and
the 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 related to closed branch locations.
Acquisition, Integration and Restructuring Costs
Acquisition, integration and restructuring costs totaled $5.4 million, $6.6 million and $7.6 million in 2020, 2019 and 2018,
respectively. In 2020, the acquisition, integration and restructuring costs consisted primarily of professional fees and furniture
and equipment expenses associated with the acquisitions completed in the fourth quarter. 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.
Partnership Investment in Tax Credit Projects
Partnership investment in tax credit projects totaled $3.8 million, $8.0 million and $4.2 million for the years ended December
31, 2020, 2019 and 2018, respectively. The expense is dependent upon the number of tax credit projects placed in service
during the year.
57
Excluding the items noted above, increases in all other noninterest expense categories for the years ended December 31, 2020,
and 2019, 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 (non-GAAP), with the
goal of reducing it to below 57%. The efficiency ratio, fully tax-equivalent (non-GAAP), improved during 2020 to 56.65%
compared to 62.50% for 2019 and 62.59% for 2018. The process improvement and automation opportunities realized from
Operation Customer Compass contributed to the lower efficiency ratio. Branch closures and consolidations also contributed to
the improved efficiency ratio, and management continues to review branch locations for additional optimization opportunities.
Additionally, systems conversions of newly acquired entities are completed as soon as possible after the closing of the
transaction to optimize cost savings.
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.
INCOME TAXES
Heartland's effective tax rate was 20.7% for 2020 compared to 19.0% for 2019 and 19.4% for 2018. The following items
impacted Heartland's 2020, 2019 and 2018 tax calculations:
Solar energy tax credits of $2.3 million, $4.0 million and $2.9 million.
Federal low-income housing tax credits of $780,000, $1.1 million and $1.2 million.
•
•
• Historic rehabilitation tax credits of $1.1 million, $1.8 million and $0.
• New markets tax credits of $300,000, $0 and $0.
• Tax-exempt interest income as a percentage of pre-tax income of 11.8%, 10.1% and 16.1%.
• The tax-equivalent adjustment for this tax-exempt interest income was $5.5 million, $4.9 million and $6.2 million.
• Tax benefits of $617,000, $1.9 million and $0 related to the release of valuation allowances on deferred tax assets.
FINANCIAL CONDITION
Heartland's total assets were $17.91 billion at December 31, 2020, an increase of $4.70 billion or 36% since December 31,
2019. Included in this increase, at fair value, were $1.97 billion of assets acquired in the AimBank transaction and $419.7
million of assets acquired in the Johnson Bank branch transaction. Heartland's total assets were $13.21 billion at December 31,
2019, an increase of $1.80 billion or 16% compared to $11.41 billion at 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.
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.
In conjunction with the adoption of ASU 2016-13, Heartland reclassified loan balances to more closely align with FDIC codes.
All prior periods shown in this Annual Report on Form 10-K have been adjusted.
Heartland originates commercial and industrial loans and owner occupied commercial real estate loans for a wide variety of
business purposes, 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 if
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 risks in the commercial and industrial portfolio include the unpredictability
of the cash flow of the borrowers and the variability in the value of the collateral securing the loans. Owner occupied
commercial real estate loans are dependent upon the cash flow of the borrowers and the collateral value of the real estate.
58 Heartland originated $1.20 billion of PPP loans during 2020, and Heartland acquired $53.1 million of PPP loans in the
AimBank transaction. At December 31, 2020, Heartland had $957.8 million of PPP loans outstanding, which was net of $19.3
million of unamortized deferred fees. Under the CARES Act, PPP loans are 100% SBA guaranteed, and borrowers may be
eligible to have an amount up to the entire principal balance forgiven and paid by the SBA. PPP loans also carry a zero risk
rating for regulatory capital purposes and the Federal Reserve has made available a liquidity facility to facilitate funding of PPP
loans held by banks. Because these loans are 100% guaranteed by the SBA, there is no allowance recorded related to the PPP
loans.
Non-owner occupied commercial real estate loans provide financing for various non-owner occupied or income producing
properties. Real estate construction loans are generally short-term or interim loans that provide financing for acquiring or
developing commercial income properties, multi-family projects or single-family residential homes. The collateral that
Heartland requires for most of these loans is based upon the discounted market value of the collateral. Non-owner occupied
commercial real estate loans are typically dependent, in large part, on sufficient income from the properties securing the loans
to cover the operating expenses and debt service. Real estate construction loans involve additional risks because funds are
advanced based upon estimates of costs and the estimated value of the completed project. Additionally, real estate construction
loans have a greater risk of default in a weaker economy because the source of repayment is reliant on the successful and timely
sale of the project. 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.
Agricultural and agricultural real estate 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 and
agricultural real estate loans present unique credit risks relating to adverse weather conditions, loss of livestock due to disease
or other reasons, declines in market prices for agricultural products and the impact of government regulations. The ultimate
repayment of agricultural and agricultural real estate loans is dependent upon the profitable operation or management of the
agricultural entity. Loans secured by farm equipment, livestock or crops may not provide an adequate source of repayment
because of damage or depreciation. In underwriting agricultural and agricultural real estate loans, lending personnel work
closely with their customers to review budgets and cash flow projections for crop production for the ensuing year. These
budgets and cash flow projections are monitored closely during the year and reviewed with the customers at least annually.
Lending personnel work closely with governmental agencies, including the U.S. Small Business Administration and U.S.
Department of Agriculture's Rural Development Business and Industry Program Farm Service Agency, to help agricultural
customers obtain credit enhancement products, such as loan guarantees, longer-term funding or interest assistance, to reduce
risk.
Residential real estate loans are originated for the purchase or refinancing of single family residential properties. Residential
real estate loans are dependent upon the borrower's ability to repay the loan and the underlying collateral value. During the
fourth quarter of 2018, Heartland entered into arrangements with third parties to offer residential real estate 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, which was merged into First Bank & Trust in April 2020. First
Bank & Trust provides mortgage loans to customers in Texas and has expanded to also serve the mortgage needs of customers
in many of Heartland's markets. First Bank & Trust 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 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.
At December 31, 2020, $234.4 million or 57% of the consumer loan portfolio were in home equity lines of credit ("HELOCs")
compared to $247.1 million or 56% at December 31, 2019. 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.
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.
59
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:
2020
2019
2018
2017
2016
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
As of December 31,
Loans receivable held
to maturity:
Commercial and
industrial
Paycheck Protection
Program ("PPP")
Owner occupied
commercial real estate
Non-owner occupied
commercial real estate
$ 2,534,799
25.29 % $ 2,530,809
30.24 % $ 2,134,840
28.81 % $ 1,797,146
28.12 % $ 1,439,919
26.90 %
957,785
9.56
—
—
—
—
—
—
—
—
1,776,406
17.72
1,472,704
17.60
1,273,762
17.20
1,042,882
16.32
861,206
16.09
1,921,481
19.17
1,495,877
17.88
1,269,056
17.13
1,190,374
18.62
921,948
17.23
Real estate construction
863,220
8.61
1,027,081
12.27
843,463
11.39
641,471
10.04
517,918
9.68
714,526
840,442
414,392
7.13
8.39
4.13
565,837
832,277
443,332
6.76
9.95
5.30
580,810
7.84
511,869
8.01
490,589
9.17
887,984
11.99
791,551
12.38
729,907
13.64
417,782
5.64
416,171
6.51
390,232
7.29
10,023,051
100.00 %
8,367,917
100.00 %
7,407,697
100.00 %
6,391,464
100.00 %
5,351,719
100.00 %
Agricultural and
agricultural real estate
Residential real estate
Consumer
Total loans receivable
held to maturity
Allowance for credit
losses
Loans receivable, net
$ 9,891,445
(131,606)
(70,395)
$ 8,297,522
(61,963)
$ 7,345,734
(55,686)
$ 6,335,778
(54,324)
$ 5,297,395
Loans held for sale totaled $57.9 million at December 31, 2020, and $26.7 million at December 31, 2019, which were primarily
residential mortgage loans. Loans held for sale totaled $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.
The table below sets forth the remaining maturities of loans held to maturity by category as of December 31, 2020, in
thousands. Maturities are based upon contractual dates.
Over 1 Year
Through 5 Years
Fixed
Rate
Floating
Rate
One Year
or Less
Over 5 Years
Fixed
Rate
Floating
Rate
Total
Commercial and industrial
PPP
Owner occupied commercial real estate
Non-owner occupied commercial real estate
Real estate construction
Agricultural and agricultural real estate
Residential real estate
Consumer
Total
$ 889,000 $ 625,782 $ 327,848 $ 476,893 $ 215,276 $ 2,534,799
957,785
1,776,406
—
234,636
—
504,433
—
250,479
957,128
498,389
657
288,469
277,241
316,104
278,683
106,540
50,160
$ 2,206,854
713,950
229,650
183,012
145,057
18,388
340,043
163,740
70,453
79,864
84,649
$ 3,371,356 $ 1,301,233
173,615
49,446
80,979
215,611
15,603
416,632
104,280
101,399
293,370
245,592
$ 1,262,626 $ 1,880,982
1,921,481
863,220
714,526
840,442
414,392
$ 10,023,051
Total loans
Total loans held to maturity were $10.02 billion at December 31, 2020, compared to $8.37 billion at year-end 2019, an increase
of $1.66 billion or 20%. This change includes $1.24 billion of total loans held to maturity acquired at fair value in the fourth
quarter in the AimBank and Johnson Bank branch transactions, which included $53.1 million of PPP loans. Excluding the loans
acquired in the AimBank and Johnson Bank branch transactions and legacy PPP loans of $904.7 million, total loans held to
maturity organically decreased $487.3 million or 6% since December 31, 2019.
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.
60
The table below shows the changes in loan balances by loan category for the years indicated, in thousands:
Commercial and industrial
$ 2,534,799 $ 2,530,809 $ 2,134,840
— %
19 %
As of December 31,
% Change
2020
2019
2018
2020/2019 2019/2018
PPP
957,785
—
—
Owner occupied commercial real estate
1,776,406
1,472,704
1,273,762
Non-owner occupied commercial real estate
1,921,481
1,495,877
1,269,056
Real estate construction
Agricultural and agricultural real estate
Residential real estate
Consumer
Total
863,220
1,027,081
714,526
840,442
414,392
565,837
832,277
443,332
843,463
580,810
887,984
417,782
$
10,023,051 $ 8,367,917 $ 7,407,697
20 %
13 %
100
21
28
(16)
26
1
(7)
—
16
18
22
(3)
(6)
6
Commercial and industrial loans
Commercial and industrial loans, which totaled $2.53 billion at December 31, 2020, increased $4.0 million or less than 1%
from $2.53 billion at year-end 2019. Commercial and industrial loans increased $396.0 million or 19% to $2.53 billion at
December 31, 2019 from $2.13 billion at year-end 2018. Changes to commercial and industrial loans for the years ended
December 31, 2020 and 2019 were:
• Excluding $186.8 million of loans acquired in the AimBank and Johnson Bank branch transactions, loans organically
decreased $182.8 million or 7% since December 31, 2019.
• Excluding $12.7 million of loans classified as held for sale during the first quarter of 2019 and $296.0 million of loans
acquired in the Blue Valley Ban Corp. and Rockford Bank and Trust Company transactions, loans organically
increased $112.7 million or 5% since year-end 2018.
PPP loans
At December 31, 2020, Heartland had $957.8 million of PPP loans outstanding, which was net of $19.3 million of unamortized
deferred fees, and included $53.1 million of loans acquired in the AimBank transaction. Under the CARES Act, PPP loans are
100% SBA guaranteed and borrowers may be eligible to have an amount up to the entire principal balance forgiven and paid by
the SBA. PPP loans also carry a zero risk rating for regulatory capital purposes, and the Federal Reserve has made available a
liquidity facility to facilitate funding of PPP loans held by banks.
Owner occupied commercial real estate loans
Owner occupied commercial real estate loans totaled $1.78 billion at December 31, 2020, which was an increase of $303.7
million or 21% from $1.47 billion at year-end 2019. Owner occupied commercial real estate loans increased $198.9 million or
16% to $1.47 billion at December 31, 2019 from $1.27 billion at December 31, 2018. Changes to owner occupied real estate
loans for the years ended December 31, 2020 and 2019 were:
• Excluding $182.1 million of loans acquired in the AimBank and Johnson Bank branch transactions, loans organically
increased $121.6 million or 8% since December 31, 2019.
• Excluding $593,000 of loans transferred to held for sale in the first quarter of 2019 and $159.3 million of loans
acquired in the Blue Valley Ban Corp. and Rockford Bank and Trust Company transactions, loans organically
increased $40.2 million or 3% since year-end 2018.
Non-owner occupied commercial real estate loans
Non-owner occupied commercial real estate loans totaled $1.92 billion at December 31, 2020, which was an increase of $425.6
million or 28% from $1.50 billion at year-end 2019. Non-owner occupied commercial real estate loans totaled $1.50 billion at
December 31, 2019, which was an increase of $226.8 million or 18% from $1.27 billion at year-end 2018. Changes to non-
owner occupied commercial real estate loans for the years ended December 31, 2020 and 2019 were:
• Excluding $218.7 million of loans acquired in the AimBank and Johnson Bank branch transactions, loans organically
increased $206.9 million or 14% since December 31, 2019.
• Excluding $90,000 of loans transferred to held for sale in the first quarter of 2019 and $232.3 million of loans acquired
in the Blue Valley Ban Corp. and Rockford Bank and Trust Company transactions, loans organically decreased $5.4
million or less than 1% since year-end 2018.
61
Real estate construction loans
Real estate construction loans totaled $863.2 million at December 31, 2020, which was a decrease of $163.9 million or 16%
from $1.03 billion at year-end 2019. Real estate construction loans totaled $1.03 billion at December 31, 2019, which was an
increase of $183.6 million or 22% from $843.5 million at December 31, 2018. Changes to real estate construction loans for the
years ended December 31, 2020 and 2019 were:
• Excluding $100.9 million of loans acquired in the AimBank and Johnson Bank branch transactions, loans organically
decreased $264.8 million or 26% since December 31, 2019.
• Excluding $520,000 of loans transferred to held for sale in the first quarter of 2019 and $74.7 million of loans acquired
in the Blue Valley Ban Corp. and Rockford Bank and Trust Company transactions, loans organically increased $109.5
million or 13% since year end 2018.
The organic increases in owner-occupied and non-owner occupied commercial real estate loans during 2020 were primarily the
result of real estate construction loans moving to permanent financing.
Agricultural and agricultural real estate loans
Agricultural and agricultural real estate loans totaled $714.5 million at December 31, 2020, which was an increase of $148.7
million or 26% from $565.8 million at December 31, 2019. Agricultural and agricultural real estate loans totaled $565.8 million
at December 31, 2019, which was a decrease of $15.0 million or 3% from $580.8 million at December 31, 2018. Changes to
agricultural and agricultural real estate loans for the years ended December 31, 2020 and 2019 were:
• Excluding $247.5 million of loans acquired in the AimBank transaction, loans organically decreased $98.8 million or
17% since December 31, 2019.
• Excluding $6.6 million of loans transferred to held for sale in the first quarter of 2019 and $3.2 million of loans
acquired in the Blue Valley Ban Corp. and Rockford Bank and Trust Company transactions, loans organically
decreased $11.6 million or 2% since year-end 2018.
The organic decreases in the agricultural and agricultural real estate loans during 2020 and 2019 were primarily attributable to
scheduled paydowns.
Residential real estate loans
Residential real estate loans totaled $840.4 million at December 31, 2020, which was an increase of $8.2 million or 1% from
$832.3 million at December 31, 2019. Residential real estate loans totaled $832.3 million at December 31, 2019, which was a
decrease of $55.7 million or 6% from $888.0 million at year-end 2018. Changes to residential real estate loans for the years
ended December 31, 2020 and 2019 were:
• Excluding $197.3 million of loans acquired in the AimBank and Johnson Bank branch transactions, loans organically
decreased $189.2 million or 23% since December 31, 2019.
• Excluding $7.2 million of loans transferred to held for sale in the first quarter of 2019 and $92.8 million of loans
acquired in the Blue Valley Ban Corp. and Rockford Bank and Trust Company transactions, loans organically
decreased $141.3 million or 16% since year-end 2018.
Consumer loans
Consumer loans totaled $414.4 million at December 31, 2020, which was a decrease of $28.9 million or 7% from $443.3
million at December 31, 2019. Consumer loans totaled $443.3 million at December 31, 2019, which was an increase of $25.6
million or 6% from $417.8 million at year-end 2018. Changes to consumer loans for the years ended December 31, 2020 and
2019 were:
• Excluding $51.4 million of loans acquired in the AimBank and Johnson Bank branch transactions, loans organically
decreased $80.3 million or 18% since December 31, 2019.
• Excluding $4.4 million of loans transferred to held for sale in the first quarter of 2019 and $37.7 million of loans
acquired in the Blue Valley Ban Corp. and Rockford Bank and Trust Company transactions, loans organically
decreased $7.8 million or 2% since year-end 2018.
The organic decreases in 2020 and 2019 in the residential real estate and consumer loans portfolios were primarily the result of
customers refinancing loans due to the recent decreases in residential mortgage interest rates.
The continued economic disruption resulting from the COVID-19 pandemic will make it difficult for some customers to repay
the principal and interest on their loans, and the Banks have been working with customers to modify the terms of certain
62 existing loans. The following table shows the total loans exposure as of December 31, 2020, to customer segment profiles that
Heartland believes will be more heavily impact by COVID-19, dollars in thousands:
Industry
Total Exposure
(1)
% of Total Gross Exposure
(1)
Lodging
Retail trade
Retail properties
Restaurants and bars
Oil and gas
Total
$
$
539,434
465,980
422,794
266,053
122,256
1,816,517
4.38 %
3.78
3.43
2.16
0.99
14.74 %
(1) Total loans outstanding and unfunded commitments excluding PPP loans
Although repayment risk exists on all loans, different factors influence repayment risk for each type of loan. The primary risks
associated with commercial, commercial real estate and agricultural loans are the quality of the borrower’s management and the
health of national and regional economies. Additionally, repayment of commercial real estate, real estate construction 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 credit 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.
ALLOWANCE FOR CREDIT LOSSES
On January 1, 2020, Heartland adopted ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)," which replaces the
incurred loss methodology with a current expected credit loss ("CECL") methodology. Additionally, ASU 2016-13 required an
allowance for unfunded commitments to be calculated using a CECL methodology. Heartland's CECL methodology is
comprised of three parts: a quantitative calculation, a qualitative calculation, and an economic forecasting component.
The process utilized by Heartland to determine the appropriateness of the allowance for credit losses is considered a critical
accounting practice for Heartland and has been updated to be in accordance with CECL as of January 1, 2020. All prior periods
are presented in accordance with prior GAAP. The allowance for credit losses represents management's estimate of lifetime
losses in the existing loan portfolio. For additional details on the specific factors considered in determining the allowance for
credit losses, refer to the critical accounting policies section of this Annual Report on Form 10-K for the year ended December
31, 2020 and Note 1, "Basis of Presentation," of the consolidated financial statements included in this Annual Report on Form
10-K.
63
Total Allowance for Lending Related Credit Losses
The following table shows, in thousands, the components of Heartland's total allowance for lending related credit losses, which
includes the allowance for credit losses for loans and the allowance for unfunded commitments, as of the dates indicated:
Quantitative
Qualitative
Economic forecast
Total
December 31, 2020
% of
Allowance
Amount
January 1, 2020(1)
% of
Allowance
Amount
December 31, 2019(2)
% of
Allowance
Amount
$
102,398
29,101
15,387
$
146,886
69.71 % $
19.81
10.48
100.00 % $
82,829
11,468
2,021
96,318
85.99 % $
11.91
2.10
41,694
28,701
—
100.00 % $
70,395
59.23 %
40.77
—
100.00 %
o show the
impact
of the
adoption of ASU 2016-13 on the
components of the
allowance for
d commitments was immaterial
prior to the
adoption of ASU 2016-13 and therefore
not
(1) January 1, 2020 is included t
lending related credit losses.
(2) The
included in prior periods.
allowance for unfunde
Heartland's quantitative allowance totaled $82.8 million or 86% of the total allowance for lending related credit losses on
January 1, 2020, and $41.7 million or 59% of the allowance for loan losses at December 31, 2019. The increase in the
quantitative component on January 1, 2020, was primarily attributable to the addition of $1.80 billion of previously acquired
loans to the allowance calculation as required under CECL.
The quantitative allowance of Heartland's total allowance for lending related credit losses increased $19.6 million to $102.4
million or 70% of the total allowance at December 31, 2020 compared to $82.8 million or 86% of the total allowance at January
1, 2020. The quantitative allowance increased $17.5 million for loans acquired in the AimBank and Johnson Bank branch
transactions in the fourth quarter of 2020.
Heartland's qualitative allowance totaled $11.5 million or 12% of the total allowance for lending related credit losses on
January 1, 2020, compared to $28.7 million or 41% of the allowance for credit losses at December 31, 2019, which was the
result of the change in methodology to an expected loss model from an incurred loss model.
The qualitative allowance component of Heartland’s total allowance for lending related credit losses increased to $29.1 million
or 20% of the total allowance at December 31, 2020, compared to $11.5 million or 12% on January 1, 2020. As described in
Note 1, "Basis of Presentation," of the consolidated financial statements included in this Annual Report on Form 10-K, in
determining the appropriate level of this qualitative component, management assesses several risk factors including an overall
assessment of "other external factors." At the end of the first quarter of 2020, in making its assessment, management increased
the level of other external factors risk from the initial day 1 (January 1, 2020) assessment of moderate to high, which remained
high at December 31, 2020. This level reflects the uncertainty of both the economic forecasting and quantitative allowance
component results given the high level of market and economic volatility that have existed due to the COVID-19 pandemic.
While several of the qualitative factors increased, the change in the other external factors was the primary driver of the overall
increase in the qualitative allowance for the year ended December 31, 2020.
Economic forecasting was not required prior to January 1, 2020. Heartland has access to various third-party economic forecast
scenarios provided by Moody's, which are updated quarterly in Heartland's methodology. Heartland’s initial January 1, 2020
allowance calculation utilized a two-year reasonable and supportable forecast period which resulted in an economic forecasting
allowance of $2.0 million or 2% of the total allowance for lending related credit losses.
At December 31, 2020, Heartland utilized Moody's December 7, 2020, baseline forecast scenario, which was the most currently
available forecast and included the potential impact of COVID-19. At March 31, 2020, due to the economic deterioration and
uncertainty associated with COVID-19, the reasonable and supportable forecast period was reduced to one year. At year-end
2020, Heartland continued to use a one year forecast period, which resulted in an allowance of $15.4 million or 10% of the total
allowance for lending related credit losses at December 31, 2020.
64
Allowance for Credit Losses-Loans
The table below presents the changes in the allowance for credit losses for loans for the years ended December 31, 2020 and
2019, in thousands:
Balance at beginning of period
Impact of ASU 2016-13 adoption on January 1, 2020
Adjusted balance January 1, 2020
Allowance for purchased credit deteriorated loans
Provision for credit losses
Recoveries on loans previously charged off
Charge-offs on loans
Balance at end of period
For the Year Ended December 31,
2020
2019
$
70,395
$
61,963
12,071
82,466
12,313
65,745
3,804
(32,722)
$
131,606
$
—
61,963
—
16,657
5,365
(13,590)
70,395
Allowance for credit losses for loans as a percent of loans
Allowance for credit losses for loans a percentage of non-performing loans
1.31 %
149.37 %
0.84 %
87.28 %
The allowance for credit losses for loans totaled $131.6 million and $70.4 million at December 31, 2020, and December 31,
2019, respectively. The allowance for credit losses for loans at December 31, 2020, was 1.31% of loans compared to 0.84% of
loans at December 31, 2019. The following items impacted Heartland's allowance for credit losses for loans for the year ended
December 31, 2020:
• The allowance for credit losses for loans increased $12.1 million after the adoption of CECL on January 1, 2020.
• Provision expense totaled $65.7 million, which included $9.6 million of provision expense for loans acquired in the
fourth quarter of 2020.
• Net charge offs totaled $28.9 million or 0.32% of average loans outstanding, which included $13.9 million of charge
offs related to two individually assessed loans with principal balances of $17.1 million.
The following items impacted Heartland's allowance for credit losses for loans, which was an incurred loss model, for the year
ended December 31, 2019:
Provision expense totaled $16.7 million.
•
• Net charge offs totaled $8.2 million or 0.11% of average loans outstanding.
65
The table below summarizes activity in the allowance for credit losses for loans for the years indicated, including amounts of
loans charged off, amounts of recoveries, additions to the allowance charged to income and the ratio of net charge-offs to
average loans outstanding, in thousands:
Balance at beginning of year
Impact of ASU 2016-13 adoption on January 1, 2020
Adjusted balance
Allowance for purchased credit deteriorated loans
Charge-offs:
Commercial and industrial
PPP
Owner occupied commercial real estate
Non-owner occupied commercial real estate
Real estate construction
Agricultural and agricultural real estate
Residential real estate
Consumer
Total charge-offs
Recoveries:
Commercial and industrial
PPP
Owner occupied commercial real estate
Non-owner occupied commercial real estate
Real estate construction
Agricultural and agricultural real estate
Residential real estate
Consumer
Total recoveries
Net charge-offs(1)
Provision for credit losses
Balance at end of year
Net charge-offs to average loans
2020
$ 70,395
12,071
As of December 31,
2018
$ 55,686
2017
$ 54,324
2019
$ 61,963
2016
$ 48,685
—
—
—
—
82,466
61,963
55,686
54,324
48,685
12,313
—
—
—
—
14,974
7,129
10,119
7,081
1,532
—
13,671
45
105
1,201
515
2,211
—
119
21
156
2,633
458
—
176
19
285
153
488
3,074
10,045
—
368
195
150
1,986
1,029
7,062
—
981
629
1,059
—
515
6,678
32,722
13,590
21,285
17,871
11,394
1,277
2,462
—
205
30
220
971
108
993
3,804
28,918
—
178
201
255
529
139
1,601
5,365
8,225
797
—
90
261
723
—
87
692
—
531
340
207
—
492
1,591
3,549
1,408
3,670
17,736
14,201
912
—
228
221
2,666
32
191
1,089
5,339
6,055
65,745
16,657
24,013
15,563
11,694
$ 131,606
$ 70,395
$ 61,963
$ 55,686
$ 54,324
0.32 %
0.11 %
0.25 %
0.24 %
0.11 %
(1) Includes net charge-offs (recoveries) at Citizens Finance Parent Co. of $(631) for 2019, $6,397 for 2018, $4,673 for 2017
and $4,280 for 2016.
Net charge offs could be elevated in future periods if customers’ ability to repay loans continues to be adversely impacted by
prolonged economic disruptions caused by the COVID-19 pandemic.
66
The table below shows our allocation of the allowance for credit losses for loans by types of loans, in thousands:
As of December 31,
2020
2019
2018
2017
2016
Loan
Category
to Gross
Loans
Amount Receivable
Amount
Loan
Category
to Gross
Loans
Receivable
Loan
Category
to Gross
Loans
Amount Receivable
Amount
Loan
Category
to Gross
Loans
Receivable
Amount
Loan
Category
to Gross
Loans
Receivable
Commercial and industrial
$ 38,818
25.29 %
$ 34,207
30.24 %
$ 29,958
28.81 %
$ 23,255
28.12 %
$ 21,281
26.90 %
PPP
—
9.56
—
—
—
—
—
—
—
—
Real estate construction
20,080
Owner occupied
commercial real estate
Non-owner occupied
commercial real estate
Agricultural and
agricultural real estate
Residential real estate
Consumer
Total allowance for credit
losses for loans
20,001
17.72
7,921
17.60
6,247
17.20
5,401
16.32
5,517
16.09
20,873
7,129
11,935
12,770
19.17
8.61
7.13
8.39
4.13
7,584
8,677
5,680
1,504
4,822
17.88
12.27
6.76
9.95
5.30
7,182
6,707
4,916
1,813
5,140
17.13
11.39
7.84
11.99
5.64
6,709
4,607
4,260
2,310
9,144
18.62
10.04
8.01
12.38
6.51
7,579
4,645
3,028
2,257
9,017
17.23
9.68
9.17
13.64
7.29
$ 131,606
$ 70,395
$ 61,963
$ 55,686
$ 53,324
Management allocates the allowance for credit losses for loans by pools of risk within each loan portfolio. The allocation of the
allowance for credit 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 credit losses is available to absorb losses from any segment
of the loan portfolio.
Allowance for Unfunded Commitments
The following table shows, in thousands, the changes in Heartland's allowance for unfunded commitments for the year ended
December 31, 2020:
For the Year Ended December 31, 2020
Balance at beginning of year(1)
Impact of ASU 2016-13 adoption on January 1, 2020
Adjusted balance at January 1, 2020
Provision for credit losses
Balance at end of year
$
$
248
13,604
13,852
1,428
15,280
(1) Prior to the adoption of ASU 2016-13, the allowance for unfunded commitments was immaterial, and therefore prior
periods have not been shown in this table.
Heartland's allowance for unfunded commitments totaled $13.9 million after the adoption of CECL on January 1, 2020. Prior to
January 1, 2020, the allowance for unfunded commitments was immaterial. Heartland recorded a benefit to provision for credit
losses for unfunded commitments of $894,000 during 2020, and $2.3 million of provision for credit losses related to unfunded
loan commitments related to the acquisitions completed in the fourth quarter of 2020. At December 31, 2020, the allowance for
unfunded commitments was $15.3 million, and Heartland had $3.26 billion of unfunded loan commitments.
CREDIT QUALITY AND NONPERFORMING ASSETS
Heartland's internal rating system for the credit quality of its loans is a series of grades reflecting management's risk assessment,
based on its analysis of the borrower's financial condition. The "pass" category consists of all loans that are not in the "nonpass"
category and categorized into a range of loan grades that reflect increasing, though still acceptable, risk. Movement of risk
through the various grade levels in the pass category is monitored for early identification of credit deterioration. For more
information on this internal rating system, see Note 5, "Loans" of Heartland’s consolidated financial statements in this Annual
Report on Form 10-K.
Heartland's nonpass loans totaled $1.08 billion or 10.8% of total loans as of December 31, 2020 compared to $556.8 million or
6.6% of total loans as of December 31, 2019. The increase in nonpass loans was primarily attributable to nonpass loans
67
acquired in the fourth quarter of 2020 and downgrades in the legacy portfolio due to the COVID-19 pandemic. As of December
31, 2020, Heartland's nonpass loans consisted of approximately 56% watch loans and 44% substandard loans. The percent of
nonpass loans on nonaccrual status as of December 31, 2020 was 8%. Included in Heartland's nonpass loans at December 31,
2020 were $77.1 million of nonpass PPP loans as a result of risk ratings on related credits. Heartland's risk rating methodology
assigns a risk rating to the whole lending relationship. Heartland has no allowance recorded related to the PPP loans because of
the 100% SBA guarantee.
As of December 31, 2019, Heartland's nonpass loans were comprised of approximately 60% watch loans and 40% substandard
loans. The percent of nonpass loans on nonaccrual status as of December 31, 2019, was 14%.
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 0.23% at December 31, 2020, compared to 0.33% at December 31, 2019, and 0.21% at December 31, 2018.
The table below presents the amounts of nonperforming loans and other nonperforming assets on the dates indicated, in
thousands:
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
2020
$ 87,386
720
88,106
6,624
240
As of December 31,
2018
$ 71,943
2017
$ 62,581
2019
$ 76,548
4,105
80,653
6,914
11
726
72,669
6,153
459
830
63,411
10,777
411
2016
$ 64,299
86
64,385
9,744
663
$ 94,970
$ 87,578
$ 79,281
$ 74,599
$ 74,792
$ 2,370
$ 3,794
$ 4,026
$ 6,617
$ 10,380
0.88 %
0.96 %
0.98 %
0.99 %
1.20 %
0.95 %
0.53 %
1.05 %
0.66 %
1.07 %
0.69 %
1.17 %
0.76 %
1.39 %
0.91 %
(1) Represents accruing restructured loans performing according to their restructured terms.
The performing troubled debt restructured loans above do not include any loan modifications initially made under COVID-19
modification programs.
The tables below summarize the changes in Heartland's nonperforming assets, including other real estate owned ("OREO")
during 2020 and 2019, in thousands:
December 31, 2019
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.
December 31, 2020
Nonperforming
Loans
Other
Real Estate
Owned
Other
Repossessed
Assets
Total
Nonperforming
Assets
$
80,653
$
6,914
$
11
$
(3,789)
(28,918)
63,151
11,662
(34,653)
—
—
—
3,511
—
—
1,119
—
(3,876)
(1,044)
—
278
—
—
—
—
(37)
(12)
—
$
88,106
$
6,624
$
240
$
87,578
—
(28,918)
63,151
12,781
(34,653)
(3,913)
(1,056)
—
94,970
(1) Includes principal reductions and transfers to performing status.
68
December 31, 2018
Loan foreclosures
Net loan charge offs
New nonperforming loans
Acquired nonperforming assets
Reduction of nonperforming loans
OREO/Repossessed sales proceeds
OREO/Repossessed assets write-downs, net
Net activity at Citizens Finance Parent Co.
December 31, 2019
(1)
Nonperforming
Loans
Other
Real Estate
Owned
Other
Repossessed
Assets
Total
Nonperforming
Assets
$
72,669
$
6,153 $
(8,287)
(8,225)
49,571
2,130
(27,205)
—
—
—
8,066
—
—
1,362
—
(7,660)
(1,007)
—
459 $
221
—
—
—
—
(184)
(39)
(446)
$
80,653
$
6,914 $
11 $
79,281
—
(8,225)
49,571
3,492
(27,205)
(7,844)
(1,046)
(446)
87,578
(1) Includes principal reductions and transfers to performing status.
Nonperforming loans were $88.1 million or 0.88% of total loans at December 31, 2020, compared to $80.7 million or 0.96% of
total loans at December 31, 2019. Excluding $11.7 million of acquired nonperforming loans, nonperforming loans decreased
$4.2 million or 5% from year-end 2019.
Approximately 54%, or $47.4 million, of Heartland's nonperforming loans at December 31, 2020, had individual loan balances
exceeding $1.0 million, the largest of which was $7.3 million. At December 31, 2019, approximately 52%, or $41.9 million, of
Heartland's nonperforming loans had individual loan balances exceeding $1.0 million, the largest of which was $7.5 million.
The portion of Heartland's nonresidential real estate nonperforming loans covered by government guarantees was $14.6 million
at December 31, 2020, compared to $18.1 million at December 31, 2019.
COVID-19 payment deferral and loan modification programs could delay the recognition of net charge-offs, delinquencies and
nonaccrual status for loans that would have otherwise moved into past due or nonaccrual status.
Other real estate owned
Other real estate owned was $6.6 million at December 31, 2020, compared to $6.9 million at December 31, 2019, and $6.2
million at December 31, 2018. 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 $3.9 million in 2020 compared to $7.7 million in 2019 and $11.6 million in 2018.
Troubled debt restructured loans
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 $6.2 million in restructured loans at December 31, 2020, of which $3.8 million were classified
as nonaccrual and $2.4 million were accruing according to the restructured terms. At December 31, 2019, we had an aggregate
balance of $7.6 million in restructured loans, of which $3.8 million were classified as nonaccrual and $3.8 million were
accruing according to the restructured terms.
During 2020, TDR treatments were updated due to COVID-19 and the CARES Act. Under the CARES Act, banking
institutions are not required to classify modifications as a TDR if the following three conditions are met:
• The deferral was related to COVID-19;
69
• The deferral was executed on a loan that was not more than 30 days past due as of December 31, 2019; and
• The deferral was executed between March 1, 2020 and the later of December 31, 2020 or the last day of the
Declaration of National Emergency.
Heartland has adopted the CARES Act rule for TDR classification and has enhanced its procedures for deferral monitoring.
As of December 31, 2020, approximately $1.21 billion of loans have been modified under COVID-19 relief programs, which
included $143.7 million of modifications made by AimBank prior to the acquisition by Heartland. Of the loans modified by
Heartland, approximately $938.9 million returned to contractual payments, $83.3 million were still in original deferral status
and $39.5 million were granted additional deferrals. These modifications are not classified as TDRs as of December 31, 2020.
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 35% of Heartland's total assets at
December 31, 2020, compared to 26% at December 31, 2019, and 24% at December 31, 2018. Whenever possible,
management intends to use a portion of the proceeds from maturities, paydowns and sales of securities to fund loan growth and
paydown borrowings. Total securities carried at fair value as of December 31, 2020, were $6.13 billion, an increase of $2.82
billion or 85% since December 31, 2019. The increase includes $267.9 million of securities acquired in 2020. 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.
The table below presents the composition of the securities portfolio, including securities carried at fair value, held to maturity
net of allowance for credit losses and other, by major category, in thousands:
U.S. treasuries
U.S. agencies
Obligations of states and political subdivisions
Mortgage-backed securities - agency
Mortgage-backed securities - non-agency
Commercial mortgage-backed securities - agency
Commercial mortgage-backed securities - non-agency
Asset-backed securities
Corporate bonds
Equity securities
Other securities
Total securities
As of December 31,
2020
2019
2018
Amount
% of
Portfolio
Amount
% of
Portfolio
Amount
% of
Portfolio
$
2,026
0.03 % $
8,503
0.25 % $
25,415
0.94 %
166,779
1,724,066
1,355,270
1,449,116
174,153
252,767
2.65
27.40
21.54
23.03
2.77
4.02
1,069,266
16.99
3,742
19,629
75,253
0.06
0.31
1.20
184,676
798,514
766,726
430,497
68,865
436,325
691,579
—
18,435
31,321
5.38
23.24
22.32
12.53
2.00
12.70
20.13
—
0.54 %
0.91 %
84,671
611,257
446,584
294,071
401,155
482,898
323,855
—
17,086
28,396
3.12
22.51
16.44
10.83
14.77
17.78
11.93
—
0.63
1.05
$ 6,292,067
100.00 % $ 3,435,441
100.00 % $ 2,715,388
100.00 %
Heartland's securities portfolio had an expected modified duration of 5.52 years as of December 31, 2020, compared to 6.17
years as of December 31, 2019, and 4.01 years as of December 31, 2018.
At December 31, 2020, we had $75.3 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.
70
The table below presents the contractual maturities for the debt securities classified as available for sale at December 31, 2020,
by major category, 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.
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
$ 1,004
2.43 %
$ 1,022
1.70 %
$ —
—
$
—
— %
$
—
—
2,647
2.02
89,137
2.04
74,995
2.29
—
—
— %
$
2,026
2.06 %
—
166,779
2.15
2,620
2.64
23,265
3.19
81,366
3.12
1,527,976
5.24
—
—
1,635,227
5.10
—
—
—
—
—
—
—
—
1,355,270
1.26
1,355,270
1.26
—
—
—
—
—
—
—
—
1,449,116
3.29
1,449,116
3.29
—
—
—
—
—
—
—
—
174,153
1.29
174,153
1.29
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
318
4.05
3,424
4.36
—
—
—
—
—
—
—
—
—
—
—
—
252,767
3.89
252,767
3.89
1,069,266
1.55
1,069,266
1.55
—
19,629
—
—
3,742
4.33
19,629
—
U.S. treasuries
U.S. agencies
Obligations of states and
political subdivisions
Mortgage-backed
securities - agency
Mortgage-backed
securities - non-agency
Commercial mortgage-
backed securities - agency
Commercial mortgage-
backed securities - non-
agency
Asset-backed securities
Corporate bonds
Equity securities
Total
$ 3,624
2.58 %
$ 27,252
3.03 %
$ 173,927
2.59 %
$ 1,602,971
5.10 %
$ 4,320,201
2.17 %
$ 6,127,975
2.96 %
The table below presents the contractual maturities for the debt securities classified as held to maturity at December 31, 2020,
by major category, 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.
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
$ 1,933
3.65 %
$ 24,129
4.54 %
$ 54,329
5.15 %
$
8,499
5.01 %
$ 88,890
4.94 %
Total
$ 1,933
3.65 %
$ 24,129
4.54 %
$ 54,329
5.15 %
$
8,499
5.01 %
$ 88,890
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 intent and ability to hold these investments until a
market price recovery or to maturity and does not believe it will be required to sell the securities before maturity, no credit
losses were recognized on these securities during the year ended December 31, 2020. See Note 4, "Securities" of the
consolidated financial statements for further discussion regarding unrealized losses on our securities portfolio.
71
DEPOSITS
Total deposits were $14.98 billion as of December 31, 2020, compared to $11.04 billion at December 31, 2019, an increase of
$3.94 billion or 36%, which included $2.09 billion of deposits acquired at fair value in the AimBank and Johnson Bank branch
transactions. The mix of total deposits remains favorable, with demand deposits representing 38% at December 31, 2020, and
32% at December 31, 2019. Savings deposits represented 54% at December 31, 2020 compared to 57% at December 31, 2019.
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:
2020
Percent
of
Deposits
36.85 %
54.35
8.80
100.00 %
Average
Deposits
$ 4,554,479
6,718,413
1,088,185
$ 12,361,077
Demand deposits
Savings
Time deposits
Total deposits
Total Average Deposits
For the Years Ended December 31,
2019
Percent Average
Interest
Rate
of
Average
Interest Average
Rate
Deposits Deposits
33.74 %
55.14
11.12
100.00 %
— % $ 3,384,341
5,530,503
1,115,785
$ 10,030,629
0.25
1.26
— %
0.85
1.49
2018
Percent
of
Deposits
35.87 %
52.50
11.63
100.00 %
Average
Interest
Rate
— %
0.53
1.00
Average
Deposits
$ 3,265,532
4,779,977
1,058,769
$ 9,104,278
• Total average deposits increased $2.33 billion or 23% during 2020 to $12.36 billion, which included approximately
$153.9 million of deposits acquired in 2020.
• Excluding acquired deposits, total average deposits increased $2.18 billion or 22% during 2020.
• 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.
• Excluding acquired deposits, total average deposits increased $493.7 million or 5% during 2019.
•
In 2020, 44% of our total average deposits were from our Midwestern markets, 29% were from our Southwestern
markets, and 27% were from our Western markets.
Average Demand Deposits
• Average demand deposits increased $1.17 billion or 35% to $4.55 billion during 2020.
• Excluding acquired demand deposits of approximately $57.3 million, average demand deposits increased $1.11 billion
or 33% during 2020.
• Average demand deposits increased $118.8 million or 4% to $3.38 billion during 2019.
• Exclusive of approximately $112.0 million of demand deposits acquired in 2019, average demand deposits increased
$6.8 million or less than 1%.
Average Savings Deposits
• Average savings deposits increased $1.19 billion or 21% to $6.72 billion during 2020.
• Excluding acquired savings deposits of approximately $72.0 million, average savings deposits increased $1.12 billion
or 20% during 2020.
• Average savings deposit balances increased by $750.5 million or 16% to $5.53 billion during 2019.
• Excluding approximately $240.0 million of average savings deposits acquired in 2019, average savings deposits
increased $510.9 million or 11%.
Average Time Deposits
• Average time deposits decreased $27.6 million or 2% to $1.09 billion during 2020.
• Excluding acquired time deposits of approximately $24.6 million, average time deposits decreased $52.2 million or
5% during 2020.
• Average time deposits increased $57.0 million or 5% to $1.12 billion during 2019.
• Exclusive of approximately $81.1 million of time deposits acquired in 2019, average time deposits decreased $24.1
million or 2%.
72
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 2020, 2019 and 2018.
The following table sets forth the amount and maturities of time deposits of $100,000 or more at December 31, 2020, in
thousands:
3 months or less
Over 3 months through 6 months
Over 6 months through 12 months
Over 12 months
Total
SHORT-TERM BORROWINGS
December 31, 2020
222,473
$
187,921
209,625
154,227
774,246
$
Short-term borrowings, which Heartland defines as borrowings with an original maturity of one year or less, were as follows as
of December 31, 2020, 2019, and 2018 in thousands:
Retail repurchase agreements
Federal funds purchased
Advances from the FHLB
Advances from the federal discount window
Other short-term borrowings
Total
As of December 31,
2019
2020
2018
80,124
% Change
2020/2019 2019/2018
5 %
$ 118,293 $ 84,486
2,100
2,450
35,400
—
81,198
100,838
35,000
—
—
12,479
14,492
10,648
$ 167,872 $ 182,626 $ 227,010
40 %
(14)
(100)
100
(14)
(8) %
(93)
(19)
—
36
(20) %
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, 2020, the amount of short-term borrowings was $167.9 million
compared to $182.6 million at year-end 2019, a decrease of $14.8 million or 8%.
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 $118.3 million at
December 31, 2020, compared to $84.5 million at December 31, 2019, an increase of $33.8 million or 40%.
Federal funds purchased totaled $2.1 million at December 31, 2020, $2.5 million at December 31, 2019, and $35.4 million at
December 31, 2018, which was a decrease of $350,000 or 14% and $33.0 million or 93%, respectively.
Short-term FHLB advances were $0 at December 31, 2020, compared to $81.2 million at December 31, 2019. Short-term
advances from the federal discount window totaled $35.0 million at December 31, 2020 compared to $0 at December 31, 2019.
Heartland used short-term borrowings to purchase securities in anticipation of expected cash flow from PPP loan forgiveness,
which is expected to occur over the next several quarters.
Heartland renewed its revolving credit line agreement with an unaffiliated bank on June 14, 2020. This revolving credit line
agreement, which has $45.0 million of borrowing capacity, 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 2020 or 2019, and
no balance was outstanding on this line at December 31, 2020, and December 31, 2019.
73
The following table reflects average amounts outstanding and weighted average interest rates for our short-term borrowings as
of December 31, 2020, 2019, and 2018, in thousands:
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 Year Ended December 31,
2019
182,626
226,096
128,098
2020
167,872
380,360
157,348
2018
227,010
229,890
152,391
$
$
0.18 %
0.39 %
1.21 %
1.38 %
1.96 %
1.19 %
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,
2020 and 2019:
Advances from the FHLB
Paycheck Protection Program Liquidity Fund
Trust preferred securities
Note payable to unaffiliated bank
Contracts payable for purchase of real estate and other assets
Subordinated notes
Total
As of December 31,
2020
2019
$ 1,018 $ 2,835
188,872
—
146,323
145,343
44,417
51,417
1,983
1,892
74,429
74,286
$ 457,042 $ 275,773
% Change
2020/2019
(64) %
100
1
(14)
5
—
66 %
Other borrowings include all debt arrangements Heartland and its subsidiaries have entered into with original maturities that
extend beyond one year, as listed in the table above. As of December 31, 2020, the amount of other borrowings was $457.0
million, an increase of $181.3 million or 66% from $275.8 million as of year-end 2019.
Each of the Banks was approved in 2020 by their respective Federal Reserve Bank to borrow from the Paycheck Protection
Program Liquidity Fund ("PPPLF"). As of December 31, 2020, $188.9 million was outstanding. Heartland anticipates limited
additional utilization of the PPPLF through 2021.
74
A schedule of Heartland's trust preferred offerings outstanding as of December 31, 2020, is as follows, in thousands:
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
9,182
12/19/2002
3.25% over LIBOR
8,865
12/17/2003
2.85% over LIBOR
Sheboygan Statutory Trust I
6,615
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
4,458
09/10/2004
3.25% over LIBOR
6,494
12/19/2003
2.80% over LIBOR
4,353
09/30/2004
2.20% over LIBOR
11,973
05/31/2006
1.54% over LIBOR
3,004
06/27/2002
3.65% over LIBOR
5,399
09/23/2004
2.50% over LIBOR
7,238
04/10/2003
3.25% over LIBOR
9,226
07/29/2005
1.60% over LIBOR
Total trust preferred offerings
146,397
Less: deferred issuance costs
(74)
$ 146,323
Interest
Rate as of
12/31/20(1)
2.98 %
(2)
(3)
(4)
1.57
1.70
1.71
3.50
3.08
3.18
3.47
3.01
2.41
1.76
3.89
2.72
3.46
1.85
Maturity
Date
Callable
Date
03/17/2034
03/17/2021
04/07/2036
04/07/2021
09/15/2037
03/15/2021
09/01/2037
03/01/2021
12/26/2032
03/26/2021
12/17/2033
03/17/2021
09/17/2033
03/17/2021
12/15/2034
03/15/2021
12/19/2033
04/23/2021
09/30/2034
05/23/2021
07/25/2036
03/15/2021
(5)
(6)
09/30/2032
03/30/2021
12/15/2034
03/15/2021
04/24/2033
04/24/2021
09/30/2035
03/30/2021
(1) Effective weighted average interest rate as of December 31, 2020, was 3.40% 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, 2020, 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, 2020, was 3.87% 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, 2020, was 3.83% 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, 2020, was 5.53% 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, 2020, 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, which provides a borrowing capacity of up to $55.0
million. At December 31, 2020, $44.4 million was outstanding on this non-revolving credit line compared to $51.4 million
outstanding at December 31, 2019. At December 31, 2020, Heartland had $6.5 million available on this non-revolving credit
facility, of which no balance was drawn.
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, $44.7 million of the subordinated notes qualified as Tier 2 capital as of December 31, 2020.
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.
75
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. The table also indicates the fully-phased in capital conservation buffer, but the
requirements to comply have been extended indefinitely.
Total
Capital
(to Risk-
Weighted
Assets)
Tier 1
Capital
(to Risk-
Weighted
Assets)
Common
Equity
Tier 1
(to Risk-
Weighted
Assets)
Tier 1
Capital
(to Average
Assets)
December 31, 2020
Minimum capital requirement
Well capitalized requirement
Minimum capital requirement, including fully-phased
in capital conservation buffer
Risk-weighted assets
Average assets
14.71 %
8.00 %
10.00 %
11.85 %
6.00 %
8.00 %
10.92 %
4.50 %
6.50 %
10.50 %
8.50 %
7.00 %
$ 11,819,037
$ 11,819,037
$ 11,819,037
9.02 %
4.00 %
5.00 %
N/A
N/A
N/A
N/A
N/A $ 15,531,884
December 31, 2019
Minimum capital requirement
Well capitalized requirement
Minimum capital requirement, including fully-phased
in capital conservation buffer (2019)
Risk-weighted assets
Average 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
10.10 %
4.00 %
5.00 %
N/A
N/A
N/A
N/A
N/A $ 12,318,135
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
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
Heartland elected not to utilize the regulatory transition relief issued by federal regulatory authorities in the first quarter of
2020, which allowed banking institutions to delay the impact of CECL on regulatory capital because the impact on the capital
ratios of Heartland and its subsidiary banks was not significant.
At December 31, 2020, retained earnings that could be available for the payment of dividends to meet the most restrictive
minimum capital requirements totaled $736.5 million. Retained earnings that could be available for the payment of dividends to
Heartland from its Banks totaled approximately $500.9 million at December 31, 2020, under the capital requirements to remain
well capitalized. These dividends are the principal source of funds to pay dividends on Heartland's common and preferred stock
and to pay interest and principal on its debt.
On December 4, 2020, Heartland completed the acquisition of AimBank, headquartered in Levelland, Texas in a transaction
valued at approximately $264.5 million, which was paid by delivery of 5,185,045 shares of Heartland common stock and cash
of $47.3 million, subject to certain hold-back provisions.
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.
76
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 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.
On June 26, 2020, Heartland issued and sold 4.6 million depositary shares, each representing a 1/400th interest in a share of
7.00% Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, Series E. The depositary shares are listed on The Nasdaq
Global Select Market under the symbol "HTLFP." If declared, dividends are paid quarterly in arrears at a rate of 7.00% per
annum beginning on October 15, 2020. For the dividend period beginning on the first reset date of July 15, 2025, and for
dividend periods beginning every fifth anniversary thereafter, each a reset date, the rate per annum will be reset based on a
recent five-year treasury rate plus 6.675%. The earliest redemption date for the preferred shares is July 15, 2025. Dividends
payable on common shares are subject to quarterly dividends payable on these outstanding preferred shares at the applicable
dividend rate. The net proceeds of $110.7 million are being used for general corporate purposes, which include organic and
acquired growth, financing investments, capital expenditures, investments in wholly-owned subsidiaries as regulatory capital
and repayment of debt.
Common stockholders' equity was $1.97 billion at December 31, 2020, compared to $1.58 billion at year-end 2019. Book value
per common share was $46.77 at December 31, 2020, compared to $43.00 at year-end 2019. 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 $76.8 million and $969,000 at December 31, 2020, and
December 31, 2019, respectively.
COMMITMENTS, CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
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, 2020, and December 31, 2019, commitments to extend credit aggregated $3.26 billion and $2.97 billion, and
standby letters of credit aggregated $73.2 million and $79.5 million, respectively.
77
The following table summarizes our significant contractual obligations and other commitments as of December 31, 2020, in
thousands:
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
Payments Due By Period
Total
Less than
One Year
One to
Three
Years
Three to
Five Years
More than
Five Years
$ 1,271,391 $
999,121 $
222,614 $
39,314 $
10,342
457,042
24,656
194,867
80,544
156,975
25,337
24,024
5,482
6,275
6,633
305
8,937
12,207
159
4,068
5,184
86
6,057
—
4,932
$ 1,783,276 $ 1,036,990 $
438,784 $ 129,196
$
178,306
$ 3,258,626 $ 2,538,708 $
385,758 $ 136,685 $
197,475
73,205
64,997
6,320
1,059
829
$ 3,331,831
$ 2,603,705
$
392,078 $ 137,744
$
198,304
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.
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 $500.9 million as of December 31, 2020.
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.
Derivative Financial Instruments
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.
Off-Balance Sheet Arrangements
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
described in Note 15, "Commitments," to the consolidated financial statements for additional information on these
commitments.
78
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. For COVID-19 trends and
uncertainties impacting Heartland’s liquidity, see the discussion of "Liquidity and Interest Rate Risks" under Item 1A, Risk
Factors.
At December 31, 2020, Heartland had $337.9 million of cash and cash equivalents, time deposits in other financial institutions
of $3.1 million and securities carried at fair value of $6.13 billion.
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.
Heartland's short-term borrowing balances are dependent on commercial cash management and smaller correspondent bank
relationships and, as a result, will normally fluctuate. Management believes these balances, on average, to be stable sources of
funds; however, Heartland intends to rely on deposit growth and additional FHLB and discount window borrowings as needed
in the future.
Additional funding is provided by long-term debt and short-term borrowings. In the event of short-term liquidity needs,
Heartland's banks may purchase federal funds from each other or from correspondent banks and may also borrow from the
Federal Reserve Bank. As of December 31, 2020, Heartland had $167.9 million of short-term borrowings outstanding.
As of December 31, 2020, Heartland had $457.0 million of long-term debt outstanding, and it is an important funding source
because of its multi-year borrowing structure. Additionally, the subsidiary banks' FHLB memberships give them the ability to
borrow funds for short-term and long-term purposes under a variety of programs, and at December 31, 2020, Heartland had
$1.56 billion of borrowing capacity under these programs. Under the PPPLF, Heartland had $788.2 million of borrowing
capacity as of December 31, 2020. Additionally, at December 31, 2020, Heartland had $1.29 billion of borrowing capacity at
the Federal Reserve Banks' discount window.
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 paid by its bank
subsidiaries and the issuance of debt and equity securities.
As of December 31, 2020, the parent company had cash of $84.7 million. Additionally, Heartland has a revolving credit
agreement and non-revolving credit line with an unaffiliated bank, which is renewed annually, most recently on June 14, 2020.
Heartland's revolving credit agreement has $45.0 million of maximum borrowing capacity, of which none was outstanding at
December 31, 2020. At December 31, 2020, $6.5 million was available on the non-revolving credit line. These credit
agreements contain specific financial covenants, all of which Heartland complied with as of December 31, 2020.
The ability of Heartland to pay dividends to its stockholders is dependent upon dividends paid to Heartland by its subsidiaries.
The bank subsidiaries are subject to statutory and regulatory restrictions on the amount they may pay in dividends. To maintain
acceptable capital ratios at Heartland's bank subsidiaries, certain portions of their retained earnings are not available for the
payment of dividends.
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.
79
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.
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.
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, 2020, and 2019, 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
2020
2019
Net Interest
Margin
% Change
From Base
Net Interest
Margin
% Change
From Base
$
506,247
511,697
540,625
485,312
501,288
562,247
(1.07) % $
5.65 %
(5.16) %
(2.03) %
9.88 %
420,402
433,232
458,911
400,891
431,503
483,419
(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
80
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.
81
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 $6,024,225 at December 31, 2020, and cost of $3,311,433 at December 31, 2019)
Held to maturity, at cost (fair value of $100,041 at December 31, 2020, and $100,484 at December 31, 2019)
Other investments, at cost
Loans held for sale
Loans receivable:
Held to maturity
Allowance for credit 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
Short-term borrowings
Other borrowings
Accrued expenses and other liabilities
TOTAL LIABILITIES
STOCKHOLDERS' EQUITY:
Preferred stock (par value $1 per share; authorized 6,104 shares; none issued or outstanding at both December 31,
2020, and December 31, 2019)
Series A Junior Participating preferred stock (par value $1 per share; authorized 16,000 shares; none issued or
outstanding at both December 31, 2020, and December 31, 2019)
Series B Fixed-Rate Reset Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares
authorized at both December 31, 2020, and December 31, 2019, none issued or outstanding at both December 31,
2020, and December 31, 2019)
Series C Senior Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares authorized at
both December 31, 2020, and December 31, 2019, none issued or outstanding at both December 31, 2020, and
December 31, 2019)
Series D Senior Non-Cumulative Perpetual Convertible Preferred Stock (par value $1 per share; 3,000 shares
authorized at both December 31, 2020, and December 31, 2019; no shares issued or outstanding at December 31,
2020, and December 31, 2019)
Series E Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 11,500 shares
authorized at December 31, 2020, and none authorized at December 31, 2019; issued and outstanding 11,500
shares at December 31, 2020, and none issued or outstanding at December 31, 2019)
Common stock (par value $1 per share; 60,000,000 shares authorized at both December 31, 2020 and December
31, 2019; issued 42,093,862 shares at December 31, 2020, and 36,704,278 shares at December 31, 2019)
Capital surplus
Retained earnings
Accumulated other comprehensive income (loss)
TOTAL STOCKHOLDERS' EQUITY
TOTAL LIABILITIES AND EQUITY
See accompanying notes to consolidated financial statements.
Notes
3
$
4
4
4
5
5, 6
7
2
2, 8
8
8
9
10
11
16, 17, 18
As of December 31,
2019
2020
219,243 $
118,660
337,903
3,129
206,607
172,127
378,734
3,564
6,127,975
88,839
75,253
57,949
3,312,796
91,324
31,321
26,748
10,023,051
(131,606)
9,891,445
219,595
6,499
6,624
576,005
42,383
6,052
187,664
281,024
8,367,917
(70,395)
8,297,522
197,558
2,967
6,914
446,345
48,688
6,736
171,625
186,755
$ 17,908,339 $ 13,209,597
$ 5,688,810 $ 3,543,863
6,307,425
1,193,043
11,044,331
182,626
275,773
128,730
11,631,460
8,019,704
1,271,391
14,979,905
167,872
457,042
224,289
15,829,108
—
—
—
—
—
110,705
—
—
—
—
—
—
42,094
1,062,083
791,630
72,719
2,079,231
36,704
839,857
702,502
(926)
1,578,137
$ 17,908,339 $ 13,209,597
82
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 $(1,820), $170, and $179 of interest expense (benefit)
related to derivatives reclassified from accumulated other comprehensive income (loss) for the
years ended December 31, 2020, 2019, and 2018, respectively)
TOTAL INTEREST EXPENSE
NET INTEREST INCOME
Provision for credit losses
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES
NONINTEREST INCOME:
Service charges and fees
Loan servicing income
Trust fees
Brokerage and insurance commissions
Securities gains, net (includes $7,592, $7,659, and $1,085 of net security gains reclassified from
accumulated other comprehensive income (loss) for the years ended December 31, 2020, 2019,
and 2018, 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
Acquisition, integration and restructuring costs
Partnership investment in tax credit projects
Other noninterest expenses
TOTAL NONINTEREST EXPENSES
INCOME BEFORE INCOME TAXES
Income taxes (includes $2,376, $1,890, and $165 of income tax expense reclassified from
accumulated other comprehensive income (loss) for the years ended December 31, 2020, 2019,
and 2018, respectively)
NET INCOME
Preferred dividends
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,
2019
2018
2020
Notes
5
$ 424,941 $ 424,615 $ 393,871
98,263
12,484
—
924
536,612
73,147
9,868
4
6,695
514,329
54,131
14,120
—
3,698
465,820
9
30,287
610
63,734
1,748
35,667
1,696
11, 12
5, 6
21
8
21
21
4
4
8
14, 16
15, 23
7
8
13
1
1
13,986
44,883
491,729
67,066
424,663
47,467
2,977
20,862
2,756
7,793
640
28,515
(1,778)
3,554
7,505
120,291
202,668
26,554
12,514
54,068
5,235
10,670
1,340
5,101
5,381
3,801
43,631
370,963
173,991
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
200,341
25,429
12,013
47,697
9,825
11,972
1,035
(19,422)
6,580
8,030
45,661
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
195,362
25,328
11,927
41,414
9,516
9,355
3,038
1,845
7,564
4,233
44,306
353,888
145,213
36,053
137,938
(4,451)
34,990
149,129
—
$ 133,487 $ 149,129
$
$
$
3.58 $
3.57 $
0.80 $
4.14 $
4.14 $
0.68 $
28,215
116,998
(39)
$ 116,959
3.54
3.52
0.59
83
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 (gains) 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
$ 137,938 $ 149,129 $ 116,998
2020
2018
109,972
(7,592)
(26,578)
75,802
52,557
(7,659)
(11,429)
33,469
(9,568)
(1,085)
2,731
(7,922)
(904)
(3,639)
816
(1,820)
567
(2,157)
73,645
431
(220)
1,027
(6,895)
$ 211,583 $ 179,852 $ 110,103
170
723
(2,746)
30,723
84
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
Accumulated
Other
Retained Comprehensive
Income (Loss)
Earnings
Treasury
Stock
Total
Equity
$
938 $
29,953 $ 503,709 $ 481,331 $
(24,474)
$
— $ 991,457
116,998
(6,895)
110,103
280
(280)
—
(39)
(19,318)
4,524
234,881
4,505
(39)
(19,318)
(938)
(97)
239,502
4,505
(97)
97
— $
34,477 $ 743,095 $ 579,252 $
— $
34,477 $ 743,095 $ 579,252 $
(31,649)
(31,649)
$
$
— $ 1,325,175
— $ 1,325,175
149,129
30,723
(1,272)
(24,607)
179,852
(1,272)
(24,607)
92,919
6,070
2,227
90,692
6,070
— $
36,704 $ 839,857 $ 702,502 $
— $
36,704 $ 839,857 $ 702,502 $
(926)
(926)
$
$
— $ 1,578,137
— $ 1,578,137
Balance at January 1, 2018
Comprehensive income (loss)
Reclassification of unrealized net gain on equity
securities
Cash dividends declared:
Series D Preferred,$52.50 per share
Common, $0.59 per share
Redemption of Series D preferred stock
(938)
Purchase of 1,761 shares of treasury stock
Issuance of 4,525,904 shares of common stock
Stock based compensation
Balance at December 31, 2018
Balance at January 1, 2019
Comprehensive income (loss)
Cumulative effect adjustment from the adoption of
ASU 2016-02 on January 1, 2019
Cash dividends declared:
Common, $0.68 per share
Issuance of 2,226,779 shares of common stock
Stock based compensation
Balance at December 31, 2019
Balance at January 1, 2020
Cumulative effect adjustment from the adoption of
ASU 2016-13 on January 1, 2020
$
$
$
$
Adjusted balance on January 1, 2020
—
36,704
839,857
Comprehensive income (loss)
Cash dividends declared:
Preferred, $386.94 per share
Common, $0.80 per share
Issuance of 11,500 shares of Series E preferred stock
110,705
Issuance of 5,389,584 shares of common stock
Stock based compensation
5,390
214,816
7,410
(14,891)
687,611
137,938
(4,451)
(29,468)
(926)
73,645
(14,891)
—
1,563,246
211,583
(4,451)
(29,468)
110,705
220,206
7,410
Balance at December 31, 2020
$ 110,705 $
42,094 $ 1,062,083 $ 791,630 $
72,719
$
— $ 2,079,231
See accompanying notes to consolidated financial statements.
85
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the Years Ended December 31,
2019
2018
2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$
137,938 $
149,129 $
116,998
Depreciation and amortization
Provision for credit 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 (expense) 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 of securities held to maturity
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 time deposits in other financial institutions
Purchase of securities available for sale
Purchase of other investments
Net increase 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 USED BY INVESTING ACTIVITIES
27,289
67,066
16,042
(10,910)
(7,793)
(640)
7,410
5,101
(621,507)
615,439
(25,133)
(9,971)
(3,504)
(2,915)
—
(3,484)
1,778
(93)
(1,745)
190,368
—
1,097,378
1,056
8,506
—
567,884
3,458
585
(4,119,814)
(49,228)
(444,146)
(292)
606
—
(18,542)
641,315
—
5,895
3,913
(2,301,426)
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)
86
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 in savings accounts
Net decrease in time deposit accounts
Proceeds on short-term revolving credit line
Repayments on short-term revolving credit line
Net increase (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
Proceeds from issuance of preferred stock
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 (decrease) 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/redemption of Series D preferred stock to common stock
Securities transferred from available for sale to held to maturity
Loans transferred to held for sale
Deposits transferred to held for sale
Dividends declared, not paid
Stock consideration granted for acquisitions
See accompanying notes to consolidated financial statements.
For the Years Ended December 31,
2019
2018
2020
1,367,903
735,968
(254,540)
—
—
40,137
516,545
(597,742)
314,397
(134,244)
110,705
—
—
3,004
(31,906)
2,070,227
(40,831)
378,734
337,903 $
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 $
33,402 $
47,798
3,511
37,609 $
80,238
8,066
855
—
8,134
—
—
462
—
—
2,013
217,202
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
$
$
87
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 industrial, owner-occupied
commercial real estate, non-owner occupied commercial real estate, real estate construction, agricultural and agricultural real
estate, residential real estate and consumer loans.
Principles of Presentation - The consolidated financial statements include the accounts of 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.; 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, 2020.
The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles
("GAAP") and prevailing practices within the banking industry. In preparing such financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities as of the date of the balance sheets and revenues and expenses for the years then ended. Actual results could
differ significantly from those estimates. A material estimate that is particularly susceptible to significant change relates to the
determination of the allowance for credit losses.
Business Combinations - 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, 2020 and
2019.
Available for Sale ("AFS") Debt Securities and Equity Securities - Available for sale securities consist of those securities not
classified as held to maturity or trading, which management intends to hold for indefinite periods of time or that may be sold in
response to changes in interest rates, prepayments or other similar factors. Available for sale securities are stated at fair value
with any unrealized gain or loss, net of applicable income tax, reported as a separate component of stockholders’ equity.
Security premiums and discounts are amortized/accreted using the interest method over the period from the purchase date to the
expected maturity or call date of the related security.
Heartland reviews the investment securities portfolio at the security level on a quarterly basis for potential credit losses, which
takes into consideration numerous factors, and the relative significance of any single factor can vary by security. Some factors
Heartland may consider include changes in security ratings, financial condition of the issuer, as well as security and industry
specific economic conditions. In addition, with regard to debt securities, Heartland may also evaluate payment structure,
88
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.
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 2020.
Allowance for Credit Losses on AFS Debt Securities - AFS debt securities in unrealized loss positions are evaluated for credit
related loss at least quarterly. The decline in fair value of an AFS debt security due to credit loss results in recording an
allowance for credit losses to the extent the fair value is less than the amortized cost basis. Declines in fair value that have not
been recorded through an allowance for credit losses, such as declines due to changes in market interest rates, are recorded
through other comprehensive income, net of applicable taxes. Although these evaluations involve significant judgment, an
unrealized loss in the fair value of a debt security is generally considered to not be related to credit when the fair value of the
security is below the carrying value primarily due to changes in risk-free interest rates, there has not been significant
deterioration in the financial condition of the issuer, and Heartland does not intend to sell nor does it believe it will be required
to sell the security before the recovery of its cost basis. Heartland had no allowance for credit losses on AFS debt securities
recorded at December 31, 2020.
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.
Allowance for Credit Losses on Held to Maturity Debt Securities - Heartland measures expected credit losses on held to
maturity debt securities on a collective basis based on security type. The estimate of expected credit losses considers historical
credit information that is adjusted for current conditions and supportable forecasts. Heartland's held to maturity debt securities
consist primarily of investment grade obligations of states and political subdivisions. The forecast and forecast period used in
the calculation of the allowance for credit losses for loans is used in calculating the allowance for credit losses on held to
maturity debt securities..
Loans Held to Maturity - Loans that management has the intent and ability to hold for the foreseeable future or until maturity
or payoff are reported at amortized cost, which is the principal amount outstanding, net of cumulative charge-offs, unamortized
net deferred loan origination fees and costs and unamortized premiums or discounts on purchased loans. Heartland has a loan
policy which establishes the credit risk appetite, lending standards and underwriting criteria designed so that Heartland may
extend credit in a prudent and sound manner. The Heartland board of directors reviews and approves the loan policy on a
regular basis. A reporting system supplements the review process by providing management and the board with frequent reports
related to loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming loans and potential
problem loans.
Heartland originates commercial and industrial loans and owner occupied commercial real estate loans for a wide variety of
business purposes, including lines of credit for capital and operating purposes and term loans for real estate and equipment
purchases. Non-owner occupied commercial real estate loans provide financing for various non-owner occupied or income
producing properties. Real estate construction loans are generally short-term or interim loans that provide financing for
acquiring or developing commercial income properties, multi-family projects or single-family residential homes. Agricultural
and agricultural real estate loans provide financing for capital improvements and farm operations, as well as livestock and
machinery purchases. Residential real estate loans are originated for the purchase or refinancing of single family residential
properties. Consumer loans include loans for motor vehicles, home improvement, home equity and personal lines of credit.
Loans are considered past due if the required principal and interest payments have not been received as of the date such
payments were due. 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
89
interest accrued in prior years is charged to the allowance for credit losses. A loan can be restored to accrual status if the
borrower has resumed paying the full amount of the scheduled contractual interest and principal payments on the loan, and (1)
all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within a
reasonable period of time, and (2) there is a sustained period of repayment performance (generally a minimum of six months)
by the borrower in accordance with the scheduled contractual terms.
Acquired Loans - On January 1, 2020, Heartland adopted ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326),"
and loans acquired after January 1, 2020 are presented under ASC Topic 326 while loans acquired before January 1, 2020,
continue to be reported in accordance with previously applicable GAAP. Heartland adopted ASU 2016-13 using the prospective
transition approach for loans purchased with credit deterioration ("PCD") that were previously classified as purchased credit
impaired ("PCI") and accounted for under ASC 310-30. In accordance with ASC 326, Heartland did not reassess whether PCI
loans met the criteria of PCD loans as of the adoption date. Heartland has acquired loans through acquisitions, some of which
have experienced more than insignificant deterioration in credit quality since origination and are classified as PCD loans.
Heartland considers the following criteria in determining PCD loans:
• watch, substandard and non-accrual loans;
•
•
•
•
•
•
loans delinquent more than 30 days as of the acquisition date;
loans that have experienced more than one 30-59 day delinquency;
loans that have experienced any delinquency of more than 60 days;
loan with a TDR status as of the acquisition date;
loans with a Coronavirus Disease 2019 ("COVID-19") modification as of the acquisition date;
loans in high-risk industries based on macroeconomic conditions and local market conditions of the acquired entity on
acquisition date.
An allowance for credit losses on PCD loans is determined using the same allowance methodology as described below for loans
held to maturity. The allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of
the PCD loan purchase price and allowance for credit loss becomes the initial amortized cost basis. The difference between the
initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest
income over the life of the loan. Any subsequent changes to the credit quality of PCD loans are recognized in net income by
adjusting the allowance for credit losses through provision expense.
At acquisition, for purchased loans not defined as PCD loans ("non-PCD"), 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 eight loan pools: commercial and industrial, Paycheck Protection Program ("PPP"), owner
occupied commercial real estate, non-owner occupied commercial real estate, real estate construction, agricultural and
agricultural real estate, residential real estate and consumer.
For non-PCD loans, the premium or 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 premium or discount accretion is suspended on loans that subsequently become nonperforming.
An allowance for credit losses for non-PCD loans is established through recognition of provision expense in net income using
the same methodology as other loans held to maturity.
Allowance for Credit Losses for Loans - As noted previously, Heartland adopted ASU 2016-13 on January 1, 2020, and thus
for 2020 follows the current expected credit losses methodology. Prior periods have been reported in accordance with
previously applicable GAAP, which followed the incurred credit losses methodology. The following policies noted are under
the current expected credit losses methodology. A summary of Heartland's previous policies under the incurred credit losses
methodology follows at the end of this section.
The allowance for credit losses is a valuation account that is deducted from the loans held to maturity amortized cost basis to
present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management
believes the uncollectibility of a loan balance is confirmed. Provisions for credit losses for loans and recoveries on loan
previously charged-off by Heartland are added back to the allowance.
90
Heartland's allowance model is designed to consider the current contractual term of the loan, defined as starting as of the most
recent renewal date and ending at maturity date.
Management's estimation of expected credit losses is based on relevant information about past events, current conditions, and
reasonable and supportable forecasts that affect the collectability of the reported amounts, including expected defaults and
prepayments. Historical loss experience is generally the starting point for estimating expected credit losses. Adjustments are
made to historical loss experience to reflect differences in asset-specific risk characteristics, such as underwriting standards,
portfolio mix or asset terms and differences in economic conditions, both current conditions and reasonable and supportable
forecasts. If Heartland is not able to make or obtain reasonable and supportable forecasts for the entire life of the financial asset,
it is required to estimate expected credit losses for the remaining life using an approach that reverts to historical credit loss
information. The components of the allowance for credit losses are described more specifically below.
Quantitative Factors
The quantitative component of the allowance for credit losses is measured using historical loss experience using a look back
period, currently over the most recent 12 years, on a pool basis for loans with similar risk characteristics. Heartland utilizes
third-party software to calculate the expected credit losses using two separate methodologies. For certain commercial and
agricultural loans, the expected credit losses are calculated through a transition matrix model derived probability of default and
loss given default methodology. The transition matrix model determines the life of loan probability of default using the
historical transitions of loans between risk ratings and through default. The probability of default and loss given default
methodology have been developed using Heartland’s historical loss experience over the look back period. For smaller
commercial and agricultural loans, residential real estate loans and consumer loans, a lifetime average historical loss rate is
established for each pool of loans based upon an average loss rate calculated using Heartland historical loss experience over the
look back-period.
The risks in the commercial and industrial loan portfolio include the unpredictability of the cash flow of the borrowers and the
variability in the value of the collateral securing the loans. Owner occupied commercial real estate loans are dependent upon the
cash flow of the borrowers and the collateral value of the real estate. Non-owner occupied commercial real estate loans are
typically dependent, in large part, on sufficient income from the properties securing the loans to cover the operating expenses
and debt service. Real estate construction loans involve additional risks because funds are advanced based upon estimates of
costs and the estimated value of the completed project. Additionally, real estate construction loans have a greater risk of default
in a weaker economy because the source of repayment is reliant on the successful and timely sale of the project. Agricultural
and agricultural real estate loans are dependent upon the profitable operation or management of the farm property securing the
loan. Loans secured by farm equipment, livestock or crops may not provide an adequate source of repayment because of
damage or depreciation. Residential real estate loans are dependent upon the borrower's ability to repay the loan and the
underlying collateral value. Consumer loans are dependent upon the borrower's personal financial circumstances and continued
financial stability.
If a loan no longer shares similar risk characteristics with other loans in the pool, it is evaluated on an individual basis and is not
included in the collective evaluation. Lending relationships with $500,000 or more of total exposure and are on nonaccrual are
individually assessed using a collateral dependency calculation. A loan is collateral-dependent when the debtor is experiencing
financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. The
impairment will be recognized by creating a specific reserve against the loan with a corresponding charge to provision expense.
In most cases, the specific reserve will be charged off in the same quarter as the loss is probable. In some cases, when Heartland
believes certain loans do not share the same risk characteristics with other loans in the pool, the standard allows for these loans
to be individually assessed. All individually assessed loan calculations are completed at least semi-annually.
Qualitative Factors
Heartland's allowance methodology also has a qualitative component, the purpose of which is to provide management with a
means to take into consideration changes in current conditions that could potentially have an effect, up or down, on the level of
recognized loan losses, that, for whatever reason, fail to show up in the quantitative analysis performed in determining its base
loan loss rates.
Heartland utilizes the following qualitative factors:
changes in lending policies and procedures
changes in the nature and volume of loans
experience and ability of management
•
•
•
91
•
•
•
•
changes in the credit quality of the loan portfolio
risk in acquired portfolios
concentrations of credit
other external factors
The qualitative adjustments are based on the comparison of the current condition to the average condition over the look back
period. The adjustment amount can be either positive or negative depending on whether or not the current condition is better or
worse than the historical average. Heartland incorporates the adjustments for changes in current conditions using an overlay
approach. The adjustments are applied as a percentage adjustment in addition to the calculated historical loss rates of each pool.
These adjustments reflect the extent to which Heartland expects current conditions to differ from the conditions that existed for
the period over which historical information was evaluated. Heartland utilizes an anchoring approach to determine the
minimum and maximum amount of qualitative allowance for credit losses, which is determined by comparing the highest and
lowest historical rate to the average loss rate to calculate the rate for the adjustment.
Economic Forecasting
The allowance for credit losses estimate incorporates a reasonable and supportable forecast of various macro-economic indices
over the remaining life of Heartland’s assets. Heartland utilizes an overlay approach for its economic forecasting component,
similar to the method utilized for the qualitative factors. The length of the reasonable and supportable forecast period is a
judgmental determination based on the level to which the entity can support its forecast of economic conditions that drive its
estimate of expected loss. Heartland compares forecasted macro-economic indices, such as unemployment and gross domestic
product, to the economic conditions that existed over Heartland's look back period.
Heartland uses Moody's baseline economic forecast scenario, which is updated quarterly in Heartland's methodology. The
economic forecast reverts to the historical mean immediately at the end of the reasonable and supportable forecast period. For
Heartland's January 1, 2020 calculation, a two-year reasonable and supportable forecast period was used. Because of the
economic uncertainty associated with COVID-19, Heartland utilized a one-year reasonable and supportable forecast period for
the calculation of the December 31, 2020 allowance for credit losses.
It is expected that actual economic conditions will, in many circumstances, turn out differently than forecasted because the
ultimate outcomes during the forecast period may be affected by events that were unforeseen, such as economic disruption and
fiscal or monetary policy actions, which are exacerbated by longer forecasting periods. This uncertainty would be relevant to
the entity’s confidence level as to the outcomes being forecasted. That is, an entity is likely less confident in the ultimate
outcome of events that will occur at the end of the forecast period as compared to the beginning. As a result, actual future
economic conditions may not be an effective indicator of the quality of management’s forecasting process, including the length
of the forecast period.
Under the incurred credit losses methodology utilized in the prior periods, the allowance for loan losses was maintained at a
level estimated by management to provide for known and inherent risks in the loan portfolio. The allowance for loan losses was
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 were deemed uncollectible were charged-off and deducted
from the allowance for loan losses. Provisions for loan losses and recoveries on loans previously charged-off by Heartland were
added to the allowance for loan losses.
The incurred credit losses methodology included the establishment of a dual risk rating system, which allowed for 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 was developed using Heartland’s
default and loss experience over historical observation periods. Heartland's incurred credit losses methodology also utilized loss
emergence periods, which represented the average amount of time from the point that a loss was incurred to the point at which
the loss was confirmed. The loss rates used in the allowance calculation were periodically re-evaluated and adjusted to reflect
changes in historical loss levels or other risks. In addition to past loss experience, management also utilized certain qualitative
factors in our incurred credit losses methodology including the overall composition of the loan portfolio, general economic
conditions, types of loans, loan collateral values, and trends in loan delinquencies and non-performing assets.
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
92
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.
During 2020, TDR treatments were updated due to COVID-19 and the Coronavirus Aid, Relief and Economic Security Act (the
"CARES Act") regulation. Under the CARES Act, banking institutions are not required to classify modifications as TDR’s if
the following three conditions are met: 1) the deferral was related to COVID-19, 2) executed on a loan that was not more than
30 days past due as of December 31, 2019, and 3) executed between March 1, 2020 and the later of December 31, 2020 or the
last day of the Declaration of National Emergency. Heartland has adopted the CARES Act rule for TDR classification and has
enhanced its procedures for deferral monitoring.
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. 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. A loan that has been modified at a below market rate will remain
classified as a TDR. 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 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, 2020 and 2019, loans held for sale primarily consisted of 1-4 family residential mortgages.
Allowance for Credit Losses on Unfunded Loan Commitments - Heartland estimates expected credit losses over the
contractual term of the loan for the unfunded portion of the loan commitment that is not unconditionally cancellable by
Heartland using the same allowance methodology for credit losses for loans described above. Management uses an estimated
average utilization rate to determine the exposure at default. The allowance for unfunded commitments is recorded in the
Accrued Expenses and Other Liabilities section of the consolidated balance sheets.
Mortgage Servicing and Transfers of Financial Assets - 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. Heartland's First Bank and
Trust subsidiary serviced mortgage loans primarily for government sponsored entities with aggregate unpaid principal balance
of $743.3 million and $616.7 million, at December 31, 2020 and 2019, respectively.
Premises, Furniture and Equipment, net - Premises, furniture and equipment are stated at cost less accumulated depreciation.
The provision for depreciation of premises, furniture and equipment is determined by straight-line and accelerated methods over
the estimated useful lives of 18 to 39 years for buildings, 15 years for land improvements and 3 to 7 years for furniture and
equipment.
Premises, Furniture and Equipment Held for Sale - Premises, furniture and equipment are stated at the estimated fair value
less disposal costs. Subsequent write-downs and gains or losses on the sales are recorded to loss on sales/valuation of assets,
net.
Other Real Estate - Other real estate represents property acquired through foreclosures and settlements of loans. Property
acquired is recorded at the estimated fair value of the property less disposal costs. The excess of carrying value over fair value
less disposal costs is charged against the allowance for credit losses. Subsequent write downs estimated on the basis of later
valuations and gains or losses on sales are charged to 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
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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 quantitative goodwill impairment test
to identify potential goodwill impairment and measure the amount of goodwill impairment to recognize, if any. In addition, the
income tax effects of tax deductible goodwill on the carrying amount of the reporting unit should be considered when
measuring the goodwill impairment loss, if applicable. A goodwill impairment charge is recognized for the amount by which
the carrying amount exceeds the reporting unit's fair value; however, the loss recognized cannot exceed the total amount of
goodwill allocated to that reporting unit.
Due to the COVID-19 pandemic and economic conditions, an interim quantitative assessment of goodwill was performed
during the second quarter of 2020, and no goodwill impairment was identified. The impairment testing involved estimating the
fair value of reporting units using a combination of discounted cash flows and market-based approaches. Depending on the
specific approach, significant assumptions included the discount rate used for cash flows, long-term growth rate, forecasted
cash flow projections and control premiums and multiples.
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, 2020, a valuation allowance of $422,000 was required on
Heartland's mortgage servicing rights with an original term of 15 years, and a valuation allowance of $1.4 million was required
on Heartland's mortgage servicing rights with an original term of 30 years. At 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.
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
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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, 2020. 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.
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
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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, 2020, 2019 and 2018, are shown in the
table below, dollars and number of shares in thousands, except per share data:
Net income attributable to Heartland
Preferred dividends
Net income available to common stockholders
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
Earnings per common share — basic
Earnings per common share — diluted
2020
2019
$ 137,938 $ 149,129 $ 116,998
2018
(4,451)
—
(39)
$ 133,487 $ 149,129 $ 116,959
37,269
35,991
88
71
37,357
36,062
$
$
3.58 $
3.57 $
4.14 $
4.14 $
33,012
201
33,213
3.54
3.52
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.
Effect of New Financial Accounting Standards -
ASU 2016-13
On January 1, 2020, Heartland adopted Accounting Standards Update ("ASU") 2016-13, "Financial Instruments - Credit Losses
(Topic 326),", which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current
expected credit loss ("CECL") methodology. Also on January 1, 2020, Heartland adopted ASU 2019-04, "Codification
Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825,
Financial Instruments," which amended certain provisions contained in ASU 2016-13, particularly by including accrued
interest in the definition of amortized cost, as well as by clarifying that loan extension and renewal options in the original or
modified contract that are not unconditionally cancelable by the entity should be considered in the entity's determination of
expected credit losses. Also on January 1, 2020, Heartland adopted ASU 2019-11, "Codification Improvements to Topic 326,
Financial Instruments - Credit Losses," which amended certain aspects of ASU 2016-13.
The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at
amortized cost, which includes loans held to maturity and held to maturity debt securities. It also applies to available for sale
debt securities and off-balance sheet unfunded loan commitments. Heartland adopted ASU 2016-13 using the modified
retrospective method for all financial assets measured at amortized cost basis and off-balance sheet unfunded loan
commitments. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period
amounts continue to be reported in accordance with previously applicable GAAP.
Heartland's adoption of ASU 2016-13 resulted in an increase of $12.1 million to the allowance for credit losses related to loans,
which included the addition of $6.0 million of purchased credit impaired discount on previously acquired loans and a
cumulative-effect adjustment to retained earnings totaling $4.6 million, net of taxes of $1.5 million. Heartland adopted ASU
2016-13 using the prospective transition approach for PCD loans that were previously classified as PCI and accounted for under
ASC 310-30. In accordance with ASC 326, Heartland did not reassess whether PCI loans met the criteria of PCD loans as of the
adoption date.
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The adoption of ASU 2016-13 resulted in an increase of $13.6 million to the allowance for unfunded commitments and a
cumulative-effect adjustment to retained earnings totaling $10.2 million, net of taxes of $3.4 million.
The adoption of ASU 2016-13 also established an allowance for credit losses for Heartland's held to maturity debt securities of
$158,000 and a cumulative-effect adjustment to retained earnings totaling $118,000, net of taxes of $40,000. Heartland did not
record an allowance for credit losses for Heartland's available for sale debt securities upon adoption of ASU 2016-13 or at
December 31, 2020.
The total result of the adoption of ASU 2016-13 was a cumulative-effect adjustment to Heartland's retained earnings of
$14.9 million, net of taxes of $5.0 million.
Heartland elected to not measure an allowance for credit losses on accrued interest as such accrued interest is written off in a
timely manner when deemed uncollectible. Any such write-off of accrued interest will reverse previously recognized interest
income. Heartland elected to not include accrued interest within the presentation and disclosures of the carrying amount of
financial assets held at amortized cost. This election is applicable to the various disclosures included within the consolidated
financial statements and notes contained in this Annual Report on Form 10-K.
The adoption of ASU 2019-04 did not have a material impact on Heartland's results of operation or financial condition.
Heartland elected not to utilize the regulatory transition relief issued by federal regulatory authorities in the first quarter of
2020, which allowed banking institutions to delay the impact of CECL on regulatory capital because the impact on the capital
ratios of Heartland and its subsidiary banks was not significant.
ASU 2017-04
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350)." The amendments in this
ASU simplify the subsequent measurement of goodwill by eliminating step two from the goodwill impairment test. Instead, an
entity performs 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 an 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 has the option to perform a qualitative assessment for a reporting unit to determine if the quantitative step one
impairment test is necessary. This ASU was effective for annual or interim goodwill impairment tests in fiscal years beginning
after December 15, 2019, and was applied prospectively. Early adoption was permitted, including in an interim period for
impairment tests performed after January 1, 2017. Heartland adopted ASU 2017-04 in the first quarter of 2020.
Heartland used this approach to evaluate its goodwill during the second quarter of 2020, as an unprecedented deterioration in
economic conditions triggered by the COVID-19 pandemic caused a significant decline in stock market valuations, including
Heartland's common stock price. Based on this goodwill impairment assessment, Heartland concluded that its goodwill was not
impaired.
ASU 2018-13
In August 2018, the FASB issued ASU 2018-13, "Disclosure Framework - Changes to the Disclosure Requirements for Fair
Value Measurement." ASU 2018-13 eliminates, adds and modifies certain disclosure requirements for fair value measurements.
Among the changes, entities are no longer required to disclose the amount of and reasons for transfers between Level 1 and
Level 2 of the fair value hierarchy but are required to disclose the range and weighted average used to develop significant
unobservable inputs for Level 3 fair value measurements. ASU 2018-13 was effective for interim and annual reporting periods
beginning after December 15, 2019, and early adoption was permitted. Heartland adopted this ASU on January 1, 2020, as
required, and because ASU 2018-13 only revised disclosure requirements, the adoption of this ASU did not have a material
impact on its results of operations, financial position and liquidity.
ASU 2018-16
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, 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. ASU 2018-16 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
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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. ASU 2018-16 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 are migrated from LIBOR to new benchmark interest rates. Heartland has a formal working
group that 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 expected to
take place at the end of 2021, and management will continue to actively assess the related opportunities and risks involved in
this transition.
ASU 2019-12
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740) - Simplifying the Accounting for Income
Taxes." ASU 2019-12 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 adopted this ASU on January 1, 2021, as required, and the adoption did not have a material
impact on its results of operations, financial position and liquidity.
ASU 2020-02
In February 2020, the FASB issued ASU 2020-02, "Financial Instruments - Credit losses (Topic 326) and Leases (Topic 842),"
which incorporates SEC Staff Accounting Bulletin ("SAB") 119 (updated from SAB 102) into the ASC by aligning SEC
recommended policies and procedures with ASC 326. ASU 2020-02 was effective immediately for Heartland and had no
significant impact on its results of operations, financial position and liquidity.
ASU 2020-03
In March 2020, the FASB issued ASU 2020-03, "Codification Improvements to Financial Instruments," which revised a wide
variety of topics in the ASC with the intent to make the ASC easier to understand and apply by eliminating inconsistencies and
providing clarifications. ASU 2020-03 was effective immediately upon its release, and the adoption did not have a material
impact on Heartland's results of operations, financial position and liquidity.
ASU 2020-04
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform," which provides optional expedients and exceptions
for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated
transition away from LIBOR toward new interest rate benchmarks. For loan and lease agreements that are modified because of
reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by
prospectively adjusting the effective interest rate, and the modifications would be considered "minor" with the result that any
existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease
agreements should be accounted for as a continuation of the existing agreement, with no reassessments of the lease
classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not
accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for derivative accounting. ASU
2020-04 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-04 for contract
modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to
March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry
Subtopic within the ASC, ASU 2020-04 must be applied prospectively for all eligible contract modifications for that Topic or
Industry Subtopic. Heartland anticipates that ASU 2020-04 will simplify any modifications executed between the selected start
date and December 31, 2022 that are directly related to LIBOR transition by allowing prospective recognition of the
continuation of the contract, rather than extinguishment of the old contract that would result in writing off unamortized fees/
costs. Management will continue to actively assess the impacts of ASU 2020-04 and the related opportunities and risks
involved in the LIBOR transition.
TWO
ACQUISITIONS
Johnson Bank branches
On December 4, 2020, Arizona Bank & Trust ("AB&T"), a wholly-owned subsidiary of Heartland headquartered in Phoenix,
Arizona, completed its acquisition of certain assets and assumed substantially all of the deposits and certain other liabilities of
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Johnson Bank’s Arizona operations, which includes four banking centers. Johnson Bank is a wholly-owned subsidiary of
Johnson Financial Group, Inc. headquartered in Racine, Wisconsin. As of the closing date, AB&T acquired, at fair value, total
assets of $419.7 million, which included gross loans of $150.7 million, and deposits of $415.5 million.
AIM Bancshares, Inc.
On October 19, 2020, Heartland entered into an Amended and Restated Agreement and Plan of Merger (the "agreement") with
First Bank & Trust ("FBT"), Heartland's Texas wholly-owned subsidiary, AIM Bancshares, Inc. ("AIM"), AimBank, a Texas
stated chartered bank and wholly-owned subsidiary of AIM, and the shareholder representative of AIM providing for Heartland
to acquire AIM and AimBank in a two-step transaction. The transaction closed on December 4, 2020.
Pursuant the agreement, each share of AimBank common stock was converted into the right to receive 207 shares of Heartland
common stock and $1,887.16 of cash, subject to certain hold-back provisions of the agreement. Based on the closing price of
$41.89 per share of Heartland common stock on December 4, 2020, the aggregate merger consideration received by AimBank
stockholders was valued at approximately $264.5 million, which was paid by delivery of Heartland common stock valued at
$217.2 million and cash of $47.3 million, subject to certain hold-back provisions of the merger agreement relating to the cash
consideration. In addition, holders of in-the-money options to acquire shares of AimBank common stock received aggregate
consideration of approximately $4.9 million in exchange for the cancellation of such stock options.
The transaction included, at fair value, total assets of $1.97 billion, including $1.09 billion of gross loans held to maturity, and
deposits of $1.67 billion. The transaction was considered a tax-free reorganization with respect to the stock consideration
received by the shareholders of AimBank.
The assets and liabilities of AimBank were recorded on the consolidated balance sheet at the estimated fair value on the
acquisition date. Loans classified as non-PCD were recorded on acquisition date 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.
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The following table represents, in thousands, the amounts recorded on the consolidated balance sheet as of December 4, 2020:
As of December 4, 2020
Fair value of consideration paid:
Common stock (5,185,045 shares)
Cash
Total consideration paid
Fair value of assets acquired
Cash and cash equivalents
Securities:
Carried at fair value
Other securities
Loans held to maturity
Allowance for credit losses for loans
Net loans held to maturity
Premises, furniture and equipment, net
Other real estate, net
Core deposit intangibles and customer relationships, net
Cash surrender value on life insurance
Other assets
Total assets
Fair value of liabilities assumed
Deposits
Short term borrowings
Other liabilities
Total liabilities assumed
Fair value of net assets acquired
Goodwill resulting from acquisition
$
$
217,202
47,275
264,477
470,085
267,936
3,210
1,087,041
(12,055)
1,074,986
27,867
1,119
3,102
13,418
20,159
1,881,882
1,670,715
26,306
11,807
1,708,828
173,054
91,423
Heartland recognized $91.4 million of goodwill in conjunction with the acquisition of AimBank 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 8 for further information on goodwill.
Pro Forma Information (unaudited): The following pro forma information represents the results of operations for the years
ended December 31, 2020, and 2019, as if the AimBank acquisition occurred on January 1, 2020, and January 1, 2019,
respectively:
Dollars in thousands, except per share data (unaudited)
For the Years Ended December 31,
Net interest income
Net income available to common stockholders
Basic earnings per share
Diluted earnings per share
$
2020
2019
557,166 $
167,168
3.94
3.93
491,462
170,010
4.13
4.12
The above pro forma results are presented for illustrative purposes and are not intended to represent or be indicative of the
actual results of operations of the merged companies that would have been achieved had the acquisition occurred on January 1,
2020, and January 1, 2019, respectively, nor are they intended to represent or be indicative of future results of operations. The
pro forma results do not include expected operating cost savings as a result of the acquisition or adjustments for transaction
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costs. The pro forma results also do not include adjustment for income taxes. These pro forma results require significant
estimates and judgments particularly with respect to valuation and accretion of income associated with the acquired loans.
Heartland incurred $2.5 million of pre-tax merger related expenses in the year ended December 31, 2020, associated with the
AimBank acquisition. The merger expenses are reflected on the consolidated statements of income for the applicable period and
are reported primarily in the category of acquisition, integration and restructuring costs.
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.
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. On March 15, 2020, the Federal Reserve temporarily suspended the reserve requirement due to the COVID-19
pandemic. The reserve balance requirement at December 31, 2019 was $46.8 million.
101
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, 2020, and December 31, 2019, are summarized in the table
below, in thousands:
Gross
Amortized Unrealized Unrealized
Gains
Losses
Gross
Cost
Estimated
Fair
Value
December 31, 2020
U.S. treasuries
U.S. agencies
Obligations of states and political subdivisions
Mortgage-backed securities - agency
Mortgage-backed securities - non-agency
Commercial mortgage-backed securities - agency
Commercial mortgage-backed securities - non-agency
Asset-backed securities
Corporate bonds
Total debt securities
Equity securities with a readily determinable fair value
Total
December 31, 2019
U.S. treasuries
U.S. agencies
Obligations of states and political subdivisions
Mortgage-backed securities - agency
Mortgage-backed securities - non-agency
Commercial mortgage-backed securities - agency
Commercial mortgage-backed securities - non-agency
Asset-backed securities
Corporate bonds
Total debt securities
Equity securities
Total
$
1,995 $
31 $
— $
2,026
167,048
1,562,631
1,351,964
1,428,068
171,451
253,421
1,064,255
3,763
657
75,555
16,029
22,688
3,440
37
9,421
8
(926)
166,779
(2,959) 1,635,227
(12,723) 1,355,270
(1,640) 1,449,116
(738)
174,153
(691)
252,767
(4,410) 1,069,266
(29)
3,742
6,004,596
127,866
(24,116) 6,108,346
19,629
—
—
19,629
$ 6,024,225 $ 127,866 $
(24,116) $ 6,127,975
$
8,466 $
37 $
— $
8,503
185,566
704,073
763,733
427,315
68,019
435,195
700,631
—
671
12,516
7,598
4,312
989
3,113
529
—
(1,561)
184,676
(9,399)
707,190
(4,605)
766,726
(1,130)
430,497
(143)
68,865
(1,983)
436,325
(9,581)
691,579
—
—
3,292,998
29,765
(28,402) 3,294,361
18,435
—
—
18,435
$ 3,311,433
$
29,765
$
(28,402) $ 3,312,796
The amortized cost, gross unrealized gains and losses and estimated fair values of held to maturity securities as of
December 31, 2020, and December 31, 2019, are summarized in the table below, in thousands:
Gross
Unrealized
Losses
Gross
Unrealized
Gains
Estimated
Fair
Value
Allowance
for Credit
Losses
Amortized
Cost
December 31, 2020
Obligations of states and political subdivisions
Total
December 31, 2019
Obligations of states and political subdivisions
Total
$
$
$
$
88,890
88,890
91,324
91,324
$
$
$
$
11,151
11,151
9,160
9,160
$
$
$
$
—
—
$ 100,041
$ 100,041
—
—
$ 100,484
$ 100,484
$
$
$
$
(51)
(51)
—
—
102
As of December 31, 2020, Heartland had $20.8 million of accrued interest receivable, which is included in other assets on the
consolidated balance sheet. Heartland does not consider accrued interest receivable in the carrying amount of financial assets
held at amortized cost basis or in the allowance for credit losses calculation.
The amortized cost and estimated fair value of investment securities carried at fair value at December 31, 2020, by contractual
maturity are as follows, in thousands. Expected maturities will differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without penalties.
December 31, 2020
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
Amortized Cost
Estimated Fair Value
3,624
3,579 $
$
26,507
168,981
1,536,370
1,735,437
4,269,159
19,629
$
6,024,225 $
27,252
173,927
1,602,971
1,807,774
4,300,572
19,629
6,127,975
The amortized cost and estimated fair value of debt securities held to maturity at December 31, 2020, by contractual maturity
are as follows, in thousands. Expected maturities will differ from contractual maturities because issuers may have the right to
call or prepay obligations with or without penalties.
December 31, 2020
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
$
$
Amortized Cost
Estimated Fair Value
1,963
1,933 $
24,129
54,329
8,499
88,890 $
25,871
60,040
12,167
100,041
As of December 31, 2020, securities with a carrying value of $2.12 billion 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, 2020, 2019
and 2018 are summarized as follows, in thousands:
Available for Sale Securities sold:
Proceeds from sales
Gross security gains
Gross security losses
2020
2019
2018
$ 1,097,378 $ 1,628,467 $
13,208
5,616
11,774
4,115
727,895
3,661
2,576
103
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, 2020, and December 31, 2019. 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, 2020, and December 31, 2019, respectively.
Debt securities available for
sale
December 31, 2020
Less than 12 months
12 months or longer
Total
Fair
Value
Unrealized
Losses
Count
Fair
Value
Unrealized
Losses
Count
Fair
Value
Unrealized
Losses
Count
U.S. agencies
$
2,981 $
(8)
5 $
99,922 $
(918)
72 $ 102,903 $
(926)
77
Obligations of states and
political subdivisions
Mortgage-backed securities -
agency
Mortgage-backed securities -
non-agency
Commercial mortgage-backed
securities - agency
Commercial mortgage-backed
securities - non-agency
Asset-backed securities
Corporate bonds
Total temporarily impaired
securities
December 31, 2019
346,598
(2,959)
49
—
—
—
346,598
(2,959)
49
653,793
(12,342)
35
31,012
(381)
378,843
(1,639)
17
1,622
(1)
3
1
684,805
(12,723)
38
380,465
(1,640)
18
46,541
(738)
100,042
141,824
1,908
(15)
(643)
(29)
6
2
9
4
—
—
—
46,541
(738)
35,428
340,452
—
(676)
(3,767)
3
24
—
—
135,470
482,276
1,908
(691)
(4,410)
(29)
6
5
33
4
$ 1,672,530 $
(18,373) 127
$
508,436 $
(5,743) 103
$ 2,180,966
$
(24,116)
230
U.S. agencies
$
94,774 $
(957)
57 $
49,555 $
(604)
24 $ 144,329 $
(1,561)
81
Obligations of states and
political subdivisions
Mortgage-backed securities -
agency
Mortgage-backed securities -
non-agency
Commercial mortgage-backed
securities - agency
Commercial mortgage-backed
securities - non-agency
Asset-backed securities
Corporate bonds
Total temporarily impaired
securities
387,534
(9,399)
50
—
—
—
387,534
(9,399)
50
182,614
(1,763)
36
92,928
(2,842)
17
275,542
(4,605)
53
225,807
(1,130)
12,509
(128)
6
4
251
—
1,842
(15)
214,774
501,254
—
(1,544)
(8,667)
19
28
—
55,896
40,760
—
(439)
(914)
11
—
—
1
1
4
226,058
(1,130)
14,351
(143)
7
5
270,670
542,014
—
(1,983)
(9,581)
23
39
—
—
$ 1,619,266 $
(23,588) 200
$
241,232 $
(4,814)
58
$ 1,860,498
$
(28,402)
258
Heartland had no securities held to maturity with unrealized losses at December 31, 2020, or December 31, 2019.
On January 1, 2020, Heartland adopted the amendments within ASU 2016-13, which replaced the legacy GAAP other-than-
temporary impairment ("OTTI") model with a credit loss model. The credit loss model under ASC 326-30, applicable to AFS
debt securities, requires the recognition of credit losses through an allowance account, but retains the concept from the OTTI
model that credit losses are recognized once securities become impaired. See Note 1, "Basis of Presentation," to the
consolidated financial statements included herein for a discussion of the impact of the adoption of ASU 2016-13. Heartland
reviews the investment securities portfolio at the security level on a quarterly basis for potential credit losses, which takes into
consideration numerous factors, and the relative significance of any single factor can vary by security. Some factors Heartland
may consider include changes in security ratings, financial condition of the issuer, as well as security and industry specific
economic conditions. In addition, with regard to debt securities, 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
104
securities in unrealized loss positions, Heartland prepares cash flow analyses to compare the present value of cash flows
expected to be collected from the security with the amortized cost basis of the security.
The remaining unrealized losses on Heartland's mortgage and asset-backed securities are the result of changes in market interest
rates or widening of market spreads subsequent to the initial purchase of the securities. The losses are not related to concerns
regarding the underlying credit of the issuers or the underlying collateral. It is expected that the securities will not be settled at a
price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates
or widening market spreads and not credit quality, and because Heartland has the intent and ability to hold these investments
until a market price recovery or to maturity and does not believe it will be required to sell the securities before maturity, no
credit losses were recognized on these securities during the year ended December 31, 2020.
The remaining unrealized losses on Heartland's obligations of states and political subdivisions are the result of changes in
market interest rates or widening of market spreads subsequent to the initial purchase of the securities. Management monitors
the published credit ratings of these securities and the stability of the underlying municipalities. Because the decline in fair
value is attributable to changes in interest rates or widening market spreads due to insurance company downgrades and not
underlying credit quality, and because Heartland has the intent and ability to hold these investments until a market price
recovery or to maturity and does not believe it will be required to sell the securities before maturity, no credit losses were
recognized on these securities during the year ended December 31, 2020.
In the third quarter of 2020, Heartland sold two obligations of states and political subdivisions securities from the held to
maturity portfolio. Because the underlying credit quality of the individual securities showed significant deterioration, it was
unlikely Heartland would recover the remaining basis of the securities prior to maturity and therefore inconsistent with
Heartland's original intent upon purchase and classification of these held to maturity securities. The carrying value of these
securities was $855,000, and the associated gross gains were $201,000.
The credit loss model under ASC 326-30, applicable to held to maturity debt securities, requires the recognition of lifetime
expected credit losses through an allowance account at the time when the security is purchased. The following table presents, in
thousands, the activity in the allowance for credit losses for securities held to maturity by major security type for the quarter and
year ended December 31, 2020:
Balance at December 31, 2019
Impact of ASU 2016-13 adoption on January 1, 2020
Adjusted balance at January 1, 2020
Provision for credit losses
Balance at December 31, 2020
Obligations of states
and political
subdivisions
$
$
—
158
158
(107)
51
The following table summarizes, in thousands, the carrying amount of Heartland's held to maturity debt securities by
investment rating as of December 31, 2020, which are updated quarterly and used to monitor the credit quality of the securities:
Rating
AAA
AA, AA+, AA-
A+, A, A-
BBB
Not Rated
Total
Obligations of states
and political
subdivisions
$
$
—
64,385
18,353
4,208
1,944
88,890
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 $19.5 million at December 31, 2020 and $16.8 million at
December 31, 2019.
105
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, 2020, did not consider the investments to be other than temporarily impaired.
FIVE
LOANS
Loans as of December 31, 2020, and December 31, 2019, were as follows, in thousands:
Loans receivable held to maturity:
Commercial and industrial
Paycheck Protection Program ("PPP")
Owner occupied commercial real estate
Non-owner occupied commercial real estate
Real estate construction
Agricultural and agricultural real estate
Residential real estate
Consumer
Total loans receivable held to maturity
Allowance for credit losses
Loans receivable, net
December 31, 2020
December 31, 2019
$
$
2,534,799 $
957,785
1,776,406
1,921,481
863,220
714,526
840,442
414,392
10,023,051
(131,606)
9,891,445
$
2,530,809
—
1,472,704
1,495,877
1,027,081
565,837
832,277
443,332
8,367,917
(70,395)
8,297,522
On January 1, 2020, Heartland adopted ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)," and results for
reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be
reported in accordance with previously applicable GAAP. Additionally, Heartland reclassified its loan categories to align more
closely with Federal Deposit Insurance Corporation ("FDIC") reporting requirements and classification codes, and all prior
periods have been adjusted. As of December 31, 2020, Heartland had $42.4 million of accrued interest receivable, which is
included in other assets on the consolidated balance sheet. Heartland does not consider accrued interest receivable in the
allowance for credit losses calculation.
The following table shows the balance in the allowance for credit losses at December 31, 2020, and December 31, 2019, and
the related loan balances, disaggregated on the basis of measurement methodology, in thousands. As of December 31, 2020,
individually assessed loans include lending relationships with total exposure of $500,000 or more and are nonaccrual and any
loans that no longer shares the same risk characteristics of the other loans in the pool. All other loans are collectively evaluated
for losses. Loans individually evaluated were considered impaired at December 31, 2019.
Allowance For Credit Losses
Gross Loans Receivable Held to Maturity
Individually Collectively
Evaluated
Evaluated
for Credit
for Credit
Losses
Losses
Loans
Individually
Evaluated for Evaluated for
Credit Losses Credit Losses
Loans
Collectively
Total
Total
December 31, 2020
Commercial and industrial
$
4,077 $
34,741 $
38,818 $
16,578 $
2,518,221 $ 2,534,799
PPP
Owner occupied commercial real estate
Non-owner occupied commercial real estate
Real estate construction
Agricultural and agricultural real estate
Residential real estate
Consumer
Total
—
111
3,250
—
1,988
—
—
—
19,890
17,623
20,080
5,141
11,935
12,770
—
20,001
20,873
20,080
7,129
11,935
12,770
—
11,174
13,490
—
15,453
535
—
957,785
957,785
1,765,232
1,776,406
1,907,991
1,921,481
863,220
699,073
839,907
414,392
863,220
714,526
840,442
414,392
$
9,426 $
122,180 $ 131,606
$
57,230 $
9,965,821 $ 10,023,051
106
Allowance For Credit Losses
Gross Loans Receivable Held to Maturity
Individually
Evaluated
for Credit
Losses
Collectively
Evaluated
for Credit
Losses
Loans
Loans
Individually
Collectively
Evaluated for
Evaluated for
Credit Losses Credit Losses
Total
Total
December 31, 2019
Commercial and industrial
$
6,276 $
27,931 $
34,207 $
31,814 $
2,498,995 $ 2,530,809
PPP
Owner occupied commercial real estate
Non-owner occupied commercial real estate
Real estate construction
Agricultural and agricultural real estate
Residential real estate
Consumer
Total
—
352
33
—
916
176
419
—
7,569
7,551
8,677
4,764
1,328
4,403
—
7,921
7,584
8,677
5,680
1,504
4,822
—
9,468
1,730
685
18,554
20,678
4,123
—
—
1,463,236
1,472,704
1,494,147
1,495,877
1,026,396
1,027,081
547,283
811,599
439,209
565,837
832,277
443,332
$
8,172 $
62,223 $
70,395 $
87,052 $
8,280,865 $ 8,367,917
Heartland had $6.2 million of troubled debt restructured loans at December 31, 2020, of which $3.8 million were classified as
nonaccrual and $2.4 million were accruing according to the restructured terms. 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.
The following table provides information on troubled debt restructured loans that were modified during the years ended
December 31, 2020, and December 31, 2019, in thousands:
For the Years Ended
December 31, 2020
December 31, 2019
Pre-
Post-
Modification Modification
Pre-
Post-
Modification Modification
Number
of Loans
Recorded
Investment
Recorded
Investment
Number
of Loans
Recorded
Investment
Recorded
Investment
Commercial and industrial
1 $
20 $
PPP
Owner occupied commercial real estate
Non-owner occupied commercial real estate
Real estate construction
Agricultural and agricultural real estate
Residential real estate
Consumer
Total
—
—
—
—
—
2
—
—
—
—
—
—
92
—
20
—
—
—
—
—
98
—
1 $
40 $
—
—
—
—
—
6
—
—
—
—
—
—
623
—
40
—
—
—
—
—
649
—
689
3
$
112 $
118
7 $
663 $
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, 2020, there were no commitments to extend credit to any of the borrowers with an
existing TDR. The tables above do not include any loan modifications made under COVID-19 modification programs.
107
The following table provides information on troubled debt restructured loans for which there was a payment default during the
years ended December 31, 2020, and December 31, 2019, in thousands, that had been modified during the 12-month period
prior to the default:
Commercial and industrial
PPP
Owner occupied commercial real estate
Non-owner occupied commercial real estate
Real estate construction
Agricultural and agricultural real estate
Residential real estate
Consumer
Total
With Payment Defaults During the Following Periods
For the Years Ended
December 31, 2020
December 31, 2019
Number of
Loans
Recorded
Investment
Number of
Loans
Recorded
Investment
— $
—
—
—
—
—
1
—
1 $
—
—
—
—
—
—
232
—
232
— $
—
—
—
—
—
2
—
2 $
—
—
—
—
—
—
210
—
210
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 and categorized
into a range of loan grades that reflect increasing, though still acceptable, risk. Movement of risk through the various grade
levels in the pass category is monitored for early identification of credit deterioration.
The "nonpass" category consists of watch, substandard, doubtful and loss loans. The "watch" rating is attached to loans where
the borrower exhibits negative trends in financial circumstances due to borrower specific or systemic conditions that, if left
uncorrected, threaten the borrower's capacity to meet its debt obligations. The borrower is believed to have sufficient financial
flexibility to react to and resolve its negative financial situation. These credits are closely monitored for improvement or
deterioration.
The "substandard" rating is assigned to loans that are inadequately protected by the current net worth and repaying capacity of
the borrower and that may be further at risk due to deterioration in the value of collateral pledged. Well-defined weaknesses
jeopardize liquidation of the debt. These loans are still considered collectible; however, a distinct possibility exists that
Heartland will sustain some loss if deficiencies are not corrected. Substandard loans may exhibit some or all of the following
weaknesses: deteriorating financial trends, lack of earnings, inadequate debt service capacity, excessive debt and/or lack of
liquidity.
The "doubtful" rating is assigned to loans where identified weaknesses in the borrowers' ability to repay the loan make
collection or liquidation in full, on the basis of existing facts, conditions and values, highly questionable and improbable. These
borrowers are usually in default, lack liquidity and capital, as well as resources necessary to remain as an operating entity.
Specific pending events, such as capital injections, liquidations or perfection of liens on additional collateral, may strengthen
the credit, thus deferring the rating of the loan as "loss" until the exact status of the loan can be determined. The loss rating is
assigned to loans considered uncollectible. As of December 31, 2020, and December 31, 2019, Heartland had no loans
classified as doubtful and no loans classified as loss.
108
The following table shows the risk category of loans by loan category and year of origination as of December 31, 2020, in
thousands:
Amortized Cost Basis of Term Loans by Year of Origination
2020
2019
2018
2017
2016
2015 and
Prior
Revolving
Total
Commercial and industrial
Pass
Watch
Substandard
$ 557,853 $ 340,809 $ 168,873 $
215,696 $
101,010 $
337,834 $
541,627 $ 2,263,702
41,574
23,024
24,676
16,274
19,672
8,897
14,262
15,717
8,072
9,098
2,474
19,537
49,432
18,388
160,162
110,935
Commercial and industrial total
$ 622,451 $ 381,759 $ 197,442 $
245,675 $
118,180 $
359,845 $
609,447
$ 2,534,799
PPP
Pass
Watch
Substandard
PPP total
Owner occupied commercial real
estate
$ 880,709 $
— $
— $
— $
— $
— $
— $
880,709
22,533
54,543
—
—
—
—
—
—
—
—
—
—
$ 957,785 $
— $
— $
— $
— $
— $
—
—
—
22,533
54,543
$
957,785
Pass
Watch
Substandard
$ 400,662 $ 369,401 $ 300,242 $
167,470 $
107,234 $
213,780 $
33,759 $ 1,592,548
15,345
15,914
13,764
9,522
22,488
12,164
20,811
14,147
8,717
8,580
15,282
21,708
4,311
1,105
100,718
83,140
Owner occupied commercial real
estate total
Non-owner occupied commercial
real estate
$ 431,921 $ 392,687 $ 334,894 $
202,428 $
124,531 $
250,770 $
39,175
$ 1,776,406
Pass
Watch
Substandard
$ 334,722 $ 411,301 $ 305,456 $
194,101 $
108,070 $
233,153 $
24,466 $ 1,611,269
22,826
30,899
55,225
15,035
24,718
23,290
18,724
17,046
20,954
9,147
45,672
21,060
5,114
502
193,233
116,979
Non-owner occupied commercial
real estate total
Real estate construction
$ 388,447
$ 481,561 $ 353,464 $
229,871 $
138,171 $
299,885
$
30,082
$ 1,921,481
Pass
Watch
Substandard
$ 311,625 $ 309,678 $ 157,171 $
12,625 $
6,954 $
5,110 $
21,431 $
824,594
2,105
196
26,659
2,760
2,403
2,036
332
—
55
39
388
358
1,295
—
33,237
5,389
Real estate construction total
$ 313,926
$ 339,097 $ 161,610 $
12,957 $
7,048 $
5,856
$
22,726
$
863,220
Agricultural and agricultural real
estate
Pass
Watch
Substandard
$ 171,578 $
90,944 $
62,349 $
39,252 $
17,626 $
37,696 $
148,456 $
567,901
20,500
17,403
16,202
7,044
8,854
23,519
2,448
6,758
3,515
3,917
3,157
9,952
12,282
11,074
66,958
79,667
Agricultural and agricultural
real estate total
Residential real estate
$ 209,481
$ 114,190 $
94,722 $
48,458 $
25,058 $
50,805
$
171,812
$
714,526
Pass
Watch
Substandard
$ 153,017 $
99,440 $ 118,854 $
83,534 $
63,477 $
244,852 $
33,467 $
796,641
3,986
980
4,507
442
2,188
2,507
1,896
1,528
3,117
884
8,525
12,141
—
1,100
24,219
19,582
Residential real estate total
$ 157,983
$ 104,389 $ 123,549 $
86,958 $
67,478 $
265,518
$
34,567
$
840,442
Consumer
Pass
Watch
Substandard
Consumer total
Total pass
Total watch
Total substandard
Total loans
$
37,037 $
27,646 $
18,811 $
15,034 $
4,009 $
19,483 $
280,996 $
403,016
168
481
352
959
647
1,884
340
500
82
897
646
1,976
1,622
822
3,857
7,519
$
37,686
$
28,957 $
21,342 $
15,874 $
4,988 $
22,105
$
283,440
$
414,392
$ 2,847,203
$ 1,649,219 $ 1,131,756 $
727,712 $
408,380 $ 1,091,908
$ 1,084,202
$ 8,940,380
129,037
143,440
141,385
52,036
80,970
74,297
58,813
55,696
44,512
32,562
76,144
86,732
74,056
32,991
604,917
477,754
$ 3,119,680
$ 1,842,640 $ 1,287,023 $
842,221 $
485,454 $ 1,254,784
$ 1,191,249
$ 10,023,051
109
Included in Heartland's nonpass loans at December 31, 2020 were $77.1 million of nonpass PPP loans as a result of risk ratings
on related credits. Heartland's risk rating methodology assigns a risk rating to the whole lending relationship. Heartland has no
allowance recorded related to the PPP loans because of the 100% SBA guarantee.
The following table presents loans by credit quality indicator at December 31, 2019, in thousands:
December 31, 2019
Commercial and industrial
Owner occupied commercial real estate
Non-owner occupied commercial real estate
Real estate construction
Agricultural and agricultural real estate
Residential real estate
Consumer
Total loans receivable held to maturity
Pass
Nonpass
Total
$
2,352,131 $
178,678 $
1,369,290
1,429,760
984,736
454,272
790,226
430,733
103,414
66,117
42,345
111,565
42,051
12,599
2,530,809
1,472,704
1,495,877
1,027,081
565,837
832,277
443,332
$
7,811,148 $
556,769 $
8,367,917
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%. Changes in
credit risk are monitored on a continuous basis and changes in risk ratings are made when identified.
As of December 31, 2020, Heartland had $1.7 million of loans secured by residential real estate property that were in the
process of foreclosure.
The following table sets forth information regarding Heartland's accruing and nonaccrual loans at December 31, 2020, and
December 31, 2019, in thousands:
Accruing Loans
30-59
Days
Past Due
60-89
Days
Past Due
90 Days
or More
Past Due Past Due Current Nonaccrual
Total
Total
Loans
December 31, 2020
Commercial and industrial
PPP
Owner occupied commercial real estate
Non-owner occupied commercial real estate
Real estate construction
Agricultural and agricultural real estate
Residential real estate
Consumer
$ 5,825 $ 2,322 $
720 $ 8,867 $ 2,504,170 $
21,762 $ 2,534,799
1
2,815
2,143
2,446
1,688
1,675
807
—
167
2,674
96
—
83
139
—
—
—
—
—
—
—
1
957,784
—
957,785
2,982
1,759,649
13,775
1,776,406
4,817
1,902,003
14,661
1,921,481
2,542
1,688
1,758
946
859,784
694,150
825,047
409,477
894
18,688
13,637
3,969
863,220
714,526
840,442
414,392
Total loans receivable held to maturity
$ 17,400
$ 5,481
$
720 $ 23,601
$ 9,912,064
$
87,386
$ 10,023,051
December 31, 2019
Commercial and industrial
$ 5,121 $
904 $ 3,899 $ 9,924 $ 2,491,110 $
29,775 $ 2,530,809
PPP
Owner occupied commercial real estate
Non-owner occupied commercial real estate
Real estate construction
Agricultural and agricultural real estate
Residential real estate
Consumer
—
3,487
614
5,689
3,734
4,166
2,511
—
690
81
72
79
24
651
—
—
—
—
26
180
—
—
—
—
—
4,177
1,461,589
6,938
1,472,704
695
1,493,619
1,563
1,495,877
5,761
1,020,153
1,167
1,027,081
3,839
4,370
3,162
541,455
814,840
436,675
20,543
13,067
3,495
565,837
832,277
443,332
Total loans receivable held to maturity
$ 25,322
$ 2,501
$ 4,105 $ 31,928
$ 8,259,441
$
76,548
$ 8,367,917
110
Loans delinquent 30 to 89 days as a percent of total loans were 0.23% at December 31, 2020, compared to 0.33% at December
31, 2019. Changes in credit risk are monitored on a continuous basis and changes in risk ratings are made when identified. All
individually assessed loans are reviewed at least semi-annually.
Heartland recognized $0 of interest income on nonaccrual loans during the year ended December 31, 2020. As of December 31,
2020, Heartland had $32.5 million of nonaccrual loans with no related allowance.
As of December 31, 2019, the majority of Heartland's impaired loans were those that were nonaccrual, were past due 90 days or
more and still accruing or have had their terms restructured in a troubled debt restructuring. The following table presents the
unpaid principal balance that was contractually due at December 31, 2019, the outstanding loan balance recorded on the
consolidated balance sheet at December 31, 2019, any related allowance recorded for those loans as of December 31, 2019, the
average outstanding loan balances recorded on the consolidated balance sheet during the year ended December 31, 2019, and
the interest income recognized on the impaired loans during the year ended December 31, 2019, in thousands:
Unpaid
Principal
Balance
Loan
Balance
Related
Allowance
Recorded
Year-to-Date
Avg. Loan
Balance
Year-to-Date
Interest Income
Recognized
Impaired loans with a related allowance:
Commercial and industrial
$
11,727 $
11,710 $
6,276 $
11,757 $
Owner occupied commercial real estate
Non-owner occupied commercial real estate
Real estate construction
Agricultural and agricultural real estate
Residential real estate
Consumer
Total loans held to maturity
Impaired loans without a related allowance:
Commercial and industrial
Owner occupied commercial real estate
Non-owner occupied commercial real estate
Real estate construction
Agricultural and agricultural real estate
Residential real estate
Consumer
Total loans held to maturity
Total impaired loans held to maturity:
Commercial and industrial
Owner occupied commercial real estate
Non-owner occupied commercial real estate
Real estate construction
Agricultural and agricultural real estate
Residential real estate
Consumer
$
$
$
$
712
138
17
2,751
1,378
998
712
138
17
2,237
1,378
997
352
33
—
916
176
419
1,435
—
—
2,739
1,116
1,170
17,721 $
17,189 $
8,172 $
18,217 $
22,525 $
20,104 $
— $
19,141 $
8,756
1,592
668
19,113
19,382
3,135
8,756
1,592
668
16,317
19,300
3,126
—
—
—
—
—
—
8,337
1,515
636
16,837
17,073
4,182
6
22
—
—
—
—
11
39
782
341
62
26
60
280
45
75,171 $
69,863 $
— $
67,721 $
1,596
34,252 $
31,814 $
6,276 $
30,898 $
9,468
1,730
685
21,864
20,760
4,133
9,468
1,730
685
18,554
20,678
4,123
352
33
—
916
176
419
9,772
1,515
636
19,576
18,189
5,352
788
363
62
26
60
280
56
Total impaired loans held to maturity
$
92,892 $
87,052 $
8,172 $
85,938 $
1,635
111
The following table sets forth information regarding the PCD loans acquired during 2020 as of the date of acquisition, in
thousands:
Purchase
Price
Allowance for
Credit Losses
Premium/
(Discount)
Book
Value
Commercial and industrial
$
81,917 $
(1,707) $
170 $
80,380
PPP
Owner occupied commercial real estate
Non-owner occupied commercial real estate
Real estate construction
Agricultural and agricultural real estate
Residential real estate
Consumer
Total PCD loans
—
74,854
134,135
19,405
54,584
25,556
2,760
—
(1,205)
(6,465)
(603)
(1,848)
(410)
(75)
—
(56)
(3,150)
360
(413)
94
17
—
73,593
124,520
19,162
52,323
25,240
2,702
$
393,211 $
(12,313) $
(2,978) $
377,920
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, 2020 and
2019, were as follows, in thousands:
Balance at beginning of year
Advances
Repayments
Balance at end of year
SIX
ALLOWANCE FOR CREDIT LOSSES
2020
184,568 $
73,412
(42,531)
215,449 $
2019
124,983
91,287
(31,702)
184,568
$
$
Changes in the allowance for credit losses for loans for the years ended December 31, 2020, 2019 and 2018 were as follows, in
thousands:
Balance at beginning of year
Impact of the adoption of ASU 2016-13 on January 1, 2020
Adjusted balance at January 1, 2020
Allowance for purchased credit deteriorated loans
Provision for credit losses
Recoveries on loans previously charged-off
Loans charged-off
Balance at end of year
2020
2019
2018
$
70,395 $
61,963 $
55,686
12,071
82,466
12,313
65,745
3,804
—
61,963
—
16,657
5,365
—
55,686
—
24,013
3,549
(32,722)
(13,590)
(21,285)
$
131,606 $
70,395 $
61,963
112
Changes in the allowance for credit losses for loans by loan category for the years ended December 31, 2020, and December 31,
2019, were as follows, in thousands:
Balance at
12/31/2019
Impact of
ASU 2016-13
adoption on
1/1/2020
Purchased
Credit
Adjusted
balance at Deteriorated Charge-
1/1/2020
Allowance
offs
Recoveries Provision
Balance at
12/31/2020
Commercial and industrial
$
34,207 $
(272) $
33,935 $
1,707 $ (14,974) $
1,277 $ 16,873 $
38,818
PPP
Owner occupied commercial
real estate
Non-owner occupied
commercial real estate
Real estate construction
Agricultural and agricultural
real estate
Residential real estate
Consumer
Total
—
7,921
7,584
8,677
5,680
1,504
4,822
—
—
—
—
—
—
—
(114)
7,807
1,205
(13,671)
205
24,455
20,001
(2,617)
6,335
4,967
15,012
6,465
603
(45)
(105)
(387)
4,817
4,309
5,293
6,321
9,131
1,848
(1,201)
410
75
(515)
(2,211)
30
220
971
108
993
9,456
4,350
218
5,611
4,782
20,873
20,080
7,129
11,935
12,770
$
70,395 $
12,071 $
82,466 $
12,313 $ (32,722) $
3,804 $ 65,745 $
131,606
Commercial and industrial
$
29,958 $
(7,129) $
2,462 $
8,916 $
34,207
12/31/2018
Charge-offs
Recoveries
Provision
12/31/2019
PPP
Owner occupied commercial real estate
Non-owner occupied commercial real estate
Real estate construction
Agricultural and agricultural real estate
Residential real estate
Consumer
Total
—
6,247
7,182
6,707
4,916
1,813
5,140
—
(119)
(21)
(156)
(2,633)
(458)
(3,074)
—
178
201
255
529
139
1,601
—
1,615
222
1,871
2,868
10
1,155
—
7,921
7,584
8,677
5,680
1,504
4,822
$
61,963 $
(13,590) $
5,365 $
16,657 $
70,395
Changes in the allowance for credit losses on unfunded commitments for the year ended December 31, 2020, were as follows:
Balance at December 31, 2019
Impact of ASU 2016-13 adoption on January 1, 2020
Adjusted balance at January 1, 2020
Provision
Balance at December 31, 2020
$
$
248
13,604
13,852
1,428
15,280
Prior to the adoption of ASU 2016-13, the allowance for credit losses on unfunded commitments was considered immaterial.
Management allocates the allowance for credit losses by pools of risk within each loan portfolio. The allocation of the
allowance for credit 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 credit losses is available to absorb losses from any segment
of the loan portfolio.
113
SEVEN
PREMISES, FURNITURE AND EQUIPMENT
Premises, furniture and equipment, excluding those held for sale, as of December 31, 2020, and December 31, 2019, 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
2020
2019
$
61,930 $ 60,444
192,702
176,838
69,468
65,617
324,100
302,899
(104,505) (105,341)
$ 219,595 $ 197,558
Depreciation expense on premises, furniture and equipment was $11.8 million, $12.0 million and $11.7 million for 2020, 2019
and 2018, respectively. Depreciation expense on buildings and building improvements of $6.5 million, $6.2 million and $5.8
million for the years ended December 31, 2020, 2019, and 2018, respectively, is recorded in occupancy expense on the
consolidated statements of income. Depreciation expense on furniture and equipment of $5.3 million, $5.8 million and $6.0
million for the years ended December 31, 2020, 2019, and 2018, 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 $576.0 million at December 31, 2020, and $446.3 million at December 31, 2019. Heartland conducts
its annual internal assessment of the goodwill both at the consolidated level and at its subsidiaries as of September 30. There
was no goodwill impairment as of the most recent assessment. Due to the COVID-19 pandemic and economic conditions, an
interim quantitative assessment of goodwill was performed during the second quarter of 2020, and no goodwill impairment was
identified.
Heartland recorded $91.4 million of goodwill and $3.1 million of core deposit intangibles in connection with the acquisition of
AimBank, headquartered in Levelland, Texas on December 4, 2020.
Heartland recorded $38.4 million of goodwill and $1.3 million of core deposit intangibles in connection with the acquisition of
certain assets and substantially all of the deposits and certain other liabilities of Johnson Bank's Arizona operations,
headquartered in Racine, Wisconsin on December 4, 2020.
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.
The core deposit intangibles recorded with the AimBank and Blue Valley Ban Corp. 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 AimBank and Blue Valley Ban Corp. 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 Johnson Bank's Arizona operations and 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 for book purposes.
114
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, 2020, and December 31, 2019, are presented in the table below, in thousands:
December 31, 2020
December 31, 2019
Gross
Carrying Accumulated Carrying
Amount Amortization Amount
Carrying Accumulated Carrying
Amount Amortization Amount
Net
Gross
Net
Amortizing intangible assets:
Core deposit intangibles
Customer relationship intangible
Mortgage servicing rights
Commercial servicing rights
Total
$ 101,185 $
1,177
11,268
7,054
$ 120,684 $
58,970 $ 42,215 $ 96,821 $
168
1,009
5,189
6,079
6,191
863
72,249 $ 48,435
1,177
7,886
6,952
$ 112,836 $
48,338 $ 48,483
205
972
5,621
2,265
5,837
1,115
57,412 $ 55,424
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 in 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.
The following table shows the estimated future amortization expense for amortizable intangible assets, in thousands:
Year ending December 31,
2021
2022
2023
2024
2025
Thereafter
Total
Core
Deposit
Intangibles
Customer
Relationship
Intangible
Mortgage
Servicing
Rights
Commercial
Servicing
Rights
Total
$
$
9,360 $
7,702
6,739
5,591
4,700
8,123
42,215
$
35 $
34
34
33
32
—
168
$
1,297 $
1,112
927
741
556
556
5,189
$
251 $
222
162
110
118
—
863
$
10,943
9,070
7,862
6,475
5,406
8,679
48,435
Projections of amortization expense for mortgage servicing rights are based on existing asset balances and the existing interest
rate environment as of December 31, 2020. 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 $743.3
million and $616.7 million as of December 31, 2020, and December 31, 2019, respectively. Custodial escrow balances
maintained in connection with the mortgage loan servicing portfolio at First Bank & Trust were approximately $5.7 million and
$5.0 million as of December 31, 2020, and December 31, 2019, respectively.
The fair value of Heartland's mortgage servicing rights at First Bank & Trust was estimated at $5.2 million and $5.6 million at
December 31, 2020, and December 31, 2019, 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.
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 16.20% as of December 31, 2020 compared to 14.20%
for the December 31, 2019 valuation. The discount rate was 9.02% for the December 31, 2020 valuations and 9.03% for the
December 31, 2019 valuations. The average capitalization rate for 2020 ranged from 76 to 116 basis points compared to a range
of 80 to 103 basis points for 2019. Fees collected for the servicing of mortgage loans for others were $1.7 million, $4.9 million
and $9.9 million for the years ended December 31, 2020, 2019 and 2018, respectively.
115
The following table summarizes, in thousands, the changes in capitalized mortgage servicing rights for the twelve months
ended December 31, 2020, and December 31, 2019:
Balance at January 1,
Originations
Amortization
Sale of 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
$
$
$
2020
5,621
3,383
(2,037)
—
(1,778)
5,189
5,189
0.70 %
2019
$ 29,363
893
(3,168)
(20,556)
(911)
5,621
5,621
0.91 %
$
$
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 $66.2 million at
December 31, 2020, and $82.1 million at December 31, 2019. 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 $879,000 and $1.0 million for the years ended
December 31, 2020 and 2019, 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 14.95% and 19.25% as of December 31, 2020, compared to 14.25%
and 18.08% as of December 31, 2019. The discount rate range was 7.70% and 12.88% for the December 31, 2020 valuations
compared to 10.65% and 13.94% for the December 31, 2019 valuations. The capitalization rate ranged from 310 to 445 basis
points at both December 31, 2020 and 2019. The total fair value of Heartland's commercial servicing rights portfolios was
estimated at $1.3 million as of December 31, 2020, and $1.6 million as of December 31, 2019.
The following table summarizes, in thousands, the changes in capitalized commercial servicing rights for the twelve months
ended December 31, 2020, and December 31, 2019:
Balance at January 1,
Originations
Amortization
Balance at December 31,
Fair value of commercial servicing rights
Commercial servicing rights, net to servicing portfolio
$
$
$
2020
2019
$
$
$
1,115
102
(354)
863
1,288
1.30 %
1,709
118
(712)
1,115
1,594
1.36 %
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, 2020, a valuation allowance of
$422,000 was required on the mortgage servicing rights 15-year tranche and a $1.4 million valuation allowance was required on
the mortgage servicing rights 30-year tranche. At December 31, 2019, a $114,000 valuation allowance was required on the 15-
year tranche and a $797,000 valuation was required on the 30-year tranche for mortgage servicing rights. At both December 31,
2020 and December 31, 2019, 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, 2020, and December 31, 2019:
116
December 31, 2020
First Bank & Trust
Total
December 31, 2019
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
1,522
1,100
422
5,445
4,089
1,522
$
1,100
$
422
$
5,445
$
4,089
$
1,482
1,368
114
5,050
4,253
1,482
$
1,368
$
114
$
5,050
$
4,253
$
$
$
1,356
1,356
797
797
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, 2020, and December 31, 2019:
Book Value-
Less than
20 Years
Fair Value-
Less than
20 Years
Impairment- Book Value-
Fair Value-
More than More than
20 Years
20 Years
Impairment-
More than
20 Years
Less than
20 Years
December 31, 2020
Premier Valley Bank
Wisconsin Bank & Trust
Total
December 31, 2019
Premier Valley Bank
Wisconsin Bank & Trust
Total
NINE
DEPOSITS
—
87
7
196
—
—
86
690
143
942
$
87 $
203 $
— $
776 $
1,085
$
1
128
13
272
—
—
135
851
161
1,148
$
129 $
285 $
— $
986 $
1,309
$
—
—
—
—
—
—
At December 31, 2020, the scheduled maturities of time certificates of deposit were as follows, in thousands:
2021
2022
2023
2024
2025
Thereafter
$
999,121
171,429
51,185
23,071
16,243
10,342
$ 1,271,391
The aggregate amount of time certificates of deposit in denominations of $100,000 or more as of December 31, 2020, and
December 31, 2019, were $774.2 million and $695.8 million, respectively. The aggregate amount of time certificates of deposit
in denominations of $250,000 or more as of December 31, 2020, and December 31, 2019 were $423.3 million and $329.1
million, respectively.
Interest expense on deposits for the years ended December 31, 2020, 2019, and 2018, 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
2020
2019
2018
$
16,560 $
47,069 $
8,244
5,483
9,344
7,321
$
30,287 $
63,734 $
25,123
4,789
5,755
35,667
117
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, 2020, and 2019, were as follows, in thousands:
Retail repurchase agreements
Federal funds purchased
Advances from the FHLB
Advances from the federal discount window
Other short-term borrowings
Total
2020
118,293 $
2,100
—
35,000
12,479
167,872 $
2019
84,486
2,450
81,198
—
14,492
182,626
$
$
At December 31, 2020, Heartland had one non-revolving credit facility with an unaffiliated bank, which provided a borrowing
capacity not to exceed $55.0 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 2.35% over LIBOR, and any outstanding balance is due on June 14,
2021. Heartland renewed its $45.0 million revolving credit line agreement with the same unaffiliated bank on June 14, 2020.
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 2020, and there was no outstanding balance
at both December 31, 2020, and December 31, 2019.
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, 2020, and December 31, 2019.
All retail repurchase agreements as of December 31, 2020, and 2019, were due within twelve months.
Average and maximum balances and rates on aggregate short-term borrowings outstanding during
December 31, 2020, December 31, 2019 and December 31, 2018, were as follows, in thousands:
the years ended
Maximum month-end balance
Average month-end balance
Weighted average interest rate for the year
Weighted average interest rate at year-end
2020
$ 380,360
157,348
2019
$ 226,096
128,098
2018
$ 229,890
152,391
0.39 %
0.18 %
1.38 %
1.21 %
1.19 %
1.96 %
All of Heartland's banks have availability to borrow short-term funds under the Discount Window Program based upon pledged
securities with an outstanding balance of $2.12 billion and pledged commercial loans under the Borrower-In Custody of
Collateral Program of $355.9 million, which provided $1.29 billion of borrowing capacity. There was $35.0 million of
borrowings outstanding at December 31, 2020.
In 2019, two of Heartland's banks had $106.0 million of commercial loans pledged to the Discount Window Program, and no
balance was outstanding at December 31, 2019.
118
ELEVEN
OTHER BORROWINGS
Other borrowings, which Heartland defines as borrowings with an original maturity date of more than one year, outstanding at
December 31, 2020 and 2019, are shown in the table below, net of discount and issuance costs amortization, in thousands:
Advances from the FHLB; weighted average interest rates were 3.03% and 4.08% at December
31, 2020 and 2019, respectively
Paycheck Protection Program Liquidity Fund
Trust preferred securities
Note payable to unaffiliated bank
Contracts payable for purchase of real estate and other assets
Subordinated notes
Total
$
1,018 $
2,835
188,872
146,323
44,417
1,983
74,429
—
145,343
51,417
1,892
74,286
$
457,042 $
275,773
2020
2019
Each of Heartland's subsidiary banks has been approved by their respective Federal Reserve Bank for the Paycheck Protection
Program Liquidity Fund ("PPPLF"), and as of December 31, 2020, $188.9 million was outstanding. Heartland anticipates
limited additional utilization of the PPPLF through 2021. Heartland had $788.2 million of remaining PPPLF borrowing
capacity at December 31, 2020.
The Heartland banks are members of the FHLB of Des Moines, Chicago, Dallas, San Francisco and Topeka. At December 31,
2020, 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 $13.6 million and $11.3 million at December 31, 2020 and 2019, respectively.
In addition, the FHLB advances are collateralized with pledges of one- to four-family residential mortgages, commercial and
agricultural mortgages and securities totaling $4.96 billion at December 31, 2020, and $4.11 billion at December 31, 2019. At
December 31, 2020, Heartland had $1.56 billion of remaining FHLB borrowing capacity.
At December 31, 2020, 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 $74,000 as of December 31, 2020. 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.
119
A schedule of Heartland’s trust preferred offerings outstanding, as of December 31, 2020, were as follows, in thousands:
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
BVBC Capital Trust III
Total trust preferred offerings
Less: deferred issuance costs
Interest
Rate
2.75% over LIBOR
1.33% over LIBOR
1.48% over LIBOR
1.48% over LIBOR
3.25% over LIBOR
2.85% over LIBOR
2.95% over LIBOR
3.25% over LIBOR
2.80% over LIBOR
2.20% over LIBOR
1.54% over LIBOR
3.65% over LIBOR
2.50% over LIBOR
3.25% over LIBOR
1.60% over LIBOR
Amount
Issued
$ 10,310
20,619
20,619
18,042
9,182
8,865
6,615
4,458
6,494
4,353
11,973
3,004
5,399
7,238
9,226
146,397
(74)
$ 146,323
(4)
(2)
(3)
Interest Rate as
of 12/31/20(1)
2.98%
1.57%
1.70%
1.71%
3.50%
3.08%
3.18%
3.47%
3.01%
2.41%
1.76%
3.89%
2.72%
3.46%
1.85%
(5)
(6)
Callable
Maturity
Date
Date
03/17/2034
03/17/2021
04/07/2036 04/07/2021
09/15/2037 03/15/2021
09/01/2037 03/01/2021
12/26/2032 03/26/2021
12/17/2033 03/17/2021
09/17/2033 03/17/2021
12/15/2034 03/15/2021
12/19/2033 04/23/2021
09/30/2034 05/23/2021
07/25/2036 03/15/2021
09/30/2032 03/30/2021
12/15/2034 03/15/2021
04/24/2033 04/24/2021
09/30/2035 03/30/2021
(1) Effective weighted average interest rate as of December 31, 2020, was 3.40% 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, 2020, 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, 2020, was 3.87% 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, 2020, was 3.83% 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, 2020, was 5.53% 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, 2020, was 4.37% due to an interest rate swap transaction as discussed in Note 12
to Heartland's consolidated financial statements.
For regulatory purposes, $146.3 million of the trust preferred securities qualified as Tier 2 capital as of December 31, 2020 and
$145.2 million of the trust preferred securities qualified as Tier 1 capital as of December 31, 2019.
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 $55.0 million when
combined with the outstanding balance on its then existing amortizing term loan with the same unaffiliated bank. 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, 2020, a
balance of $44.4 million was outstanding on this term debt compared to $51.4 million at December 31, 2019. At December 31,
2020, $6.5 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
annum, payable semi-annually. For regulatory purposes, $44.7 million of the subordinated notes qualified as Tier 2 capital as of
December 31, 2020. In connection with the sale of the notes, the balance of deferred issuance costs included in other
borrowings was $151,000 at December 31, 2020, and $189,000 at December 31, 2019. These deferred costs are amortized on a
straight-line basis over the life of the notes.
120
Future payments at December 31, 2020, for other borrowings at their maturity date follow in the table below, in thousands.
2021
2022
2023
2024
2025
Thereafter
Total
$
$
24,656
191,830
3,037
77,542
3,002
156,975
457,042
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 $3.8 million of cash as collateral at December 31, 2020,
and $1.9 million of cash at December 31, 2019. No collateral was required to be pledged by Heartland's counterparties at both
December 31, 2020 and December 31, 2019.
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, 2020, 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 $1.8 million. For the next twelve
months, Heartland estimates that cash payments and reclassification from accumulated other comprehensive income to interest
expense will total $2.4 million.
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
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.
121
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, 2020, and December 31, 2019, in thousands:
Notional
Amount
Fair
Value
Balance Sheet
Category
Receive
Rate
Weighted
Average
Pay Rate
Maturity
December 31, 2020
Interest rate swap
Interest rate swap
Interest rate swap
Interest rate swap
Interest rate swap
Interest rate swap
Interest rate swap
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
$
25,000 $
21,667
22,750
20,000
20,000
6,000
3,000
$
25,000 $
20,000
25,667
25,750
20,000
20,000
6,000
3,000
(127) Other Liabilities
(91) Other Liabilities
(2,220) Other Liabilities
(1,482) Other Liabilities
(1,385) Other Liabilities
(50) Other Liabilities
(25) Other Liabilities
(167) Other Liabilities
(67) Other Liabilities
135
Other Assets
(1,384) Other Liabilities
(614) Other Liabilities
(561) Other Liabilities
(15) Other Liabilities
(9) Other Liabilities
0.229 %
2.649
2.643
0.217
0.225
0.217
0.241
1.900 %
2.043
4.215
4.280
1.894
1.907
1.894
1.831
2.390
5.425
2.255 % 03/17/2021
05/10/2021
3.674
07/24/2028
06/15/2024
03/01/2024
06/15/2021
06/30/2021
1.878
1.866
2.352
5.425
3.674
2.255 % 03/17/2021
01/07/2020
3.355
05/10/2021
07/24/2028
06/15/2024
03/01/2024
06/15/2021
06/30/2021
1.878
1.866
2.352
2.390
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, 2020, and December 31, 2019, in thousands:
Effective Portion
Recognized in
OCI
Amount of Gain
(Loss)
Reclassified from AOCI into
Income
Category
Amount of
Gain (Loss)
Ineffective Portion
Recognized in Income on
Derivatives
Category
Amount of
Gain (Loss)
December 31, 2020
Interest rate swap
December 31, 2019
Interest rate swap
$
$
(2,698)
Interest expense
$
1,794
Other income
(3,442)
Interest Expense $
(197)
Other Income
$
$
—
—
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.
122
Heartland was required to pledge $4.2 million and $3.4 million of cash as collateral for these fair value hedges at December 31,
2020, and December 31, 2019, respectively.
The table below identifies the notional amount, fair value and balance sheet category of Heartland's fair value hedges at
December 31, 2020, and December 31, 2019, in thousands:
Notional Amount
Fair Value
Balance Sheet Category
December 31, 2020
Fair value hedges
December 31, 2019
Fair value hedges
$
$
20,841 $
(2,480)
Other liabilities
21,250 $
(1,253)
Other liabilities
The table below identifies the gains and losses recognized on Heartland's fair value hedges for the years ended December 31,
2020, and December 31, 2019, in thousands:
Amount of Gain (Loss)
Income Statement Category
December 31, 2020
Fair value hedges
December 31, 2019
Fair value hedges
$
$
(1,227)
Interest income
(988)
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, 2020, and December 31, 2019, in thousands:
December 31, 2020
Embedded derivatives
December 31, 2019
Embedded derivatives
Notional Amount
Fair Value
Balance Sheet Category
$
$
9,198 $
9,627 $
680
465
Other assets
Other assets
The table below identifies the gains and losses recognized on Heartland's embedded derivatives for the years ended
December 31, 2020 and December 31, 2019, in thousands:
Amount of Gain (Loss)
Income Statement Category
December 31, 2020
Embedded derivatives
December 31, 2019
Embedded derivatives
$
$
215
Other noninterest income
66
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 $46.5 million and $20.2 million as of December 31, 2020, and
December 31, 2019, respectively, as collateral related to these back-to-back swaps. Heartland's counterparties were required to
pledge $0 at both December 31, 2020 and December 31, 2019, 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, 2020, and December 31, 2019, 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, 2020 and 2019, in
thousands:
123
December 31, 2020
Customer interest rate swaps
Customer interest rate swaps
December 31, 2019
Customer interest rate swaps
Customer interest rate swaps
Notional
Amount
Fair
Value
Balance Sheet
Category
Weighted
Average
Receive
Rate
Weighted
Average
Pay
Rate
$
440,719 $
440,719
43,422
(43,422) Other Liabilities
Other Assets
4.46 %
2.46 %
2.46 %
4.46 %
$
374,191 $
374,191
16,927
(16,927) Other Liabilities
Other Assets
4.68 %
4.05 %
4.05 %
4.68 %
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 at both December 31, 2020, and December 31,
2019, as collateral for these forward commitments. Heartland's counterparties were required to pledge no cash as collateral at
both December 31, 2020, and December 31, 2019, as collateral for these forward commitments.
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, 2020, and December 31, 2019, in thousands:
Notional
Amount
Fair
Value
Balance Sheet
Category
December 31, 2020
Interest rate lock commitments (mortgage)
Forward commitments
Forward commitments
Undesignated interest rate swaps
December 31, 2019
Interest rate lock commitments (mortgage)
Forward commitments
Forward commitments
Undesignated interest rate swaps
$
42,078 $
1,827
—
86,500
9,198
Other Assets
Other Assets
—
(697) Other Liabilities
(680) Other Liabilities
$
20,356 $
16,000
36,500
9,627
681
15
Other Assets
Other Assets
(113) Other Liabilities
(465) Other Liabilities
124
table
below identifies the
The
standing derivative instruments
December 31, 2019, in thousands:
income
statement
category of the
gains and losses recognized in income
not designated as hedging instruments for
on Heartland's other free
the years ended December 31, 2020, and
December 31, 2020
Interest rate lock commitments (mortgage)
Forward commitments
Forward commitments
Undesignated interest rate swaps
December 31, 2019
Interest rate lock commitments (mortgage)
Forward commitments
Forward commitments
Undesignated interest rate swaps
THIRTEEN
INCOME TAXES
Income Statement Category
Year-to-Date
Gain (Loss)
Recognized
Net gains on sale of loans held for sale $
Net gains on sale of loans held for sale
Net gains on sale of loans held for sale
Other noninterest income
Net gains on sale of loans held for sale $
Net gains on sale of loans held for sale
Net gains on sale of loans held for sale
Other noninterest income
2,803
(15)
(585)
(215)
18
15
287
(66)
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, 2020, 2019, and 2018 were as follows, in
thousands:
Current:
Federal
State
Total current expense
Deferred:
Federal
State
Total deferred expense (benefit)
Total income tax expense
2020
2019
2018
$
$
$
$
34,513 $
12,450
46,963 $
24,106 $
11,298
35,404 $
(8,498) $
(2,412)
(10,910)
36,053 $
760 $
(1,174)
(414)
34,990 $
16,769
8,686
25,455
2,615
145
2,760
28,215
125
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, 2020 and 2019, were as follows, in thousands:
Deferred tax assets:
Tax effect of net unrealized loss on derivatives reflected in stockholders’ equity
Allowance for credit losses
Deferred compensation
Net operating loss carryforwards
Tax credit projects
Deferred loan fees
Other
Total deferred tax assets
Valuation allowance for deferred tax assets
Total deferred tax assets after valuation allowance
Deferred tax liabilities:
Tax effect of net unrealized gain on securities carried at fair value reflected in stockholders’
equity
Securities
Premises, furniture and equipment
Purchase accounting
Prepaid expenses
Deferred loan costs
Other
Total deferred tax liabilities
Net deferred tax assets
2020
2019
$
1,130 $
33,393
9,623
17,585
4,746
3,496
5,563
75,536
(12,828)
62,708 $
$
$
26,858 $
4,914
8,311
5,326
2,675
2,597
3,905
563
17,686
8,071
18,459
4,252
—
4,754
53,785
(12,379)
41,406
279
4,240
6,232
7,824
2,176
3,342
3,713
$
$
$
54,586
8,122 $
27,806
13,600
As a result of acquisitions, Heartland had net operating loss carryforwards for federal income tax purposes of approximately
$25.8 million at December 31, 2020, and $31.9 million at December 31, 2019. The associated deferred tax asset was $5.4
million at December 31, 2020, and $6.7 million at December 31, 2019. These net carryforwards expire during the period from
December 31, 2026, through December 31, 2039, and are subject to an annual limitation of approximately $7.3 million. Net
operating loss carryforwards for state income tax purposes were approximately $159.1 million at December 31, 2020, and
$163.7 million at December 31, 2019. The associated deferred tax asset, net of federal tax, was $11.8 million at both
December 31, 2020, and December 31, 2019. 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 $10.5 million at December 31, 2020, and $10.1 million at December 31, 2019. During both
2020 and 2019, 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 both December 31, 2020, and December 31, 2019. Heartland released valuation
allowances of $617,000 and $1.9 million in 2020 and 2019, respectively, 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. The 2020 capital loss is expected to be carried back to an
earlier year with capital gains.
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.
126
The actual income tax expense from continuing operations differs from the expected amounts for the years ended December 31,
2020, 2019, and 2018, (computed by applying the U.S. federal corporate tax rate of 21% for 2020, 2019, and 2018 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 expense/(benefit) on stock compensation
Other
Income taxes
Effective tax rates
2020
$ 36,538
2019
$ 38,665
2018
$ 30,495
(4,011)
7,930
(4,521)
(374)
80
411
(3,281)
8,509
(6,860)
(1,648)
(229)
(166)
(4,423)
6,976
(4,085)
23
(657)
(114)
$ 36,053
$ 34,990
$ 28,215
20.7 %
19.0 %
19.4 %
Heartland's income taxes included solar energy credits totaling $2.3 million, $4.0 million, and $2.9 million during 2020, 2019
and 2018, respectively. Federal historic rehabilitation tax credits included in Heartland's income taxes totaled $1.1 million, $1.8
million, and $0 in 2020, 2019, and 2018, respectively. Additionally, investments in certain low-income housing partnerships
totaled $5.6 million at December 31, 2020, $6.1 million at December 31, 2019, and $6.9 million at December 31, 2018. These
investments generated federal low-income housing tax credits of $780,000 during 2020, $1.1 million at December 31, 2019 and
$1.2 million at December 31, 2018. These investments are expected to generate federal low-income housing tax credits of
approximately $538,000 for 2021 through 2023, $322,000 for 2024, $86,000 for 2025 and $34,000 for 2026. Additionally,
Heartland had new markets tax credits of $300,000 in 2020.
On December 31, 2020, the amount of unrecognized tax benefits was $702,000, including $79,000 of accrued interest and
penalties. On December 31, 2019, the amount of unrecognized tax benefits was $657,000, including $69,000 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, 2017, and later remain subject to examination by the Internal Revenue Service. For state
purposes, the tax years ended December 31, 2015, 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 2020, 2019, and 2018. Costs
charged to operating expenses with respect to the matching contributions were $4.1 million, $3.9 million, and $3.5 million for
2020, 2019 and 2018, 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, $4.8 million, and $4.0 million for 2020, 2019 and 2018, respectively.
In addition, Heartland has a non-qualified defined contribution plan that allows certain employees to make voluntary
contributions into a deferred compensation plan. Any non-elective contributions to this plan are subject to approval by the
Heartland Board of Directors.
127
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
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. Heartland's bank subsidiaries evaluate the creditworthiness of customers to
which they extend a credit commitment on a case-by-case basis and may require collateral to secure any credit extended. The
amount of collateral obtained is based upon management's credit evaluation of the counterparty. Collateral held varies but may
include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties. Standby
letters of credit and financial guarantees are conditional commitments issued by Heartland's bank subsidiaries 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, 2020, and at December 31, 2019, commitments to extend credit aggregated $3.26
billion and $2.97 billion, respectively, and standby letters of credit aggregated $73.2 million and $79.5 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 no repurchase obligation at December 31, 2020, compared
to $313,000 at December 31, 2019, which is included in other liabilities on the consolidated balance sheets. Heartland had no
new requests for repurchases during 2020 and 2019.
There are certain legal proceedings pending against Heartland and its subsidiaries at December 31, 2020, that are ordinary
routine litigation incidental to business.
The aggregate amount of cash consideration paid in the AimBank transaction was reduced by $5.3 million as a holdback against
any losses that might be incurred as a result of pending litigation involving a former customer. Heartland does not currently
anticipate any material exposure from the litigation, and that if any litigation losses are incurred, the holdback amount will be
sufficient to cover such losses. The shareholders of AimBank are entitled to any remaining amount from the holdback after
payment for any potential settlement and related legal expenses. While the ultimate outcome of this and any other ordinary
routine litigation proceedings incidental to business 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, Compensation and Corporate Governance Committee (the "Compensation
Committee") non-qualified and incentive stock options, stock appreciation rights, stock awards, restricted stock, restricted stock
units and cash incentive awards, under its 2020 Long-Term Incentive Plan (the "Plan"). The Plan was approved by stockholders
in May 2020 and replaces the 2012 Long-Term Incentive Plan. The Plan increased the number of shares of common stock
authorized for issuance to 1,460,000 and made certain other changes to the Plan. At December 31, 2020, 1,409,320 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.
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
128
based upon its fair value estimated on the date of grant and recognized in the consolidated statements of income over the
vesting period of the award. The fair market value of restricted stock and restricted stock units is based on the fair value of the
underlying shares of common stock on the date of grant. Forfeitures are accounted for as they occur.
Heartland's income tax expense included $93,000 of tax expense for the year ended December 31, 2020, compared to a tax
benefit of $266,000 for the year ended December 31, 2019, related to the vesting and forfeiture of equity-based awards.
Restricted Stock Units
The Plan permits the Compensation Committee to grant restricted stock units ("RSUs"). In the first quarter of 2020, the
Compensation Committee granted time-based RSUs with respect to 114,944 shares of common stock, and in the first quarter of
2019, the Compensation Committee granted time-based RSUs with respect to 90,073 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 2020 and 2019 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 50,787 shares and 34,848 shares of
common stock in the first quarter of 2020 and 2019, respectively. These performance-based RSUs will be earned based upon
satisfaction of performance targets for the three-year performance period ended December 31, 2022, and December 31, 2021.
These performance-based RSUs or a portion thereof may vest in 2023 and 2022, respectively, after measurement of
performance in relation to the performance targets.
The three-year performance-based RSUs vest to the extent that they are earned upon death or disability or upon a "qualified
retirement" after measurement of performance. 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 2020 and 2019 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.
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, 2020, 2019, and 2018, 66,855, 37,544 and 36,462 RSUs, respectively, were granted to directors and new
employees.
A summary of the status of RSUs as of December 31, 2020, 2019 and 2018, and changes during the years ended December 31,
2020, 2019, and 2018, follows:
Outstanding at January 1
Granted
Vested
Forfeited
Outstanding at December 31
2020
2019
2018
Weighted-
Average
Grant Date
Fair Value
46.76
32.06
44.47
46.10
38.22
Shares
254,383 $
232,586
(119,916)
(18,778)
348,275 $
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
Shares
301,578 $
123,711
(127,744)
(30,550)
266,995 $
Total compensation costs recorded for RSUs were $7.2 million, $5.8 million and $4.4 million, for 2020, 2019 and 2018,
respectively. As of December 31, 2020, there were $5.8 million of total unrecognized compensation costs related to the Plan for
RSUs which are expected to be recognized through 2023.
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 discounted price as determined by
the Compensation Committee. Under ASC Topic 718, compensation expense related to the ESPP of $186,000 was recorded in
2020, $222,000 was recorded in 2019, and $91,000 was recorded in 2018.
129
A maximum of 500,000 shares is available for purchase under the ESPP, and as of December 31, 2020, 380,342 shares remain
available for purchase. Beginning with the 2020 plan year, the Compensation Committee authorized Heartland to make ESPP
purchases semi-annually, and the purchases are to be made as soon as practicable on or after June 30 and December 31. For
employee deferrals made in the 2020 plan year, shares purchased in 2020 totaled 43,207. 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 employee deferrals made during the plan year ended December 31,
2018.
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 business 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, "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 2020 Long-Term Incentive Plan and the 2016 ESPP, see Note 16, "Stock-Based Compensation."
Series E Preferred Stock
On June 26, 2020, Heartland issued 4,600,000 depositary shares, each representing a 1/400th ownership interest in a share of
Heartland's 7.00% Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, Series E, (the "Series E Preferred Stock) par
value $1.00 per share, with a liquidation preference of $10,000 per share of Series E Preferred Stock (equivalent to $25 per
depositary share).
Holders of the depositary shares are entitled to all proportional rights and preferences of the Series E Preferred Stock (including
dividend, voting, redemption and liquidation rights).
130
With respect to the payment of dividends and distributions upon Heartland’s liquidation, dissolution, or winding-up, the Series
E Preferred Stock ranks:
•
•
•
senior to Heartland’s common stock and to any class or series of its capital stock that it may issue in the future that is
not expressly stated to be on parity with or senior to the Series E Preferred Stock with respect to such dividends and
distributions, including but not limited to Heartland’s Series A Junior Participating Preferred Stock;
on parity with, or equally to, any class or series of Heartland’s capital stock that it may issue in the future that is
expressly stated to be on parity with the Series E Preferred Stock with respect to such dividends and distributions; and
junior to any class or series of Heartland’s capital stock that it may issue in the future that is expressly stated to be
senior to the Series E Preferred Stock with respect to such dividends and distributions, if the issuance is approved by
the holders of at least two-thirds of the outstanding shares of Series E Preferred Stock.
Heartland will generally be able to pay dividends and distributions upon liquidation, dissolution or winding up only out of
lawfully available assets for such payment after satisfaction of all claims for indebtedness and other non-equity claims.
Heartland will pay dividends or make distributions on the Series E Preferred Stock only when, as, and if declared by its Board
of Directors or a duly authorized committee of the Board. Under the terms of the Series E Preferred Stock, subject to certain
important exceptions, the ability of Heartland to pay dividends on, make distributions with respect to, or to repurchase, redeem
or otherwise acquire its common stock or any other stock ranking junior to or on parity with the Series E Preferred Stock is
subject to restrictions unless the full dividends for the most recently completed dividend period have been declared and paid, or
set aside for payment, on all outstanding shares of Series E Preferred Stock.
Shelf Registration
Heartland filed a universal shelf registration with the SEC to register debt or equity securities on August 8, 2019, that expires
on August 8, 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, depositary shares, warrants, rights, units or any combination of these securities. The amount of
securities that may have been offered was not specified in the registration statement, and the terms of any future offerings were
to be established at the time of the offering.
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, 2020 and 2019, that the
Heartland banks met all capital adequacy requirements to which they were subject.
As of December 31, 2020 and 2019, 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, 2020, that management believes have changed each institution’s category.
The Heartland banks’ actual capital amounts and ratios are also presented in the tables below, in thousands:
131
As of December 31, 2020
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
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
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Ratio
Amount
To Be Well Capitalized
Under Prompt
Corrective Action
Provisions
Amount
Ratio
$ 1,739,048
177,782
133,674
121,899
177,708
112,589
56,872
258,419
85,566
157,093
93,032
304,397
$ 1,401,131
164,316
121,513
111,985
161,750
102,882
51,597
237,295
78,661
145,795
85,456
279,521
14.71 % $ 945,523
102,018
13.94
13.13
81,432
14.35
67,956
13.40
106,120
12.16
74,056
13.49
33,732
15.30
135,097
13.11
52,206
72,240
17.40
58,968
12.62
158,705
15.34
11.85 % $ 709,142
12.89
76,514
11.94
61,074
13.18
50,967
12.19
79,590
11.11
55,542
12.24
25,299
14.05
101,323
12.05
39,155
54,180
16.15
44,226
11.59
119,029
14.09
8.00 %
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
N/A
$ 127,523
101,790
84,945
132,649
92,571
42,166
168,871
65,258
90,300
73,710
198,381
N/A
$ 102,018
81,432
67,956
106,120
74,056
33,732
135,097
52,206
72,240
58,968
158,705
10.00 %
10.00
10.00
10.00
10.00
10.00
10.00
10.00
10.00
10.00
10.00
8.00 %
8.00
8.00
8.00
8.00
8.00
8.00
8.00
8.00
8.00
8.00
132
As of December 31, 2020
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
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
$ 1,290,426
164,316
121,513
111,985
161,750
102,882
51,597
237,295
78,661
145,795
85,456
279,521
$ 1,401,131
164,316
121,513
111,985
161,750
102,882
51,597
237,295
78,661
145,795
85,456
279,521
10.92 % $ 531,857
57,385
12.89
45,806
11.94
38,225
13.18
59,692
12.19
41,657
11.11
18,974
12.24
75,992
14.05
29,366
12.05
40,635
16.15
33,170
11.59
89,271
14.09
9.02 % $ 621,275
77,150
8.52
59,129
8.22
46,337
9.67
79,764
8.11
45,295
9.09
24,552
8.41
98,182
9.67
36,251
8.68
53,343
10.93
39,893
8.57
63,407
17.63
$
$
4.50 %
4.50
4.50
4.50
4.50
4.50
4.50
4.50
4.50
4.50
4.50
4.50
4.00 %
4.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
N/A
82,890
66,164
55,214
86,222
60,171
27,408
109,766
42,418
58,695
47,912
128,948
N/A
96,437
73,912
57,921
99,705
56,619
30,690
122,728
45,313
66,679
49,866
79,259
6.50 %
6.50
6.50
6.50
6.50
6.50
6.50
6.50
6.50
6.50
6.50
5.00 %
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Ratio
Amount
To Be Well Capitalized
Under Prompt
Corrective Action
Provisions
Amount
Ratio
$ 1,388,511
168,959
107,678
117,355
157,555
75,498
53,266
240,735
76,400
145,256
91,257
109,545
13.75 % $
14.55
10.54
14.13
12.33
11.19
13.80
13.88
13.50
14.50
13.21
14.11
807,881
92,872
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
8.00
8.00
N/A
$ 116,090
102,164
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
10.00
10.00
133
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
159,579
103,011
109,939
148,227
69,648
48,692
231,085
70,235
140,195
87,335
104,914
$ 1,098,428
159,579
103,011
109,939
148,227
69,648
48,692
231,085
70,235
140,195
87,335
104,914
$ 1,243,582
159,579
103,011
109,939
148,227
69,648
48,692
231,085
70,235
140,195
87,335
104,914
12.31 % $
13.75
10.08
13.24
11.60
10.32
12.62
13.33
12.41
13.99
12.64
13.51
10.88 % $
13.75
10.08
13.24
11.60
10.32
12.62
13.33
12.41
13.99
12.64
13.51
10.10 % $
9.83
10.26
10.76
9.11
9.87
9.22
10.66
10.51
11.07
10.43
10.25
605,911
69,654
61,298
49,824
76,645
40,486
23,151
104,028
33,945
60,115
41,455
46,596
454,433
52,241
45,974
37,368
57,484
30,365
17,363
78,021
25,459
45,086
31,091
34,947
492,725
64,961
40,144
40,863
65,076
28,235
21,132
86,732
26,740
50,638
33,487
40,941
$
$
$
6.00 %
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
4.50 %
4.50
4.50
4.50
4.50
4.50
4.50
4.50
4.50
4.50
4.50
4.50
4.00 %
4.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
N/A
92,872
81,731
66,431
102,193
53,982
30,868
138,704
45,260
80,153
55,273
62,128
N/A
75,459
66,407
53,976
83,032
43,860
25,080
112,697
36,774
65,124
44,909
50,479
N/A
81,202
50,180
51,078
81,345
35,293
26,415
108,416
33,426
63,297
41,859
51,177
8.00 %
8.00
8.00
8.00
8.00
8.00
8.00
8.00
8.00
8.00
8.00
6.50 %
6.50
6.50
6.50
6.50
6.50
6.50
6.50
6.50
6.50
6.50
5.00 %
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
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 $736.5 million as of
December 31, 2020, under the most restrictive minimum capital requirements. Retained earnings that could be available for the
payment of dividends to Heartland totaled approximately $500.9 million as of December 31, 2020, under the capital
requirements to remain well capitalized.
134
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. 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.
Loans Held to Maturity
Heartland does not record loans held to maturity at fair value on a recurring basis. However, from time to time, certain loans are
considered collateral dependent and an allowance for credit losses is established. The fair value of individually assessed loans is
measured using the fair value of the collateral. In accordance with ASC 820, individually assessed loans measured at fair value
are classified as nonrecurring Level 3 in the fair value hierarchy.
Premises, Furniture and Equipment Held for Sale
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
135
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.
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, 2020,
and December 31, 2019, 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.
136
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
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.
137
The table below presents Heartland's assets and liabilities that are measured at fair value on a recurring basis as of
December 31, 2020, and December 31, 2019, 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, 2020
Assets
Securities available for sale
U.S. treasuries
U.S. agencies
Obligations of states and political subdivisions
Mortgage-backed securities - agency
Mortgage-backed securities - non-agency
Commercial mortgage-backed securities - agency
Commercial mortgage-backed securities - non-agency
Asset-backed securities
Corporate bonds
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, 2019
Assets
Securities available for sale
U.S. treasuries
U.S. agencies
Obligations of states and political subdivisions
Mortgage-backed securities - agency
Mortgage-backed securities - non-agency
Commercial mortgage-backed securities - agency
Commercial mortgage-backed securities - non-agency
Asset-backed securities
Corporate bonds
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
$
2,026 $
2,026 $
— $
166,779
1,635,227
1,355,270
1,449,116
174,153
252,767
1,069,266
3,742
19,629
44,102
1,827
—
—
—
—
—
—
—
—
—
—
—
—
—
166,779
1,635,227
1,355,270
1,449,116
174,153
252,767
1,069,266
3,742
19,629
44,102
—
—
$
$
$
6,173,904 $
2,026 $
6,170,051 $
51,962 $
697
52,659 $
— $
—
— $
51,962 $
697
52,659 $
$
8,503 $
8,503 $
— $
184,676
707,190
766,726
430,497
68,865
436,325
691,579
—
18,435
17,527
681
15
—
—
—
—
—
—
—
—
—
—
—
—
184,676
707,190
766,726
430,497
68,865
436,325
691,579
—
18,435
17,527
—
15
$
$
$
3,331,019 $
8,503 $
3,321,835 $
21,462 $
113
21,575 $
— $
—
— $
21,462 $
113
21,575 $
—
—
—
—
—
—
—
—
—
—
—
1,827
—
1,827
—
—
—
—
—
—
—
—
—
—
—
—
—
—
681
—
681
—
—
—
(1) Includes embedded derivatives, back-to-back loan swaps and cash flow hedges.
(2) Includes cash flow hedges, fair value hedges, back-to-back loan swaps and free standing derivative instruments.
138
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, 2020
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Total
Significant
Other
Significant
Observable Unobservable
Inputs
(Level 2)
Inputs
(Level 3)
(Gains)/
Losses
5,874
4,907
$ 11,256 $
Collateral dependent individually assessed loans:
Commercial and industrial
Owner occupied commercial real estate
Non-owner occupied commercial real estate
Real estate construction
Agricultural and agricultural real estate
Residential real estate
Consumer
Total collateral dependent individually assessed loans $ 34,488 $
Loans held for sale
Other real estate owned
Premises, furniture and equipment held for sale
Servicing rights
$ 57,949 $
5,189 $
6,624 $
6,499 $
12,451
—
—
—
$
$
$
— $
— $
11,256 $
451
—
—
—
—
—
—
— $
— $
— $
— $
— $
—
—
—
—
—
—
5,874
4,907
—
12,451
—
—
11,631
—
—
—
—
—
— $
34,488 $ 12,082
57,949 $
— $
(982)
— $
— $
— $
6,624 $
1,044
6,499 $
3,288
5,189 $
1,778
Fair Value Measurements at December 31, 2019
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Significant
Observable Unobservable
Inputs
(Level 2)
Inputs
(Level 3)
(Gains)/
Losses
—
—
—
—
—
—
—
—
—
—
—
—
—
—
15,173
1,114
1,352
1,305
—
12,623
4,978
1,033
—
—
—
1,254
82
—
Total
$ 15,173
1,352
1,305
—
12,623
4,978
1,033
$ 36,464 $
$ 26,748 $
$
$
$
6,914 $
2,967 $
5,621 $
— $
— $
— $
— $
— $
— $
36,464 $
2,450
26,748 $
— $
(980)
— $
— $
— $
6,914 $
2,967 $
5,621 $
947
735
911
Collateral dependent impaired loans:
Commercial and industrial
Owner occupied commercial real estate
Non-owner occupied commercial real estate
Real estate construction
Agricultural and agricultural real estate
Residential real estate
Consumer
Total collateral dependent impaired loans
Loans held for sale
Other real estate owned
Premises, furniture and equipment held for sale
Servicing rights
139
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 12/31/20
Valuation Technique
Unobservable Input Range (Weighted Average)
$
1,827
Discounted cash flows
Closing ratio
0 - 99% (86%)(1)
Interest rate lock
commitments
Premises, furniture and
equipment held for sale
6,499
Modified appraised value
Third party appraisal
Appraisal discount
Other real estate owned
6,624
Modified appraised value
Third party appraisal
Servicing rights
Collateral dependent
individually assessed loans:
Commercial and industrial
Owner occupied commercial
real estate
Non-owner occupied
commercial real estate
Agricultural and agricultural
real estate
5,189
Discounted cash flows
Third party valuation
Appraisal discounts
11,256 Modified appraised value Third party appraisal
5,874
Modified appraised value
Third party appraisal
Appraisal discount
Appraisal discount
4,907
Modified appraised value
Third party appraisal
Appraisal discount
12,451 Modified appraised value Third party appraisal
Appraisal discount
(2)
0-10%(3)
(2)
0-10%(3)
(4)
(2)
0-8%(3)
(2)
0-12%(3)
(2)
0-10%(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.
140
Interest rate lock commitments $
Fair Value at 12/31/19
681
Valuation Technique
Unobservable Input Range (Weighted Average)
Discounted cash flows
Closing ratio
0 - 99% (90%)(1)
Premises, furniture and
equipment held for sale
Other real estate owned
Servicing rights
Collateral dependent
impaired loans:
2,967
Modified appraised value
Third party appraisal
Appraisal discount
6,914 Modified appraised value Third party appraisal
5,621
Discounted cash flows
Third party valuation
Appraisal discounts
Commercial and industrial
15,173 Modified appraised value Third party appraisal
Owner occupied commercial
real estate
Non-owner occupied
commercial real estate
Real estate construction
Agricultural and agricultural
real estate
Residential real estate
Appraisal discount
1,352
Modified appraised value
Third party appraisal
Appraisal discounts
1,305
Modified appraised value
Third party appraisal
Appraisal discounts
— Modified appraised value Third party appraisal
Appraisal discount
12,623 Modified appraised value
Third party appraisal
Appraisal discount
4,978 Modified appraised value Third party appraisal
Appraisal discount
Consumer
1,033 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)
0-14%(3)
(2)
0-14%(3)
(2)
0-15%(3)
(2)
0-25%(5)
(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) 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.
(4) 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:
For the Years Ended
Balance at January 1,
Acquired interest rate lock commitments
Total gains (losses), net, included in earnings
Issuances
Settlements
Balance at period end,
$
$
December 31, 2020
December 31, 2019
725
681 $
—
2,803
17,221
(18,878)
1,827 $
—
18
10,702
(10,764)
681
Gains included in net gains on sale of loans held for sale attributable to interest rate lock commitments held at December 31,
2020, and December 31, 2019, were $1.8 million and $681,000, 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, 2020, and December 31, 2019, in thousands. The carrying amounts in the following table are recorded in the
consolidated balance sheets under the indicated captions. In accordance with ASC 825, the assets and liabilities that are not
financial instruments are not included in the disclosure, including the value of the commercial and mortgage servicing rights,
141
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.
142
Fair Value Measurements at
December 31, 2020
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Carrying
Amount
Estimated
Fair
Value
Significant
Other
Significant
Observable Unobservable
Inputs
(Level 2)
Inputs
(Level 3)
$ 337,903 $ 337,903 $
337,903 $
3,129
3,129
3,129
— $
—
6,127,975
6,127,975
2,026
6,125,949
Financial assets:
Cash and cash equivalents
Time deposits in other financial institutions
Securities:
Carried at fair value
Held to maturity
Other investments
Loans held for sale
Loans, net:
Commercial
PPP
Owner occupied commercial real estate
Non-owner occupied commercial real estate
Real estate construction
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
88,839
75,253
57,949
100,041
75,523
57,949
2,495,981
2,391,041
957,785
957,785
1,756,405
1,745,397
1,900,608
1,892,213
843,140
707,397
828,507
401,622
849,224
697,729
828,366
407,914
9,891,445
9,769,669
187,664
187,664
44,102
1,827
—
44,102
1,827
—
5,688,810
5,688,810
8,019,704
1,271,391
8,019,704
1,273,468
167,872
457,042
51,962
697
167,872
458,806
51,962
697
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
11,256
—
5,874
4,907
—
12,451
—
—
100,041
75,523
57,949
2,379,785
957,785
1,739,523
1,887,306
849,224
685,278
828,366
407,914
9,735,181
34,488
187,664
44,102
—
—
5,688,810
8,019,704
1,273,468
167,872
458,806
51,962
697
—
—
1,827
—
—
—
—
—
—
—
—
(1) Includes embedded derivatives, back-to-back loan swaps and cash flow hedges.
(2) Includes cash flow hedges, fair value hedges, back-to-back loan swaps and free standing derivative instruments.
143
Fair Value Measurements at
December 31, 2019
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Carrying
Amount
Estimated
Fair
Value
Significant
Other
Significant
Observable Unobservable
Inputs
(Level 2)
Inputs
(Level 3)
$ 378,734 $ 378,734 $
378,734 $
3,564
3,564
3,564
— $
—
Financial assets:
Cash and cash equivalents
Time deposits in other financial institutions
Securities:
Carried at fair value
Held to maturity
Other investments
Loans held for sale
Loans, net:
Commercial and industrial
PPP
Owner occupied commercial real estate
Non-owner occupied commercial real estate
Real estate construction
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
3,304,293
91,324
31,321
26,748
100,484
31,321
26,748
2,500,022
2,621,253
—
—
1,464,490
1,409,388
1,488,075
1,397,527
1,015,482
560,164
830,773
438,516
924,041
576,821
843,343
470,972
8,297,522
8,243,345
171,625
171,625
17,527
17,527
681
—
637
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
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,304,293
100,484
31,321
26,748
2,606,080
15,173
—
1,408,036
1,396,222
924,041
564,198
838,365
469,939
8,206,881
171,625
17,527
—
15
3,543,863
6,307,425
1,193,043
182,626
278,169
21,462
113
—
1,352
1,305
—
12,623
4,978
1,033
36,464
—
—
637
—
—
—
—
—
—
—
—
(1) Includes embedded derivatives, back-to-back loan swaps and cash flow hedges.
(2) Includes cash flow hedges, fair value hedges, back-to-back loan swaps and free standing derivative instruments.
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
144
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 individually assessed or impaired loans is measured using the fair value of the underlying collateral. The fair
value of loans held for sale is estimated using quoted market prices or sales contracts.
Cash surrender value on life insurance — Life insurance policies are held on certain officers. The carrying value of these
policies approximates fair value as it is based on the cash surrender value adjusted for other charges or amounts due that are
probable at settlement. As such, 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.
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
Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers, requires revenue to be recognized at
an amount that reflects the consideration to which Heartland expects to be entitled in exchange for transferring goods or
services to a customer. ASC 606 applies to all contracts with customers to provide goods or services in the ordinary course of
business, except for contracts that are specifically excluded from its scope. The majority of Heartland's revenue streams
including interest income, loan servicing income, net securities gain, net unrealized gains and losses on equity securities, net
gains on sale of loans held for sale, valuation adjustment on servicing rights, income from bank owned life insurance and other
noninterest income are outside the scope of ASC 606. Revenue streams including service charges and fees, interchange fees on
credit and debit cards, trust fees and brokerage and insurance commissions are within the scope of ASC 606.
145
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.
146
The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the year
ended December 31, 2020, 2019, and 2018, in thousands:
For the Years Ended December 31,
2019
2020
2018
In-scope of Topic 606
Service charges and fees
Service charges and fees on deposit accounts
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
Total noninterest income
$
14,441
$
12,790
$
$
$
9,166
177
16,026
7,657
47,467
20,862
2,756
11,543
331
15,594
11,899
52,157
19,399
3,786
71,085 $
75,342 $
2,977 $
4,843 $
7,793
640
28,515
7,659
525
15,555
(1,778)
(911)
3,554
7,505
49,206
3,785
9,410
40,866
$
120,291 $
116,208 $
11,291
10,796
330
11,893
14,396
48,706
18,393
4,513
71,612
7,292
1,085
212
21,450
(46)
2,793
4,762
37,548
109,160
Contract Balances
Heartland does not typically enter into long-term revenue contracts with customers, and therefore, does not experience
significant contract balances. As of December 31, 2020, 2019 and 2018, Heartland did not have any significant contract
balances or capitalized contract acquisition costs.
147
TWENTY-TWO
PARENT COMPANY ONLY FINANCIAL INFORMATION
Condensed financial information for Heartland Financial USA, Inc. is as follows:
BALANCE SHEETS
(Dollars in thousands)
December 31,
2020
2019
Assets:
Cash and interest bearing deposits
Investment in subsidiaries
Other assets
Total assets
Liabilities and Stockholders’ equity:
Other borrowings
Accrued expenses and other liabilities
Total liabilities
Stockholders’ equity:
Preferred stock
Common stock
Capital surplus
Retained earnings
Accumulated other comprehensive income (loss)
Total stockholders’ equity
Total liabilities and stockholders’ equity
INCOME STATEMENTS
(Dollars in thousands)
Operating revenues:
Dividends from subsidiaries
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
Net income available to common stockholders
$
84,728 $
61,866
1,765,995
49,002
$ 2,387,804 $ 1,876,863
2,234,813
68,263
$
265,168 $
43,405
308,573
271,046
27,680
298,726
110,705
42,094
1,062,083
791,630
72,719
2,079,231
—
36,704
839,857
702,502
(926)
1,578,137
$ 2,387,804 $ 1,876,863
For the Years Ended December 31,
2018
2019
2020
$
83,000 $
1,948
84,948
137,000 $
893
137,893
85,000
493
85,493
13,573
8,147
4,310
4,939
30,969
73,430
127,409
10,529
137,938
(4,451)
133,487 $
15,044
4,072
3,029
15,559
37,704
34,307
134,496
14,633
149,129
—
149,129 $
14,371
3,639
2,841
12,510
33,361
52,570
104,702
12,296
116,998
(39)
116,959
$
148
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
Gain on extinguishment of debt
Increase in accrued expenses and other liabilities
Increase in other assets
Excess tax (expense) benefit 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
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 preferred stock
Proceeds from issuance of common stock
Net cash provided by (used in) 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 year
Supplemental disclosure:
Cumulative effect adjustment from the adoption of ASU 2016-13
on January 1, 2020
Dividends declared, not paid
Conversion/redemption of Series D preferred stock to common stock
Stock consideration granted for acquisitions
TWENTY-THREE
LEASES
For the Years Ended December 31,
2018
2019
2020
$
137,938 $
149,129 $
116,998
(73,430)
—
8,419
(19,168)
(93)
6,375
60,041
(70,000)
—
(41,982)
(111,982)
(34,307)
(375)
3,274
(12,248)
270
4,103
109,846
(46,583)
6,000
(594)
(41,177)
—
—
—
(7,000)
—
(31,906)
—
110,705
3,004
74,803
22,862
61,866
84,728 $
—
—
—
(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
14,891 $
2,013
—
217,202
— $
—
—
92,258
—
—
938
238,075
$
$
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.
Lessee Accounting
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 sheet. With the adoption of ASU 2016-02
149
"Leases" (Topic 842), operating lease agreements are required to be recognized on the consolidated balance sheet 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 sheet.
The table below presents Heartland's ROU assets and lease liabilities as of December 31, 2020 and December 31, 2019, in
thousands:
Operating lease right-of-use assets
Operating lease liabilities
Classification
Other assets
Accrued expenses and other liabilities
$
$
As of December 31,
2020
2019
21,557 $
25,337 $
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. 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, 2020 and December 31, 2019, in
thousands:
Lease Cost
Operating lease cost
Variable lease cost
Total lease cost
Supplemental Information
Noncash reduction of ROU assets
Noncash reduction lease liabilities
Income Statement Category
Occupancy expense
Occupancy expense
Occupancy expense
Occupancy expense
Supplemental balance sheet information
Weighted-average remaining operating lease term (in years)
Weighted-average discount rate for operating leases
As of December 31,
2020
2019
$
$
$
$
6,071
72
6,143
1,037
389
$
$
$
$
6,031
145
6,176
1,771
1,789
As of December 31, 2020
5.91
2.85 %
Included in the noncash reduction of ROU assets in 2020 are expenses related to lease modifications and ROU acceleration
related to lease abandonments.
Heartland recorded an impairment on one lease in 2020, and the impairment of $360,000 was recorded in gain/loss on sales/
valuations of assets, net.
150
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, 2020 is as follows, in thousands:
Year ending December 31,
2021
2022
2023
2024
2025
Thereafter
Total lease payments
Less interest
Present value of lease liabilities
$
$
$
6,890
5,690
4,035
2,334
2,195
6,427
27,571
(2,234)
25,337
TWENTY-FOUR
SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(Dollars in thousands, except per share data)
As of and for the Quarter Ended
2020
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Noninterest income
Noninterest expense
Income taxes
Net income
Preferred dividends
Net income available to common stockholders
Per share:
December 31 September 30
$
132,575 $
17,072
122,497 $
1,678
June 30
March 31
124,146 $
26,796
112,511
21,520
115,503
120,819
32,621
99,269
9,046
39,809
(2,014)
31,216
90,396
13,681
47,958
(2,437)
97,350
30,637
90,439
7,417
30,131
—
90,991
25,817
90,859
5,909
20,040
—
$
37,795 $
45,521 $
30,131 $
20,040
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
$
0.98 $
1.23 $
0.82 $
0.98
0.20
46.77
1.23
0.20
46.11
0.82
0.20
44.42
0.54
0.54
0.20
42.21
38,420,063
38,534,082
36,941,110
36,995,572
36,880,325
36,915,630
36,820,972
36,895,591
151
(Dollars in thousands, except per share data)
2019
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Noninterest income
Noninterest expense
Income taxes
Net income
Preferred dividends
Net income available to common stockholders
Per share:
As of and for the Quarter Ended
December 31 September 30
$
112,745 $
4,903
111,321 $
5,201
106,708 $
4,918
June 30
March 31
107,842
106,120
101,790
28,030
92,866
5,155
37,851
—
29,400
92,967
7,941
34,612
—
32,061
75,098
13,584
45,169
—
102,955
1,635
101,320
26,717
88,230
8,310
31,497
—
$
37,851 $
34,612 $
45,169 $
31,497
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 $
0.94 $
1.26 $
1.03
0.18
43.00
0.94
0.18
42.62
1.26
0.16
41.48
0.91
0.91
0.16
39.65
36,758,025
36,692,381
35,743,986
34,564,378
36,840,519
36,835,191
35,879,259
34,699,839
152
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, 2020 and 2019, 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, 2020, 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, 2020 and 2019, and the results of its
operations and its cash flows for each of the years in the three-year period ended December 31, 2020,
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, 2020, 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
25, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method
of accounting for the recognition and measurement of credit losses as of January 1, 2020 due to the
adoption of ASC Topic 326, Financial Instruments – Credit Losses.
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.
153
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
below, providing separate opinions on the critical audit matters or on the accounts or disclosures to
which they relate.
Assessment of the allowance for credit losses and unfunded loan commitments collectively
evaluated
As discussed in Note 1 to the consolidated financial statements, the Company adopted ASU
No. 2016-13, Financial Instruments – Credit Losses (ASC Topic 326) as of January 1, 2020. As
discussed in Notes 1, 5, and 6 to the consolidated financial statements, the Company’s
allowance for credit losses related to loans and unfunded loan commitments collectively
evaluated for credit losses is comprised of an allowance for credit losses on loans and an
allowance for credit losses on unfunded loan commitments (the collective ACL). As of January
1, 2020, the total allowance for credit losses related to loans and unfunded loan commitments
was $82.5 million and $13.9 million, respectively, of which a portion was related to the collective
ACL. As of December 31, 2020, the total allowance for credit losses related to loans and
unfunded loan commitments was $131.6 million and $15.3 million, respectively, of which $122.2
million and $15.3 million, respectively, was related to the collective ACL. The Company
estimates the collective ACL using a current expected credit losses methodology which is
based on relevant information about past events, current conditions, and reasonable and
supportable forecasts that affect the collectability of the reported loan amounts, including
expected defaults. The allowance for credit losses on unfunded commitments leverages the
same methodology utilized for the allowance for credit losses on loans. The Company
estimates the collective ACL on a pool basis for loans with similar risk characteristics using 1) a
transition matrix probability of default (PD) and loss given default (LGD) model, which is based
on transition of loans between risk ratings and through default based on the Company’s
historical loss experience, for certain commercial and agricultural loans, or 2) a lifetime average
historical loss model for all other commercial and agricultural loans, residential real estate
loans, and consumer loans. A portion of the collective ACL on outstanding loans is comprised of
qualitative adjustments, based on a comparison of current conditions to the average conditions
over the look back period. The qualitative adjustments are determined by the Company using
an anchoring approach to determine the minimum and maximum amount of qualitative
allowance, which is determined by comparing the highest and lowest historical rate to the
average loss rate to calculate the rate for the adjustment. The collective ACL utilizes an overlay
approach for its economic forecasting component which incorporates a reasonable and
supportable forecast of various macro-economic indices. The Company utilizes an economic
forecast scenario which reverts to the historical mean immediately at the end of the reasonable
and supportable forecast period. For the allowance for credit losses on unfunded loan
commitments, the Company separately estimates the exposure at default using estimated
average utilization rates.
We identified the assessment of the January 1, 2020 collective ACL and the December 31,
2020 collective ACL as a critical audit matter. A high degree of audit effort, including specialized
skills and knowledge, and subjective and complex auditor judgment was involved in the
assessment of the collective ACL estimates. Specifically, the assessment encompassed the
evaluation of the collective ACL methodology, including the methods and models used to
estimate (1) the PD and LGD and their significant assumptions, including the risk ratings for
certain commercial and agricultural loans, the historical loss experience, the look back period,
and pooling of loans with similar risk characteristics, (2) the lifetime average historical loss rates
and their significant factors and assumptions, including pooling of loans with similar risk
characteristics, and the look back period, (3) the economic forecasting component, including
the economic forecast scenario and the reasonable and supportable forecast period, and (4)
154
the qualitative adjustments. The assessment also included an evaluation of the conceptual
soundness and performance of the PD, LGD, and lifetime average historical loss models. In
addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained.
The following are the primary procedures we performed to address this critical audit matter. We
evaluated the design and tested the operating effectiveness of certain internal controls related
to the Company’s measurement of the collective ACL estimates, including controls over the:
•
•
•
•
•
•
•
•
development and approval of the collective ACL methodology
development of the PD, LGD, and lifetime average historical loss models
performance monitoring and validation of the PD, LGD, and lifetime average historical
loss models
identification and determination of the significant assumptions used in the PD and LGD
models
identification and determination of the significant assumptions used in the lifetime
average historical loss models
identification and determination of the exposure at default assumption used in the PD,
LGD, and lifetime average historical loss models
development of the qualitative adjustments, including the anchoring approach
analysis of the collective ACL results, trends and ratios.
We evaluated the Company’s process to develop the collective ACL estimates 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 skills and knowledge, who assisted in evaluating:
•
•
•
the Company’s collective ACL methodology for compliance with U.S. generally
accepted accounting principles
judgments made by the Company relative to the development and performance
monitoring of the PD, LGD, and lifetime average historical loss models, including the
exposure at default assumption, by comparing them to relevant Company-specific
metrics and trends and applicable industry and regulatory practices
the exposure at default assumption by comparing to relevant Company-specific metrics
and trends and applicable industry and regulatory practices
the conceptual soundness of the PD, LGD, and lifetime average historical loss models
by inspecting the model documentation to determine whether the models are suitable
for their intended use
the methodology used to develop the economic forecasting component, including
selection of the economic forecast scenario, by comparing it to the Company’s
business environment and relevant industry practices
the length of the historical look back period and reasonable and supportable forecast
period by comparing to Company specific portfolio risk characteristics and trends
• whether the loan portfolio is segmented by similar risk characteristics by comparing to
•
•
•
•
•
the Company’s business environment and relevant industry practices
the methodology used to develop the qualitative adjustments and the effect of those
adjustments on the collective ACL estimates compared with relevant credit risk factors
and consistency with credit trends and identified limitations of the underlying
quantitative models
individual risk ratings for a selection of commercial and agricultural loan relationships
by evaluating the financial performance of the borrower, sources of repayment, and any
relevant guarantees or underlying collateral.
We also assessed the sufficiency of the audit evidence obtained related to the collective ACL
estimates by evaluating the:
•
•
•
cumulative results of the audit procedures
qualitative aspects of the Company’s accounting practices
potential bias in the accounting estimates.
155 Valuation of goodwill for certain reporting units
As discussed in Notes 1 and 8 to the consolidated financial statements, the goodwill balance as
of December 31, 2020 was $576.0 million, which represents goodwill recorded at various
subsidiary banks (the reporting units). The Company performs goodwill impairment testing
using either a qualitative or quantitative assessment at least annually or whenever
circumstances indicate a potential impairment may exist that would more likely than not reduce
the fair value of a reporting unit below its carrying amount. Due to the COVID-19 pandemic and
economic conditions, an interim quantitative assessment of goodwill was performed during the
second quarter of 2020, and no goodwill impairment was identified. The quantitative impairment
testing involves estimating the fair value of the reporting units using a combination of
discounted cash flow and market-based approaches. Depending on the specific approach,
significant assumptions include the discount rates used for cash flows, long-term growth rates,
forecasted cash flow projections, and control premiums and multiples.
We identified the valuation of goodwill for certain reporting units for which a quantitative
impairment assessment was performed as a critical audit matter. The estimated fair value of
certain reporting units involved significant measurement uncertainty and required a high degree
of subjective auditor judgment. The discount rates used for cash flows, the long-term growth
rates and the forecasted cash flow projections used in the discounted cash flow method, and
the control premiums and multiples used in the market-based approach used to estimate the
fair value of certain reporting units were challenging to test as they represented subjective
determinations of market and economic conditions that were sensitive to variations and minor
changes to those assumptions could have had a significant effect on the Company’s
assessment of the value of the goodwill for certain reporting units. Additionally, the audit effort
associated with the valuation of goodwill required specialized skills and knowledge.
The following are the primary procedures we performed to address this critical audit matter. We
evaluated the design and tested the operating effectiveness of certain internal controls related
to the Company’s determination of the estimated fair value of certain reporting units, including
controls over the development of the discount rates used for cash flows, the long-term growth
rates and the forecasted cash flow projections used in the discounted cash flow method, and
the control premiums and multiples used in the market-based approach and application of the
overall fair value methodology. We evaluated the forecasted cash flow projections used in the
discounted cash flow method by comparing the assumptions used by management to the
Company’s historical information and historical trends. Additionally, we involved valuation
professionals with specialized skills and knowledge, who assisted in:
•
•
•
•
evaluating the discount rates used in the discounted cash flow method, by comparing
the rates against discount rate ranges that were independently developed using
publicly available market data for comparable companies
evaluating the long-term growth rates used in the discounted cash flow method, by
comparing the rates to economic and industry growth trends
evaluating the multiples used in the market-based approach, by comparing them to
market data for trading multiples for comparable companies
evaluating the control premiums used in the market-based approach by comparing
them to market data of premiums paid for comparable companies.
Initial measurement of the fair value of acquired loans in a business combination
As discussed in Notes 1, 2 and 8 to the consolidated financial statements, on December 4,
2020, the Company completed the acquisition of AimBank. The Company records all assets
and liabilities, including intangibles, purchased in business combinations at fair value. As of
the closing date, the Company acquired, at fair value, total assets of AimBank of $1.97 billion,
which included gross loans of $1.09 billion, and deposits of $1.67 billion. The fair value of
acquired loans for AimBank was based on a discounted cash flow methodology that projected
principal and interest payments using significant assumptions related to the discount rate and
loss rates.
156
We identified the evaluation of the initial measurement of the fair value of acquired loans in the
acquisition of AimBank as a critical audit matter. This fair value measurement involved a high
degree of measurement uncertainty and subjectivity, which required specialized skills and
knowledge to evaluate the measurement. Specifically, there was a high degree of subjectivity
in applying and evaluating the fair value measurement methodology including the acquired loan
valuation significant assumptions.
The following are the primary procedures we performed to address this critical audit matter. We
evaluated the design and tested the operating effectiveness of certain internal controls related
to the Company’s determination of the fair value of acquired loans in the acquisition of
AimBank, including controls over the application of the overall fair value measurement
methodology and the identification and determination of the significant assumptions used in the
acquired loan fair value estimate. We involved valuation professionals with specialized skills
and knowledge, who assisted in evaluating the fair value measurement methodology, including
the significant assumptions, for compliance with U.S. generally accepted accounting principles
and evaluating the significant assumptions used in the fair value measurement through (1)
comparison to internal historical data and publicly available data and (2) review of the
underlying support and methodology for the development of the significant assumptions.
We have served as the Company’s auditor since 1994.
/s/ KPMG LLP
Des Moines, Iowa
February 25, 2021
157
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, 2020. 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, 2020.
Heartland acquired AimBank on December 4, 2020. AimBank, which had assets of $1.89 billion as of December 31, 2020, and
revenues of $4.7 million from the acquisition date through December 31, 2020, was excluded from the scope of this report as
allowed by the Securities and Exchange Commission. AimBank's assets comprised 11% of Heartland's assets at December 31,
2020, and AimBank's 2020 revenues were less than 1% of Heartland's revenues for 2020.
KPMG LLP, the independent registered public accounting firm that audited Heartland’s consolidated financial statements as of
and for the year ended December 31, 2020, 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, 2020, that have materially affected or are reasonably likely to materially affect Heartland's internal
control over financial reporting.
158
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, 2020, 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, 2020, 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,
2020 and 2019, 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, 2020, and the
related notes (collectively, the consolidated financial statements), and our report dated February 25,
2021 expressed an unqualified opinion on those consolidated financial statements.
The Company acquired AimBank on December 4, 2020, and management excluded from its
assessment of the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2020, AimBank’s internal control over financial reporting associated with total assets of
$1.89 billion and total revenues of $4.7 million included in the consolidated financial statements of the
Company as of and for the year ended December 31, 2020. Our audit of internal control over financial
reporting of the Company also excluded an evaluation of the internal control over financial reporting of
AimBank.
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.
159
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.
Des Moines, Iowa
February 25, 2021
/s/ KPMG LLP
160
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information in the Proxy Statement for Heartland’s 2021 Annual Meeting of Stockholders to be held on May 19, 2021, (the
"2020 Proxy Statement") under the captions "Proposal 1-Election of Directors", "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 2021 Proxy Statement, under the captions "Corporate Governance and the Board of Directors - Director
Compensation" and "Executive Officer Compensation" is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information in our 2021 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 2021 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 2021 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.
161 2.1
2.2
2.3
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
3.10
3.11
INDEX OF EXHIBITS
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).
Amended and Restated Agreement and Plan of Merger dated as of October 19, 2020 among Heartland Financial
USA, Inc., First Bank & Trust, AIM Bancshares, Inc., AimBank and Michael F. Epps, as the Shareholder
Representative (incorporated by reference to Appendix B to the Proxy Statement/Prospectus contained in
Amendment No. 1 to Heartland’s Registration Statement on Form S-4 (Registration No. 333‑238459)) filed on
October 19, 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).
Certificate of Designation of 7.00% Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, Series E, filed
with the Secretary of State of the State of Delaware and effective June 25, 2020 (incorporated by reference to
Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on June 26, 2020).
162
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
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).
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).
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).
Form of certificate representing the 7.00% Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, Series E
(incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed on June 26, 2020).
Deposit Agreement, dated June 26, 2020, by and among Heartland Financial USA, Inc., Broadridge Corporate
Issuer Solutions, Inc. and the holders from time to time of Depositary Receipts described therein (incorporated by
reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K filed on June 26, 2020).
Form of Depositary Receipt representing Depositary Shares (included as Exhibit A to Exhibit 4.12).
Amended and Restated Shareholder Voting Agreement, dated October 19, 2020, by and among AIM Bancshares,
Inc., AimBank, Heartland Financial USA, Inc., First Bank & Trust, and certain holders of Common Stock
(incorporated by reference to Exhibit 10.3 to the Registrant’s Registration Statement on Form S-4/A filed on
October 19, 2020).
4.15 (1) Description of Securities
10.1 (2)
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).
163
10.2 (2)
10.3 (2)
10.4 (2)
10.5
10.6 (2)
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).
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 Amendment to Change in Control Agreements (incorporated by reference to Exhibit 10.8 to the
Registrant’s Annual Report on Form 10-K filed on February 26, 2020).
10.7 (2) Heartland Financial USA, Inc. 2016 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.2 to
the Registrant's Current Report on Form 8-K filed on May 20, 2016).
10.8 (2) Business 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).
10.9
10.10
First Amendment First Amendment dated June 16, 2020 to Business Loan Agreement dated June 14, 2019 June
16, 2020 to Business 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 6, 2020).
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).
10.11 (2)
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).
10.12
10.13
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).
10.14 (2) 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
10.15
Promissory Note dated June 14, 2020 (issued under the credit facility)issued to Bankers Trust Company by
Heartland Financial USA, Inc. (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on
Form 10-Q filed on August 6, 2020).
164
10.16
10.17 (2)
10.18 (2)
10.19 (2)
10.20 (2)
Promissory Note dated June 14, 2020 (issued under the non-revolving line of credit) issued to Bankers Trust
Company by Heartland Financial USA, Inc.(incorporated by reference to Exhibit 10.3 to the Registrant’s
Quarterly Report on Form 10-Q filed on August 6, 2020).
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.
Heartland Financial USA, Inc. 2020 Long-Term Incentive Plan (incorporated by reference to Annex A to the
Registrant's Definitive Proxy Statement filed on April 6, 2020)
10.21 (1)(2) Form of Time-Based Restricted Stock Unit Award Agreement under the Heartland Financial USA, Inc. 2020
Long-Term Incentive Plan for time-based awards vesting fully on the third year following the original grant
award
10.22 (1)(2) Form of Director Restricted Stock Unit Award Agreement under the Heartland Financial USA, Inc. 2020 Long-
Term Incentive Plan
21.1 (1)
Subsidiaries of the Registrant.
23.1 (1) Consent of KPMG LLP.
31.1 (1) Certification of Chief Executive Officer pursuant to Rule 13a-14.
31.2 (1) Certification of Chief Financial Officer pursuant to Rule 13a-14.
32.1 (1) 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.
32.2 (1) 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.
101 (1)
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.
165
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 25, 2021.
SIGNATURES
Heartland Financial USA, Inc.
By: /s/ Bruce K. Lee
President and Chief Executive Officer
Date:
February 25, 2021
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 25, 2021.
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/ Christopher S. Hylen
Christopher S. Hylen
Director
/s/ Susan G. Murphy
Susan G. Murphy
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/ R. Mike McCoy
R. Mike McCoy
Director
/s/ Barry H. Orr
Barry H. Orr
Director
/s/ Martin J. Schmitz
Martin J. Schmitz
Director
166