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,
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
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.
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
•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
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
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
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
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Net income attributable to Heartland
|
$
|
137,938
|
|
|
$
|
149,129
|
|
|
$
|
116,998
|
|
Preferred dividends
|
(4,451)
|
|
|
—
|
|
|
(39)
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
$
|
133,487
|
|
|
$
|
149,129
|
|
|
$
|
116,959
|
|
Weighted average common shares outstanding for basic earnings per share
|
37,269
|
|
|
35,991
|
|
|
33,012
|
|
Assumed incremental common shares issued upon vesting of restricted stock units
|
88
|
|
|
71
|
|
|
201
|
|
Weighted average common shares for diluted earnings per share
|
37,357
|
|
|
36,062
|
|
|
33,213
|
|
Earnings per common share — basic
|
$
|
3.58
|
|
|
$
|
4.14
|
|
|
$
|
3.54
|
|
Earnings per common share — diluted
|
$
|
3.57
|
|
|
$
|
4.14
|
|
|
$
|
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.
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
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
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.
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)
|
$
|
217,202
|
|
Cash
|
47,275
|
|
Total consideration paid
|
264,477
|
|
Fair value of assets acquired
|
|
Cash and cash equivalents
|
470,085
|
|
|
|
|
|
|
|
Securities:
|
|
Carried at fair value
|
267,936
|
|
|
|
Other securities
|
3,210
|
|
Loans held to maturity
|
1,087,041
|
|
Allowance for credit losses for loans
|
(12,055)
|
|
Net loans held to maturity
|
1,074,986
|
|
Premises, furniture and equipment, net
|
27,867
|
|
Other real estate, net
|
1,119
|
|
|
|
Core deposit intangibles and customer relationships, net
|
3,102
|
|
Cash surrender value on life insurance
|
13,418
|
|
Other assets
|
20,159
|
|
Total assets
|
1,881,882
|
|
Fair value of liabilities assumed
|
|
Deposits
|
1,670,715
|
|
Short term borrowings
|
26,306
|
|
|
|
Other liabilities
|
11,807
|
|
Total liabilities assumed
|
1,708,828
|
|
Fair value of net assets acquired
|
173,054
|
|
Goodwill resulting from acquisition
|
$
|
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,
|
|
2020
|
|
2019
|
Net interest income
|
$
|
557,166
|
|
|
$
|
491,462
|
|
Net income available to common stockholders
|
167,168
|
|
|
170,010
|
|
Basic earnings per share
|
3.94
|
|
|
4.13
|
|
Diluted earnings per share
|
3.93
|
|
|
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
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.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair
Value
|
December 31, 2020
|
|
|
|
|
|
|
|
U.S. treasuries
|
$
|
1,995
|
|
|
$
|
31
|
|
|
$
|
—
|
|
|
$
|
2,026
|
|
U.S. agencies
|
167,048
|
|
|
657
|
|
|
(926)
|
|
|
166,779
|
|
Obligations of states and political subdivisions
|
1,562,631
|
|
|
75,555
|
|
|
(2,959)
|
|
|
1,635,227
|
|
Mortgage-backed securities - agency
|
1,351,964
|
|
|
16,029
|
|
|
(12,723)
|
|
|
1,355,270
|
|
Mortgage-backed securities - non-agency
|
1,428,068
|
|
|
22,688
|
|
|
(1,640)
|
|
|
1,449,116
|
|
Commercial mortgage-backed securities - agency
|
171,451
|
|
|
3,440
|
|
|
(738)
|
|
|
174,153
|
|
Commercial mortgage-backed securities - non-agency
|
253,421
|
|
|
37
|
|
|
(691)
|
|
|
252,767
|
|
Asset-backed securities
|
1,064,255
|
|
|
9,421
|
|
|
(4,410)
|
|
|
1,069,266
|
|
Corporate bonds
|
3,763
|
|
|
8
|
|
|
(29)
|
|
|
3,742
|
|
Total debt securities
|
6,004,596
|
|
|
127,866
|
|
|
(24,116)
|
|
|
6,108,346
|
|
Equity securities with a readily determinable fair value
|
19,629
|
|
|
—
|
|
|
—
|
|
|
19,629
|
|
Total
|
$
|
6,024,225
|
|
|
$
|
127,866
|
|
|
$
|
(24,116)
|
|
|
$
|
6,127,975
|
|
December 31, 2019
|
|
|
|
|
|
|
|
U.S. treasuries
|
$
|
8,466
|
|
|
$
|
37
|
|
|
$
|
—
|
|
|
$
|
8,503
|
|
U.S. agencies
|
185,566
|
|
|
671
|
|
|
(1,561)
|
|
|
184,676
|
|
Obligations of states and political subdivisions
|
704,073
|
|
|
12,516
|
|
|
(9,399)
|
|
|
707,190
|
|
Mortgage-backed securities - agency
|
763,733
|
|
|
7,598
|
|
|
(4,605)
|
|
|
766,726
|
|
Mortgage-backed securities - non-agency
|
427,315
|
|
|
4,312
|
|
|
(1,130)
|
|
|
430,497
|
|
Commercial mortgage-backed securities - agency
|
68,019
|
|
|
989
|
|
|
(143)
|
|
|
68,865
|
|
Commercial mortgage-backed securities - non-agency
|
435,195
|
|
|
3,113
|
|
|
(1,983)
|
|
|
436,325
|
|
Asset-backed securities
|
700,631
|
|
|
529
|
|
|
(9,581)
|
|
|
691,579
|
|
Corporate bonds
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total debt securities
|
3,292,998
|
|
|
29,765
|
|
|
(28,402)
|
|
|
3,294,361
|
|
Equity securities
|
18,435
|
|
|
—
|
|
|
—
|
|
|
18,435
|
|
Total
|
$
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair
Value
|
|
Allowance for Credit Losses
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
$
|
88,890
|
|
|
$
|
11,151
|
|
|
$
|
—
|
|
|
$
|
100,041
|
|
|
$
|
(51)
|
|
Total
|
$
|
88,890
|
|
|
$
|
11,151
|
|
|
$
|
—
|
|
|
$
|
100,041
|
|
|
$
|
(51)
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
$
|
91,324
|
|
|
$
|
9,160
|
|
|
$
|
—
|
|
|
$
|
100,484
|
|
|
$
|
—
|
|
Total
|
$
|
91,324
|
|
|
$
|
9,160
|
|
|
$
|
—
|
|
|
$
|
100,484
|
|
|
$
|
—
|
|
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
|
|
Amortized Cost
|
|
Estimated Fair Value
|
Due in 1 year or less
|
$
|
3,579
|
|
|
$
|
3,624
|
|
Due in 1 to 5 years
|
26,507
|
|
|
27,252
|
|
Due in 5 to 10 years
|
168,981
|
|
|
173,927
|
|
Due after 10 years
|
1,536,370
|
|
|
1,602,971
|
|
Total debt securities
|
1,735,437
|
|
|
1,807,774
|
|
Mortgage and asset-backed securities
|
4,269,159
|
|
|
4,300,572
|
|
Equity securities with a readily determinable fair value
|
19,629
|
|
|
19,629
|
|
Total investment securities
|
$
|
6,024,225
|
|
|
$
|
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
|
|
Amortized Cost
|
|
Estimated Fair Value
|
Due in 1 year or less
|
$
|
1,933
|
|
|
$
|
1,963
|
|
Due in 1 to 5 years
|
24,129
|
|
|
25,871
|
|
Due in 5 to 10 years
|
54,329
|
|
|
60,040
|
|
Due after 10 years
|
8,499
|
|
|
12,167
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
$
|
88,890
|
|
|
$
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Available for Sale Securities sold:
|
|
|
|
|
|
Proceeds from sales
|
$
|
1,097,378
|
|
|
$
|
1,628,467
|
|
|
$
|
727,895
|
|
Gross security gains
|
13,208
|
|
|
11,774
|
|
|
3,661
|
|
Gross security losses
|
5,616
|
|
|
4,115
|
|
|
2,576
|
|
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
|
Less than 12 months
|
|
12 months or longer
|
|
Total
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Count
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Count
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Count
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agencies
|
$
|
2,981
|
|
|
$
|
(8)
|
|
|
5
|
|
|
$
|
99,922
|
|
|
$
|
(918)
|
|
|
72
|
|
|
$
|
102,903
|
|
|
$
|
(926)
|
|
|
77
|
|
Obligations of states and political subdivisions
|
346,598
|
|
|
(2,959)
|
|
|
49
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
346,598
|
|
|
(2,959)
|
|
|
49
|
|
Mortgage-backed securities - agency
|
653,793
|
|
|
(12,342)
|
|
|
35
|
|
|
31,012
|
|
|
(381)
|
|
|
3
|
|
|
684,805
|
|
|
(12,723)
|
|
|
38
|
|
Mortgage-backed securities - non-agency
|
378,843
|
|
|
(1,639)
|
|
|
17
|
|
|
1,622
|
|
|
(1)
|
|
|
1
|
|
|
380,465
|
|
|
(1,640)
|
|
|
18
|
|
Commercial mortgage-backed securities - agency
|
46,541
|
|
|
(738)
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
46,541
|
|
|
(738)
|
|
|
6
|
|
Commercial mortgage-backed securities - non-agency
|
100,042
|
|
|
(15)
|
|
|
2
|
|
|
35,428
|
|
|
(676)
|
|
|
3
|
|
|
135,470
|
|
|
(691)
|
|
|
5
|
|
Asset-backed securities
|
141,824
|
|
|
(643)
|
|
|
9
|
|
|
340,452
|
|
|
(3,767)
|
|
|
24
|
|
|
482,276
|
|
|
(4,410)
|
|
|
33
|
|
Corporate bonds
|
1,908
|
|
|
(29)
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,908
|
|
|
(29)
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
$
|
1,672,530
|
|
|
$
|
(18,373)
|
|
|
127
|
|
|
$
|
508,436
|
|
|
$
|
(5,743)
|
|
|
103
|
|
|
$
|
2,180,966
|
|
|
$
|
(24,116)
|
|
|
230
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agencies
|
$
|
94,774
|
|
|
$
|
(957)
|
|
|
57
|
|
|
$
|
49,555
|
|
|
$
|
(604)
|
|
|
24
|
|
|
$
|
144,329
|
|
|
$
|
(1,561)
|
|
|
81
|
|
Obligations of states and political subdivisions
|
387,534
|
|
|
(9,399)
|
|
|
50
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
387,534
|
|
|
(9,399)
|
|
|
50
|
|
Mortgage-backed securities - agency
|
182,614
|
|
|
(1,763)
|
|
|
36
|
|
|
92,928
|
|
|
(2,842)
|
|
|
17
|
|
|
275,542
|
|
|
(4,605)
|
|
|
53
|
|
Mortgage-backed securities - non-agency
|
225,807
|
|
|
(1,130)
|
|
|
6
|
|
|
251
|
|
|
—
|
|
|
1
|
|
|
226,058
|
|
|
(1,130)
|
|
|
7
|
|
Commercial mortgage-backed securities - agency
|
12,509
|
|
|
(128)
|
|
|
4
|
|
|
1,842
|
|
|
(15)
|
|
|
1
|
|
|
14,351
|
|
|
(143)
|
|
|
5
|
|
Commercial mortgage-backed securities - non-agency
|
214,774
|
|
|
(1,544)
|
|
|
19
|
|
|
55,896
|
|
|
(439)
|
|
|
4
|
|
|
270,670
|
|
|
(1,983)
|
|
|
23
|
|
Asset-backed securities
|
501,254
|
|
|
(8,667)
|
|
|
28
|
|
|
40,760
|
|
|
(914)
|
|
|
11
|
|
|
542,014
|
|
|
(9,581)
|
|
|
39
|
|
Corporate bonds
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
$
|
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
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:
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
Balance at December 31, 2019
|
$
|
—
|
|
Impact of ASU 2016-13 adoption on January 1, 2020
|
158
|
|
Adjusted balance at January 1, 2020
|
158
|
|
Provision for credit losses
|
(107)
|
|
Balance at December 31, 2020
|
$
|
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
|
Obligations of states and political subdivisions
|
AAA
|
$
|
—
|
|
AA, AA+, AA-
|
64,385
|
|
A+, A, A-
|
18,353
|
|
BBB
|
4,208
|
|
Not Rated
|
1,944
|
|
Total
|
$
|
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.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
Loans receivable held to maturity:
|
|
|
|
Commercial and industrial
|
$
|
2,534,799
|
|
|
$
|
2,530,809
|
|
Paycheck Protection Program ("PPP")
|
957,785
|
|
|
—
|
|
Owner occupied commercial real estate
|
1,776,406
|
|
|
1,472,704
|
|
Non-owner occupied commercial real estate
|
1,921,481
|
|
|
1,495,877
|
|
Real estate construction
|
863,220
|
|
|
1,027,081
|
|
Agricultural and agricultural real estate
|
714,526
|
|
|
565,837
|
|
Residential real estate
|
840,442
|
|
|
832,277
|
|
Consumer
|
414,392
|
|
|
443,332
|
|
|
|
|
|
|
|
|
|
Total loans receivable held to maturity
|
10,023,051
|
|
|
8,367,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses
|
(131,606)
|
|
|
(70,395)
|
|
Loans receivable, net
|
$
|
9,891,445
|
|
|
$
|
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 Evaluated for Credit Losses
|
|
Collectively Evaluated for Credit Losses
|
|
Total
|
|
Loans Individually Evaluated for Credit Losses
|
|
Loans Collectively Evaluated for Credit Losses
|
|
Total
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
4,077
|
|
|
$
|
34,741
|
|
|
$
|
38,818
|
|
|
$
|
16,578
|
|
|
$
|
2,518,221
|
|
|
$
|
2,534,799
|
|
PPP
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
957,785
|
|
|
957,785
|
|
Owner occupied commercial real estate
|
111
|
|
|
19,890
|
|
|
20,001
|
|
|
11,174
|
|
|
1,765,232
|
|
|
1,776,406
|
|
Non-owner occupied commercial real estate
|
3,250
|
|
|
17,623
|
|
|
20,873
|
|
|
13,490
|
|
|
1,907,991
|
|
|
1,921,481
|
|
Real estate construction
|
—
|
|
|
20,080
|
|
|
20,080
|
|
|
—
|
|
|
863,220
|
|
|
863,220
|
|
Agricultural and agricultural real estate
|
1,988
|
|
|
5,141
|
|
|
7,129
|
|
|
15,453
|
|
|
699,073
|
|
|
714,526
|
|
Residential real estate
|
—
|
|
|
11,935
|
|
|
11,935
|
|
|
535
|
|
|
839,907
|
|
|
840,442
|
|
Consumer
|
—
|
|
|
12,770
|
|
|
12,770
|
|
|
—
|
|
|
414,392
|
|
|
414,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
9,426
|
|
|
$
|
122,180
|
|
|
$
|
131,606
|
|
|
$
|
57,230
|
|
|
$
|
9,965,821
|
|
|
$
|
10,023,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance For Credit Losses
|
|
Gross Loans Receivable Held to Maturity
|
|
Individually Evaluated for Credit Losses
|
|
Collectively Evaluated for Credit Losses
|
|
Total
|
|
Loans Individually Evaluated for Credit Losses
|
|
Loans Collectively Evaluated for Credit Losses
|
|
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
|
352
|
|
|
7,569
|
|
|
7,921
|
|
|
9,468
|
|
|
1,463,236
|
|
|
1,472,704
|
|
Non-owner occupied commercial real estate
|
33
|
|
|
7,551
|
|
|
7,584
|
|
|
1,730
|
|
|
1,494,147
|
|
|
1,495,877
|
|
Real estate construction
|
—
|
|
|
8,677
|
|
|
8,677
|
|
|
685
|
|
|
1,026,396
|
|
|
1,027,081
|
|
Agricultural and agricultural real estate
|
916
|
|
|
4,764
|
|
|
5,680
|
|
|
18,554
|
|
|
547,283
|
|
|
565,837
|
|
Residential real estate
|
176
|
|
|
1,328
|
|
|
1,504
|
|
|
20,678
|
|
|
811,599
|
|
|
832,277
|
|
Consumer
|
419
|
|
|
4,403
|
|
|
4,822
|
|
|
4,123
|
|
|
439,209
|
|
|
443,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
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
|
|
Number of Loans
|
|
Pre-Modification Recorded Investment
|
|
Post-Modification Recorded Investment
|
|
Number of Loans
|
|
Pre-Modification Recorded Investment
|
|
Post-Modification Recorded Investment
|
Commercial and industrial
|
1
|
|
|
$
|
20
|
|
|
$
|
20
|
|
|
1
|
|
|
$
|
40
|
|
|
$
|
40
|
|
PPP
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Owner occupied commercial real estate
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Non-owner occupied commercial real estate
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Real estate construction
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Agricultural and agricultural real estate
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Residential real estate
|
2
|
|
|
92
|
|
|
98
|
|
|
6
|
|
|
623
|
|
|
649
|
|
Consumer
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
3
|
|
|
$
|
112
|
|
|
$
|
118
|
|
|
7
|
|
|
$
|
663
|
|
|
$
|
689
|
|
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.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
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
|
1
|
|
|
232
|
|
|
2
|
|
|
210
|
|
Consumer
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
1
|
|
|
$
|
232
|
|
|
2
|
|
|
$
|
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.
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
|
$
|
557,853
|
|
|
$
|
340,809
|
|
|
$
|
168,873
|
|
|
$
|
215,696
|
|
|
$
|
101,010
|
|
|
$
|
337,834
|
|
|
$
|
541,627
|
|
|
$
|
2,263,702
|
|
Watch
|
41,574
|
|
|
24,676
|
|
|
19,672
|
|
|
14,262
|
|
|
8,072
|
|
|
2,474
|
|
|
49,432
|
|
|
160,162
|
|
Substandard
|
23,024
|
|
|
16,274
|
|
|
8,897
|
|
|
15,717
|
|
|
9,098
|
|
|
19,537
|
|
|
18,388
|
|
|
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
|
$
|
880,709
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
880,709
|
|
Watch
|
22,533
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
22,533
|
|
Substandard
|
54,543
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
54,543
|
|
PPP total
|
$
|
957,785
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
957,785
|
|
Owner occupied commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
$
|
400,662
|
|
|
$
|
369,401
|
|
|
$
|
300,242
|
|
|
$
|
167,470
|
|
|
$
|
107,234
|
|
|
$
|
213,780
|
|
|
$
|
33,759
|
|
|
$
|
1,592,548
|
|
Watch
|
15,345
|
|
|
13,764
|
|
|
22,488
|
|
|
20,811
|
|
|
8,717
|
|
|
15,282
|
|
|
4,311
|
|
|
100,718
|
|
Substandard
|
15,914
|
|
|
9,522
|
|
|
12,164
|
|
|
14,147
|
|
|
8,580
|
|
|
21,708
|
|
|
1,105
|
|
|
83,140
|
|
Owner occupied commercial real estate total
|
$
|
431,921
|
|
|
$
|
392,687
|
|
|
$
|
334,894
|
|
|
$
|
202,428
|
|
|
$
|
124,531
|
|
|
$
|
250,770
|
|
|
$
|
39,175
|
|
|
$
|
1,776,406
|
|
Non-owner occupied commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
$
|
334,722
|
|
|
$
|
411,301
|
|
|
$
|
305,456
|
|
|
$
|
194,101
|
|
|
$
|
108,070
|
|
|
$
|
233,153
|
|
|
$
|
24,466
|
|
|
$
|
1,611,269
|
|
Watch
|
22,826
|
|
|
55,225
|
|
|
24,718
|
|
|
18,724
|
|
|
20,954
|
|
|
45,672
|
|
|
5,114
|
|
|
193,233
|
|
Substandard
|
30,899
|
|
|
15,035
|
|
|
23,290
|
|
|
17,046
|
|
|
9,147
|
|
|
21,060
|
|
|
502
|
|
|
116,979
|
|
Non-owner occupied commercial real estate total
|
$
|
388,447
|
|
|
$
|
481,561
|
|
|
$
|
353,464
|
|
|
$
|
229,871
|
|
|
$
|
138,171
|
|
|
$
|
299,885
|
|
|
$
|
30,082
|
|
|
$
|
1,921,481
|
|
Real estate construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
$
|
311,625
|
|
|
$
|
309,678
|
|
|
$
|
157,171
|
|
|
$
|
12,625
|
|
|
$
|
6,954
|
|
|
$
|
5,110
|
|
|
$
|
21,431
|
|
|
$
|
824,594
|
|
Watch
|
2,105
|
|
|
26,659
|
|
|
2,403
|
|
|
332
|
|
|
55
|
|
|
388
|
|
|
1,295
|
|
|
33,237
|
Substandard
|
196
|
|
|
2,760
|
|
|
2,036
|
|
|
—
|
|
|
39
|
|
|
358
|
|
|
—
|
|
|
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
|
$
|
171,578
|
|
|
$
|
90,944
|
|
|
$
|
62,349
|
|
|
$
|
39,252
|
|
|
$
|
17,626
|
|
|
$
|
37,696
|
|
|
$
|
148,456
|
|
|
$
|
567,901
|
|
Watch
|
20,500
|
|
|
16,202
|
|
|
8,854
|
|
|
2,448
|
|
|
3,515
|
|
|
3,157
|
|
|
12,282
|
|
|
66,958
|
|
Substandard
|
17,403
|
|
|
7,044
|
|
|
23,519
|
|
|
6,758
|
|
|
3,917
|
|
|
9,952
|
|
|
11,074
|
|
|
79,667
|
|
Agricultural and agricultural real estate total
|
$
|
209,481
|
|
|
$
|
114,190
|
|
|
$
|
94,722
|
|
|
$
|
48,458
|
|
|
$
|
25,058
|
|
|
$
|
50,805
|
|
|
$
|
171,812
|
|
|
$
|
714,526
|
|
Residential real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
$
|
153,017
|
|
|
$
|
99,440
|
|
|
$
|
118,854
|
|
|
$
|
83,534
|
|
|
$
|
63,477
|
|
|
$
|
244,852
|
|
|
$
|
33,467
|
|
|
$
|
796,641
|
|
Watch
|
3,986
|
|
|
4,507
|
|
|
2,188
|
|
|
1,896
|
|
|
3,117
|
|
|
8,525
|
|
|
—
|
|
|
24,219
|
Substandard
|
980
|
|
|
442
|
|
|
2,507
|
|
|
1,528
|
|
|
884
|
|
|
12,141
|
|
|
1,100
|
|
|
19,582
|
Residential real estate total
|
$
|
157,983
|
|
|
$
|
104,389
|
|
|
$
|
123,549
|
|
|
$
|
86,958
|
|
|
$
|
67,478
|
|
|
$
|
265,518
|
|
|
$
|
34,567
|
|
|
$
|
840,442
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
$
|
37,037
|
|
|
$
|
27,646
|
|
|
$
|
18,811
|
|
|
$
|
15,034
|
|
|
$
|
4,009
|
|
|
$
|
19,483
|
|
|
$
|
280,996
|
|
|
$
|
403,016
|
|
Watch
|
168
|
|
|
352
|
|
|
647
|
|
|
340
|
|
|
82
|
|
|
646
|
|
|
1,622
|
|
|
3,857
|
Substandard
|
481
|
|
|
959
|
|
|
1,884
|
|
|
500
|
|
|
897
|
|
|
1,976
|
|
|
822
|
|
|
7,519
|
Consumer total
|
$
|
37,686
|
|
|
$
|
28,957
|
|
|
$
|
21,342
|
|
|
$
|
15,874
|
|
|
$
|
4,988
|
|
|
$
|
22,105
|
|
|
$
|
283,440
|
|
|
$
|
414,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pass
|
$
|
2,847,203
|
|
|
$
|
1,649,219
|
|
|
$
|
1,131,756
|
|
|
$
|
727,712
|
|
|
$
|
408,380
|
|
|
$
|
1,091,908
|
|
|
$
|
1,084,202
|
|
|
$
|
8,940,380
|
|
Total watch
|
129,037
|
|
|
141,385
|
|
|
80,970
|
|
|
58,813
|
|
|
44,512
|
|
|
76,144
|
|
|
74,056
|
|
|
604,917
|
Total substandard
|
143,440
|
|
|
52,036
|
|
|
74,297
|
|
|
55,696
|
|
|
32,562
|
|
|
86,732
|
|
|
32,991
|
|
|
477,754
|
Total loans
|
$
|
3,119,680
|
|
|
$
|
1,842,640
|
|
|
$
|
1,287,023
|
|
|
$
|
842,221
|
|
|
$
|
485,454
|
|
|
$
|
1,254,784
|
|
|
$
|
1,191,249
|
|
|
$
|
10,023,051
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
Nonpass
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
Commercial and industrial
|
$
|
2,352,131
|
|
|
$
|
178,678
|
|
|
$
|
2,530,809
|
|
Owner occupied commercial real estate
|
1,369,290
|
|
|
103,414
|
|
|
1,472,704
|
|
Non-owner occupied commercial real estate
|
1,429,760
|
|
|
66,117
|
|
|
1,495,877
|
|
Real estate construction
|
984,736
|
|
|
42,345
|
|
|
1,027,081
|
|
Agricultural and agricultural real estate
|
454,272
|
|
|
111,565
|
|
|
565,837
|
|
Residential real estate
|
790,226
|
|
|
42,051
|
|
|
832,277
|
|
Consumer
|
430,733
|
|
|
12,599
|
|
|
443,332
|
|
|
|
|
|
|
|
Total loans receivable held to maturity
|
$
|
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
|
|
Total
Past Due
|
|
Current
|
|
Nonaccrual
|
|
Total Loans
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
5,825
|
|
|
$
|
2,322
|
|
|
$
|
720
|
|
|
$
|
8,867
|
|
|
$
|
2,504,170
|
|
|
$
|
21,762
|
|
|
$
|
2,534,799
|
|
PPP
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
957,784
|
|
|
—
|
|
|
957,785
|
|
Owner occupied commercial real estate
|
2,815
|
|
|
167
|
|
|
—
|
|
|
2,982
|
|
|
1,759,649
|
|
|
13,775
|
|
|
1,776,406
|
|
Non-owner occupied commercial real estate
|
2,143
|
|
|
2,674
|
|
|
—
|
|
|
4,817
|
|
|
1,902,003
|
|
|
14,661
|
|
|
1,921,481
|
|
Real estate construction
|
2,446
|
|
|
96
|
|
|
—
|
|
|
2,542
|
|
|
859,784
|
|
|
894
|
|
|
863,220
|
|
Agricultural and agricultural real estate
|
1,688
|
|
|
—
|
|
|
—
|
|
|
1,688
|
|
|
694,150
|
|
|
18,688
|
|
|
714,526
|
|
Residential real estate
|
1,675
|
|
|
83
|
|
|
—
|
|
|
1,758
|
|
|
825,047
|
|
|
13,637
|
|
|
840,442
|
|
Consumer
|
807
|
|
|
139
|
|
|
—
|
|
|
946
|
|
|
409,477
|
|
|
3,969
|
|
|
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
|
3,487
|
|
|
690
|
|
|
—
|
|
|
4,177
|
|
|
1,461,589
|
|
|
6,938
|
|
|
1,472,704
|
|
Non-owner occupied commercial real estate
|
614
|
|
|
81
|
|
|
—
|
|
|
695
|
|
|
1,493,619
|
|
|
1,563
|
|
|
1,495,877
|
|
Real estate construction
|
5,689
|
|
|
72
|
|
|
—
|
|
|
5,761
|
|
|
1,020,153
|
|
|
1,167
|
|
|
1,027,081
|
|
Agricultural and agricultural real estate
|
3,734
|
|
|
79
|
|
|
26
|
|
|
3,839
|
|
|
541,455
|
|
|
20,543
|
|
|
565,837
|
|
Residential real estate
|
4,166
|
|
|
24
|
|
|
180
|
|
|
4,370
|
|
|
814,840
|
|
|
13,067
|
|
|
832,277
|
|
Consumer
|
2,511
|
|
|
651
|
|
|
—
|
|
|
3,162
|
|
|
436,675
|
|
|
3,495
|
|
|
443,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans receivable held to maturity
|
$
|
25,322
|
|
|
$
|
2,501
|
|
|
$
|
4,105
|
|
|
$
|
31,928
|
|
|
$
|
8,259,441
|
|
|
$
|
76,548
|
|
|
$
|
8,367,917
|
|
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
|
|
|
$
|
6
|
|
Owner occupied commercial real estate
|
712
|
|
|
712
|
|
|
352
|
|
|
|
|
|
|
1,435
|
|
|
22
|
|
Non-owner occupied commercial real estate
|
138
|
|
|
138
|
|
|
33
|
|
|
|
|
|
|
—
|
|
|
—
|
|
Real estate construction
|
17
|
|
|
17
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
—
|
|
Agricultural and agricultural real estate
|
2,751
|
|
|
2,237
|
|
|
916
|
|
|
|
|
|
|
2,739
|
|
|
—
|
|
Residential real estate
|
1,378
|
|
|
1,378
|
|
|
176
|
|
|
|
|
|
|
1,116
|
|
|
—
|
|
Consumer
|
998
|
|
|
997
|
|
|
419
|
|
|
|
|
|
|
1,170
|
|
|
11
|
|
Total loans held to maturity
|
$
|
17,721
|
|
|
$
|
17,189
|
|
|
$
|
8,172
|
|
|
|
|
|
|
$
|
18,217
|
|
|
$
|
39
|
|
Impaired loans without a related allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
22,525
|
|
|
$
|
20,104
|
|
|
$
|
—
|
|
|
|
|
|
|
$
|
19,141
|
|
|
$
|
782
|
|
Owner occupied commercial real estate
|
8,756
|
|
|
8,756
|
|
|
—
|
|
|
|
|
|
|
8,337
|
|
|
341
|
|
Non-owner occupied commercial real estate
|
1,592
|
|
|
1,592
|
|
|
—
|
|
|
|
|
|
|
1,515
|
|
|
62
|
|
Real estate construction
|
668
|
|
|
668
|
|
|
—
|
|
|
|
|
|
|
636
|
|
|
26
|
|
Agricultural and agricultural real estate
|
19,113
|
|
|
16,317
|
|
|
—
|
|
|
|
|
|
|
16,837
|
|
|
60
|
|
Residential real estate
|
19,382
|
|
|
19,300
|
|
|
—
|
|
|
|
|
|
|
17,073
|
|
|
280
|
|
Consumer
|
3,135
|
|
|
3,126
|
|
|
—
|
|
|
|
|
|
|
4,182
|
|
|
45
|
|
Total loans held to maturity
|
$
|
75,171
|
|
|
$
|
69,863
|
|
|
$
|
—
|
|
|
|
|
|
|
$
|
67,721
|
|
|
$
|
1,596
|
|
Total impaired loans held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
34,252
|
|
|
$
|
31,814
|
|
|
$
|
6,276
|
|
|
|
|
|
|
$
|
30,898
|
|
|
$
|
788
|
|
Owner occupied commercial real estate
|
9,468
|
|
|
9,468
|
|
|
352
|
|
|
|
|
|
|
9,772
|
|
|
363
|
|
Non-owner occupied commercial real estate
|
1,730
|
|
|
1,730
|
|
|
33
|
|
|
|
|
|
|
1,515
|
|
|
62
|
|
Real estate construction
|
685
|
|
|
685
|
|
|
—
|
|
|
|
|
|
|
636
|
|
|
26
|
|
Agricultural and agricultural real estate
|
21,864
|
|
|
18,554
|
|
|
916
|
|
|
|
|
|
|
19,576
|
|
|
60
|
|
Residential real estate
|
20,760
|
|
|
20,678
|
|
|
176
|
|
|
|
|
|
|
18,189
|
|
|
280
|
|
Consumer
|
4,133
|
|
|
4,123
|
|
|
419
|
|
|
|
|
|
|
5,352
|
|
|
56
|
|
Total impaired loans held to maturity
|
$
|
92,892
|
|
|
$
|
87,052
|
|
|
$
|
8,172
|
|
|
|
|
|
|
$
|
85,938
|
|
|
$
|
1,635
|
|
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
|
74,854
|
|
|
(1,205)
|
|
|
(56)
|
|
|
73,593
|
|
Non-owner occupied commercial real estate
|
134,135
|
|
|
(6,465)
|
|
|
(3,150)
|
|
|
124,520
|
|
Real estate construction
|
19,405
|
|
|
(603)
|
|
|
360
|
|
|
19,162
|
|
Agricultural and agricultural real estate
|
54,584
|
|
|
(1,848)
|
|
|
(413)
|
|
|
52,323
|
|
Residential real estate
|
25,556
|
|
|
(410)
|
|
|
94
|
|
|
25,240
|
|
Consumer
|
2,760
|
|
|
(75)
|
|
|
17
|
|
|
2,702
|
|
Total PCD loans
|
$
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Balance at beginning of year
|
$
|
184,568
|
|
|
$
|
124,983
|
|
Advances
|
73,412
|
|
|
91,287
|
|
Repayments
|
(42,531)
|
|
|
(31,702)
|
|
Balance at end of year
|
$
|
215,449
|
|
|
$
|
184,568
|
|
SIX
ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses for loans for the years ended December 31, 2020, 2019 and 2018 were as follows, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Balance at beginning of year
|
$
|
70,395
|
|
|
$
|
61,963
|
|
|
$
|
55,686
|
|
Impact of the adoption of ASU 2016-13 on January 1, 2020
|
12,071
|
|
|
—
|
|
|
—
|
|
Adjusted balance at January 1, 2020
|
82,466
|
|
|
61,963
|
|
|
55,686
|
|
Allowance for purchased credit deteriorated loans
|
12,313
|
|
|
—
|
|
|
—
|
|
Provision for credit losses
|
65,745
|
|
|
16,657
|
|
|
24,013
|
|
Recoveries on loans previously charged-off
|
3,804
|
|
|
5,365
|
|
|
3,549
|
|
Loans charged-off
|
(32,722)
|
|
|
(13,590)
|
|
|
(21,285)
|
|
Balance at end of year
|
$
|
131,606
|
|
|
$
|
70,395
|
|
|
$
|
61,963
|
|
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
|
|
Adjusted balance at 1/1/2020
|
|
Purchased Credit Deteriorated Allowance
|
|
Charge-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
|
7,921
|
|
|
(114)
|
|
|
7,807
|
|
|
1,205
|
|
|
(13,671)
|
|
|
205
|
|
|
24,455
|
|
|
20,001
|
|
Non-owner occupied commercial real estate
|
7,584
|
|
|
(2,617)
|
|
|
4,967
|
|
|
6,465
|
|
|
(45)
|
|
|
30
|
|
|
9,456
|
|
|
20,873
|
|
Real estate construction
|
8,677
|
|
|
6,335
|
|
|
15,012
|
|
|
603
|
|
|
(105)
|
|
|
220
|
|
|
4,350
|
|
|
20,080
|
|
Agricultural and agricultural real estate
|
5,680
|
|
|
(387)
|
|
|
5,293
|
|
|
1,848
|
|
|
(1,201)
|
|
|
971
|
|
|
218
|
|
|
7,129
|
|
Residential real estate
|
1,504
|
|
|
4,817
|
|
|
6,321
|
|
|
410
|
|
|
(515)
|
|
|
108
|
|
|
5,611
|
|
|
11,935
|
|
Consumer
|
4,822
|
|
|
4,309
|
|
|
9,131
|
|
|
75
|
|
|
(2,211)
|
|
|
993
|
|
|
4,782
|
|
|
12,770
|
|
Total
|
$
|
70,395
|
|
|
$
|
12,071
|
|
|
$
|
82,466
|
|
|
$
|
12,313
|
|
|
$
|
(32,722)
|
|
|
$
|
3,804
|
|
|
$
|
65,745
|
|
|
$
|
131,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2018
|
|
|
|
|
|
Charge-offs
|
|
Recoveries
|
|
Provision
|
|
12/31/2019
|
Commercial and industrial
|
$
|
29,958
|
|
|
|
|
|
|
$
|
(7,129)
|
|
|
$
|
2,462
|
|
|
$
|
8,916
|
|
|
$
|
34,207
|
|
PPP
|
—
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Owner occupied commercial real estate
|
6,247
|
|
|
|
|
|
|
(119)
|
|
|
178
|
|
|
1,615
|
|
|
7,921
|
|
Non-owner occupied commercial real estate
|
7,182
|
|
|
|
|
|
|
(21)
|
|
|
201
|
|
|
222
|
|
|
7,584
|
|
Real estate construction
|
6,707
|
|
|
|
|
|
|
(156)
|
|
|
255
|
|
|
1,871
|
|
|
8,677
|
|
Agricultural and agricultural real estate
|
4,916
|
|
|
|
|
|
|
(2,633)
|
|
|
529
|
|
|
2,868
|
|
|
5,680
|
|
Residential real estate
|
1,813
|
|
|
|
|
|
|
(458)
|
|
|
139
|
|
|
10
|
|
|
1,504
|
|
Consumer
|
5,140
|
|
|
|
|
|
|
(3,074)
|
|
|
1,601
|
|
|
1,155
|
|
|
4,822
|
|
Total
|
$
|
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
|
$
|
248
|
|
Impact of ASU 2016-13 adoption on January 1, 2020
|
13,604
|
|
Adjusted balance at January 1, 2020
|
13,852
|
|
Provision
|
1,428
|
|
Balance at December 31, 2020
|
$
|
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.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Land and land improvements
|
$
|
61,930
|
|
|
$
|
60,444
|
|
Buildings and building improvements
|
192,702
|
|
|
176,838
|
|
Furniture and equipment
|
69,468
|
|
|
65,617
|
|
Total
|
324,100
|
|
|
302,899
|
|
Less accumulated depreciation
|
(104,505)
|
|
|
(105,341)
|
|
Premises, furniture and equipment, net
|
$
|
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.
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
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Amortizing intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Core deposit intangibles
|
$
|
101,185
|
|
|
$
|
58,970
|
|
|
$
|
42,215
|
|
|
$
|
96,821
|
|
|
$
|
48,338
|
|
|
$
|
48,483
|
|
Customer relationship intangible
|
1,177
|
|
|
1,009
|
|
|
168
|
|
|
1,177
|
|
|
972
|
|
|
205
|
|
Mortgage servicing rights
|
11,268
|
|
|
6,079
|
|
|
5,189
|
|
|
7,886
|
|
|
2,265
|
|
|
5,621
|
|
Commercial servicing rights
|
7,054
|
|
|
6,191
|
|
|
863
|
|
|
6,952
|
|
|
5,837
|
|
|
1,115
|
|
Total
|
$
|
120,684
|
|
|
$
|
72,249
|
|
|
$
|
48,435
|
|
|
$
|
112,836
|
|
|
$
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core
Deposit
Intangibles
|
|
Customer
Relationship
Intangible
|
|
Mortgage
Servicing
Rights
|
|
Commercial
Servicing
Rights
|
|
Total
|
Year ending December 31,
|
|
|
|
|
|
|
|
|
|
2021
|
$
|
9,360
|
|
|
$
|
35
|
|
|
$
|
1,297
|
|
|
$
|
251
|
|
|
$
|
10,943
|
|
2022
|
7,702
|
|
|
34
|
|
|
1,112
|
|
|
222
|
|
|
9,070
|
|
2023
|
6,739
|
|
|
34
|
|
|
927
|
|
|
162
|
|
|
7,862
|
|
2024
|
5,591
|
|
|
33
|
|
|
741
|
|
|
110
|
|
|
6,475
|
|
2025
|
4,700
|
|
|
32
|
|
|
556
|
|
|
118
|
|
|
5,406
|
|
Thereafter
|
8,123
|
|
|
—
|
|
|
556
|
|
|
—
|
|
|
8,679
|
|
Total
|
$
|
42,215
|
|
|
$
|
168
|
|
|
$
|
5,189
|
|
|
$
|
863
|
|
|
$
|
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.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Balance at January 1,
|
$
|
5,621
|
|
|
$
|
29,363
|
|
Originations
|
3,383
|
|
|
893
|
|
Amortization
|
(2,037)
|
|
|
(3,168)
|
|
Sale of mortgage servicing rights
|
—
|
|
|
(20,556)
|
|
|
|
|
|
Valuation allowance on servicing rights
|
(1,778)
|
|
|
(911)
|
|
Balance at December 31,
|
$
|
5,189
|
|
|
$
|
5,621
|
|
Fair value of mortgage servicing rights
|
$
|
5,189
|
|
|
$
|
5,621
|
|
Mortgage servicing rights, net to servicing portfolio
|
0.70
|
%
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Balance at January 1,
|
$
|
1,115
|
|
|
$
|
1,709
|
|
Originations
|
102
|
|
|
118
|
|
Amortization
|
(354)
|
|
|
(712)
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
|
$
|
863
|
|
|
$
|
1,115
|
|
Fair value of commercial servicing rights
|
$
|
1,288
|
|
|
$
|
1,594
|
|
Commercial servicing rights, net to servicing portfolio
|
1.30
|
%
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
First Bank & Trust
|
1,522
|
|
|
1,100
|
|
|
422
|
|
|
5,445
|
|
|
4,089
|
|
|
1,356
|
|
Total
|
$
|
1,522
|
|
|
$
|
1,100
|
|
|
$
|
422
|
|
|
$
|
5,445
|
|
|
$
|
4,089
|
|
|
$
|
1,356
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Bank & Trust
|
1,482
|
|
|
1,368
|
|
|
114
|
|
|
5,050
|
|
|
4,253
|
|
|
797
|
|
Total
|
$
|
1,482
|
|
|
$
|
1,368
|
|
|
$
|
114
|
|
|
$
|
5,050
|
|
|
$
|
4,253
|
|
|
$
|
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-
Less than
20 Years
|
|
Book Value-
More than
20 Years
|
|
Fair Value-
More than
20 Years
|
|
Impairment-
More than
20 Years
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premier Valley Bank
|
—
|
|
|
7
|
|
|
—
|
|
|
86
|
|
|
143
|
|
|
—
|
|
Wisconsin Bank & Trust
|
87
|
|
|
196
|
|
|
—
|
|
|
690
|
|
|
942
|
|
|
—
|
|
Total
|
$
|
87
|
|
|
$
|
203
|
|
|
$
|
—
|
|
|
$
|
776
|
|
|
$
|
1,085
|
|
|
$
|
—
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premier Valley Bank
|
1
|
|
|
13
|
|
|
—
|
|
|
135
|
|
|
161
|
|
|
—
|
|
Wisconsin Bank & Trust
|
128
|
|
|
272
|
|
|
—
|
|
|
851
|
|
|
1,148
|
|
|
—
|
|
Total
|
$
|
129
|
|
|
$
|
285
|
|
|
$
|
—
|
|
|
$
|
986
|
|
|
$
|
1,309
|
|
|
$
|
—
|
|
NINE
DEPOSITS
At December 31, 2020, the scheduled maturities of time certificates of deposit were as follows, in thousands:
|
|
|
|
|
|
2021
|
$
|
999,121
|
|
2022
|
171,429
|
|
2023
|
51,185
|
|
2024
|
23,071
|
|
2025
|
16,243
|
|
Thereafter
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Savings and money market accounts
|
$
|
16,560
|
|
|
$
|
47,069
|
|
|
$
|
25,123
|
|
Time certificates of deposit in denominations of $100,000 or more
|
8,244
|
|
|
9,344
|
|
|
4,789
|
|
Other time deposits
|
5,483
|
|
|
7,321
|
|
|
5,755
|
|
Interest expense on deposits
|
$
|
30,287
|
|
|
$
|
63,734
|
|
|
$
|
35,667
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Retail repurchase agreements
|
$
|
118,293
|
|
|
$
|
84,486
|
|
Federal funds purchased
|
2,100
|
|
|
2,450
|
|
Advances from the FHLB
|
—
|
|
|
81,198
|
|
Advances from the federal discount window
|
35,000
|
|
|
—
|
|
Other short-term borrowings
|
12,479
|
|
|
14,492
|
|
Total
|
$
|
167,872
|
|
|
$
|
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 the years ended December 31, 2020, December 31, 2019 and December 31, 2018, were as follows, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Maximum month-end balance
|
$
|
380,360
|
|
|
$
|
226,096
|
|
|
$
|
229,890
|
|
Average month-end balance
|
157,348
|
|
|
128,098
|
|
|
152,391
|
|
Weighted average interest rate for the year
|
0.39
|
%
|
|
1.38
|
%
|
|
1.19
|
%
|
Weighted average interest rate at year-end
|
0.18
|
%
|
|
1.21
|
%
|
|
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.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Advances from the FHLB; weighted average interest rates were 3.03% and 4.08% at December 31, 2020 and 2019, respectively
|
$
|
1,018
|
|
|
$
|
2,835
|
|
Paycheck Protection Program Liquidity Fund
|
188,872
|
|
|
—
|
|
Trust preferred securities
|
146,323
|
|
|
145,343
|
|
|
|
|
|
Note payable to unaffiliated bank
|
44,417
|
|
|
51,417
|
|
Contracts payable for purchase of real estate and other assets
|
1,983
|
|
|
1,892
|
|
Subordinated notes
|
74,429
|
|
|
74,286
|
|
|
|
|
|
Total
|
$
|
457,042
|
|
|
$
|
275,773
|
|
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.
A schedule of Heartland’s trust preferred offerings outstanding, as of December 31, 2020, were as follows, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
Issued
|
|
Interest
Rate
|
|
Interest Rate as
of 12/31/20(1)
|
|
Maturity
Date
|
|
Callable
Date
|
|
|
|
|
|
|
|
|
|
|
|
Heartland Financial Statutory Trust IV
|
$
|
10,310
|
|
|
2.75% over LIBOR
|
|
2.98%
|
(2)
|
|
03/17/2034
|
|
03/17/2021
|
Heartland Financial Statutory Trust V
|
20,619
|
|
|
1.33% over LIBOR
|
|
1.57%
|
|
|
04/07/2036
|
|
04/07/2021
|
Heartland Financial Statutory Trust VI
|
20,619
|
|
|
1.48% over LIBOR
|
|
1.70%
|
(3)
|
|
09/15/2037
|
|
03/15/2021
|
Heartland Financial Statutory Trust VII
|
18,042
|
|
|
1.48% over LIBOR
|
|
1.71%
|
(4)
|
|
09/01/2037
|
|
03/01/2021
|
Morrill Statutory Trust I
|
9,182
|
|
|
3.25% over LIBOR
|
|
3.50%
|
|
|
12/26/2032
|
|
03/26/2021
|
Morrill Statutory Trust II
|
8,865
|
|
|
2.85% over LIBOR
|
|
3.08%
|
|
|
12/17/2033
|
|
03/17/2021
|
Sheboygan Statutory Trust I
|
6,615
|
|
|
2.95% over LIBOR
|
|
3.18%
|
|
|
09/17/2033
|
|
03/17/2021
|
CBNM Capital Trust I
|
4,458
|
|
|
3.25% over LIBOR
|
|
3.47%
|
|
|
12/15/2034
|
|
03/15/2021
|
Citywide Capital Trust III
|
6,494
|
|
|
2.80% over LIBOR
|
|
3.01%
|
|
|
12/19/2033
|
|
04/23/2021
|
Citywide Capital Trust IV
|
4,353
|
|
|
2.20% over LIBOR
|
|
2.41%
|
|
|
09/30/2034
|
|
05/23/2021
|
Citywide Capital Trust V
|
11,973
|
|
|
1.54% over LIBOR
|
|
1.76%
|
|
|
07/25/2036
|
|
03/15/2021
|
OCGI Statutory Trust III
|
3,004
|
|
|
3.65% over LIBOR
|
|
3.89%
|
(5)
|
|
09/30/2032
|
|
03/30/2021
|
OCGI Capital Trust IV
|
5,399
|
|
|
2.50% over LIBOR
|
|
2.72%
|
(6)
|
|
12/15/2034
|
|
03/15/2021
|
BVBC Capital Trust II
|
7,238
|
|
|
3.25% over LIBOR
|
|
3.46%
|
|
|
04/24/2033
|
|
04/24/2021
|
BVBC Capital Trust III
|
9,226
|
|
|
1.60% over LIBOR
|
|
1.85%
|
|
|
09/30/2035
|
|
03/30/2021
|
Total trust preferred offerings
|
146,397
|
|
|
|
|
|
|
|
|
|
|
Less: deferred issuance costs
|
(74)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
146,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
Future payments at December 31, 2020, for other borrowings at their maturity date follow in the table below, in thousands.
|
|
|
|
|
|
2021
|
$
|
24,656
|
|
2022
|
191,830
|
|
2023
|
3,037
|
|
2024
|
77,542
|
|
2025
|
3,002
|
|
Thereafter
|
156,975
|
|
Total
|
$
|
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.
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:
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|
Notional
Amount
|
|
Fair
Value
|
|
Balance Sheet
Category
|
|
Receive
Rate
|
|
Weighted Average
Pay Rate
|
|
Maturity
|
December 31, 2020
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
$
|
25,000
|
|
|
$
|
(127)
|
|
|
Other Liabilities
|
|
0.229
|
%
|
|
2.255
|
%
|
|
03/17/2021
|
|
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|
|
|
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|
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|
|
Interest rate swap
|
21,667
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|
|
(91)
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|
|
Other Liabilities
|
|
2.649
|
|
|
3.674
|
|
|
05/10/2021
|
Interest rate swap
|
22,750
|
|
|
(2,220)
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|
|
Other Liabilities
|
|
2.643
|
|
|
5.425
|
|
|
07/24/2028
|
Interest rate swap
|
20,000
|
|
|
(1,482)
|
|
|
Other Liabilities
|
|
0.217
|
|
|
2.390
|
|
|
06/15/2024
|
Interest rate swap
|
20,000
|
|
|
(1,385)
|
|
|
Other Liabilities
|
|
0.225
|
|
|
2.352
|
|
|
03/01/2024
|
Interest rate swap
|
6,000
|
|
|
(50)
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|
|
Other Liabilities
|
|
0.217
|
|
|
1.866
|
|
|
06/15/2021
|
Interest rate swap
|
3,000
|
|
|
(25)
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|
|
Other Liabilities
|
|
0.241
|
|
|
1.878
|
|
|
06/30/2021
|
December 31, 2019
|
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|
|
|
|
|
|
|
|
|
Interest rate swap
|
$
|
25,000
|
|
|
$
|
(167)
|
|
|
Other Liabilities
|
|
1.900
|
%
|
|
2.255
|
%
|
|
03/17/2021
|
Interest rate swap
|
20,000
|
|
|
(67)
|
|
|
Other Liabilities
|
|
2.043
|
|
|
3.355
|
|
|
01/07/2020
|
Interest rate swap
|
25,667
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|
|
135
|
|
|
Other Assets
|
|
4.215
|
|
|
3.674
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|
|
05/10/2021
|
Interest rate swap
|
25,750
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|
|
(1,384)
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|
|
Other Liabilities
|
|
4.280
|
|
|
5.425
|
|
|
07/24/2028
|
Interest rate swap
|
20,000
|
|
|
(614)
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|
|
Other Liabilities
|
|
1.894
|
|
|
2.390
|
|
|
06/15/2024
|
Interest rate swap
|
20,000
|
|
|
(561)
|
|
|
Other Liabilities
|
|
1.907
|
|
|
2.352
|
|
|
03/01/2024
|
Interest rate swap
|
6,000
|
|
|
(15)
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|
|
Other Liabilities
|
|
1.894
|
|
|
1.866
|
|
|
06/15/2021
|
Interest rate swap
|
3,000
|
|
|
(9)
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|
|
Other Liabilities
|
|
1.831
|
|
|
1.878
|
|
|
06/30/2021
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|
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:
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|
|
Effective Portion
|
|
Ineffective Portion
|
|
Recognized in OCI
|
|
Reclassified from AOCI into Income
|
|
Recognized in Income on Derivatives
|
|
Amount of Gain (Loss)
|
|
Category
|
|
Amount of Gain (Loss)
|
|
Category
|
|
Amount of Gain (Loss)
|
December 31, 2020
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|
Interest rate swap
|
$
|
(2,698)
|
|
|
Interest expense
|
|
$
|
1,794
|
|
|
Other income
|
|
$
|
—
|
|
December 31, 2019
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|
Interest rate swap
|
$
|
(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.
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:
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|
|
|
|
|
|
|
|
|
Notional Amount
|
|
Fair Value
|
|
Balance Sheet Category
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
Fair value hedges
|
$
|
20,841
|
|
|
$
|
(2,480)
|
|
|
Other liabilities
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Fair value hedges
|
$
|
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:
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|
|
|
|
|
|
|
|
|
Amount of Gain (Loss)
|
|
Income Statement Category
|
December 31, 2020
|
|
|
|
Fair value hedges
|
$
|
(1,227)
|
|
|
Interest income
|
December 31, 2019
|
|
|
|
Fair value hedges
|
$
|
(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:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount
|
|
Fair Value
|
|
Balance Sheet Category
|
December 31, 2020
|
|
|
|
|
|
Embedded derivatives
|
$
|
9,198
|
|
|
$
|
680
|
|
|
Other assets
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
Embedded derivatives
|
$
|
9,627
|
|
|
$
|
465
|
|
|
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
|
$
|
215
|
|
|
Other noninterest income
|
December 31, 2019
|
|
|
|
Embedded derivatives
|
$
|
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:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
Amount
|
|
Fair
Value
|
|
Balance Sheet
Category
|
|
Weighted
Average
Receive
Rate
|
|
Weighted
Average
Pay
Rate
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
Customer interest rate swaps
|
|
$
|
440,719
|
|
|
$
|
43,422
|
|
|
Other Assets
|
|
4.46
|
%
|
|
2.46
|
%
|
Customer interest rate swaps
|
|
440,719
|
|
|
(43,422)
|
|
|
Other Liabilities
|
|
2.46
|
%
|
|
4.46
|
%
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Customer interest rate swaps
|
|
$
|
374,191
|
|
|
$
|
16,927
|
|
|
Other Assets
|
|
4.68
|
%
|
|
4.05
|
%
|
Customer interest rate swaps
|
|
374,191
|
|
|
(16,927)
|
|
|
Other Liabilities
|
|
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:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
Amount
|
|
Fair
Value
|
|
Balance Sheet
Category
|
December 31, 2020
|
|
|
|
|
|
Interest rate lock commitments (mortgage)
|
$
|
42,078
|
|
|
$
|
1,827
|
|
|
Other Assets
|
|
|
|
|
|
|
Forward commitments
|
—
|
|
|
—
|
|
|
Other Assets
|
Forward commitments
|
86,500
|
|
|
(697)
|
|
|
Other Liabilities
|
Undesignated interest rate swaps
|
9,198
|
|
|
(680)
|
|
|
Other Liabilities
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
Interest rate lock commitments (mortgage)
|
$
|
20,356
|
|
|
$
|
681
|
|
|
Other Assets
|
Forward commitments
|
16,000
|
|
|
15
|
|
|
Other Assets
|
Forward commitments
|
36,500
|
|
|
(113)
|
|
|
Other Liabilities
|
Undesignated interest rate swaps
|
9,627
|
|
|
(465)
|
|
|
Other Liabilities
|
|
|
|
|
|
|
The table below identifies the income statement category of the gains and losses recognized in income on Heartland's other free standing derivative instruments not designated as hedging instruments for the years ended December 31, 2020, and December 31, 2019, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Statement Category
|
|
Year-to-Date
Gain (Loss)
Recognized
|
December 31, 2020
|
|
|
|
Interest rate lock commitments (mortgage)
|
Net gains on sale of loans held for sale
|
|
$
|
2,803
|
|
Forward commitments
|
Net gains on sale of loans held for sale
|
|
(15)
|
|
Forward commitments
|
Net gains on sale of loans held for sale
|
|
(585)
|
|
Undesignated interest rate swaps
|
Other noninterest income
|
|
(215)
|
|
December 31, 2019
|
|
|
|
Interest rate lock commitments (mortgage)
|
Net gains on sale of loans held for sale
|
|
$
|
18
|
|
Forward commitments
|
Net gains on sale of loans held for sale
|
|
15
|
|
Forward commitments
|
Net gains on sale of loans held for sale
|
|
287
|
|
Undesignated interest rate swaps
|
Other noninterest income
|
|
(66)
|
|
THIRTEEN
INCOME TAXES
The current income tax provision reflects the tax consequences of revenue and expenses currently taxable or deductible on various income tax returns for the year reported. The deferred income tax provision generally reflects the net change in deferred income tax assets and liabilities during the year, excluding any deferred income tax assets and liabilities of acquired businesses. The components of the provision for income taxes for the years ended December 31, 2020, 2019, and 2018 were as follows, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Current:
|
|
|
|
|
|
Federal
|
$
|
34,513
|
|
|
$
|
24,106
|
|
|
$
|
16,769
|
|
State
|
12,450
|
|
|
11,298
|
|
|
8,686
|
|
Total current expense
|
$
|
46,963
|
|
|
$
|
35,404
|
|
|
$
|
25,455
|
|
Deferred:
|
|
|
|
|
|
Federal
|
$
|
(8,498)
|
|
|
$
|
760
|
|
|
$
|
2,615
|
|
State
|
(2,412)
|
|
|
(1,174)
|
|
|
145
|
|
Total deferred expense (benefit)
|
(10,910)
|
|
|
(414)
|
|
|
2,760
|
|
Total income tax expense
|
$
|
36,053
|
|
|
$
|
34,990
|
|
|
$
|
28,215
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Tax effect of net unrealized loss on derivatives reflected in stockholders’ equity
|
$
|
1,130
|
|
|
$
|
563
|
|
|
|
|
|
Allowance for credit losses
|
33,393
|
|
|
17,686
|
|
Deferred compensation
|
9,623
|
|
|
8,071
|
|
|
|
|
|
Net operating loss carryforwards
|
17,585
|
|
|
18,459
|
|
|
|
|
|
|
|
|
|
Tax credit projects
|
4,746
|
|
|
4,252
|
|
|
|
|
|
Deferred loan fees
|
3,496
|
|
|
—
|
|
Other
|
5,563
|
|
|
4,754
|
|
Total deferred tax assets
|
75,536
|
|
|
53,785
|
|
Valuation allowance for deferred tax assets
|
(12,828)
|
|
|
(12,379)
|
|
Total deferred tax assets after valuation allowance
|
$
|
62,708
|
|
|
$
|
41,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Tax effect of net unrealized gain on securities carried at fair value reflected in stockholders’ equity
|
$
|
26,858
|
|
|
$
|
279
|
|
|
|
|
|
Securities
|
4,914
|
|
|
4,240
|
|
Premises, furniture and equipment
|
8,311
|
|
|
6,232
|
|
|
|
|
|
|
|
|
|
Purchase accounting
|
5,326
|
|
|
7,824
|
|
Prepaid expenses
|
2,675
|
|
|
2,176
|
|
|
|
|
|
Deferred loan costs
|
2,597
|
|
|
3,342
|
|
Other
|
3,905
|
|
|
3,713
|
|
Total deferred tax liabilities
|
$
|
54,586
|
|
|
$
|
27,806
|
|
Net deferred tax assets
|
$
|
8,122
|
|
|
$
|
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.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Computed "expected" tax on net income
|
$
|
36,538
|
|
|
$
|
38,665
|
|
|
$
|
30,495
|
|
Increase (decrease) resulting from:
|
|
|
|
|
|
Nontaxable interest income
|
(4,011)
|
|
|
(3,281)
|
|
|
(4,423)
|
|
State income taxes, net of federal tax benefit
|
7,930
|
|
|
8,509
|
|
|
6,976
|
|
|
|
|
|
|
|
Tax credits
|
(4,521)
|
|
|
(6,860)
|
|
|
(4,085)
|
|
Valuation allowance
|
(374)
|
|
|
(1,648)
|
|
|
23
|
|
Excess tax expense/(benefit) on stock compensation
|
80
|
|
|
(229)
|
|
|
(657)
|
|
|
|
|
|
|
|
Other
|
411
|
|
|
(166)
|
|
|
(114)
|
|
Income taxes
|
$
|
36,053
|
|
|
$
|
34,990
|
|
|
$
|
28,215
|
|
Effective tax rates
|
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.
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
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Shares
|
|
Weighted-Average Grant Date Fair Value
|
|
Shares
|
|
Weighted-Average Grant Date Fair Value
|
|
Shares
|
|
Weighted-Average Grant Date Fair Value
|
Outstanding at January 1
|
254,383
|
|
|
$
|
46.76
|
|
|
266,995
|
|
|
$
|
43.89
|
|
|
301,578
|
|
|
$
|
34.74
|
|
Granted
|
232,586
|
|
|
32.06
|
|
|
162,465
|
|
|
45.09
|
|
|
123,711
|
|
|
55.13
|
|
Vested
|
(119,916)
|
|
|
44.47
|
|
|
(148,158)
|
|
|
39.27
|
|
|
(127,744)
|
|
|
32.73
|
|
Forfeited
|
(18,778)
|
|
|
46.10
|
|
|
(26,919)
|
|
|
49.20
|
|
|
(30,550)
|
|
|
45.69
|
|
Outstanding at December 31
|
348,275
|
|
|
$
|
38.22
|
|
|
254,383
|
|
|
$
|
46.76
|
|
|
266,995
|
|
|
$
|
43.89
|
|
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.
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).
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
For Capital
Adequacy Purposes
|
|
To Be Well Capitalized Under Prompt Corrective Action Provisions
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
As of December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
$
|
1,739,048
|
|
|
14.71
|
%
|
|
$
|
945,523
|
|
|
8.00
|
%
|
|
N/A
|
|
|
Dubuque Bank and Trust Company
|
177,782
|
|
|
13.94
|
|
|
102,018
|
|
|
8.00
|
|
|
$
|
127,523
|
|
|
10.00
|
%
|
Illinois Bank & Trust
|
133,674
|
|
|
13.13
|
|
|
81,432
|
|
|
8.00
|
|
|
101,790
|
|
|
10.00
|
|
Wisconsin Bank & Trust
|
121,899
|
|
|
14.35
|
|
|
67,956
|
|
|
8.00
|
|
|
84,945
|
|
|
10.00
|
|
New Mexico Bank & Trust
|
177,708
|
|
|
13.40
|
|
|
106,120
|
|
|
8.00
|
|
|
132,649
|
|
|
10.00
|
|
Arizona Bank & Trust
|
112,589
|
|
|
12.16
|
|
|
74,056
|
|
|
8.00
|
|
|
92,571
|
|
|
10.00
|
|
Rocky Mountain Bank
|
56,872
|
|
|
13.49
|
|
|
33,732
|
|
|
8.00
|
|
|
42,166
|
|
|
10.00
|
|
Citywide Banks
|
258,419
|
|
|
15.30
|
|
|
135,097
|
|
|
8.00
|
|
|
168,871
|
|
|
10.00
|
|
Minnesota Bank & Trust
|
85,566
|
|
|
13.11
|
|
|
52,206
|
|
|
8.00
|
|
|
65,258
|
|
|
10.00
|
|
Bank of Blue Valley
|
157,093
|
|
|
17.40
|
|
|
72,240
|
|
|
8.00
|
|
|
90,300
|
|
|
10.00
|
|
Premier Valley Bank
|
93,032
|
|
|
12.62
|
|
|
58,968
|
|
|
8.00
|
|
|
73,710
|
|
|
10.00
|
|
First Bank & Trust
|
304,397
|
|
|
15.34
|
|
|
158,705
|
|
|
8.00
|
|
|
198,381
|
|
|
10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital (to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
$
|
1,401,131
|
|
|
11.85
|
%
|
|
$
|
709,142
|
|
|
6.00
|
%
|
|
N/A
|
|
|
Dubuque Bank and Trust Company
|
164,316
|
|
|
12.89
|
|
|
76,514
|
|
|
6.00
|
|
|
$
|
102,018
|
|
|
8.00
|
%
|
Illinois Bank & Trust
|
121,513
|
|
|
11.94
|
|
|
61,074
|
|
|
6.00
|
|
|
81,432
|
|
|
8.00
|
|
Wisconsin Bank & Trust
|
111,985
|
|
|
13.18
|
|
|
50,967
|
|
|
6.00
|
|
|
67,956
|
|
|
8.00
|
|
New Mexico Bank & Trust
|
161,750
|
|
|
12.19
|
|
|
79,590
|
|
|
6.00
|
|
|
106,120
|
|
|
8.00
|
|
Arizona Bank & Trust
|
102,882
|
|
|
11.11
|
|
|
55,542
|
|
|
6.00
|
|
|
74,056
|
|
|
8.00
|
|
Rocky Mountain Bank
|
51,597
|
|
|
12.24
|
|
|
25,299
|
|
|
6.00
|
|
|
33,732
|
|
|
8.00
|
|
Citywide Banks
|
237,295
|
|
|
14.05
|
|
|
101,323
|
|
|
6.00
|
|
|
135,097
|
|
|
8.00
|
|
Minnesota Bank & Trust
|
78,661
|
|
|
12.05
|
|
|
39,155
|
|
|
6.00
|
|
|
52,206
|
|
|
8.00
|
|
Bank of Blue Valley
|
145,795
|
|
|
16.15
|
|
|
54,180
|
|
|
6.00
|
|
|
72,240
|
|
|
8.00
|
|
Premier Valley Bank
|
85,456
|
|
|
11.59
|
|
|
44,226
|
|
|
6.00
|
|
|
58,968
|
|
|
8.00
|
|
First Bank & Trust
|
279,521
|
|
|
14.09
|
|
|
119,029
|
|
|
6.00
|
|
|
158,705
|
|
|
8.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
For Capital
Adequacy Purposes
|
|
To Be Well Capitalized Under Prompt Corrective Action Provisions
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
As of December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1 (to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
$
|
1,290,426
|
|
|
10.92
|
%
|
|
$
|
531,857
|
|
|
4.50
|
%
|
|
N/A
|
|
|
Dubuque Bank and Trust Company
|
164,316
|
|
|
12.89
|
|
|
57,385
|
|
|
4.50
|
|
|
$
|
82,890
|
|
|
6.50
|
%
|
Illinois Bank & Trust
|
121,513
|
|
|
11.94
|
|
|
45,806
|
|
|
4.50
|
|
|
66,164
|
|
|
6.50
|
|
Wisconsin Bank & Trust
|
111,985
|
|
|
13.18
|
|
|
38,225
|
|
|
4.50
|
|
|
55,214
|
|
|
6.50
|
|
New Mexico Bank & Trust
|
161,750
|
|
|
12.19
|
|
|
59,692
|
|
|
4.50
|
|
|
86,222
|
|
|
6.50
|
|
Arizona Bank & Trust
|
102,882
|
|
|
11.11
|
|
|
41,657
|
|
|
4.50
|
|
|
60,171
|
|
|
6.50
|
|
Rocky Mountain Bank
|
51,597
|
|
|
12.24
|
|
|
18,974
|
|
|
4.50
|
|
|
27,408
|
|
|
6.50
|
|
Citywide Banks
|
237,295
|
|
|
14.05
|
|
|
75,992
|
|
|
4.50
|
|
|
109,766
|
|
|
6.50
|
|
Minnesota Bank & Trust
|
78,661
|
|
|
12.05
|
|
|
29,366
|
|
|
4.50
|
|
|
42,418
|
|
|
6.50
|
|
Bank of Blue Valley
|
145,795
|
|
|
16.15
|
|
|
40,635
|
|
|
4.50
|
|
|
58,695
|
|
|
6.50
|
|
Premier Valley Bank
|
85,456
|
|
|
11.59
|
|
|
33,170
|
|
|
4.50
|
|
|
47,912
|
|
|
6.50
|
|
First Bank & Trust
|
279,521
|
|
|
14.09
|
|
|
89,271
|
|
|
4.50
|
|
|
128,948
|
|
|
6.50
|
|
Tier 1 Capital (to Average Assets)
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
$
|
1,401,131
|
|
|
9.02
|
%
|
|
$
|
621,275
|
|
|
4.00
|
%
|
|
N/A
|
|
|
Dubuque Bank and Trust Company
|
164,316
|
|
|
8.52
|
|
|
77,150
|
|
|
4.00
|
|
|
$
|
96,437
|
|
|
5.00
|
%
|
Illinois Bank & Trust
|
121,513
|
|
|
8.22
|
|
|
59,129
|
|
|
4.00
|
|
|
73,912
|
|
|
5.00
|
|
Wisconsin Bank & Trust
|
111,985
|
|
|
9.67
|
|
|
46,337
|
|
|
4.00
|
|
|
57,921
|
|
|
5.00
|
|
New Mexico Bank & Trust
|
161,750
|
|
|
8.11
|
|
|
79,764
|
|
|
4.00
|
|
|
99,705
|
|
|
5.00
|
|
Arizona Bank & Trust
|
102,882
|
|
|
9.09
|
|
|
45,295
|
|
|
4.00
|
|
|
56,619
|
|
|
5.00
|
|
Rocky Mountain Bank
|
51,597
|
|
|
8.41
|
|
|
24,552
|
|
|
4.00
|
|
|
30,690
|
|
|
5.00
|
|
Citywide Banks
|
237,295
|
|
|
9.67
|
|
|
98,182
|
|
|
4.00
|
|
|
122,728
|
|
|
5.00
|
|
Minnesota Bank & Trust
|
78,661
|
|
|
8.68
|
|
|
36,251
|
|
|
4.00
|
|
|
45,313
|
|
|
5.00
|
|
Bank of Blue Valley
|
145,795
|
|
|
10.93
|
|
|
53,343
|
|
|
4.00
|
|
|
66,679
|
|
|
5.00
|
|
Premier Valley Bank
|
85,456
|
|
|
8.57
|
|
|
39,893
|
|
|
4.00
|
|
|
49,866
|
|
|
5.00
|
|
First Bank & Trust
|
279,521
|
|
|
17.63
|
|
|
63,407
|
|
|
4.00
|
|
|
79,259
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
For Capital
Adequacy Purposes
|
|
To Be Well Capitalized Under Prompt Corrective Action Provisions
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
$
|
1,388,511
|
|
|
13.75
|
%
|
|
$
|
807,881
|
|
|
8.00
|
%
|
|
N/A
|
|
|
Dubuque Bank and Trust Company
|
168,959
|
|
|
14.55
|
|
|
92,872
|
|
|
8.00
|
|
|
$
|
116,090
|
|
|
10.00
|
%
|
Illinois Bank & Trust
|
107,678
|
|
|
10.54
|
|
|
81,731
|
|
|
8.00
|
|
|
102,164
|
|
|
10.00
|
|
Wisconsin Bank & Trust
|
117,355
|
|
|
14.13
|
|
|
66,431
|
|
|
8.00
|
|
|
83,039
|
|
|
10.00
|
|
New Mexico Bank & Trust
|
157,555
|
|
|
12.33
|
|
|
102,193
|
|
|
8.00
|
|
|
127,741
|
|
|
10.00
|
|
Arizona Bank & Trust
|
75,498
|
|
|
11.19
|
|
|
53,982
|
|
|
8.00
|
|
|
67,477
|
|
|
10.00
|
|
Rocky Mountain Bank
|
53,266
|
|
|
13.80
|
|
|
30,868
|
|
|
8.00
|
|
|
38,585
|
|
|
10.00
|
|
Citywide Banks
|
240,735
|
|
|
13.88
|
|
|
138,704
|
|
|
8.00
|
|
|
173,380
|
|
|
10.00
|
|
Minnesota Bank & Trust
|
76,400
|
|
|
13.50
|
|
|
45,260
|
|
|
8.00
|
|
|
56,575
|
|
|
10.00
|
|
Bank of Blue Valley
|
145,256
|
|
|
14.50
|
|
|
80,153
|
|
|
8.00
|
|
|
100,191
|
|
|
10.00
|
|
Premier Valley Bank
|
91,257
|
|
|
13.21
|
|
|
55,273
|
|
|
8.00
|
|
|
69,091
|
|
|
10.00
|
|
First Bank & Trust
|
109,545
|
|
|
14.11
|
|
|
62,128
|
|
|
8.00
|
|
|
77,660
|
|
|
10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
For Capital
Adequacy Purposes
|
|
To Be Well Capitalized Under Prompt Corrective Action Provisions
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital (to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
$
|
1,243,582
|
|
|
12.31
|
%
|
|
$
|
605,911
|
|
|
6.00
|
%
|
|
N/A
|
|
|
Dubuque Bank and Trust Company
|
159,579
|
|
|
13.75
|
|
|
69,654
|
|
|
6.00
|
|
|
$
|
92,872
|
|
|
8.00
|
%
|
Illinois Bank & Trust
|
103,011
|
|
|
10.08
|
|
|
61,298
|
|
|
6.00
|
|
|
81,731
|
|
|
8.00
|
|
Wisconsin Bank & Trust
|
109,939
|
|
|
13.24
|
|
|
49,824
|
|
|
6.00
|
|
|
66,431
|
|
|
8.00
|
|
New Mexico Bank & Trust
|
148,227
|
|
|
11.60
|
|
|
76,645
|
|
|
6.00
|
|
|
102,193
|
|
|
8.00
|
|
Arizona Bank & Trust
|
69,648
|
|
|
10.32
|
|
|
40,486
|
|
|
6.00
|
|
|
53,982
|
|
|
8.00
|
|
Rocky Mountain Bank
|
48,692
|
|
|
12.62
|
|
|
23,151
|
|
|
6.00
|
|
|
30,868
|
|
|
8.00
|
|
Citywide Banks
|
231,085
|
|
|
13.33
|
|
|
104,028
|
|
|
6.00
|
|
|
138,704
|
|
|
8.00
|
|
Minnesota Bank & Trust
|
70,235
|
|
|
12.41
|
|
|
33,945
|
|
|
6.00
|
|
|
45,260
|
|
|
8.00
|
|
Bank of Blue Valley
|
140,195
|
|
|
13.99
|
|
|
60,115
|
|
|
6.00
|
|
|
80,153
|
|
|
8.00
|
|
Premier Valley Bank
|
87,335
|
|
|
12.64
|
|
|
41,455
|
|
|
6.00
|
|
|
55,273
|
|
|
8.00
|
|
First Bank & Trust
|
104,914
|
|
|
13.51
|
|
|
46,596
|
|
|
6.00
|
|
|
62,128
|
|
|
8.00
|
|
Common Equity Tier 1 (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
$
|
1,098,428
|
|
|
10.88
|
%
|
|
$
|
454,433
|
|
|
4.50
|
%
|
|
N/A
|
|
|
Dubuque Bank and Trust Company
|
159,579
|
|
|
13.75
|
|
|
52,241
|
|
|
4.50
|
|
|
$
|
75,459
|
|
|
6.50
|
%
|
Illinois Bank & Trust
|
103,011
|
|
|
10.08
|
|
|
45,974
|
|
|
4.50
|
|
|
66,407
|
|
|
6.50
|
|
Wisconsin Bank & Trust
|
109,939
|
|
|
13.24
|
|
|
37,368
|
|
|
4.50
|
|
|
53,976
|
|
|
6.50
|
|
New Mexico Bank & Trust
|
148,227
|
|
|
11.60
|
|
|
57,484
|
|
|
4.50
|
|
|
83,032
|
|
|
6.50
|
|
Arizona Bank & Trust
|
69,648
|
|
|
10.32
|
|
|
30,365
|
|
|
4.50
|
|
|
43,860
|
|
|
6.50
|
|
Rocky Mountain Bank
|
48,692
|
|
|
12.62
|
|
|
17,363
|
|
|
4.50
|
|
|
25,080
|
|
|
6.50
|
|
Citywide Banks
|
231,085
|
|
|
13.33
|
|
|
78,021
|
|
|
4.50
|
|
|
112,697
|
|
|
6.50
|
|
Minnesota Bank & Trust
|
70,235
|
|
|
12.41
|
|
|
25,459
|
|
|
4.50
|
|
|
36,774
|
|
|
6.50
|
|
Bank of Blue Valley
|
140,195
|
|
|
13.99
|
|
|
45,086
|
|
|
4.50
|
|
|
65,124
|
|
|
6.50
|
|
Premier Valley Bank
|
87,335
|
|
|
12.64
|
|
|
31,091
|
|
|
4.50
|
|
|
44,909
|
|
|
6.50
|
|
First Bank & Trust
|
104,914
|
|
|
13.51
|
|
|
34,947
|
|
|
4.50
|
|
|
50,479
|
|
|
6.50
|
|
Tier 1 Capital (to Average Assets)
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
$
|
1,243,582
|
|
|
10.10
|
%
|
|
$
|
492,725
|
|
|
4.00
|
%
|
|
N/A
|
|
|
Dubuque Bank and Trust Company
|
159,579
|
|
|
9.83
|
|
|
64,961
|
|
|
4.00
|
|
|
$
|
81,202
|
|
|
5.00
|
%
|
Illinois Bank & Trust
|
103,011
|
|
|
10.26
|
|
|
40,144
|
|
|
4.00
|
|
|
50,180
|
|
|
5.00
|
|
Wisconsin Bank & Trust
|
109,939
|
|
|
10.76
|
|
|
40,863
|
|
|
4.00
|
|
|
51,078
|
|
|
5.00
|
|
New Mexico Bank & Trust
|
148,227
|
|
|
9.11
|
|
|
65,076
|
|
|
4.00
|
|
|
81,345
|
|
|
5.00
|
|
Arizona Bank & Trust
|
69,648
|
|
|
9.87
|
|
|
28,235
|
|
|
4.00
|
|
|
35,293
|
|
|
5.00
|
|
Rocky Mountain Bank
|
48,692
|
|
|
9.22
|
|
|
21,132
|
|
|
4.00
|
|
|
26,415
|
|
|
5.00
|
|
Citywide Banks
|
231,085
|
|
|
10.66
|
|
|
86,732
|
|
|
4.00
|
|
|
108,416
|
|
|
5.00
|
|
Minnesota Bank & Trust
|
70,235
|
|
|
10.51
|
|
|
26,740
|
|
|
4.00
|
|
|
33,426
|
|
|
5.00
|
|
Bank of Blue Valley
|
140,195
|
|
|
11.07
|
|
|
50,638
|
|
|
4.00
|
|
|
63,297
|
|
|
5.00
|
|
Premier Valley Bank
|
87,335
|
|
|
10.43
|
|
|
33,487
|
|
|
4.00
|
|
|
41,859
|
|
|
5.00
|
|
First Bank & Trust
|
104,914
|
|
|
10.25
|
|
|
40,941
|
|
|
4.00
|
|
|
51,177
|
|
|
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.
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
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.
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.
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
|
$
|
2,026
|
|
|
$
|
2,026
|
|
|
$
|
—
|
|
|
$
|
—
|
|
U.S. agencies
|
166,779
|
|
|
—
|
|
|
166,779
|
|
|
—
|
|
Obligations of states and political subdivisions
|
1,635,227
|
|
|
—
|
|
|
1,635,227
|
|
|
—
|
|
Mortgage-backed securities - agency
|
1,355,270
|
|
|
—
|
|
|
1,355,270
|
|
|
—
|
|
Mortgage-backed securities - non-agency
|
1,449,116
|
|
|
—
|
|
|
1,449,116
|
|
|
—
|
|
Commercial mortgage-backed securities - agency
|
174,153
|
|
|
—
|
|
|
174,153
|
|
|
—
|
|
Commercial mortgage-backed securities - non-agency
|
252,767
|
|
|
—
|
|
|
252,767
|
|
|
—
|
|
Asset-backed securities
|
1,069,266
|
|
|
—
|
|
|
1,069,266
|
|
|
—
|
|
Corporate bonds
|
3,742
|
|
|
—
|
|
|
3,742
|
|
|
—
|
|
Equity securities with a readily determinable fair value
|
19,629
|
|
|
—
|
|
|
19,629
|
|
|
—
|
|
Derivative financial instruments(1)
|
44,102
|
|
|
—
|
|
|
44,102
|
|
|
—
|
|
Interest rate lock commitments
|
1,827
|
|
|
—
|
|
|
—
|
|
|
1,827
|
|
Forward commitments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total assets at fair value
|
$
|
6,173,904
|
|
|
$
|
2,026
|
|
|
$
|
6,170,051
|
|
|
$
|
1,827
|
|
Liabilities
|
|
|
|
|
|
|
|
Derivative financial instruments(2)
|
$
|
51,962
|
|
|
$
|
—
|
|
|
$
|
51,962
|
|
|
$
|
—
|
|
Forward commitments
|
697
|
|
|
—
|
|
|
697
|
|
|
—
|
|
Total liabilities at fair value
|
$
|
52,659
|
|
|
$
|
—
|
|
|
$
|
52,659
|
|
|
$
|
—
|
|
December 31, 2019
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
U.S. treasuries
|
$
|
8,503
|
|
|
$
|
8,503
|
|
|
$
|
—
|
|
|
$
|
—
|
|
U.S. agencies
|
184,676
|
|
|
—
|
|
|
184,676
|
|
|
—
|
|
Obligations of states and political subdivisions
|
707,190
|
|
|
—
|
|
|
707,190
|
|
|
—
|
|
Mortgage-backed securities - agency
|
766,726
|
|
|
—
|
|
|
766,726
|
|
|
—
|
|
Mortgage-backed securities - non-agency
|
430,497
|
|
|
—
|
|
|
430,497
|
|
|
—
|
|
Commercial mortgage-backed securities - agency
|
68,865
|
|
|
—
|
|
|
68,865
|
|
|
—
|
|
Commercial mortgage-backed securities - non-agency
|
436,325
|
|
|
—
|
|
|
436,325
|
|
|
—
|
|
Asset-backed securities
|
691,579
|
|
|
—
|
|
|
691,579
|
|
|
—
|
|
Corporate bonds
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Equity securities
|
18,435
|
|
|
—
|
|
|
18,435
|
|
|
—
|
|
Derivative financial instruments(1)
|
17,527
|
|
|
—
|
|
|
17,527
|
|
|
—
|
|
Interest rate lock commitments
|
681
|
|
|
—
|
|
|
—
|
|
|
681
|
|
Forward commitments
|
15
|
|
|
—
|
|
|
15
|
|
|
—
|
|
Total assets at fair value
|
$
|
3,331,019
|
|
|
$
|
8,503
|
|
|
$
|
3,321,835
|
|
|
$
|
681
|
|
Liabilities
|
|
|
|
|
|
|
|
Derivative financial instruments(2)
|
$
|
21,462
|
|
|
$
|
—
|
|
|
$
|
21,462
|
|
|
$
|
—
|
|
Forward commitments
|
113
|
|
|
—
|
|
|
113
|
|
|
—
|
|
Total liabilities at fair value
|
$
|
21,575
|
|
|
$
|
—
|
|
|
$
|
21,575
|
|
|
$
|
—
|
|
|
(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.
|
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
|
|
Total
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
(Gains)/Losses
|
Collateral dependent individually assessed loans:
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
11,256
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,256
|
|
|
$
|
451
|
|
Owner occupied commercial real estate
|
5,874
|
|
|
—
|
|
|
—
|
|
|
5,874
|
|
|
11,631
|
|
Non-owner occupied commercial real estate
|
4,907
|
|
|
—
|
|
|
—
|
|
|
4,907
|
|
|
—
|
|
Real estate construction
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Agricultural and agricultural real estate
|
12,451
|
|
|
—
|
|
|
—
|
|
|
12,451
|
|
|
—
|
|
Residential real estate
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total collateral dependent individually assessed loans
|
$
|
34,488
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
34,488
|
|
|
$
|
12,082
|
|
Loans held for sale
|
$
|
57,949
|
|
|
$
|
—
|
|
|
$
|
57,949
|
|
|
$
|
—
|
|
|
$
|
(982)
|
|
Other real estate owned
|
$
|
6,624
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,624
|
|
|
$
|
1,044
|
|
Premises, furniture and equipment held for sale
|
$
|
6,499
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,499
|
|
|
$
|
3,288
|
|
Servicing rights
|
$
|
5,189
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,189
|
|
|
$
|
1,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2019
|
|
Total
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
(Gains)/Losses
|
Collateral dependent impaired loans:
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
15,173
|
|
|
—
|
|
|
—
|
|
|
15,173
|
|
|
1,114
|
|
Owner occupied commercial real estate
|
1,352
|
|
|
—
|
|
|
—
|
|
|
1,352
|
|
|
—
|
|
Non-owner occupied commercial real estate
|
1,305
|
|
|
—
|
|
|
—
|
|
|
1,305
|
|
|
—
|
|
Real estate construction
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Agricultural and agricultural real estate
|
12,623
|
|
|
—
|
|
|
—
|
|
|
12,623
|
|
|
1,254
|
|
Residential real estate
|
4,978
|
|
|
—
|
|
|
—
|
|
|
4,978
|
|
|
82
|
|
Consumer
|
1,033
|
|
|
—
|
|
|
—
|
|
|
1,033
|
|
|
—
|
|
Total collateral dependent impaired loans
|
$
|
36,464
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
36,464
|
|
|
$
|
2,450
|
|
Loans held for sale
|
$
|
26,748
|
|
|
$
|
—
|
|
|
$
|
26,748
|
|
|
$
|
—
|
|
|
$
|
(980)
|
|
Other real estate owned
|
$
|
6,914
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,914
|
|
|
$
|
947
|
|
Premises, furniture and equipment held for sale
|
$
|
2,967
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,967
|
|
|
$
|
735
|
|
Servicing rights
|
$
|
5,621
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,621
|
|
|
$
|
911
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
Interest rate lock
commitments
|
$
|
1,827
|
|
|
Discounted cash flows
|
|
Closing ratio
|
|
0 - 99% (86%)(1)
|
Premises, furniture and equipment held for sale
|
6,499
|
|
|
Modified appraised value
|
|
Third party appraisal
|
|
(2)
|
|
|
|
|
Appraisal discount
|
|
0-10%(3)
|
Other real estate owned
|
6,624
|
|
|
Modified appraised value
|
|
Third party appraisal
|
|
(2)
|
|
|
|
|
Appraisal discounts
|
|
0-10%(3)
|
Servicing rights
|
5,189
|
|
|
Discounted cash flows
|
|
Third party valuation
|
|
(4)
|
|
|
|
|
|
|
|
Collateral dependent individually assessed loans:
|
|
|
|
|
|
|
|
Commercial and industrial
|
11,256
|
|
|
Modified appraised value
|
|
Third party appraisal
|
|
(2)
|
|
|
|
|
Appraisal discount
|
|
0-8%(3)
|
Owner occupied commercial real estate
|
5,874
|
|
|
Modified appraised value
|
|
Third party appraisal
|
|
(2)
|
|
|
|
|
Appraisal discount
|
|
0-12%(3)
|
Non-owner occupied commercial real estate
|
4,907
|
|
|
Modified appraised value
|
|
Third party appraisal
|
|
(2)
|
|
|
|
|
Appraisal discount
|
|
0-10%(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural and agricultural real estate
|
12,451
|
|
|
Modified appraised value
|
|
Third party appraisal
|
|
(2)
|
|
|
|
|
Appraisal discount
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at 12/31/19
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Range (Weighted Average)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate lock commitments
|
$
|
681
|
|
|
Discounted cash flows
|
|
Closing ratio
|
|
0 - 99% (90%)(1)
|
|
|
|
|
|
|
|
Premises, furniture and equipment held for sale
|
2,967
|
|
|
Modified appraised value
|
|
Third party appraisal
|
|
(2)
|
|
|
|
|
Appraisal discount
|
|
0-10%(3)
|
Other real estate owned
|
6,914
|
|
|
Modified appraised value
|
|
Third party appraisal
|
|
(2)
|
|
|
|
|
|
Appraisal discounts
|
|
0-10%(3)
|
Servicing rights
|
5,621
|
|
|
Discounted cash flows
|
|
Third party valuation
|
|
(4)
|
|
|
|
|
|
|
|
Collateral dependent impaired loans:
|
|
|
|
|
|
|
|
Commercial and industrial
|
15,173
|
|
|
Modified appraised value
|
|
Third party appraisal
|
|
(2)
|
|
|
|
|
Appraisal discount
|
|
0-25%(3)
|
Owner occupied commercial real estate
|
1,352
|
|
|
Modified appraised value
|
|
Third party appraisal
|
|
(2)
|
|
|
|
|
Appraisal discounts
|
|
0-14%(3)
|
Non-owner occupied commercial real estate
|
1,305
|
|
|
Modified appraised value
|
|
Third party appraisal
|
|
(2)
|
|
|
|
|
Appraisal discounts
|
|
0-14%(3)
|
Real estate construction
|
—
|
|
|
Modified appraised value
|
|
Third party appraisal
|
|
(2)
|
|
|
|
|
|
Appraisal discount
|
|
0-14%(3)
|
Agricultural and agricultural real estate
|
12,623
|
|
|
Modified appraised value
|
|
Third party appraisal
|
|
(2)
|
|
|
|
|
Appraisal discount
|
|
0-15%(3)
|
Residential real estate
|
4,978
|
|
|
Modified appraised value
|
|
Third party appraisal
|
|
(2)
|
|
|
|
|
|
Appraisal discount
|
|
0-25%(5)
|
Consumer
|
1,033
|
|
|
Modified appraised value
|
|
Third party valuation
|
|
(2)
|
|
|
|
|
Valuation discount
|
|
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
|
|
December 31, 2020
|
|
December 31, 2019
|
Balance at January 1,
|
$
|
681
|
|
|
$
|
725
|
|
Acquired interest rate lock commitments
|
—
|
|
|
—
|
|
Total gains (losses), net, included in earnings
|
2,803
|
|
|
18
|
|
Issuances
|
17,221
|
|
|
10,702
|
|
Settlements
|
(18,878)
|
|
|
(10,764)
|
|
Balance at period end,
|
$
|
1,827
|
|
|
$
|
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,
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
December 31, 2020
|
|
Carrying
Amount
|
|
Estimated
Fair
Value
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
337,903
|
|
|
$
|
337,903
|
|
|
$
|
337,903
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Time deposits in other financial institutions
|
3,129
|
|
|
3,129
|
|
|
3,129
|
|
|
—
|
|
|
—
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carried at fair value
|
6,127,975
|
|
|
6,127,975
|
|
|
2,026
|
|
|
6,125,949
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity
|
88,839
|
|
|
100,041
|
|
|
—
|
|
|
100,041
|
|
|
—
|
|
Other investments
|
75,253
|
|
|
75,523
|
|
|
—
|
|
|
75,523
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
57,949
|
|
|
57,949
|
|
|
—
|
|
|
57,949
|
|
|
—
|
|
Loans, net:
|
|
|
|
|
|
|
|
|
|
Commercial
|
2,495,981
|
|
|
2,391,041
|
|
|
—
|
|
|
2,379,785
|
|
|
11,256
|
|
PPP
|
957,785
|
|
|
957,785
|
|
|
—
|
|
|
957,785
|
|
|
—
|
|
Owner occupied commercial real estate
|
1,756,405
|
|
|
1,745,397
|
|
|
—
|
|
|
1,739,523
|
|
|
5,874
|
|
Non-owner occupied commercial real estate
|
1,900,608
|
|
|
1,892,213
|
|
|
—
|
|
|
1,887,306
|
|
|
4,907
|
|
Real estate construction
|
843,140
|
|
|
849,224
|
|
|
—
|
|
|
849,224
|
|
|
—
|
|
Agricultural and agricultural real estate
|
707,397
|
|
|
697,729
|
|
|
—
|
|
|
685,278
|
|
|
12,451
|
|
Residential real estate
|
828,507
|
|
|
828,366
|
|
|
—
|
|
|
828,366
|
|
|
—
|
|
Consumer
|
401,622
|
|
|
407,914
|
|
|
—
|
|
|
407,914
|
|
|
—
|
|
Total Loans, net
|
9,891,445
|
|
|
9,769,669
|
|
|
—
|
|
|
9,735,181
|
|
|
34,488
|
|
|
|
|
|
|
|
|
|
|
|
Cash surrender value on life insurance
|
187,664
|
|
|
187,664
|
|
|
—
|
|
|
187,664
|
|
|
—
|
|
Derivative financial instruments(1)
|
44,102
|
|
|
44,102
|
|
|
—
|
|
|
44,102
|
|
|
—
|
|
Interest rate lock commitments
|
1,827
|
|
|
1,827
|
|
|
—
|
|
|
—
|
|
|
1,827
|
|
Forward commitments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
5,688,810
|
|
|
5,688,810
|
|
|
—
|
|
|
5,688,810
|
|
|
—
|
|
Savings deposits
|
8,019,704
|
|
|
8,019,704
|
|
|
—
|
|
|
8,019,704
|
|
|
—
|
|
Time deposits
|
1,271,391
|
|
|
1,273,468
|
|
|
—
|
|
|
1,273,468
|
|
|
—
|
|
Short term borrowings
|
167,872
|
|
|
167,872
|
|
|
—
|
|
|
167,872
|
|
|
—
|
|
Other borrowings
|
457,042
|
|
|
458,806
|
|
|
—
|
|
|
458,806
|
|
|
—
|
|
Derivative financial instruments(2)
|
51,962
|
|
|
51,962
|
|
|
—
|
|
|
51,962
|
|
|
—
|
|
Forward commitments
|
697
|
|
|
697
|
|
|
—
|
|
|
697
|
|
|
—
|
|
|
(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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
December 31, 2019
|
|
|
|
Carrying
Amount
|
|
Estimated
Fair
Value
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
378,734
|
|
|
$
|
378,734
|
|
|
$
|
378,734
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Time deposits in other financial institutions
|
3,564
|
|
|
3,564
|
|
|
3,564
|
|
|
—
|
|
|
—
|
|
|
|
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carried at fair value
|
3,312,796
|
|
|
3,304,293
|
|
|
—
|
|
|
3,304,293
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity
|
91,324
|
|
|
100,484
|
|
|
—
|
|
|
100,484
|
|
|
—
|
|
|
|
|
|
Other investments
|
31,321
|
|
|
31,321
|
|
|
—
|
|
|
31,321
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
26,748
|
|
|
26,748
|
|
|
—
|
|
|
26,748
|
|
|
—
|
|
|
|
|
|
Loans, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
2,500,022
|
|
|
2,621,253
|
|
|
—
|
|
|
2,606,080
|
|
|
15,173
|
|
|
|
|
|
PPP
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
Owner occupied commercial real estate
|
1,464,490
|
|
|
1,409,388
|
|
|
—
|
|
|
1,408,036
|
|
|
1,352
|
|
|
|
|
|
Non-owner occupied commercial real estate
|
1,488,075
|
|
|
1,397,527
|
|
|
—
|
|
|
1,396,222
|
|
|
1,305
|
|
|
|
|
|
Real estate construction
|
1,015,482
|
|
|
924,041
|
|
|
—
|
|
|
924,041
|
|
|
—
|
|
|
|
|
|
Agricultural and agricultural real estate
|
560,164
|
|
|
576,821
|
|
|
—
|
|
|
564,198
|
|
|
12,623
|
|
|
|
|
|
Residential real estate
|
830,773
|
|
|
843,343
|
|
|
—
|
|
|
838,365
|
|
|
4,978
|
|
|
|
|
|
Consumer
|
438,516
|
|
|
470,972
|
|
|
—
|
|
|
469,939
|
|
|
1,033
|
|
|
|
|
|
Total Loans, net
|
8,297,522
|
|
|
8,243,345
|
|
|
—
|
|
|
8,206,881
|
|
|
36,464
|
|
|
|
|
|
Cash surrender value on life insurance
|
171,625
|
|
|
171,625
|
|
|
—
|
|
|
171,625
|
|
|
—
|
|
|
|
|
|
Derivative financial instruments(1)
|
17,527
|
|
|
17,527
|
|
|
—
|
|
|
17,527
|
|
|
—
|
|
|
|
|
|
Interest rate lock commitments
|
681
|
|
|
637
|
|
|
—
|
|
|
—
|
|
|
637
|
|
|
|
|
|
Forward commitments
|
—
|
|
|
15
|
|
|
—
|
|
|
15
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
3,543,863
|
|
|
3,543,863
|
|
|
—
|
|
|
3,543,863
|
|
|
—
|
|
|
|
|
|
Savings deposits
|
6,307,425
|
|
|
6,307,425
|
|
|
—
|
|
|
6,307,425
|
|
|
—
|
|
|
|
|
|
Time deposits
|
1,193,043
|
|
|
1,193,043
|
|
|
—
|
|
|
1,193,043
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term borrowings
|
182,626
|
|
|
182,626
|
|
|
—
|
|
|
182,626
|
|
|
—
|
|
|
|
|
|
Other borrowings
|
275,773
|
|
|
278,169
|
|
|
—
|
|
|
278,169
|
|
|
—
|
|
|
|
|
|
Derivative financial instruments(2)
|
21,462
|
|
|
21,462
|
|
|
—
|
|
|
21,462
|
|
|
—
|
|
|
|
|
|
Forward commitments
|
113
|
|
|
113
|
|
|
—
|
|
|
113
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
(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
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.
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.
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,
|
|
2020
|
|
2019
|
|
2018
|
In-scope of Topic 606
|
|
|
|
|
|
Service charges and fees
|
|
|
|
|
|
Service charges and fees on deposit accounts
|
$
|
14,441
|
|
|
$
|
12,790
|
|
|
$
|
11,291
|
|
Overdraft fees
|
9,166
|
|
|
11,543
|
|
|
10,796
|
|
Customer service fees
|
177
|
|
|
331
|
|
|
330
|
|
Credit card fee income
|
16,026
|
|
|
15,594
|
|
|
11,893
|
|
Debit card income
|
7,657
|
|
|
11,899
|
|
|
14,396
|
|
|
|
|
|
|
|
Total service charges and fees
|
47,467
|
|
|
52,157
|
|
|
48,706
|
|
Trust fees
|
20,862
|
|
|
19,399
|
|
|
18,393
|
|
Brokerage and insurance commissions
|
2,756
|
|
|
3,786
|
|
|
4,513
|
|
Total noninterest income in-scope of Topic 606
|
$
|
71,085
|
|
|
$
|
75,342
|
|
|
$
|
71,612
|
|
|
|
|
|
|
|
Out-of-scope of Topic 606
|
|
|
|
|
|
Loan servicing income
|
$
|
2,977
|
|
|
$
|
4,843
|
|
|
$
|
7,292
|
|
Securities gains, net
|
7,793
|
|
|
7,659
|
|
|
1,085
|
|
Unrealized gain on equity securities, net
|
640
|
|
|
525
|
|
|
212
|
|
Net gains on sale of loans held for sale
|
28,515
|
|
|
15,555
|
|
|
21,450
|
|
Valuation adjustment on servicing rights
|
(1,778)
|
|
|
(911)
|
|
|
(46)
|
|
Income on bank owned life insurance
|
3,554
|
|
|
3,785
|
|
|
2,793
|
|
Other noninterest income
|
7,505
|
|
|
9,410
|
|
|
4,762
|
|
Total noninterest income out-of-scope of Topic 606
|
49,206
|
|
|
40,866
|
|
|
37,548
|
|
Total noninterest income
|
$
|
120,291
|
|
|
$
|
116,208
|
|
|
$
|
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.
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
|
$
|
84,728
|
|
|
$
|
61,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in subsidiaries
|
2,234,813
|
|
|
1,765,995
|
|
Other assets
|
68,263
|
|
|
49,002
|
|
|
|
|
|
Total assets
|
$
|
2,387,804
|
|
|
$
|
1,876,863
|
|
Liabilities and Stockholders’ equity:
|
|
|
|
|
|
|
|
Other borrowings
|
$
|
265,168
|
|
|
$
|
271,046
|
|
Accrued expenses and other liabilities
|
43,405
|
|
|
27,680
|
|
Total liabilities
|
308,573
|
|
|
298,726
|
|
Stockholders’ equity:
|
|
|
|
Preferred stock
|
110,705
|
|
|
—
|
|
Common stock
|
42,094
|
|
|
36,704
|
|
Capital surplus
|
1,062,083
|
|
|
839,857
|
|
Retained earnings
|
791,630
|
|
|
702,502
|
|
Accumulated other comprehensive income (loss)
|
72,719
|
|
|
(926)
|
|
|
|
|
|
Total stockholders’ equity
|
2,079,231
|
|
|
1,578,137
|
|
Total liabilities and stockholders’ equity
|
$
|
2,387,804
|
|
|
$
|
1,876,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME STATEMENTS
|
(Dollars in thousands)
|
|
For the Years Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Operating revenues:
|
|
|
|
|
|
Dividends from subsidiaries
|
$
|
83,000
|
|
|
$
|
137,000
|
|
|
$
|
85,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
1,948
|
|
|
893
|
|
|
493
|
|
Total operating revenues
|
84,948
|
|
|
137,893
|
|
|
85,493
|
|
Operating expenses:
|
|
|
|
|
|
Interest
|
13,573
|
|
|
15,044
|
|
|
14,371
|
|
Salaries and employee benefits
|
8,147
|
|
|
4,072
|
|
|
3,639
|
|
Professional fees
|
4,310
|
|
|
3,029
|
|
|
2,841
|
|
Other operating expenses
|
4,939
|
|
|
15,559
|
|
|
12,510
|
|
Total operating expenses
|
30,969
|
|
|
37,704
|
|
|
33,361
|
|
Equity in undistributed earnings
|
73,430
|
|
|
34,307
|
|
|
52,570
|
|
Income before income tax benefit
|
127,409
|
|
|
134,496
|
|
|
104,702
|
|
Income tax benefit
|
10,529
|
|
|
14,633
|
|
|
12,296
|
|
Net income
|
137,938
|
|
|
149,129
|
|
|
116,998
|
|
Preferred dividends
|
(4,451)
|
|
|
—
|
|
|
(39)
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
$
|
133,487
|
|
|
$
|
149,129
|
|
|
$
|
116,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STATEMENTS OF CASH FLOWS
|
(Dollars in thousands)
|
|
For the Years Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income
|
$
|
137,938
|
|
|
$
|
149,129
|
|
|
$
|
116,998
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Undistributed earnings of subsidiaries
|
(73,430)
|
|
|
(34,307)
|
|
|
(52,570)
|
|
|
|
|
|
|
|
Gain on extinguishment of debt
|
—
|
|
|
(375)
|
|
|
—
|
|
Increase in accrued expenses and other liabilities
|
8,419
|
|
|
3,274
|
|
|
5,336
|
|
Increase in other assets
|
(19,168)
|
|
|
(12,248)
|
|
|
(1,559)
|
|
|
|
|
|
|
|
Excess tax (expense) benefit from stock based compensation
|
(93)
|
|
|
270
|
|
|
674
|
|
Other, net
|
6,375
|
|
|
4,103
|
|
|
5,401
|
|
Net cash provided by operating activities
|
60,041
|
|
|
109,846
|
|
|
74,280
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Capital contributions to subsidiaries
|
(70,000)
|
|
|
(46,583)
|
|
|
(30,696)
|
|
Repayment of advances from subsidiaries
|
—
|
|
|
6,000
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
(41,982)
|
|
|
(594)
|
|
|
(13,504)
|
|
Net cash used by investing activities
|
(111,982)
|
|
|
(41,177)
|
|
|
(44,200)
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds on short-term revolving credit line
|
—
|
|
|
—
|
|
|
25,000
|
|
Proceeds from borrowings
|
—
|
|
|
—
|
|
|
30,000
|
|
Repayments on short-term revolving credit line
|
—
|
|
|
—
|
|
|
(25,000)
|
|
Repayments of borrowings
|
(7,000)
|
|
|
(20,023)
|
|
|
(25,759)
|
|
Payment for the redemption of debt
|
—
|
|
|
(2,500)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid
|
(31,906)
|
|
|
(24,607)
|
|
|
(19,357)
|
|
Purchase of treasury stock
|
—
|
|
|
—
|
|
|
(97)
|
|
Proceeds from issuance of preferred stock
|
110,705
|
|
|
—
|
|
|
—
|
|
Proceeds from issuance of common stock
|
3,004
|
|
|
661
|
|
|
489
|
|
Net cash provided by (used in) by financing activities
|
74,803
|
|
|
(46,469)
|
|
|
(14,724)
|
|
Net increase in cash and cash equivalents
|
22,862
|
|
|
22,200
|
|
|
15,356
|
|
Cash and cash equivalents at beginning of year
|
61,866
|
|
|
39,666
|
|
|
24,310
|
|
Cash and cash equivalents at end of year
|
$
|
84,728
|
|
|
$
|
61,866
|
|
|
$
|
39,666
|
|
Supplemental disclosure:
|
|
|
|
|
|
Cumulative effect adjustment from the adoption of ASU 2016-13
on January 1, 2020
|
$
|
14,891
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Dividends declared, not paid
|
2,013
|
|
|
—
|
|
|
—
|
|
Conversion/redemption of Series D preferred stock to common stock
|
—
|
|
|
—
|
|
|
938
|
|
Stock consideration granted for acquisitions
|
217,202
|
|
|
92,258
|
|
|
238,075
|
|
TWENTY-THREE
LEASES
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
"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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
Classification
|
|
2020
|
|
2019
|
Operating lease right-of-use assets
|
Other assets
|
|
$
|
21,557
|
|
|
$
|
23,200
|
|
Operating lease liabilities
|
Accrued expenses and other liabilities
|
|
$
|
25,337
|
|
|
$
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
Lease Cost
|
|
Income Statement Category
|
|
2020
|
|
2019
|
Operating lease cost
|
|
Occupancy expense
|
|
$
|
6,071
|
|
|
$
|
6,031
|
|
Variable lease cost
|
|
Occupancy expense
|
|
72
|
|
|
145
|
|
|
|
|
|
|
|
|
Total lease cost
|
|
|
|
$
|
6,143
|
|
|
$
|
6,176
|
|
Supplemental Information
|
|
|
|
|
|
|
Noncash reduction of ROU assets
|
|
Occupancy expense
|
|
$
|
1,037
|
|
|
$
|
1,771
|
|
Noncash reduction lease liabilities
|
|
Occupancy expense
|
|
$
|
389
|
|
|
$
|
1,789
|
|
|
|
|
|
|
|
|
Supplemental balance sheet information
|
|
|
|
As of December 31, 2020
|
Weighted-average remaining operating lease term (in years)
|
|
5.91
|
|
Weighted-average discount rate for operating leases
|
|
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.
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
|
$
|
6,890
|
|
2022
|
5,690
|
|
2023
|
4,035
|
|
2024
|
2,334
|
|
2025
|
2,195
|
|
Thereafter
|
6,427
|
|
Total lease payments
|
$
|
27,571
|
|
Less interest
|
(2,234)
|
|
Present value of lease liabilities
|
$
|
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
|
December 31
|
|
September 30
|
|
June 30
|
|
March 31
|
Net interest income
|
$
|
132,575
|
|
|
$
|
122,497
|
|
|
$
|
124,146
|
|
|
$
|
112,511
|
|
Provision for credit losses
|
17,072
|
|
|
1,678
|
|
|
26,796
|
|
|
21,520
|
|
Net interest income after provision for credit losses
|
115,503
|
|
|
120,819
|
|
|
97,350
|
|
|
90,991
|
|
Noninterest income
|
32,621
|
|
|
31,216
|
|
|
30,637
|
|
|
25,817
|
|
Noninterest expense
|
99,269
|
|
|
90,396
|
|
|
90,439
|
|
|
90,859
|
|
Income taxes
|
9,046
|
|
|
13,681
|
|
|
7,417
|
|
|
5,909
|
|
Net income
|
39,809
|
|
|
47,958
|
|
|
30,131
|
|
|
20,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred dividends
|
(2,014)
|
|
|
(2,437)
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
$
|
37,795
|
|
|
$
|
45,521
|
|
|
$
|
30,131
|
|
|
$
|
20,040
|
|
|
|
|
|
|
|
|
|
Per share:
|
|
|
|
|
|
|
|
Earnings per share-basic
|
$
|
0.98
|
|
|
$
|
1.23
|
|
|
$
|
0.82
|
|
|
$
|
0.54
|
|
Earnings per share-diluted
|
0.98
|
|
|
1.23
|
|
|
0.82
|
|
|
0.54
|
|
Cash dividends declared on common stock
|
0.20
|
|
|
0.20
|
|
|
0.20
|
|
|
0.20
|
|
Book value per common share
|
46.77
|
|
|
46.11
|
|
|
44.42
|
|
|
42.21
|
|
Weighted average common shares outstanding
|
38,420,063
|
|
|
36,941,110
|
|
|
36,880,325
|
|
|
36,820,972
|
|
Weighted average diluted common shares outstanding
|
38,534,082
|
|
|
36,995,572
|
|
|
36,915,630
|
|
|
36,895,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per share data)
|
|
As of and for the Quarter Ended
|
2019
|
December 31
|
|
September 30
|
|
June 30
|
|
March 31
|
Net interest income
|
$
|
112,745
|
|
|
$
|
111,321
|
|
|
$
|
106,708
|
|
|
$
|
102,955
|
|
Provision for credit losses
|
4,903
|
|
|
5,201
|
|
|
4,918
|
|
|
1,635
|
|
Net interest income after provision for credit losses
|
107,842
|
|
|
106,120
|
|
|
101,790
|
|
|
101,320
|
|
Noninterest income
|
28,030
|
|
|
29,400
|
|
|
32,061
|
|
|
26,717
|
|
Noninterest expense
|
92,866
|
|
|
92,967
|
|
|
75,098
|
|
|
88,230
|
|
Income taxes
|
5,155
|
|
|
7,941
|
|
|
13,584
|
|
|
8,310
|
|
Net income
|
37,851
|
|
|
34,612
|
|
|
45,169
|
|
|
31,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred dividends
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
$
|
37,851
|
|
|
$
|
34,612
|
|
|
$
|
45,169
|
|
|
$
|
31,497
|
|
|
|
|
|
|
|
|
|
Per share:
|
|
|
|
|
|
|
|
Earnings per share-basic
|
$
|
1.03
|
|
|
$
|
0.94
|
|
|
$
|
1.26
|
|
|
$
|
0.91
|
|
Earnings per share-diluted
|
1.03
|
|
|
0.94
|
|
|
1.26
|
|
|
0.91
|
|
Cash dividends declared on common stock
|
0.18
|
|
|
0.18
|
|
|
0.16
|
|
|
0.16
|
|
Book value per common share
|
43.00
|
|
|
42.62
|
|
|
41.48
|
|
|
39.65
|
|
Weighted average common shares outstanding
|
36,758,025
|
|
|
36,692,381
|
|
|
35,743,986
|
|
|
34,564,378
|
|
Weighted average diluted common shares outstanding
|
36,840,519
|
|
|
36,835,191
|
|
|
35,879,259
|
|
|
34,699,839
|
|