EDGAR 10-K Filing

Company CIK: 920112
Filing Year: 2022
Filename: 920112_10-K_2022_0000920112-22-000054.json

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ITEM 1. BUSINESS
ITEM 1. BUSINESS
A. GENERAL DESCRIPTION
Heartland Financial USA, Inc. (individually referred to herein as "Parent Company" and collectively with all of its subsidiaries and affiliates referred to herein as "HTLF," "we," "us," or "our") is a multi-bank holding company registered under the Bank Holding Company Act of 1956, as amended (the "BHCA"), that was originally formed in the state of Iowa in 1981 and reincorporated in the State of Delaware in 1993. HTLF's headquarters are located at 1398 Central Avenue, Dubuque, Iowa. Our website address is www.htlf.com. You can access, free of charge, our filings with the SEC, including our Annual Report on Form 10-K, our quarterly reports on Form 10-Q, current reports on Form 8-K and any other amendments to those reports, at our website under the Investor Relations tab, or at the SEC website at www.sec.gov. Proxy materials for our upcoming 2022 Annual Shareholders Meeting to be held on May 18, 2022, will be available electronically via a link on our website at www.htlf.com.
At December 31, 2021, HTLF had total assets of $19.27 billion, total loans held to maturity of $9.95 billion and total deposits of $16.42 billion. HTLF’s total stockholders' equity as of December 31, 2021, was $2.18 billion. Net income available to common stockholders for 2021 was $211.9 million.
HTLF conducts a community banking business through eleven independently branded and chartered community banks (collectively, the "Banks") operating in the states of Iowa, Illinois, Wisconsin, New Mexico, Arizona, Montana, Colorado, Minnesota, Kansas, Missouri, Texas and California. Each Bank serves a separate state banking market, with the exception of Kansas and Missouri which constitute a single banking market (collectively the "Bank Markets"). In the fourth quarter of 2021, HTLF completed evaluating the consolidation of its eleven bank charters as part of its ongoing efforts to improve operational efficiency. As a result, the HTLF Board of Directors approved a plan to consolidate its eleven bank charters into a single Colorado based charter, named "HTLF Bank," that will continue to operate under separate bank brands in each Bank Market. The plan is subject to regulatory approval. The consolidation project is underway and is expected to take 18-24 months to complete.
All Banks are insured and regulated by the Federal Deposit Insurance Corporation (the "FDIC"). Listed below are the Banks and their respective Bank brands, which, as of the date of this Annual Report on Form 10-K, operate a total of 129 banking locations:
•Dubuque Bank and Trust Company, Dubuque, Iowa, is chartered under the laws of the state of Iowa.
•Illinois Bank & Trust, Rockford, Illinois, is chartered under the laws of the state of Illinois.
•Wisconsin Bank & Trust, Madison, Wisconsin, is chartered under the laws of the state of Wisconsin.
•New Mexico Bank & Trust, Albuquerque, New Mexico, is chartered under the laws of the state of New Mexico.
•Rocky Mountain Bank, Billings, Montana, is chartered under the laws of the state of Montana.
•Arizona Bank & Trust, Phoenix, Arizona, is chartered under the laws of the state of Arizona.
•Citywide Banks, Denver, Colorado, is chartered under the laws of the state of Colorado.
•Minnesota Bank & Trust, Edina, Minnesota, is chartered under the laws of the state of Minnesota.
•Bank of Blue Valley, Merriam, Kansas, is chartered under the laws of the state of Kansas.
•Premier Valley Bank, Fresno, California, is chartered under the laws of the state of California.
•First Bank & Trust, Lubbock, Texas, is chartered under the laws of the state of Texas.
Dubuque Bank and Trust Company also has two wholly-owned non-bank subsidiaries:
•DB&T Insurance, Inc., a multi-line insurance agency, with one wholly-owned subsidiary:
◦Heartland Financial USA, Inc. Insurance Services, a multi-line insurance agency that provides online insurance products to consumers and small business clients in Bank Markets.
•DB&T Community Development Corp., a community development company with the primary purpose of partnering in low-income housing and historic rehabilitation projects.
HTLF uses the "HTLF" brand to refer to Parent Company activities and operations and certain limited common products and services offered by all Banks, such as HTLF Retirement Plan Services. In addition, the relationship of each Bank to HTLF is communicated using the phrase "Powered by HTLF".
In addition, as of December 31, 2021, HTLF had trust preferred securities issued through special purpose trust subsidiaries formed for the purpose of offering cumulative capital securities including Heartland Financial Statutory Trust IV, Heartland Financial Statutory Trust V, Heartland Financial Statutory Trust VI, Heartland Financial Statutory Trust VII, Morrill Statutory Trust I, Morrill Statutory Trust II, Sheboygan Statutory Trust I, CBNM Capital Trust I, Citywide Capital Trust III, Citywide Capital Trust IV, Citywide Capital Trust V, OCGI Statutory Trust III, OCGI Capital Trust IV, BVBC Capital Trust II and BVBC Capital Trust III. All of HTLF’s subsidiaries were wholly owned as of December 31, 2021.
The principal business of our Banks consists of making loans to and accepting deposits from businesses and consumers. Our Banks provide full service commercial and consumer banking in their communities. Both our loans and our deposits are generated primarily through strong banking knowledge and customer relationships, guided by management that is actively involved in the community. Our lending and investment activities are funded primarily by core deposits. This stable source of funding is achieved by developing banking relationships with customers through value-added product offerings, competitive market pricing, convenience and high-touch personal service. Deposit products, which are insured by the FDIC to the full extent permitted by law, include checking and other demand deposit accounts, NOW accounts, savings accounts, money market accounts, certificates of deposit, individual retirement accounts and other time deposits. Loan products include commercial and industrial, commercial real estate, small business, agricultural, real estate mortgage, consumer, and credit cards for commercial, business and personal use.
We enhance the customer-centric local services in our Bank Markets with a full complement of value-added services, including wealth management, investment, retirement plan and insurance services. We provide contemporary technology solutions that provide our customers convenient electronic banking services and client access to account information through business and personal online banking, mobile banking, bill payment, remote deposit capture, treasury management services, credit and debit cards and automated teller machines.
Business Model and Operating Philosophy
HTLF’s operating philosophy is to maximize the benefits of a community banking model by:
1.Creating strong community ties through customer-centric local bank delivery of products and services.
•Deeply rooted local management and boards
•Local community knowledge and relationships
•Local decision-making
•Locally recognized brands
•Commitment to an exceptional customer experience
2.Providing extensive banking services to increase revenue.
•Full range of commercial products and services, including government guaranteed lending and treasury management services
•Private client services, including investment management, trust, retirement plans and brokerage and investment services
•Convenient and competitive consumer products and services
•Residential mortgage origination and referrals
•Providing added client value through consultative relationship building
•Supporting the needs of growing customers by sharing credits across our combined banking organization
•Specialized industries division providing middle-market lending expertise
3.Centralizing back-office operations for efficiency.
•Leverage expertise across all Banks
•Contemporary technology for account processing and delivery systems
•Efficient back-office support for loan processing and deposit operations
•Centralized customer relationship management systems
•Centralized loan underwriting and collections
•Centralized loss management and risk analysis
•Centralized support for other professional services, including human resources, marketing, legal, compliance, finance, administration, internal audit, risk management, investment management, customer support and facilities
We believe the personal and professional service we offer to our customers provides an appealing alternative to the service provided by the "megabanks" or large regional banks. While we are committed to a community banking philosophy, we believe our size, combined with our robust suite of financial products and services, allows us to effectively compete in our respective market areas. To remain price competitive, we also believe that we must manage expenses and gain economies of scale by centralizing back office support functions. Although each of our Banks currently operate under the direction of its own board of directors, we have standard operating policies regarding asset/liability management, liquidity management, risk management, investment management, lending and deposit structure management, information technology management and security management.
Another component of our operating strategy is to encourage all directors, officers and employees to maintain a strong ownership interest in HTLF. We have established ownership guidelines for our directors. We also have a stock compensation plan and an employee stock purchase plan.
We are deeply committed to our communities by encouraging the active participation of our employees, officers and board members in local charitable, civic, school, religious and community development activities.
Acquisition and Branch Optimization Strategies
HTLF continues to seek opportunities for growth through acquisitions, capitalizing on an established record of successful transactions. HTLF's acquisition strategy is to augment organic growth by focusing on acquisition targets that compliment or supplement our current banking strategy. This includes transactions that increase penetration in existing geographic Bank Markets and expansion into adjacent markets. In addition to acquisitions of established financial institutions, primarily commercial banks, HTLF is exploring acquisitions of fee income businesses that compliment and build on our existing fee income businesses or support and complement our existing lines of business. HTLF is also exploring the expansion of its lending products and services through the acquisition of specialty lending, equipment finance, leasing and other services. All acquisition opportunities are evaluated using a range of financial and non-financial criteria, including earnings per share accretion, tangible equity earn back and internal rate of return.
In recent years, we have focused on markets with growth potential in the Midwestern, Southwestern and Western regions of the United States. Our strategy is to balance the growth in our Southwestern and Western Bank Markets with the stability of our Midwestern Bank Markets. The following table provides information about the implementation of HTLF's expansion strategy:
Year Name De Novo Acquisition Merged Into or Assets Purchased By
1988 Citizens Finance Co.(1)
X N/A
1989 Key City Bank X Dubuque Bank and Trust Company
1991 Farley State Bank X Dubuque Bank and Trust Company
1992 Galena State Bank & Trust Co. X Illinois Bank & Trust (2015)
1994 First Community Bank(2)
X Dubuque Bank and Trust Company (2011)
1995 Riverside Community Bank(3)
X N/A
1997 Cottage Grove State Bank(4)
X N/A
1998 New Mexico Bank & Trust X N/A
1999 Bank One Monroe (branch) X Wisconsin Bank & Trust
2000 First National Bank of Clovis X New Mexico Bank & Trust
2003 Arizona Bank & Trust X N/A
2004 Rocky Mountain Bank X N/A
2006 Summit Bank & Trust(5)
X N/A
2006 Bank of the Southwest X Arizona Bank & Trust
2008 Minnesota Bank & Trust X N/A
2009 Elizabeth State Bank X Galena State Bank & Trust Co.(6)
2012 Liberty Bank, FSB (three branches) X Dubuque Bank and Trust Company
2012 First National Bank Platteville X Wisconsin Bank & Trust
Year Name De Novo Acquisition Merged Into or Assets Purchased By
2012 Heritage Bank, N.A. X Arizona Bank & Trust
2013 Morrill & Janes Bank and Trust Company X N/A
2013 Freedom Bank(7)
X Illinois Bank & Trust (2014)
2015 Community Bank & Trust (Sheboygan) X Wisconsin Bank & Trust
2015 Community Bank (Santa Fe) X New Mexico Bank & Trust
2015 First Scottsdale Bank, N.A. X Arizona Bank & Trust
2015 Premier Valley Bank X N/A
2016 Centennial Bank(5)
X Summit Bank & Trust(5)
2017 Founders Community Bank X Premier Valley Bank
2017 Citywide Banks X Centennial Bank and Trust(8)
2018 Signature Bank X Minnesota Bank & Trust
2018 First Bank & Trust X N/A
2019 Bank of Blue Valley X Morrill & Janes Bank and Trust Company(9)
2019 Rockford Bank and Trust Company X Illinois Bank & Trust
2020 Johnson Bank (4 branches) X Arizona Bank & Trust
2020 AimBank X First Bank & Trust(10)
(1) The loans of Citizens Finance Co. were sold in the first quarter of 2019.
(2) First Community Bank branches were sold in the second quarter of 2019.
(3) Riverside Community Bank changed its name to Illinois Bank & Trust in 2014.
(4) Cottage Grove State Bank was renamed Wisconsin Community Bank upon acquisition and subsequently changed its name to Wisconsin Bank & Trust.
(5) Summit Bank & Trust changed its name to Centennial Bank and Trust upon the acquisition of Centennial Bank.
(6) Galena State Bank & Trust Co. was merged into Illinois Bank & Trust in 2015.
(7) Two Freedom Bank branches were sold in the second quarter of 2019.
(8) Centennial Bank and Trust changed its name to Citywide Banks upon the acquisition of Citywide Banks.
(9) Morrill & Janes Bank and Trust Company changed its name to Bank of Blue Valley upon the acquisition of Bank of Blue Valley.
(10) In the first quarter of 2021, seven of the twenty-five AimBank branches were transferred to New Mexico Bank & Trust.
Through organic growth and acquisitions, our goal is to reach at least $1 billion in assets in each of our Bank Markets. As of December 31, 2021, we have achieved this goal in nine of our eleven Bank Markets. Dubuque Bank and Trust Company, Illinois Bank & Trust, Wisconsin Bank & Trust, New Mexico Bank & Trust, Arizona Bank & Trust, Citywide Banks, Bank of Blue Valley, Premier Valley Bank and First Bank & Trust each have assets over $1 billion.
Due to changes in our customers' banking preferences and behaviors as well as the competitive landscape, we have begun selectively selling, consolidating and closing branches. We have also selectively opened loan production offices in certain growth markets. We anticipate these strategic activities will provide additional resources to support our investments in areas that improve our customer experiences and fuel our organic growth. As a result of our ongoing branch optimization, we may complete additional, selective reductions in our branch network in the future.
Primary Business Lines
General
We are engaged in the business of community banking, with the expertise to serve a wide range of businesses and the scale to compete at many levels. Our Banks provide a wide range of commercial, small business and consumer banking services to businesses, including public sector and non-profit entities, and to individuals. Each Bank can also leverage a centralized team of middle-market lenders with expertise in specific industries and loan structures. We have a broad customer base and are not dependent upon a single or a few customers. We provide a contemporary menu of traditional and non-traditional service channels including online banking, mobile banking and telephone banking. Our Banks provide a comprehensive suite of banking products and services comprised of competitively priced deposit and credit offerings, along with treasury management, wealth management, retirement plan services and insurance services.
Our bankers actively solicit the business of established and new businesses in their respective business communities. We believe that the Banks are successful in attracting new customers in their markets through knowledgeable bankers, professional high-touch service, a suite of comprehensive banking products and services, competitive pricing, credit facilities, convenient locations and proactive communications. Our primary lines of business are described below.
Commercial Banking
Our Banks have a strong commercial loan base generated primarily through strong reputations, business networks and personal relationships in the communities they serve. The current portfolios in each Bank Market reflect the businesses in those communities and include a wide range of business loans, including lines of credit for working capital and operational purposes. Commercial real estate loans, which include owner occupied and non-owner occupied real estate loans, are generally term loans originated for the acquisition of equipment and real estate. Although most loans are made on a secured basis, loans may be made on an unsecured basis when warranted by the overall financial condition of the borrower. Generally, terms of commercial and commercial real estate loans range from one to five years.
Commercial bankers provide a consultative customer-centric approach utilizing the comprehensive suite of banking products and services to deliver tailored solutions to the client in an organized and efficient manner both for the client and the bank. Bankers are knowledgeable and experienced in providing consultative solutions to clients to assist them in accomplishing their business strategies and objectives. The suite of banking products and services offered are highly competitive and can be tailored to fit the objectives of the client.
Closely integrated with our lending activities is a significant emphasis on treasury management services that enhance our business clients' ability to monitor, accumulate and disburse funds efficiently. Our treasury management services have five basic functions:
•collection;
•disbursement;
•management of cash;
•information reporting; and
•fraud prevention.
Our treasury management services suite includes online banking and bill payment, automated clearing house ("ACH") services, wire transfer, zero balance accounts, transaction reporting, lock box services, remote deposit capture, accounts receivable solutions, commercial purchasing cards, merchant credit card services, investment sweep accounts, reconciliation services, foreign exchange and several fraud prevention services, including check and electronic positive pay services.
Many of the businesses in the communities we serve are small to middle market businesses, and commercial lending to these businesses has been, and continues to be, an emphasis for the Banks. The table below shows the certifications granted to the Banks from the United States Small Business Administration ("SBA").
Bank SBA
Express
Lender
SBA
Preferred
Lender
SBA
Export
Express
Dubuque Bank and Trust Company X
Illinois Bank & Trust X
Wisconsin Bank & Trust X X
New Mexico Bank & Trust X X X
Arizona Bank & Trust X
Rocky Mountain Bank X X
Citywide Banks X X
Minnesota Bank & Trust X
Bank of Blue Valley X X X
Premier Valley Bank X X X
First Bank & Trust X X
Our Banks participated in the Paycheck Protection Program ("PPP"), originally created by the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") and later expanded with the adoption of the Paycheck Protection Program Flexibility Act (the "PPFA") and the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the "Economic Aid Act"). PPP loans provided small businesses with funding to maintain payroll and cover certain other overhead expenses. PPP loans are 100% SBA guaranteed and borrowers may be eligible to have an amount up to the entire principal balance forgiven and paid by the SBA. PPP loans also carry a zero-risk rating for regulatory capital purposes, and because these loans are 100% guaranteed by the SBA, there is no allowance recorded related to the PPP loans.
Our commercial and commercial real estate loans are primarily made based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. We value the collateral for most of these loans based upon its estimated fair market value and require personal guarantees in most instances. The primary repayment risks of commercial and commercial real estate loans are that the cash flow of the borrowers may be unpredictable, and the collateral securing these loans may fluctuate in value.
Lenders in each Bank Market are complimented by HTLF Specialized Industries, a centralized team of middle-market lenders focused on specific industries and more complex loan structures. The expertise of this team includes the commercial real estate, healthcare, and food and agribusiness industries, as well as syndications and franchise finance.
With the oversight of our centralized credit administration group, our credit risk management process is governed by our commercial and consumer loan policies which establish a framework for credit and underwriting standards across the company. Our loan policies establish underwriting standards in alignment with safe and sound credit decision making and in accordance with regulatory guidelines as applicable to our portfolio (e.g., Real Estate Lending Standards, Supervisory Loan-to-Value Limits). Centralized staff in credit administration assist our commercial and agricultural lending officers in the analysis, underwriting of credit and facilitation of the credit approval process.
In addition to the lending personnel of the Banks, our internal loan review department validates credit risk rating accuracy and analyzes the credit risk of the Banks. To reduce the risk of loss, we have processes to help identify problem loans early, and we work with customers and aggressively seek resolution of credit problems.
HTLF has a special assets group which focuses on providing guidance to our customers and resolving problem assets. In 2020, we added additional personnel and resources to the special assets group in response to the economic changes caused by the COVID-19 pandemic. Commercial or agricultural loans in a default or workout status are assigned to the special assets group. Special assets personnel are also responsible for marketing repossessed properties and meet with representatives from each Bank on a quarterly basis.
Small Business Banking
HTLF's Small Business Lending Center is dedicated to serving the credit needs of small businesses with annual sales generally under $5 million. The Small Business Lending Center is designed to provide quick turnaround on small business customer credit requests on a wide variety of credit products and services. We believe that small businesses are an underserved market segment and see additional opportunity in serving this market with competitively priced deposit and loan offerings and convenient electronic banking services, as well as retirement plan services. The Banks have designated business bankers and branch managers that serve the distinct banking needs of this customer segment.
Agricultural Loans
Agricultural loans are emphasized by those Banks with operations in and around rural areas, including Dubuque Bank and Trust Company, Premier Valley Bank, Rocky Mountain Bank, Wisconsin Bank & Trust's Monroe and Platteville branches, New Mexico Bank & Trust’s Clovis banking offices, Bank of Blue Valley's northeast Kansas banking offices, and First Bank & Trust. Agricultural loans constituted approximately 8% of our total loan portfolio at December 31, 2021. In making agricultural loans, we have policies designating a primary lending area for each Bank, in which a majority of its agricultural operating and real estate loans are made. Under this policy, loans in a secondary market area must be secured by real estate.
Agricultural loans, many of which are secured by crops, machinery and real estate, are provided to finance capital improvements and farm operations as well as acquisitions of livestock and machinery. Agricultural loans present unique credit risks relating to adverse weather conditions, loss of livestock due to disease or other factors, declines in market prices for agricultural products and the impact of government regulations. The ultimate repayment of agricultural loans is dependent upon the profitable operation or management of the agricultural entity.
In underwriting agricultural loans, the lending officers of the Banks work closely with their customers to review budgets and cash flow projections for the ensuing crop year. These budgets and cash flow projections are monitored closely during the year and reviewed with the customers at least annually. The Banks also work closely with governmental agencies, including the United States Department of Agriculture ("USDA") and the Farm Services Agency ("FSA"), to help agricultural customers obtain credit enhancement products such as loan guarantees, interest assistance and crop insurance.
Residential Real Estate Mortgage Lending
With our acquisition in 2018 of First Bank & Trust in Lubbock, Texas, we acquired its wholly owned mortgage subsidiary, PrimeWest Mortgage Corporation ("PrimeWest"). PrimeWest, which was merged into First Bank & Trust in April 2020, provides mortgage loans to customers in Texas and has expanded to also serve the mortgage needs of our customers in many of our Bank Markets. First Bank & Trust services the loans it sells into the secondary market, and at December 31, 2021, residential real estate mortgage loans serviced, primarily for government sponsored entities ("GSE"), totaled $723.3 million. The Banks also provide mortgage loans to their customers that are retained and serviced by the originating Bank and, at December 31, 2021, totaled $829.3 million for all the Banks combined.
Consumer Banking
A wide variety of consumer banking services are delivered through our branches. Services include checking, savings, money market accounts, certificates of deposit, individual retirement accounts ("IRAs") and consumer credit cards. Brokerage services, including fixed rate annuity products are also provided in many locations. Consumer lending services include a broad array of consumer loans, including motor vehicle, home improvement, home equity lines of credit ("HELOC"), fixed rate home equity loans and personal lines of credit.
Our Banks continue to enhance our consumer banking experience through the addition of secure electronic banking options including online account opening and mobile banking. Our consumer banking customers receive high-touch service in our branches and further enjoy the convenience of online bill pay, 24-hour ATM availability, mobile deposit, and 24-hour access to account detail. As technology advances, we are committed to offering our customers the convenience of online, ATM and mobile delivery channels in a secure manner.
Wealth Management and Retirement Plan Services
In most Banks Markets, wealth management, trust, and securities brokerage services are offered. HTLF also specializes in retirement plan services, offering qualified retirement plan recordkeeping, administration and advice to business clients, including 401(k), 403(b) and profit sharing plans. As of December 31, 2021, total trust assets under management were $3.79 billion.
HTLF has contracted with LPL Financial Institution Services, a division of LPL Financial, to operate independent securities brokerage offices at the majority of the Banks. Through LPL Financial, HTLF offers a full array of investment services including mutual funds, annuities, individual retirement products, education savings products, and brokerage services.
Insurance Services
Vehicle, property and casualty, life and disability insurance are also offered by HTLF through DB&T Insurance, Inc. and Heartland Financial USA, Inc. Insurance Services, a multi-line insurance agency that provides online insurance products to consumers and small businesses.
B. MARKET AREAS
HTLF is a geographically diversified company with a Midwestern, Western and Southwestern franchise, which balances the risk of regional economic fluctuations. In general, we view our Midwest Bank Markets as stable with slower growth prospects and the West and Southwest as offering greater opportunities for growth accompanied by the potential of wider economic swings. The following table sets forth certain information about the offices and total deposits of each of the Banks and Bank Markets as of December 31, 2021, dollars in thousands:
Charter
State Bank
Name Total
Deposits Banking
Locations
Market Areas
Served
IA Dubuque Bank and Trust Company $ 1,750,071 6 Dubuque MSA
1 Des Moines MSA
IL Illinois Bank & Trust $ 1,496,262 5 Rockford MSA
2 Galena
2 Jo Daviess County
WI Wisconsin Bank & Trust $ 1,070,161 3 Madison MSA
1 Green Bay MSA
5 Sheboygan MSA
1 Grant County
1 Green County
1 Milwaukee County
NM New Mexico Bank & Trust $ 2,308,939 9 Albuquerque MSA
3 Clovis MSA
2 Santa Fe MSA
2 Colfax County
1 Guadalupe County
1 Los Alamos County
2 Quay County
2 Rio Arriba County
1 Union County
1 Dallam County, TX
AZ Arizona Bank & Trust $ 1,768,793 9 Phoenix MSA
MT Rocky Mountain Bank $ 640,757 2 Billings MSA
2 Flathead County
1 Gallatin County
1 Jefferson County
1 Ravalli County
1 Sanders County
1 Sheridan County
CO Citywide Banks $ 2,291,912 11 Denver MSA
1 Arapahoe County
2 Boulder County
1 Eagle County
1 Grand County
4 Jefferson County
MN Minnesota Bank & Trust $ 719,489 2 Minneapolis/St. Paul MSA
Charter
State Bank
Name Total
Deposits Banking
Locations
Market Areas
Served
KS Bank of Blue Valley $ 1,179,294 7 Kansas City MSA
1 Atchison County
2 Brown County
CA Premier Valley Bank $ 1,051,286 1 Fresno MSA
1 Madera County
1 Mariposa County
2 San Luis Obispo County
1 Tuolumne County
TX First Bank & Trust $ 2,397,350 8 Lubbock MSA
1 Bailey County
1 Ector County
1 Gray County
1 Hockley County
1 Lamb County
1 Midland County
1 Mitchell County
1 Parmer County
1 Potter County
1 Roberts County
1 Scurry County
1 Taylor County
1 Wheeler County
1 Yoakum County
C. COMPETITION
We face direct competition for deposits, loans and other financial related services. To compete effectively, develop our market share, maintain flexibility and keep pace with changing consumer preferences, business and economic conditions, we continuously refine and develop our banking personnel, products and services. We have found the principal methods of competing in the financial services industry are through personal service, product selection, convenience and technology.
Our Bank Markets are highly competitive, and our competitors are comprised of other commercial banks, credit unions, thrifts, stock brokers, mutual fund companies, mortgage companies and loan production offices, insurance companies and online providers and other non-bank financial service companies, including fintech companies. Some of these competitors are local, while others are regional, national or global.
Technological advances have made it possible for our competitors, including nonbank competitors, to offer products and services that traditionally were exclusively banking products and for financial institutions and other companies to provide electronic and internet-based financial solutions, including online deposit accounts, electronic payment processing and marketplace lending, without having a physical presence where their customers are located. In addition, many of our non-bank competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally insured banks. In many cases, our competitors have substantially greater resources and lending limits.
We believe we are well positioned to compete for loans effectively through the array and quality of the credit products and services we provide, and the high-touch, customer-centric way in which we provide them. We invest in building long-lasting customer relationships, and our strategy is to serve our customers above and beyond their expectations through excellence in customer service and providing banking solutions that are tailored to our customers’ needs. We believe that our long-standing presence and commitment to the communities we serve and the personal service we emphasize enhance our ability to compete favorably in attracting and retaining commercial and consumer customers. We continue to attract deposit-oriented customers by offering personal attention, combined with contemporary electronic banking convenience, professional service and competitive interest rates. The breadth of our product suite, coupled with our superior customer service, allows us to compete favorably with our larger competitors.
D. HUMAN CAPITAL
People are our most valuable asset. They are critical in providing the high quality of service and knowledge our clients deserve. Accordingly, the attraction and retention of qualified, engaged and diverse employees is critical to HTLF’s success and the growth and preservation of long term client relationships. HTLF is committed to placing a primary focus on our associates' interest as part of our evolving our human capital strategy. In 2021, we had 93% of employees participate in our annual employee engagement survey, and we achieved our highest average engagement score since inception of the survey process in 2017. On December 31, 2021, HTLF employed 2,249 full-time equivalent employees.
COVID-19 Relief
As the COVID-19 pandemic advanced throughout the year, and in spite of the challenges presented by COVID-19 variants, our employees' and customers' health and safety remained top of mind as our employees rose to the challenges of serving our customers.
•HTLF continued a limited "pandemic pay" program for 2021, which helped to reduce employee financial hardship when they needed to stay remote due to COVID-19 exposures during the first year of the pandemic. This additional pay program will not continue in 2022.
•HTLF continues to provide preventative health care coverage at 100%, virtual medical care options and supplement employees health savings accounts to make sure they stay healthy while social distancing.
•HTLF continues to promote the Employee Assistance Program to support employees and their families with the stress and mental health strain of the pandemic.
In anticipation of some moderation of the effects of the COVID-19 pandemic on the workplace and employees, HTLF planned for the return to work of most employees on work from home status in response to the pandemic. Return to work and related office utilization planning was adjusted from pre-pandemic models to accommodate a mix of in office and hybrid work schedules as well as some continued remote working arrangements.
Recruitment and Retention
In response to growing expectations of hybrid and remote working options, near full employment and wage pressure we strengthened our employee recruitment and retention efforts. With the increased demand for talent, HTLF deployed enhanced recruitment strategies and expanded our recruiting capacity. Given these challenges, our 2021 net voluntary turnover ratio was 20.18%, excluding acquired employees, which was an increase of 4.44% over our 2020 rate of 15.74% in a year that has been labeled as "the great resignation". Increasing wage pressures also caused an increase in the compensation offered during the hiring process, with successful recruitment initiatives often requiring compensation above the mid-point. Overall hiring for 2021 totaled 984 positions, 728 filled externally and 256 internally. As of December 31, 2021, there were open requisitions for 90 positions.
Employee onboarding and training continues to be delivered virtually, which enables most new hires to be engaged faster and build their skill set to better serve our clients. HTLF delivers a culture session to all new hires to aide them in understanding the importance of who we are and the importance of living our mission, vision, and values.
Competitive Compensation and Benefits
We remain focused on providing market level compensation and benefit packages. HTLF instituted a minimum pay threshold of $15 per hour in all Bank Markets to compete with other businesses and banks for entry level talent. We also benchmark our compensation programs annually. Incentive arrangements are evaluated annually to ensure that we reward talent appropriately in exchange for their efforts in adding value for our customers. In 2021, we partnered with our compensation consultant to identify a move toward true market based pay versus the Hay method of job grading. We believe that there will continue to be significant market adjustments as greater pay transparency crosses our footprint. As a greater percentage of employees are working hybrid or remote, we will evaluate how the market will compensate individuals, whether it will be national or based on a geographic basis of an employee’s remote work or office location. HTLF continues to support employees with matching contributions to their 401(k) (approximately 95% employee participation), an employee stock purchase plan, and buy down of student debt in exchange for unused paid time off. Employees are also active participants in our wellness platform, which includes a weight loss program, smoking cessation program, a program offering tips on how to stay healthy and resources for home schooling. We offer comprehensive healthcare options including HTLF making annual health savings account contributions.
Investment in Employee Development
We invest in our talent and provide meaningful development opportunities. Our training programs start on the employee's first day with the basics of our culture and use of systems. There are more extensive programs for our Commercial and Consumer lending teams that educate them on products, services, sales and systems. Our goal is to help the employee acclimate quickly to HTLF so that they can focus on their role and servicing customers. In 2021, we initiated a manager training program that will roll out more extensively to seasoned and newly promoted managers in 2022. All employees participate in our annual compliance course work.
HTLF has implemented robust training for our consumer and commercial teams to enhance their ability to serve our customers using a values based approach.
Diversity and Inclusion
HTLF is committed to seeking diversity and inclusion at all levels of the organization beginning with our Board of Directors. Our diversity statement reflects both our current culture and what we aspire to be:
HTLF is unique and so are you. We all come from different backgrounds and experience that help shape our company values. Our values are rooted in the belief that respect, equality, and inclusiveness make us stronger together. The variety of experiences and lifestyles we bring to work every day provides insights that help us better understand each other and our customers.
HTLF's Chief Diversity & Inclusion Officer and Diversity Advisory Council were appointed to oversee, advise and connect Diversity, Equity, and Inclusion (DEI) activities to a broader business-driven, results-oriented strategy, as well as to align with our corporate values and the future of HTLF. The Diversity Advisory Council has engaged guest speakers to further the conversation as we work to educate our teams and enhance inclusiveness. The counsel is also establishing Employee Business Resource Groups and expanding the depth and breadth of our annual DEI reporting. In furtherance of our diversity and inclusion initiatives, executive and senior management also participated in diversity, equity and inclusion "listen and learn" sessions. We are in the process of implementing additional diversity and inclusion training for all employees and updating the onboarding process to enhance employee dialogue.
E. SUPERVISION AND REGULATION
General
Financial institutions, their holding companies, and their affiliates are extensively regulated and supervised under federal and state law. As a result, the growth and earnings performance of HTLF may be affected not only by management decisions and general economic conditions, but also by the requirements of federal and state statutes and by the regulations, supervisory expectations and policies of various bank regulatory authorities. Both the scope of the laws and regulations and the intensity of the supervision to which HTLF is subject have increased in recent years because of the increase in HTLF's asset size and other factors such as technological and market changes. Regulatory enforcement and fines have also increased across the banking and financial services sector. HTLF expects that its business will remain subject to extensive regulation and supervision. Further, the scope of regulation and the intensity of supervision will likely be higher under the Biden Administration, including increased scrutiny and possible denials of bank mergers and acquisitions by federal bank regulators.
As a bank holding company with subsidiary banks chartered under the laws of eleven different states, HTLF is regulated by the Board of Governors of the Federal Reserve System (the "Federal Reserve"). Each of the Banks is regulated by the FDIC as its principal federal regulator and one of the following as its state regulator: the Arizona State Banking Department (the "Arizona Department"); the California Department of Business Oversight, Division of Financial Institutions (the "California Division"); the Colorado Department of Regulatory Agencies, Division of Banking (the "Colorado Division"); the Illinois Department of Financial and Professional Regulation (the "Illinois DFPR"); the Iowa Superintendent of Banking (the "Iowa Superintendent"); the State Bank Commissioner of Kansas Division of Banking (the "Kansas Division"); the Minnesota Department of Commerce: Division of Financial Institutions (the "Minnesota Division"); the Montana Division of Banking and Financial Institutions (the "Montana Division"); the New Mexico Financial Institutions Division (the "New Mexico FID"); the Texas Department of Banking (the "Texas Division"); and the Division of Banking of the Wisconsin Department of Financial Institutions (the "Wisconsin DFI").
Federal and state laws and regulations generally applicable to financial institutions regulate, among other things, the scope of business, the kinds and amounts of investments, reserve requirements, capital levels, the establishment of branches, mergers and consolidations and the payment of dividends. This system of supervision and regulation establishes a comprehensive framework for the respective operations of HTLF and its subsidiaries and is intended primarily for the protection of the FDIC-
insured deposits and depositors, consumers, the stability of the financial system in the United States, and the health of the national economy, rather than stockholders.
Federal and state banking regulators regularly examine HTLF and its subsidiaries to evaluate their financial condition and monitor their compliance with laws and regulatory policies. Following those exams, HTLF and the Banks are assigned supervisory ratings. These ratings are considered confidential supervisory information and disclosure to third parties is not allowed without permission of the issuing regulator. Violations of laws and regulations or deemed deficiencies in risk management practices may be incorporated into these supervisory ratings. A downgrade in these ratings could limit HTLF’s ability to pursue acquisitions or conduct other expansionary activities for a period of time, require new or additional regulatory approvals before engaging in certain other business activities or investments, affect a subsidiary bank’s deposit insurance assessment rate, and impose additional recordkeeping and corporate governance requirements, as well as generally increase regulatory scrutiny of HTLF.
The federal bank regulatory agencies have broad authority to issue orders to depository institutions and their holding companies prohibiting activities that constitute violations of law, rule, regulation, or administrative order, or that represent unsafe or unsound banking practices, as determined by the federal banking agencies. The federal banking agencies also are empowered to require affirmative actions to correct any violation or practice; issue administrative orders that can be judicially enforced; direct increases in capital; limit dividends and distributions; restrict growth; assess civil money penalties against institutions or individuals who violate any laws, regulations, orders, or written agreements with the agencies; order termination of certain activities of holding companies or their non-bank subsidiaries; remove officers and directors; order divestiture of ownership or control of a non-banking subsidiary by a holding company; or terminate deposit insurance and appoint a conservator or receiver.
The Consumer Financial Protection Bureau ("CFPB") has broad rulemaking authority over a wide range of federal consumer protection laws applicable to the business of the Banks and some of our other operating subsidiaries. Because each of the Banks currently has less than $10 billion in total consolidated assets, the FDIC, not the CFPB, is responsible for examining and supervising the Banks’ compliance with federal consumer protection laws and regulations. Should we receive regulatory approval and complete the consolidation of our Banks, we will become subject to the jurisdiction of the CFPB. Our non-bank subsidiaries are subject to regulation by their functional regulators, including applicable state finance and insurance agencies.
Banking and other financial services statutes, regulations and policies are continually under review by Congress, state legislatures and federal and state regulatory agencies. In addition to laws and regulations, state and federal bank regulatory agencies may issue policy statements, interpretive letters and similar written guidance applicable to HTLF and its subsidiaries. Any change in the statutes, regulations or regulatory policies including changes in their interpretation or implementation, may have a material effect on the business of HTLF and its subsidiaries.
This section summarizes material elements of the regulatory framework that applies to HTLF and its subsidiaries. It does not describe all of the applicable statutes, regulations and regulatory policies that apply, nor does it disclose all of the requirements of the statutes, regulations and regulatory policies requirements that are described.
Regulation of HTLF
General
HTLF, as the sole shareholder of Dubuque Bank and Trust Company, New Mexico Bank & Trust, Rocky Mountain Bank, Wisconsin Bank & Trust, Illinois Bank & Trust, Arizona Bank & Trust, Citywide Banks, Minnesota Bank & Trust, Bank of Blue Valley, Premier Valley Bank and First Bank & Trust, is a bank holding company. As a bank holding company, HTLF is registered with, and is subject to regulation, supervision and examination by, the Federal Reserve under the BHCA. In accordance with Federal Reserve policy, HTLF is expected to act as a source of financial and managerial strength to the Banks and to commit resources to support the Banks in circumstances where HTLF might not otherwise do so. In addition, since the Banks are under the common control of HTLF, the FDIC may look to the assets of the Banks to offset losses incurred as a result of the failure of one or more of the other Banks. Under the Dodd-Frank Act, the FDIC also has backup enforcement authority over a depository institution holding company, such as HTLF, if the conduct or threatened conduct of the holding company poses a risk to the Deposit Insurance Fund, although such authority may not be used if the holding company is in sound condition and does not pose a foreseeable and material risk to the insurance fund.
Under the BHCA, HTLF is subject to examination by the Federal Reserve. Supervision and examinations are confidential, and the outcomes of these actions will not be made public. HTLF is also required to file with the Federal Reserve periodic reports of HTLF's operations and such additional information regarding HTLF and its subsidiaries as the Federal Reserve may require.
Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA may elect to operate as financial holding companies which may engage in, or own shares in companies engaged in, a wider range of nonbanking activities. As of the date of this Annual Report on Form 10-K, HTLF has not applied for approval to operate as a financial holding company.
Acquisitions, Activities and Change in Control
Acquisitions of HTLF’s voting stock above certain thresholds may be subject to prior regulatory notice or approval under applicable federal banking laws. Investors are responsible for ensuring that they do not, directly or indirectly, acquire shares of our stock in excess of the amount that can be acquired without regulatory approval or notice under the BHCA and the Change in Bank Control Act.
The BHCA generally requires the prior approval of the Federal Reserve before acquiring direct or indirect ownership or control of more than 5% of the voting shares of an additional bank or bank holding company, or to merge or consolidate with another bank holding company. The Bank Merger Act generally requires our subsidiary banks to obtain prior regulatory approval to merge or consolidate with, or acquire substantially all of the assets of or assume deposits of, another bank. We must also be well-capitalized and well-managed, in order to acquire a bank located outside of our home state, which is currently Iowa under the BHCA.
Capital Requirements
Bank holding companies and their subsidiary financial institutions are required to maintain minimum risk-based and leverage capital ratios, as well as a capital conservation buffer, pursuant to regulations adopted by the Federal Reserve and FDIC, as applicable, to implement the Basel III capital framework ("Basel III Rule"). These requirements include quantitative measures that assign risk weightings to assets and off-balance sheet items and define and set minimum regulatory capital ratios. Failure to meet minimum capital requirements can initiate certain mandatory, and possible additional discretionary, actions by the federal banking regulators that, if undertaken, could have a material adverse effect on the financial condition and results of operations of a bank holding company and its subsidiaries. Federal banking regulators are required by law to take prompt action when institutions are viewed as engaging in unsafe or unsound practices or do not meet certain minimum capital requirements. In addition to other potential actions, failure to meet regulatory capital requirements would result in limitations on capital distributions as well as executive bonuses. The Federal Reserve, FDIC and applicable state banking regulators may determine that a banking organization, based on its size, complexity or risk profile, must maintain a higher level of capital in order to operate in a safe and sound manner. In addition, if a bank holding company is not well-capitalized, it will have difficulty engaging in acquisition transactions.
The regulations of the Federal Reserve and the FDIC as the primary regulator of state banks, separate capital into three components, Common Equity Tier 1 ("CET 1") capital, Tier 1 capital and Tier 2 capital, and test these capital components based on their ratio to assets and to "risk weighted assets." CET 1 capital consists of common stockholders' equity. Tier 1 capital generally consists of (a) common stockholders' equity, qualifying noncumulative preferred stock, and to the extent they do not exceed 25% of total Tier 1 capital, qualifying cumulative perpetual preferred stock and, for some institutions, trust preferred securities, and (b) among other things, goodwill and specified intangible assets, credit enhancing strips and investments in unconsolidated subsidiaries. Tier 2 capital includes, to the extent not in excess of Tier 1 capital, the allowance for credit losses, other qualifying perpetual preferred stock, certain hybrid capital instruments, qualifying term subordinated debt and certain trust preferred securities not otherwise included in Tier 1 capital. Risk weighted assets include the sum of specific assets of an institution multiplied by risk weightings for each asset class.
The Basel III Rule generally requires that CET 1 capital include the effects of other comprehensive income adjustments, such as gains and losses on securities held to maturity, but allow institutions, such as HTLF, to make a one-time election not to include those effects. HTLF and its Banks elected not to include the effects of other comprehensive income in CET 1 capital.
If an institution grows beyond $15 billion in assets as a result of mergers or acquisitions, it loses its ability to include trust preferred securities in Tier 1 capital. Previously issued trust preferred securities are excluded from Tier 1 capital but remain included in Tier 2 capital. HTLF had $19.27 billion of assets as of December 31, 2021, and reclassified $147.3 million of trust preferred securities from Tier 1 capital to Tier 2 capital.
Under the Basel III Rule, HTLF and the Banks are required to comply with a leverage requirement consisting of a minimum ratio of Tier 1 capital to total assets (the "Leverage Ratio") of 4.0%. The Basel III Rule also requires HTLF and the Banks to maintain a capital conservation buffer of 2.5% on top of the minimum risk-weighted asset ratios designed to absorb losses during periods of economic stress and composed entirely of common equity Tier 1 capital.
The following table presents the minimum regulatory capital ratios, minimum ratio plus capital conservation buffer, and well-capitalized minimums that HTLF and the Banks must satisfy.
Ratio Entity Minimum Regulatory
Capital Ratio % Minimum Ratio +
Capital Buffer %(1)
Well-Capitalized Minimum %(2)
CET 1 risk-based capital Consolidated 4.50 7.00 N/A
Bank 4.50 7.00 6.50
Tier 1 risk-based capital Consolidated 6.00 8.50 6.00
Bank 6.00 8.50 8.00
Total risk-based capital Consolidated 8.00 10.50 10.00
Bank 8.00 10.50 10.00
Tier 1 leverage ratio Consolidated 4.00 N/A N/A
Bank 4.00 N/A 5.00
(1) Reflects a capital conservation buffer of 2.5%
(2) Reflects the well-capitalized standard applicable to HTLF under Federal Reserve Regulation Y and the well-capitalized standard applicable to the Banks.
Failure to be well-capitalized or to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on our operations or financial condition. For example, a financial institution generally must be "well-capitalized" to engage in acquisitions, and well-capitalized institutions may qualify for exemptions from prior notice or application requirements otherwise applicable to certain types of activities and may qualify for expedited processing of other required notices or applications. In addition, only a well-capitalized depository institution may accept brokered deposits without prior regulatory approval. Failure to be well-capitalized or to meet minimum capital requirements could also result in restrictions on HTLF’s or the Banks’ ability to pay dividends or otherwise distribute capital. See the discussion of "Capital Resources" in Management’s Discussion and Analysis of Financial Condition and Results of Operations. As of December 31, 2021, HTLF had regulatory capital in excess of the Federal Reserve requirements for well-capitalized bank holding companies.
Stress Testing
The Dodd-Frank Act requires certain institutions to conduct an annual "stress test" of capital and consolidated earnings and losses under a base case and two severely adverse stress scenarios. The Economic Growth, Regulatory Relief and Consumer Protection Act (the "Economic Growth Act") raised the asset threshold for institutions subject to these stress testing requirements from $10 billion in average total consolidated assets to $100 billion for bank holding companies. As a result, HTLF, as well as its Banks, are no longer subject to the Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") stress testing requirements or any requirement to publish the results of stress testing. Despite elimination of this requirement, HTLF continues to perform certain stress tests internally and incorporate the economic models and information developed through its stress testing program into its risk management and business planning activities.
Dividend Payments
HTLF's ability to pay dividends to its stockholders may be affected by both general corporate law consideration, minimum regulatory capital requirements and policies of the Federal Reserve applicable to bank holding companies. As a Delaware corporation, HTLF is subject to the limitations of the Delaware General Corporation Law (the "DGCL"), which allows HTLF to pay dividends only out of its surplus (as defined and computed in accordance with the provisions of the DGCL) or, if HTLF has no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Federal Reserve policy provides that a bank holding company should not pay cash dividends unless (1) its net income over the last four quarters (net of dividends paid) is sufficient to fully fund the dividends, (2) the prospective rate of earnings retention appears consistent with the capital needs, asset quality, and overall financial condition of the bank holding company and its subsidiaries and (3) the bank holding company will continue to meet minimum required capital adequacy ratios. The policy also provides that a bank holding company should inform the Federal Reserve reasonably in advance of declaring or paying a dividend that exceeds earnings for the period for which the dividend is being paid or that could result in a material adverse change to the bank holding company’s capital structure. Bank holding companies also are expected to consult with the Federal Reserve before materially increasing dividends. The Federal Reserve could prohibit or limit the payment of dividends by a bank holding company if it determines that payment of the dividend would constitute an unsafe or unsound practice.
Regulation of the Banks
General
All of the Banks are state chartered, non-member banks, which means that they are all formed under state law and are not members of the Federal Reserve System. As a result, each Bank is subject to direct regulation by the banking authorities in the state in which it was chartered, as well as by the FDIC as its primary federal regulator.
Dubuque Bank and Trust Company is an Iowa-chartered bank. As an Iowa-chartered bank, Dubuque Bank and Trust Company is subject to the examination, supervision, reporting and enforcement requirements of the Iowa Superintendent, the chartering authority for Iowa banks.
Illinois Bank & Trust is an Illinois-chartered bank. As an Illinois-chartered bank, Illinois Bank & Trust is subject to the examination, supervision, reporting and enforcement requirements of the Illinois DFPR, the chartering authority for Illinois banks.
Wisconsin Bank & Trust is a Wisconsin-chartered bank. As a Wisconsin-chartered bank, Wisconsin Bank & Trust is subject to the examination, supervision, reporting and enforcement requirements of the Wisconsin DFI, the chartering authority for Wisconsin banks.
New Mexico Bank & Trust is a New Mexico-chartered bank. As a New Mexico-chartered bank, New Mexico Bank & Trust is subject to the examination, supervision, reporting and enforcement requirements of the New Mexico FID, the chartering authority for New Mexico banks.
Arizona Bank & Trust is an Arizona-chartered bank. As an Arizona-chartered bank, Arizona Bank & Trust is subject to the examination, supervision, reporting and enforcement requirements of the Arizona Department, the chartering authority for Arizona banks.
Rocky Mountain Bank is a Montana-chartered bank. As a Montana-chartered bank, Rocky Mountain Bank is subject to the examination, supervision, reporting and enforcement requirements of the Montana Division, the chartering authority for Montana banks.
Citywide Banks is a Colorado-chartered bank. As a Colorado-chartered bank, Citywide Banks is subject to the examination, supervision, reporting and enforcement requirements of the Colorado Division, the chartering authority for Colorado banks.
Minnesota Bank & Trust is a Minnesota-chartered bank. As a Minnesota-chartered bank, Minnesota Bank & Trust is subject to the examination, supervision, reporting and enforcement requirements of the Minnesota Division, the chartering authority for Minnesota banks.
Bank of Blue Valley is a Kansas-chartered bank. As a Kansas-chartered bank, Bank of Blue Valley is subject to the examination, supervision, reporting and enforcement requirements of the Kansas Division, the chartering authority for Kansas banks.
Premier Valley Bank is a California-chartered bank. As a California-chartered bank, Premier Valley Bank is subject to the examination, supervision, reporting and enforcement requirements of the California Division, the chartering authority for California banks.
First Bank & Trust is a Texas-chartered bank. As a Texas-chartered bank, First Bank & Trust is subject to the examination, supervision, reporting and enforcement requirements of the Texas Division, the chartering authority for Texas banks.
Deposit Insurance
The deposits of each of the Banks are insured by the Depositors Insurance Fund (“DIF”) up to the standard maximum deposit insurance amount of $250,000 per depositor. As FDIC-insured institutions, the Banks are required to pay deposit insurance premium assessments to the FDIC using a risk-based assessment system based upon average total consolidated assets minus tangible equity of the insured bank. The FDIC has authority to raise or lower assessment rates on insured deposits in order to achieve statutorily required reserve ratios in the DIF and to impose special additional assessments.
Supervisory Assessments
Each of the Banks is required to pay supervisory assessments to its respective state banking regulator to fund the operations of that agency. In general, the amount of the assessment is calculated on the basis of each institution's total assets. During 2021, the Banks paid supervisory assessments totaling $1.5 million.
Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") requires the federal bank regulatory agencies to take "prompt corrective action" regarding FDIC-insured depository institutions that do not meet certain capital adequacy standards. A depository institution’s treatment for purposes of the prompt corrective action provisions depends upon its level of capitalization and certain other factors. An institution that fails to remain well-capitalized becomes subject to a series of restrictions that increase in severity as its capital condition weakens. Such restrictions may include a prohibition on capital distributions, restrictions on asset growth or restrictions on the ability to receive regulatory approval of applications. The FDICIA also provides for enhanced supervisory authority over undercapitalized institutions, including authority for the appointment of a conservator or receiver for the institution. In certain instances, a bank holding company may be required to guarantee the performance of an undercapitalized subsidiary bank’s capital restoration plan. The capital adequacy requirements applicable to the Banks are described above under the caption "HTLF-Capital Requirements."
As of December 31, 2021: (i) none of the Banks was subject to a directive from its primary federal regulator to increase its capital; (ii) each of the Banks exceeded its minimum regulatory capital requirements under applicable capital adequacy guidelines; (iii) each of the Banks was "well-capitalized," as defined by applicable regulations; and (iv) none of the Banks were subject to a directive to maintain capital higher than the regulatory capital requirements, as discussed below under the caption "Safety and Soundness Standards."
Liability of Commonly Controlled Institutions
Under federal law, institutions insured by the FDIC may be liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with the default of commonly controlled FDIC-insured depository institutions or any assistance provided by the FDIC to commonly controlled FDIC-insured depository institutions in danger of default. Because HTLF controls each of the Banks, the Banks are commonly controlled for purposes of these provisions of federal law.
Anti-Money Laundering
The Bank Secrecy Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the "USA PATRIOT Act") and other related federal laws and regulations require financial institutions, including the Banks, to implement policies and procedures relating to anti-money laundering, customer identification and due diligence requirements and the reporting of certain types of transactions and suspicious activity. The Financial Crimes Enforcement Network rules require financial institutions to develop policies, procedures and practices to prevent and deter money laundering. The program must be a written board-approved program that is reasonably designed to identify and verify the identities of beneficial owners of legal entity customers at the time a new account is opened. The program must, at a minimum (1) provide for a system of internal controls to assure ongoing compliance; (2) designate a compliance officer; (3) establish an ongoing employee training program; and (4) implement an independent audit function to test programs. This rule has increased compliance costs for the Banks.
The Anti-Money Laundering Act of 2020, enacted on January 1, 2021 as part of the National Defense Authorization Act, does not directly impose new requirements on banks, but requires the U.S. Treasury Department to issue National Anti-Money Laundering and Countering the Financing of Terrorism Priorities, and conduct studies and issue regulations that may, over the next few years, significantly alter some of the due diligence, recordkeeping and reporting requirements that the Bank Secrecy Act and USA PATRIOT Act impose on banks. The Anti-Money Laundering Act of 2020 also contains provisions that promote increased information-sharing and use of technology and increases penalties for violations of the Bank Secrecy Act and includes whistleblower incentives, both of which could increase the prospect of regulatory enforcement.
Office of Foreign Assets Control Regulation
The U.S. Department of the Treasury’s Office of Foreign Assets Control, or "OFAC," is responsible for administering economic sanctions that affect transactions with designated foreign countries, nationals and others, as defined by various Executive Orders and Acts of Congress. OFAC-administered sanctions take many different forms. For example, sanctions may include: (1) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on U.S. persons engaging in financial transactions relating to, making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (2) a blocking of assets in which the government or "specially designated nationals" of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). OFAC also
publishes lists of persons, organizations, and countries suspected of aiding, harboring or engaging in terrorist acts, known as Specially Designated Nationals and Blocked Persons. Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences.
Dividend Payments
HTLF is a legal entity separate and distinct from its banking and non-banking subsidiaries. The primary source of funds for HTLF is dividends from the Banks. In general, the Banks may only pay dividends either out of their net income after any required transfers to surplus or reserves have been made or out of their retained earnings.
The payment of dividends by any financial institution is limited by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. As described above, each of the Banks exceeded its minimum capital requirements under applicable guidelines as of December 31, 2021.
As of December 31, 2021, approximately $502.1 million was available in retained earnings at the Banks for payment of dividends to HTLF under the regulatory capital requirements to remain well-capitalized. Notwithstanding the availability of funds for dividends, however, the FDIC and state regulators may reduce or prohibit the payment of dividends by the Banks.
Transactions with Affiliates
The Federal Reserve regulates transactions among HTLF and its subsidiaries. Generally, the Federal Reserve Act and Regulation W, as amended by the Dodd-Frank Act, limit lending and certain other "covered transactions" as well as other transactions between the Banks and their affiliates, including HTLF and its subsidiaries and for the primary purpose of protecting the interests of the Banks. The aggregate amount of "covered transactions" a Bank may enter into with an affiliate may not exceed 10% of the capital stock and surplus of the Bank. The aggregate amount of "covered transactions" with all affiliates may not exceed 20% of the capital stock and surplus of the Bank.
"Covered transactions" between each Bank and its affiliates are also subject to collateralization requirements and must be conducted on arm’s length terms. "Covered transactions" include (a) a loan or extension of credit by a Bank, including derivative contracts, (b) a purchase of securities issued to a Bank, (c) a purchase of assets by a Bank unless otherwise exempted by the Federal Reserve, (d) acceptance of securities issued by an affiliate to the Bank as collateral for a loan, and (e) the issuance of a guarantee, acceptance or letter of credit by a Bank on behalf of an affiliate.
While the quantitative limits and collateral requirement described above are generally not applicable to transactions between Banks, all affiliate transactions, including those between Banks, are subject to safety and soundness requirements, prohibitions on the purchase of low-quality assets, and certain other requirements and most affiliate transactions are required to be on market terms and conditions at least as favorable to the Bank as comparable transactions with non-affiliates.
Insider Transactions
The Banks are subject to certain restrictions imposed by federal law on extensions of credit to HTLF and its subsidiaries, on investments in the stock or other securities of HTLF and its subsidiaries and the acceptance of the stock or other securities of HTLF or its subsidiaries as collateral for loans made by the Banks. Certain limitations and reporting requirements are also placed on extensions of credit by each of the Banks to its directors and officers, to directors and officers of HTLF and its subsidiaries, to principal stockholders of HTLF and to "related interests" of such directors, officers and principal stockholders. In addition, federal law and regulations may affect the terms upon which any person who is a director or officer of HTLF or any of its subsidiaries or a principal stockholder of HTLF may obtain credit from banks with which the Banks maintain correspondent relationships.
Safety and Soundness Standards
The federal banking agencies have adopted guidelines that establish operational and managerial standards to promote the safety and soundness of federally insured depository institutions. The guidelines set forth standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, vendor and model risk management, asset quality and earnings. In general, the safety and soundness guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines, the institution's primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. If an institution fails to submit an acceptable compliance plan or fails in any material respect to implement a compliance plan that has been accepted by its primary federal regulator, the regulator is required to issue an order directing the institution to cure the
deficiency. Until the deficiency cited in the regulator's order is cured, the regulator may restrict the institution's rate of growth, require the institution to increase its capital, restrict the rates the institution pays on deposits or require the institution to take any action the regulator deems appropriate under the circumstances. Noncompliance with the standards established by the safety and soundness guidelines may also constitute grounds for other enforcement action by the federal banking regulators, including cease and desist orders and civil money penalty assessments.
Properly managing risks has been identified as critical to the conduct of safe and sound banking activities and has become even more important as new technologies, product innovation, and the size and speed of financial transactions have changed the nature of banking markets. The federal banking agencies have identified a spectrum of risks facing banking institutions including, but not limited to, credit, market, liquidity, operational, legal, and reputational risk. Some of the regulatory pronouncements have focused on operational risk, which arises from the potential that inadequate information systems, operational problems, breaches in internal controls, fraud, or unforeseen catastrophes will result in unexpected losses. New products and services, third-party risk management and cybersecurity are critical sources of operational risk that financial institutions are expected to address in the current environment. The Banks are expected to have active board and senior management oversight; adequate policies, procedures, and limits; adequate risk measurement, monitoring, and management information systems; and comprehensive and effective internal controls.
Branching Authority
Each of the Banks has the authority, pursuant to the laws under which it is chartered, to establish branches anywhere in the state in which its main office is located, subject to the receipt of all required regulatory approvals.
Federal law permits state and national banks to merge with banks in other states subject to: (i) regulatory approval; (ii) federal and state deposit concentration limits; and (iii) state law limitations requiring the merging bank to have been in existence for a minimum period of time (not to exceed five years) prior to the merger.
State Bank Investments and Activities
Each of the Banks generally is permitted to make investments and engage in activities directly or through subsidiaries as authorized by the laws of the state under which it is chartered. However, under federal law and FDIC regulations, FDIC-insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank. Federal law and FDIC regulations also prohibit FDIC-insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank, unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines the activity would not pose a significant risk to the deposit insurance fund of which the bank is a member.
Incentive Compensation Policies and Restrictions
The federal banking agencies have issued joint guidance on incentive compensation designed to ensure that the incentive compensation policies of banking organizations such as HTLF and the Banks are consistent with the safety and soundness of the organization and its subsidiary banks.
In addition, the Dodd-Frank Act requires the federal banking agencies and the SEC to issue regulations and guidelines requiring covered banking organizations such as HTLF and the Banks, to prohibit incentive-based compensation payment arrangements that encourage inappropriate risk taking by providing compensation that is excessive or that could lead to material financial loss to the organization. A proposed rule was issued in 2016. Also pursuant to the Dodd-Frank Act, in 2015, the SEC proposed rules that would direct stock exchanges to require listed companies to implement clawback policies to recover incentive-based compensation from current or former executive officers in the event of certain financial restatements and would also require companies to disclose their clawback policies and their actions under those policies. It is unclear when, if ever, the proposed rules will be finalized. The Biden Administration may revisit these proposals.
The Volcker Rule and Proprietary Trading
HTLF and the Banks are prohibited under the Volcker Rule from (1) engaging in short-term proprietary trading for their own accounts, and (2) having certain ownership interests in and relationships with hedge funds or private equity funds. The fundamental prohibitions of the Volcker Rule apply to banking entities of any size, including HTLF and the Banks. The Volcker Rule regulations contain exemptions for market-making, hedging, underwriting, trading in U.S. government and agency obligations and also permit certain ownership interests in certain types of funds to be retained. They also permit the offering and sponsoring of funds under certain conditions. The Volcker Rule regulations impose compliance and reporting obligations on banking entities.
HTLF does not engage in any significant amount of proprietary trading, as defined in the Volcker Rule, and the impact of the Volcker Rule on HTLF's business activities and investment portfolio has been minimal. HTLF has reviewed its investment portfolio to determine if any investments meet the Volcker Rule's definition of covered funds. Based on the review, HTLF determined that the impact related to investments considered to be covered funds did not have a significant effect on its financial condition or results of operations.
Community Reinvestment Act Requirements
The Community Reinvestment Act ("CRA") imposes a continuing and affirmative obligation on each of the Banks to help meet the credit needs of their respective communities, including low- and moderate-income neighborhoods, in a safe and sound manner. The FDIC and the respective state regulators regularly assess the record of each Bank in meeting the credit needs of its community. Applications for additional acquisitions are subject to evaluation of the effectiveness of the Banks' in meeting their CRA requirements.
In December of 2019, the FDIC issued a proposal to significantly amend existing CRA regulations, with the goal of making the regulatory framework more objective, transparent, consistent, and easy to understand. To accomplish these goals, this proposed rule would strengthen the CRA regulations by clarifying which activities qualify for CRA credit, updating where activities count for CRA credit, creating a more transparent and objective method for measuring CRA performance, and providing for more transparent, consistent, and timely CRA-related data collection, recordkeeping, and reporting. While the adoption and implementation of this proposed rule is uncertain, if adopted it is not anticipated that the rule would become effective before 2022.
Consumer Protection
The Banks and some of HTLF’s other operating subsidiaries are subject to a variety of federal and state statutes and regulations designed to protect consumers. The CFPB has broad rulemaking authority over a wide range of federal consumer protection laws that apply to banks and other providers of financial products and services, including the authority to prohibit “unfair, deceptive or abusive” acts and practices, but examination and supervision is carried out by each subsidiary bank’s primary federal banking agency and, where applicable, state banking agency, not the CFPB. In addition, state attorneys general and other state officials have authority to enforce consumer protection rules issued by the CFPB. State authorities have recently increased their focus on and enforcement of consumer protection rules.
The CFPB has undertaken numerous rule-making and other initiatives, including issuing informal guidance and taking enforcement actions against certain financial institutions. The CFPB’s rulemaking, examination and enforcement authority has affected and will continue to significantly affect financial institutions involved in the provision of consumer financial products and services.
The CFPB has also been publishing complaints submitted by consumers regarding consumer financial products and services in a publicly accessible online portal. The CFPB also publishes complaint narratives from consumers that opted to have their narratives made public. The publication of complaint narratives could affect the Banks in the following ways: (i) complaint data might be used by the CFPB to make decisions regarding regulatory, enforcement or examination issues; and (ii) the publication of such narratives may have a negative effect on the reputation of those institutions that are the subject of complaints.
In addition, deposit operations are subject to, among others: the Truth in Savings Act and Regulation DD issued by the CFPB, which require disclosure of deposit terms to consumers; Regulation CC issued by the Federal Reserve Board, which relates to the availability of deposit funds to consumers; the Right to Financial Privacy Act, which imposes a duty to maintain the confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and the Electronic Fund Transfer Act and Regulation E issued by the CFPB, which governs automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.
Changes to consumer protection regulations, including those promulgated by the CFPB, could affect our business but the likelihood, timing and scope of any such changes and the impact any such change may have on us cannot be determined with any certainty.
Mortgage Lending
Mortgage loans held at each of the Banks and mortgage loans originated by PrimeWest, a division of First Bank & Trust, are subject to a number of laws and rules affecting residential mortgages, including the Home Mortgage Disclosure Act ("HMDA") and Regulation C and the Real Estate Settlement Procedures Act ("RESPA") and Regulation X. In recent years, the CFPB and other federal agencies have proposed and finalized a number of rules affecting residential mortgages. These rules implement the Dodd-Frank Act amendments to the Equal Credit Opportunity Act, Truth in Lending Act ("TILA") and RESPA. The rules,
among other things, impose requirements regarding procedures to ensure compliance with "ability to repay" requirements, policies and procedures for servicing mortgages, and additional rules and restrictions regarding mortgage loan originator compensation and qualification and registration requirements for individual loan originator employees. These rules also impose new or revised disclosure requirements, including a new integrated mortgage origination disclosure that combines disclosures currently required under TILA and RESPA.
The HMDA and Regulation C require lenders to report certain information regarding home loans and includes tests for determining what financial institutions and credit transactions are covered under HMDA and reporting requirements for new data points identified in the Dodd-Frank Act or identified by the CFPB as necessary to carry out the purposes of HMDA. Regulation C requires detailed information from lenders and the reporting on mortgage loan underwriting and pricing.
Federal law also requires financial institutions to impose a mandatory purchase requirement for flood insurance for loans secured by certain real property located in areas with special flood hazards. In February 2019, federal regulators issued a final rule implementing the Biggert-Waters Flood Insurance Reform Act. The final rule, which became effective July 1, 2019, includes rules for identifying when private flood insurance policies must be accepted and criteria to apply in determining whether certain types of coverage qualify as "flood insurance" for federal flood insurance law purposes.
Ability-to-Repay and Qualified Mortgage Rule
Under Federal Reserve Board Regulation Z, mortgage lenders, such as the Banks and the PrimeWest division of First Bank & Trust, are required to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms. Mortgage lenders are required to determine consumers’ ability to repay in one of two ways. The first alternative requires the mortgage lender to consider the following eight underwriting factors when making the credit decision: (1) current or reasonably expected income or assets; (2) current employment status; (3) the monthly payment on the covered transaction; (4) the monthly payment on any simultaneous loan; (5) the monthly payment for mortgage-related obligations; (6) current debt obligations, alimony and child support; (7) the monthly debt-to-income ratio or residual income; and (8) credit history. Alternatively, the mortgage lender can originate "qualified mortgages," which are entitled to a presumption that the creditor making the loan satisfied the ability-to-repay requirements. In general, a "qualified mortgage" is a mortgage loan without negative amortization, interest-only payments, balloon payments or terms exceeding 30 years. In addition, to be a qualified mortgage, the points and fees paid by a consumer cannot exceed 3% of the total loan amount. Qualified mortgages that are "higher-priced" (e.g., subprime loans) have a rebuttable presumption of compliance with the ability-to-repay rules, while qualified mortgages that are not "higher-priced" (e.g., prime loans) are given a safe harbor of compliance. The Banks primarily originate compliant qualified mortgages.
Lending Standards and Guidance
The federal banking agencies have adopted uniform regulations prescribing standards for extensions of credit that are secured by liens or interests in real estate or made for the purpose of financing permanent improvements to real estate. Under these regulations, all insured depository institutions, such as the Banks, must adopt and maintain written policies establishing appropriate limits and standards for extensions of credit that are secured by liens or interests in real estate or are made for the purpose of financing permanent improvements to real estate. These policies must establish loan portfolio diversification standards, prudent underwriting standards (including loan-to-value limits) that are clear and measurable, loan administration procedures, and documentation, approval and reporting requirements. The real estate lending policies must reflect consideration of the federal bank regulators’ Interagency Guidelines for Real Estate Lending Policies.
Data Privacy and Cybersecurity
Various federal and state laws and regulations contain extensive data privacy and cybersecurity provisions and the regulatory framework for data privacy and cybersecurity is in considerable flux and evolving rapidly. At the federal level, the Gramm-Leach-Bliley Act ("GLBA") requires financial institutions to, among other things, periodically disclose their privacy policies and practices relating to sharing personal information and, in some cases, enables consumers to opt out of the sharing of certain information with unaffiliated third parties. The GLBA also requires financial institutions to implement an information security program that includes administrative, technical and physical safeguards to ensure the security and confidentiality of customer records and information. Additionally, like other lenders, the Banks use credit bureau data in their underwriting activities. Use of such data is regulated under the Fair Credit Reporting Act ("FCRA"), and the FCRA also regulates reporting information to credit bureaus, prescreening individuals for credit offers, sharing of information between affiliates, and using affiliate data for marketing purposes. HTLF is also subject to the rules and regulations promulgated under the authority of the Federal Trade Commission, which regulates unfair or deceptive acts or practices, including with respect to data privacy and cybersecurity. Moreover, the United States Congress is currently considering various proposals for more comprehensive data privacy and cybersecurity legislation, to which we may be subject if passed.
The federal banking regulators, as well as the SEC and related self-regulatory organizations, regularly issue guidance regarding cybersecurity that is intended to enhance cyber risk management among financial institutions. A financial institution is expected to establish a framework of internal control, first, second and third lines of defense, and risk management policies, procedures and processes that are designed to address the cyber risks that it faces in its business operations. A financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s operations after a cyber-attack. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations if the institution or its critical service providers fall victim to a cyber-attack. Additionally, the Federal Financial Institutions Examination Council ("FFIEC") developed the Cybersecurity Assessment Tool to help financial institutions identify their risks and determine their preparedness for cybersecurity threats.
The FFIEC has also issued an Information Security booklet, which includes guidelines for evaluating the adequacy of information security programs (including effective threat identification, assessment and monitoring, and incident identification assessment and response), assurance reports and testing of information security programs.
Data privacy and cybersecurity are also areas of increasing state legislative focus. Various state laws and regulations apply, or may apply in the future, to HTLF’S operations and may impose additional requirements on HTLF and its subsidiaries or otherwise impact HTLF’s ability to share certain personal information with affiliates and non-affiliates. For example, the California Consumer Protection Act of 2018 (the "CCPA"), which became effective on January 1, 2020, applies to for-profit businesses that conduct business in California and meet certain revenue or data collection thresholds. The CCPA gives California residents the right to, among other things, request disclosure of information collected about them and whether that information has been sold to others, request deletion of personal information (subject to certain exceptions), opt out of the sale of their personal information, and not be discriminated against for exercising these rights. The CCPA contains several exemptions, including an exemption applicable to personal information that is collected, processed, sold or disclosed pursuant to the GLBA. Further, effective in most material respects starting on January 1, 2023, the California Privacy Rights Act ("CPRA") (which was passed via a ballot initiative as part of the November 2020 election) will significantly modify the CCPA, including by expanding California residents’ rights with respect to certain sensitive personal information. The CPRA also creates a new state agency which will be vested with authority to implement and enforce the CCPA and the CPRA. Other states where HTLF does business, or may in the future do business, or from which HTLF otherwise collects, or may in the future otherwise collect, personal information of residents have adopted or are considering adopting similar laws. For example, Virginia and Colorado have recently adopted comprehensive data privacy laws similar to the CCPA, which will go into effect in January and July of 2023, respectively. In addition, laws in all 50 U.S. states generally require businesses to provide notice under certain circumstances to consumers whose personal information has been disclosed as a result of a data breach.
See "Legal, Compliance and Reputational Risks-We are subject to complex and evolving laws, regulations, rules, standards and contractual obligations regarding data privacy and cybersecurity, which can increase the cost of doing business, compliance risks and potential liability." for additional information.
Durbin Amendment
The Dodd-Frank Act included provisions (known as the "Durbin Amendment"), which restrict interchange fees to those which are "reasonable and proportionate" for certain debit card issuers and limits the ability of networks and issuers to restrict debit card transaction routing. The Federal Reserve issued final rules implementing the Durbin Amendment on June 29, 2011. In the final rules, interchange fees for debit card transactions were capped at $0.21 plus five basis points to be eligible for a safe harbor such that the fee is conclusively determined to be reasonable and proportionate. The interchange fee restrictions contained in the Durbin Amendment, and the rules promulgated thereunder, only apply to debit card issuers with $10 billion or more in total consolidated assets at year-end. Because HTLF's assets exceeded $10 billion at December 31, 2018, it was required to comply with the Durbin Amendment effective July 1, 2019.

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
An investment in our securities is subject to risks inherent in our business. The material risks and uncertainties that management believes affect us are described below. Additional risks and uncertainties that management is not aware of or that management currently deems immaterial may also impair our business operations. If any of the events described in the risk factors should actually occur, our financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of our securities could decline significantly, and you could lose all or part of your investment.
Summary of Risk Factors
Below is a summary of the principal factors that make an investment in our common stock speculative or risky. This summary does not address all of the risks that we face. Additional discussion of the risks summarized in this risk factor summary, and other risks that we face, can be found below and should be carefully considered, together with other information in this Form 10-K and our other filings with the SEC, before making an investment decision regarding our common stock. These risks include, but are not limited to, the following:
•The ongoing COVID-19 pandemic and measures intended to prevent its spread have adversely affected, and may continue to adversely affect our business activities, financial condition, and results of operations and such effects will depend on future developments, which are highly uncertain and difficult to predict.
•Our participation in the Paycheck Protection Program and other regulatory and governmental actions to mitigate the impact of the COVID-19 could result in reputational harm, claims and litigation.
•Our business and financial results are significantly affected by general business and economic conditions.
•Our business dependent upon the continued growth and welfare of the various geographic markets that we serve.
•Our business and performance are vulnerable to the impact of volatility in debt and equity markets.
•Changes in interest rates and other conditions could negatively impact net interest income and net interest margin.
•We may be adversely impacted by the planned phasing out of the London Interbank Offered Rate ("LIBOR") as a reference rate.
•We have recorded goodwill as a result of acquisitions, and if it becomes impaired, our earnings could be significantly impacted.
•We have substantial deferred tax assets that could require a valuation allowance and a charge against earnings if we conclude that the tax benefits represented by the assets are unlikely to be realized.
•Changes in the federal, state or local tax laws may negatively impact our financial performance.
•Our business and financial performance could be adversely affected, directly or indirectly, by natural disasters, climate change, pandemics, terrorist activities, domestic disturbances or international hostilities.
•Climate change manifesting as transition, physical or other risks could adversely affect our operations, businesses, customers, reputation and financial condition.
•Our framework for managing risks may not be effective in mitigating risk and losses.
•If we do not properly manage our credit risk, we could suffer material credit losses.
•We are subject to lending concentration risks.
•We depend on the accuracy and completeness of information about our customers and counterparties.
•Our loan portfolio has a large concentration of commercial real estate loans, a segment that can be subject to volatile cash flows and collateral values.
•We may encounter issues with environmental law compliance if we take possession, through foreclosure or otherwise, of the real property that secures a commercial real estate loan.
•The ability of a borrower to repay agricultural loans may be especially affected by many factors outside of the borrower’s control.
•We hold one- to four-family first-lien residential mortgage loans in our loan portfolio, and the ability of the borrower to repay may be difficult to estimate.
•Economic disruption resulting from the COVID-19 pandemic may make it difficult for some customers to repay their loans, resulting in increased credit losses.
•Government programs established in response to the COVID-19 pandemic may delay but not avoid the realization of credit losses.
•Our allowance for credit losses may prove to be insufficient to absorb losses in our loan portfolio.
•Liquidity is essential to our business, and our performance could be adversely affected by constraints in or increased costs for funding.
•The required accounting treatment of loans we acquire through acquisitions could result in higher net interest margins and interest income in current periods and lower net interest margins and interest income in future periods.
•Our liability portfolio, including deposits, may subject us to liquidity risk and pricing risk from concentrations.
•Our growth may create the need to raise additional capital in the future, but that capital may not be available when it is needed.
•We rely on dividends from our subsidiaries for most of our revenue and are subject to restrictions on payment of dividends.
•Reduction in the value, or impairment of our investment securities, can impact our earnings and common stockholders' equity.
•We have a continuing need for technology investments, and we may not have the resources to effectively implement new technology.
•Our operations are affected by risks associated with our use of vendors and other third-party service providers.
•Security breaches, cyber-attacks or other similar incidents with respect to our or our vendors’ systems or network security, as well as the resulting theft or compromise of business and customer information, including personal information, could adversely affect our business or reputation, and create significant legal, regulatory or financial exposure.
•The potential for business interruption or failure exists throughout our organization.
•We are subject to risks from employee errors, customer or employee fraud and data processing system failures and errors.
•Our Bank Markets and growth strategy rely heavily on our management team, and the unexpected loss of key managers may adversely affect our operations.
•New lines of business, products and services are essential to our ability to compete but may subject us to additional risks.
•Our analytical and forecasting models may be improper or ineffective.
•Our internal controls may be ineffective.
•The soundness of other financial institutions could adversely affect our liquidity and operations.
•We may experience difficulties in achieving and managing our growth and our growth strategy involves risks that may negatively impact our net income. Strong organic growth is an integral component to allow us to achieve business and financial results necessary to make appropriate investments in people, processes and systems which allow HTLF to remain competitive in attracting and retaining employees and customers.
•Attractive acquisition opportunities may not be available to us in the future.
•We face intense competition in all phases of our business and competitive factors could adversely affect our business.
•Government regulation can result in limitations on our growth strategy.
•We are subject to extensive and evolving government regulation and supervision, which can increase the cost of doing business and lead to enforcement actions.
•Stringent requirements related to capital and liquidity may limit our ability to return earnings to stockholders or operate or invest in our business.
•We are becoming subject to additional regulatory requirements as our total assets increase, and these additional requirements could have an adverse effect on our financial condition or results of operations.
•We are subject to complex and evolving laws, regulations, rules, standards and contractual obligations regarding data privacy and cybersecurity, which can increase the cost of doing business, compliance risks and potential liability.
•Litigation and enforcement actions could result in negative publicity and could adversely impact our business and financial results.
•Our reputation and our business are subject to negative publicity risk.
•Our stock price can be volatile.
•Stockholders may experience dilution as a result of future equity offerings and acquisitions.
•Certain banking laws and the HTLF Stockholder Rights Plan may have an anti-takeover effect.
COVID-19 Pandemic Risks
The ongoing COVID-19 pandemic and measures intended to prevent its spread have adversely affected, and may continue to adversely affect our business activities, financial condition, and results of operations and such effects will depend on future developments, which are highly uncertain and difficult to predict.
Although the U.S. and global economies have begun to recover from the COVID-19 pandemic as many health and safety restrictions have been lifted and vaccine distribution has increased, certain adverse consequences of the pandemic continue to impact the macroeconomic environment and may persist for some time, including labor shortages and disruptions of global supply chains. The growth in economic activity and demand for goods and services, alongside labor shortages, wage pressure and supply chain complications, have also contributed to rising inflationary pressures. The extent to which the COVID-19
pandemic impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the rate of distribution and administration of vaccines globally, the severity and duration of any resurgence of COVID-19 variants, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. The impact of the COVID-19 pandemic may also vary between our various Bank Markets, based in part on the severity, timing and duration of COVID-19 variants, differences in local vaccinations rates and differences in state and local responses to the COVID-19 pandemic.
The federal government has taken measures to address the economic and social consequences of the pandemic, including the passage of the CARES Act and later with the adoption of the PPFA and the Economic Aid Act. The CARES Act, as supplemented by the PPFA and Economic Aid Act, among other things, provides certain measures to support individuals and businesses in maintaining solvency through monetary relief, including in the form of financing, loan forgiveness and automatic forbearance. There can be no assurance, however, that the steps taken by the worldwide community or the U.S. government will be sufficient to address the negative economic effects of COVID-19 or avert severe and prolonged reductions in economic activity.
We have experienced adverse financial consequences due to a number of factors and may continue to experience such consequences should the effects of the pandemic, including the emergence of variants, continue for an extended period of time or worsen. These consequences include, but are not limited to:
•negative effects on net interest income and net interest margins as a result of the low interest rate environment;
•increased credit losses due to financial strain on our customers as a result of the pandemic and governmental actions, specifically on loans to borrowers in the lodging, retail trade, retail properties, restaurants and bars and oil and gas;
•increases in our provision for credit losses and net charge-offs resulting from increased credit losses;
•declines in collateral values;
•an impairment of goodwill or core deposit and customer relationship intangibles that could result in charges being recorded and restrictions on the ability of certain Banks to pay dividends to us;
•loan modifications and loan payment deferrals resulting in reduced earnings;
•increased demand on our liquidity as we meet borrowers’ needs and cover expenses related to the pandemic management plan;
•negative effects on capital and leverage ratios as a result of reduced liquidity which, although not currently contemplated, could reduce or force suspension of dividends;
•stock price volatility;
•workforce disruptions if a significant portion of our workforce is unable to work effectively or must continue to work remotely, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic;
•third-party disruptions, including negative effects on network providers and other suppliers, which may affect their ability to perform under the terms of agreements or provide essential services;
•increased risk of payment fraud, security breaches, cyber-attacks, and other similar incidents due to increased online and remote activity; and
•other operational failures due to changes in our normal business practices because of the pandemic and governmental actions to contain it.
To the extent the pandemic adversely affects our business, financial condition, liquidity, or results of operations, it also has the effect of heightening many of the other risks described in this 2021 Annual Report on Form 10-K.
We expect that the temporary reduction of interest rates to near zero will, gradually over the course of next year, be reversed, with the Federal Reserve now signaling its concerns with respect to inflation and announcing that it will begin to taper its purchases of mortgage and other bonds and increase the federal funds rate. The timing and impact of this expected reversal in interest rates trends is unknown.
The factors described above may remain prevalent for a significant period of time and may continue to affect our business, results of operations and financial condition even after the COVID-19 pandemic has subsided. There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the pandemic is highly uncertain and subject to change.
Our participation in the Paycheck Protection Program and other regulatory and governmental actions to mitigate the impact of the COVID-19 could result in reputational harm, claims and litigation.
Our Banks are participating lenders in the PPP, a loan program administered through the SBA that was created under the CARES Act, and modified by the PPFA and Economic Aid Acts, to help eligible businesses, organizations and self-employed persons fund their operational costs during the COVID-19 pandemic. Under this program, the SBA guarantees 100% of the amounts of fixed, low interest rate loans that are subject to numerous other regulatory requirements. Borrowers are also eligible to apply to the SBA for forgiveness of their PPP loan obligations, and most are expected to do so. Because of the short windows between the passing of the authorizing legislation and the opening of the PPP, there was and continues to be some ambiguity in the laws, rules and guidance regarding the operation of the PPP. Subsequent rounds of legislation and associated agency guidance have not provided necessary clarity and have created potential additional inconsistencies and ambiguities. Accordingly, the Banks are exposed to risks relating to compliance with the PPP requirements, including reputational harm. Additionally, since the launch of the PPP, several other banks have been subject to litigation regarding the process and procedures used in processing applications for the PPP. If PPP borrowers fail to qualify for loan forgiveness, the Banks face a heightened risk of holding these loans at unfavorable interest rates for an extended period of time. The Banks have credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced. If a deficiency is identified, the SBA may deny forgiveness, take action against borrowers and, in some instances, deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Banks.
Economic and Market Conditions Risk
Our business and financial results are significantly affected by general business and economic conditions.
Our business activities and earnings are affected by general business conditions in the United States and particularly in our Bank Markets. Factors such as the volatility of interest rates, home prices and real estate values, unemployment, credit defaults, increased bankruptcies, decreased consumer spending and household income, volatility in the securities markets, persistent inflation, supply chain issues, labor shortages, and the cost and availability of capital have negatively impacted our business in the past and may adversely impact us in the future. Economic deterioration that affects household and/or corporate incomes could result in renewed credit deterioration and reduced demand for credit or fee-based products and services, negatively impacting our performance. In addition, changes in securities market conditions and monetary fluctuations could adversely affect the availability and terms of funding necessary to meet our liquidity needs.
Our business dependent upon the continued growth and welfare of the various geographic markets that we serve.
We operate in Bank Markets in Iowa, Illinois, Wisconsin, Arizona, New Mexico, Montana, Colorado, Minnesota, Kansas, Missouri, Texas and California, and our financial condition, results of operations and cash flows are subject to changes in the economic conditions in those markets. Our success depends upon the economic vitality, growth prospects, business activity, population, income levels, deposits and real estate activity in those areas and may be impacted by the effects of past and future civil unrest and domestic disturbances in the communities that we serve. Although our customers' business and financial interests may extend well beyond our market areas, adverse economic conditions that affect our specific market area could reduce our growth rate, affect the ability of our customers to repay their loans to us and impact the stability of our deposit funding sources. Consequently, declines in economic conditions in those Bank Markets could generally affect our financial condition and results of operations.
Our business and performance are vulnerable to the impact of volatility in debt and equity markets.
As most of our assets and liabilities are financial in nature, our performance is sensitive to the performance of the financial markets. Turmoil and volatility in the financial markets can be a major contributory factor to overall weak economic conditions, including the impaired ability of borrowers and other counterparties to meet obligations to us. Financial market volatility may:
•Affect the value or liquidity of our on-balance sheet and off-balance sheet financial instruments.
•Affect the value of capitalized servicing assets.
•Affect our ability to access capital markets to raise funds. Inability to access capital markets if needed, at cost effective rates, could adversely affect our liquidity and results of operations.
•Affect the value of the assets that we manage or otherwise administer or service for others. Although we are not directly impacted by changes in the value of such assets, decreases in the value of those assets would affect related fee income and could result in decreased demand for our services.
Additionally, financial markets may be adversely affected by the current or anticipated impact of military conflict, including escalating military tension between Russia and Ukraine, terrorism or other geopolitical events.
Changes in interest rates and other conditions could negatively impact net interest income and net interest margin.
A high percentage of our assets and certain liabilities could become interest-bearing, and as a result, changes in interest rates, in the shape of the yield curve or in spreads between different market interest rates, can have a material effect on our financial
performance. Our profitability is in part a function of the spread between the interest rates earned on investments and loans and the interest rates paid on deposits and other interest-bearing liabilities. Like most banking institutions, our net interest spread and margin will be affected by general economic conditions and other factors, including fiscal and monetary policies of the Federal Reserve that influence market interest rates, and our ability to respond to changes in such rates. The Federal Reserve System regulates the supply of money and credit in the United States, and it influences interest rates by changing the discount rate at which it lends money to banks and by adjusting the target for the federal funds rate at which banks borrow from other banks. Its fiscal and monetary policies determine, in a large part, our cost of funds for lending and investing and the return that can be earned on those loans and investments, both of which affect our net interest margin. In addition, decisions by the Federal Reserve to increase or reduce the size of its balance sheet or to engage in tapering its purchase of assets may also affect interest rates. Federal Reserve Board policies can also materially affect the value of financial instruments that we hold, such as debt securities and mortgage servicing rights.
At any given time, our assets and liabilities may be affected differently by a given change in interest rates. Asset values, especially commercial real estate collateral, securities or other fixed rate earning assets, can decline significantly with relatively minor changes in interest rates. As a result, an increase or decrease in rates, the length of loan terms or the mix of adjustable and fixed rate loans in our portfolio could have a positive or negative effect on our net income, capital and liquidity. We measure interest rate risk under various rate scenarios using specific criteria and assumptions. A summary of this process, along with the results of our net interest income simulations, is presented under the caption "Quantitative and Qualitative Disclosures About Market Risk" included under Item 7A of Part II of this Annual Report on Form 10-K. Although we believe our current level of interest rate sensitivity is reasonable and effectively managed, significant fluctuations in interest rates may have an adverse effect on our business, financial condition and results of operations, and specifically, our net interest income. Also, our interest rate risk modeling techniques and assumptions may not fully predict or capture the impact of actual interest rate changes on our financial condition and results of operations.
In response to the economic consequences of the COVID-19 pandemic, the Federal Reserve lowered its target for the federal funds rate to a range of 0% to 0.25%. While interest rates remain low, the Federal Reserve is expected to begin slowly raising interest rates during 2022. We cannot predict the nature or timing of future changes in monetary policies or the precise effects that they may have on our activities and financial results.
We may be adversely impacted by the planned phasing out of the London Interbank Offered Rate ("LIBOR") as a reference rate.
We have derivative contracts, borrowings, variable rate loans and other financial instruments with attributes that are either directly or indirectly dependent on the LIBOR. Central banks around the world, including the Federal Reserve, have commissioned committees and working groups of market participants and official sector representatives to replace LIBOR and replace or reform other interest rate benchmarks. The publication of most LIBOR rates ceased as of the end of December 2021. While certain U.S. dollar LIBOR tenors are expected to continue to be published until June 30, 2023, the U.S. banking agencies have encouraged banks to cease entering into new contracts referencing LIBOR no later than December 31, 2021. A transition away from the widespread use of LIBOR to alternative rates and other potential interest rate benchmark reforms has begun and will continue over the course of the next few years. These reforms may cause such rates to perform differently than in the past, or to disappear entirely, or have other consequences which cannot be predicted.
While there is no consensus on what rate or rates may become accepted alternatives to LIBOR, a group of market participants convened by the Federal Reserve, the Alternative Reference Rate Committee, has selected the Secured Overnight Financing Rate ("SOFR") as its recommended alternative to LIBOR. SOFR is a broad measure of the cost of overnight borrowings collateralized by Treasury securities that was selected due to the depth and robustness of the U.S. Treasury repurchase market. At this time, it is impossible to predict whether SOFR will become an accepted alternative to LIBOR.
The transition from LIBOR to SOFR or a different alternative reference rate is complex and could have a range of adverse impacts on us. In particular, any such transition could, among other things, (i) adversely effect the value of, return on and trading for financial assets or liabilities that are linked to LIBOR, including securities, loans or derivatives; (ii) require renegotiation of outstanding financial assets and liabilities; (iii) result in additional inquiries or other actions from regulators in respect to our preparation and readiness for the LIBOR transition; (iv) increase the risks of disputes or litigation and/or increase expenses related to the transition; (v) adversely impact our reputation as we work with customers to transition loans and financial instruments from LIBOR; (vi) require successful system and analytics development and operationalization to transition to our systems, loan portfolio and risk management processes away from LIBOR, which will require reliance on third-party vendors; and (vii) cause disruption in financial markets that are relevant to our business.
In March 2020, the Financial Accounting Standards Board ("FASB") issued ASU 2020-04 "Reference Rate Reform" which addresses the effect of the anticipated transfer away from LIBOR towards new interest rate benchmarks under GAAP. HTLF
has a formal working group that is responsible for the planning, assessment and execution of the transition from LIBOR to SOFR. Currently, HTLF has adjustable rate loans, several debt obligations and securities and derivative instruments in place that reference LIBOR-based rates. HTLF began transitioning to term SOFR effective December 31, 2021 and has ceased using LIBOR as a reference rate for new contracts. While HTLF will continue to execute on its transition plan, there can be no assurance that actions taken by us and third parties to address these risks or effectively transition from LIBOR will be successful.
We have recorded goodwill as a result of acquisitions, and if it becomes impaired, our earnings could be significantly impacted.
Under current accounting standards, goodwill is not amortized but, instead, is subject to impairment tests on at least an annual basis or more frequently if an event occurs or circumstances change that reduce the fair value of a reporting unit below its carrying amount. Although we do not anticipate impairment charges, if we conclude that some portion of our goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded against earnings. A goodwill impairment charge could be caused by a decline in our stock price or occurrence of a triggering event that compounds the negative results in an unfavorable quarter. At December 31, 2021, we had goodwill of $576.0 million, representing approximately 26% of stockholders’ equity.
We have substantial deferred tax assets that could require a valuation allowance and a charge against earnings if we conclude that the tax benefits represented by the assets are unlikely to be realized.
Our consolidated balance sheet reflected approximately $53.6 million of deferred tax assets at December 31, 2021, that represents differences in the timing of the benefit of deductions, credits and other items for accounting purposes and the benefit for tax purposes. To the extent we conclude that the value of this asset is not more likely than not to be realized, we would be obligated to record a valuation allowance against the asset, impacting our earnings during the period in which the valuation allowance is recorded. Assessing the need for, or the sufficiency of, a valuation allowance requires management to evaluate all available evidence, both negative and positive. Positive evidence necessary to overcome the negative evidence includes whether future taxable income in sufficient amounts and character within the carryback and carryforward periods is available under the tax law. When negative evidence (e.g., cumulative losses in recent years, history of operating losses or tax credit carryforwards expiring unused) exists, more positive evidence than negative evidence will be necessary. If the positive evidence is not sufficient to exceed the negative evidence, a valuation allowance for deferred tax assets is established. The creation of a substantial valuation allowance could have a significant negative impact on our reported results in the period in which it is recorded. The impact of the impairment of HTLF's deferred tax assets could have a material adverse effect on our business, results of operations and financial condition.
Changes in the federal, state or local tax laws may negatively impact our financial performance.
We are subject to changes in tax law that could increase our effective tax rates. The enactment of such legislation including provisions impacting tax rates, apportionment, consolidation or combination, income, expenses, credits and exemptions may have a material impact on our business, financial conditions and results of operations. These tax law changes may also be retroactive to previous periods and could negatively affect our current and future financial performance. There is no assurance that tax rates will remain at current levels or that presently anticipated benefits will be realized in future years’ financial performance.
Our business and financial performance could be adversely affected, directly or indirectly, by natural disasters, climate change, pandemics, terrorist activities, domestic disturbances or international hostilities
Neither the occurrence nor the potential impact of natural disasters, climate change, pandemics, terrorist activities, domestic disturbances or international hostilities can be predicted. However, these occurrences could impact us directly (for example, by interrupting our systems, which could prevent the us from obtaining deposits, originating loans and processing and controlling the flow of business; causing significant damage to our facilities; or otherwise preventing us from conducting business in the ordinary course), or indirectly as a result of their impact on our borrowers, depositors, other customers, vendors or other counterparties (for example, by damaging properties pledged as collateral for our loans or impairing the ability of certain borrowers to repay their loans). We could also suffer adverse consequences to the extent that natural disasters, climate change, pandemics, terrorist activities, domestic disturbances or international hostilities affect the financial markets or the economy in general or in any particular region. These types of impacts could lead, for example, to an increase in delinquencies, bankruptcies or defaults that could result in higher levels of nonperforming assets, net charge- offs and provisions for credit
losses.
Our ability to mitigate the adverse consequences of these occurrences is in part dependent on the quality of our resiliency planning, and our ability, if any, to anticipate the nature of any such event that occurs. The adverse impact of natural disasters, climate change, pandemics, terrorist activities, domestic disturbances or international hostilities also could be increased to the extent that there is a lack of preparedness on the part of national or regional emergency responders or on the part of other
organizations and businesses that we transact with, particularly those that we depend upon, but have no control over. Additionally, the force and frequency of natural disasters are increasing as the climate changes.
Climate change manifesting as transition, physical or other risks could adversely affect our operations, businesses, customers, reputation and financial condition.
There is an increasing concern over the risks of climate change and related environmental sustainability matters. The physical risks of climate change include discrete events, such as flooding, hurricanes, tornadoes and wildfires, and longer-term shifts in climate patterns, such as extreme heat, sea level rise, and more frequent and prolonged drought. Such events could disrupt our operations or those of our customers or third parties on which we rely, including through direct damage to assets and indirect impacts from supply chain disruption and market volatility. Additionally, transitioning to a low-carbon economy will entail extensive policy, legal, technology and market initiatives. Transition risks, including changes in consumer preferences, additional regulatory requirements or taxes and additional counterparty or customer requirements, could increase our expenses, undermine our strategies and impact our financial condition. In addition, our reputation and client relationships may be damaged as a result of our practices related to climate change, including our involvement, or our clients’ involvement, in certain industries or projects associated with causing or exacerbating climate change, as well as any decisions we make to continue to conduct or change our activities in response to considerations relating to climate change. As climate risk is interconnected with all key risk types, we are developing and enhancing processes and disclosures to embed climate risk considerations into our risk management strategies established for risks such as market, credit and operational risks; however, because the timing and severity of climate change may not be predictable, our risk management strategies may not be effective in mitigating climate risk exposure.
Our framework for managing risks may not be effective in mitigating risk and losses.
Our risk management framework seeks to mitigate risk and loss. We have established processes and procedures intended to identify, measure, monitor, report, and analyze the types of risk to which we are subject, including liquidity risk, credit risk, market risk (including interest rate and price risk), compliance risk, strategic risk, reputation risk, and operational risk related to our employees, systems, processes and vendors, among others. However, as with any risk management framework, there are inherent limitations to our risk management strategies as there may exist, or develop in the future, risks that it has not appropriately anticipated or identified. We must also develop and maintain a culture of risk management among our employees, as well as manage risks associated with third parties, and could fail to do so effectively. If our risk management framework proves ineffective, we could incur litigation and negative regulatory consequences, and suffer unexpected losses that could affect its financial condition or results of operations.
Credit Risks
If we do not properly manage our credit risk, we could suffer material credit losses.
There are substantial risks inherent in making any loan, including, but not limited to:
•risks resulting from changes in economic and industry conditions;
•risks inherent in dealing with individual borrowers;
•uncertainties as to the future value of collateral; and
•the risk of non-payment of loans.
Although we attempt to properly establish, measure and manage our credit risk through prudent loan underwriting procedures and by monitoring concentrations of our loans, there can be no assurance that these underwriting and monitoring procedures will effectively reduce these risks. Moreover, as we continue to expand into new markets, credit administration and loan underwriting policies and procedures may need to be adapted to local conditions. The inability to properly manage our credit risk or appropriately adapt our credit administration and loan underwriting policies and procedures to local market conditions or to changing economic circumstances could have an adverse impact on our allowance and provision for credit losses and our financial condition, results of operations and liquidity.
We are subject to lending concentration risks.
Our commercial loans, which tend to be larger and more complex credits than loans to individuals, are primarily approved based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. If the economy weakens or if the industry in which the borrower operates weakens, our borrowers may experience depressed or sudden decreases in revenues that could hinder their cash flow and ability to repay their loans. Consequently, declines in the economy could have a material adverse impact on our earnings. Most often, the underlying collateral consists of accounts receivable, inventory, machinery or real estate. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its
customers. The other types of collateral securing these loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the customer's business and market conditions.
We depend on the accuracy and completeness of information about our customers and counterparties.
In deciding whether to extend credit or enter into other transactions, we rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports and other financial information. We may also rely on representations of those customers, counterparties or other third parties, such as independent auditors, regarding the accuracy and completeness of that information. As a result of the current economic environment caused by the COVID-19 pandemic, we are engaging in more frequent communication with borrowers to better understand their creditworthiness and the challenges faced. These communications should allow HTLF to respond proactively as borrower needs and issues arise. Reliance on inaccurate or misleading financial statements, credit reports or other financial information could cause us to make uncollectible loans or enter into other unfavorable transactions, which could have a material adverse effect on our financial condition and results of operations.
Our loan portfolio has a large concentration of commercial real estate loans, a segment that can be subject to volatile cash flows and collateral values.
Commercial real estate lending, which is comprised of owner-occupied, non-owner occupied, and real estate construction loans, represents a large portion of our commercial loan portfolio. The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in any of our geographic Bank Markets in which the real estate is located. Adverse developments in nationwide or regional market conditions affecting real estate values could negatively impact of our commercial real estate loans, and other developments could increase the credit risk associated with our loan portfolio. Non-owner occupied commercial real estate loans typically are dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. The effect of and response to the COVID-19 pandemic (as separately described above) has had a negative impact on some commercial real estate loans and a more heavily negative impact on lodging, retail trade, and retail properties, in particular those retail properties dependent on restaurants and bars, and the oil and gas, segments.
Real estate construction loans involve additional risks because funds are advanced based upon estimates of costs and the estimated value of the completed project and also have a greater risk of default in a weaker economy because the source of repayment is reliant on the successful and timely sale of lots or land held for resale. These loans present project completion risks, as well as the risks applicable to other commercial real estate loans. Economic events or governmental regulations outside of the control of HTLF or the borrower could negatively impact the future cash flow and market values of the affected properties.
We may encounter issues with environmental law compliance if we take possession, through foreclosure or otherwise, of the real property that secures a commercial real estate loan.
A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If previously unknown or undisclosed hazardous or toxic substances are discovered, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses which may materially reduce the affected property's value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although we have policies and procedures to perform an environmental review at the time of underwriting a loan secured by real property and also before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations.
The ability of a borrower to repay agricultural loans may be especially affected by many factors outside of the borrower’s control.
Payments on agricultural and agricultural real estate loans are dependent on the profitable operation or management of the farm property securing the loan. If the cash flow from a farming operation is diminished, the borrower's ability to repay the loan may be impaired. Loans that are unsecured or secured by rapidly depreciating assets such as farm equipment or assets such as livestock or crops may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage to or depreciation in the value of crops or livestock.
The success of a farm may be affected by many factors outside the control of the borrower, including adverse weather conditions that prevent the planting of a crop or limit crop yields (such as hail, drought and floods), loss of livestock due to disease or other factors, declines in market prices for agricultural products (both domestically and internationally) and the
impact of government regulations (including changes to global trade agreements, price supports, subsidies and environmental regulations). In addition, many farms are dependent on a limited number of key individuals whose injury or death may significantly affect the successful operation of the farm.
We hold one- to four-family first-lien residential mortgage loans in our loan portfolio, and the ability of the borrower to repay may be difficult to estimate.
The residential mortgage loans that we hold in our loan portfolio are primarily to borrowers we believe to be credit worthy based on internal standards and guidelines. Repayment is dependent upon the borrower's ability to repay the loan and the underlying value of the collateral. If we have overestimated or improperly calculated the abilities of the borrowers to repay those loans, default rates could be high, and we could face more legal process and costs to enforce collection of the loan obligations. If the value of the collateral is incorrect, we could face higher losses on the loans.
Economic disruption resulting from the COVID-19 pandemic may make it difficult for some customers to repay their loans, resulting in increased credit losses.
The effect of and response to the COVID-19 pandemic (as separately described above) will make it difficult for some customers to make timely payments on their loans in accordance with their terms. We believe that the COVID-19 pandemic has had some impact on all customers and an especially negative impact on the lodging, retail trade, retail properties, restaurants and bars and oil and gas segments.
In keeping with guidance from regulators, we have actively worked with COVID-19 affected borrowers to defer their payments, interest, and fees. Beginning in March of 2020, we offered certain customers the opportunity to modify the terms of existing loans, resulting in interest only payments or the deferment of principal and interest payments for a set period of time, typically 90 days. In accordance with regulatory guidance, these modifications are not considered or reported as troubled debt restructurings. While interest and fees will still accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments occur, interest income and fees accrued would need to be reversed. In such a scenario, interest income and net interest margin could be negatively impacted in future periods. Upon completion of these initial deferral periods, it is anticipated that some loans will return to normal repayment and other may require further modifications.
These loan deferrals are intended to increase the likelihood that the affected borrowers will operate through and recover following the COVID-19 pandemic, after which their loans will return to a normal repayment schedule and perform in accordance with their original terms. There can be no assurance, however, that these efforts will be successful and may instead only result in a delay rather than avoidance of deterioration or losses on loans to the affected borrowers. If economic conditions worsen, we could be required to further increase our allowance for credit losses and record additional credit loss expense. Our asset quality measures could worsen during future measurement periods if the effects of the COVID-19 pandemic are prolonged.
Government programs established in response to the COVID-19 pandemic may delay but not avoid the realization of credit losses.
Pursuant to the CARES Act, beginning at the end of March 2020, the SBA made up to six months of principal and interest payments on behalf of borrowers on certain qualifying SBA guaranteed loans. Pursuant to the Economic Aid Act, beginning in February of 2021 the SBA began making an additional three months of such principal and interest payments.
The CARES Act also established the PPP (as further described above). PPP loans are also in payment deferral, requiring no principal or interest payments until the loan forgiveness process is completed. Pursuant to the Economic Aid Act, in January of 2021, the PPP loan program was re-opened for new PPP borrowers and expanded to allow certain previous PPP borrowers to receive a second draw PPP loan. Second draw PPP loans are also 100% SBA guaranteed, eligible for up to 100% forgiveness by the SBA and will be in payment deferral, requiring no principal or interest payments until the loan forgiveness process is completed.
The foregoing programs are intended to increase the likelihood that the affected borrowers operate through and recover following the COVID-19 pandemic, after which their loans will return to a normal repayment schedule and perform in accordance with their original terms or in the case of PPP loans, will be forgiven. There can be no assurance, however, that these programs will be successful and may instead result in a delay rather than avoidance of deterioration or losses on loans to the affected borrowers. In addition, while the implementation and success of these programs is highly dependent on the SBA and other governmental bodies, these programs also expose the participating financial institutions, including HTLF, to reputational risks.
Our allowance for credit losses may prove to be insufficient to absorb losses in our loan portfolio.
We establish our allowance for credit losses in consultation with management of the Banks and maintain it at a level considered
appropriate by management to absorb current expected credit losses and risks inherent in the portfolio. While the level of allowance for credit losses reflects management's continuing evaluation of quantitative and qualitative factors including industry concentrations, loan portfolio quality and economic conditions, the amount of future loan losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, levels of inflation, and other factors which may be beyond our control, and such losses may exceed current estimates. At December 31, 2021, our allowance for credit losses as a percentage of total loans was 1.11% and as a percentage of total nonperforming loans was approximately 157%. Although we believe that the allowance for credit losses is appropriate to absorb current expected credit losses on any existing loans that may become uncollectible, we cannot predict loan losses with certainty, and we cannot provide assurance that our allowance for credit losses will prove sufficient to cover actual loan losses in the future. Further significant provisions, or charge-offs against our allowance that result in provisions, could have a significant negative impact on our profitability. Credit losses in excess of our reserves may adversely affect our business, financial condition and results of operations.
In June 2016, the FASB issued an accounting standard update, "Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments," which replaced the "incurred loss" model for recognizing credit losses with an "expected loss" model referred to as the Current Expected Credit Loss ("CECL") model. The CECL standard became effective for us on January 1, 2020. Under the CECL model, we present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. CECL also requires that an allowance for credit losses be established for any unfunded loan commitments that are not cancelable. The measurement of expected credit losses is based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount, including anticipated losses resulting from changes in economic conditions as a result of events such as the COVID-19 pandemic. This measurement takes place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the incurred loss model previously required under GAAP, which delayed recognition until it is probable a loss has been incurred. Accordingly, the adoption of the CECL model materially affected how we determine our allowance for credit losses and could require us to significantly increase our allowance in future periods. Moreover, the CECL model may create more volatility in the level of our allowance for credit losses. If we are required to materially increase our level of allowance for credit losses for any reason, such increase could adversely affect our business, financial condition and results of operations. See Note 1, "Basis of Presentation," of the notes to the consolidated financial statements for additional information on our CECL methodology.
While the fiscal stimulus and relief programs enacted in response to the COVID-19 pandemic mitigated credit losses in 2021, going forward we may experience changes in the value of collateral securing outstanding loans, deterioration in the credit quality of borrowers, and the inability of borrowers to repay loans in accordance with their loan terms causing credit losses.
Liquidity and Interest Rate Risks
Liquidity is essential to our business, and our performance could be adversely affected by constraints in or increased costs for funding.
We require liquidity to fund our deposit and debt obligations as they come due. A number of factors beyond our control could have a detrimental impact on the availability or costs of that funding. These include market disruptions, changes in our credit ratings or the sentiment of investors, the state of the regulatory environment and monetary and fiscal policies, declines in the value of our investment securities, loss of substantial deposits or customer relationships, financial or systemic shocks, significant counterparty failures or reputational damage. Our ability to meet current financial obligations is a function of our balance sheet structure, ability to liquidate assets and access to alternative sources of funds. Our access to deposits can be impacted by the liquidity needs of our customers as a substantial portion of our deposit liabilities are on demand, while a significant portion of our assets are loans that cannot be sold in the same timeframe or are securities that may not be readily saleable if there is disruption in capital markets. If we become unable to obtain funds when needed, it could have a material adverse effect on our business, financial condition and results of operations.
The required accounting treatment of loans we acquire through acquisitions could result in higher net interest margins and interest income in current periods and lower net interest margins and interest income in future periods.
Under United States GAAP, we are required to record loans acquired through acquisitions, at fair value. Estimating the fair value of such loans requires management to make estimates based on available information and facts and circumstances on the acquisition date. Any net discount, which is the excess of the amount of reasonably estimable and probable discounted future cash collections over the purchase price, is accreted into interest income over the weighted average remaining contractual life of the loans. Therefore, our net interest margins may fluctuate due to the net discount accretion. We expect the yields on the total loan portfolio will decline as our acquired loan portfolios pay down or mature and the corresponding accretion of the net discount decreases. We expect downward pressure on our interest income to the extent that the runoff of our acquired loan portfolios is not replaced with comparable high-yielding loans. This could result in higher net interest margins and interest income in current periods and lower net interest margins and interest income in future periods.
Our liability portfolio, including deposits, may subject us to liquidity risk and pricing risk from concentrations.
We strive to maintain a diverse liability portfolio, and we manage deposit portfolio diversification through our asset/liability committee process. However, even with our efforts to maintain diversification, we occasionally accept larger deposit customers, and our typical deposit customers might occasionally carry larger balances. Unanticipated, significant changes in these large balances could affect our liquidity risk and pricing risk, particularly within the deposit portfolio of a single Bank, where the effects of the concentration would be greater than for HTLF as a whole. Our inability to manage deposit concentration risk could have a material adverse effect on our business, financial condition and results of operations.
Our growth may create the need to raise additional capital in the future, but that capital may not be available when it is needed.
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. We anticipate that our existing capital resources will satisfy our capital requirements for the foreseeable future. However, from time to time, we raise additional capital to support continued growth, both internally and through acquisitions. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside of our control, and on our financial performance. Accordingly, we cannot provide assurance that we will be able to raise additional capital if needed on terms acceptable to us. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired.
We rely on dividends from our subsidiaries for most of our revenue and are subject to restrictions on payment of dividends.
The primary source of funds for HTLF is dividends from the Banks. In general, the Banks may only pay dividends either out of their historical net income after any required transfers to surplus or reserves have been made or out of their retained earnings. The payment of dividends by any financial institution is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. These dividends are the principal source of funds to pay dividends on HTLF's common and preferred stock and to pay interest and principal on our debt. Dividends payable on common shares are also subject to quarterly dividends payable on outstanding preferred shares at the applicable dividend rate.
Reduction in the value, or impairment of our investment securities, can impact our earnings and common stockholders' equity.
We maintained a balance of $7.70 billion, or 40% of our assets, in investment securities at December 31, 2021. Changes in market interest rates can affect the value of these investment securities, with increasing interest rates generally resulting in a reduction of value. Although the reduction in value from temporary increases in market rates does not affect our income until the security is sold, it does result in an unrealized loss recorded in other comprehensive income that can reduce our common stockholders’ equity. Further, we may have to record provision expense to establish an allowance for credit losses on our carried at fair value debt securities, and we must periodically test our investment securities for other-than-temporary impairment in value. In assessing whether the impairment of investment securities is other-than-temporary, we consider the length of time and extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability to retain our investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value in the near term.
Operational Risks
We have a continuing need for technology investments, and we may not have the resources to effectively implement new technology.
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to being able to better serve customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience, as well as to create additional efficiencies in our operations as we continue to grow and expand our market areas. Many of our larger competitors have substantially greater resources to invest in technological improvements. As a result, they may be able to offer additional or superior products and services to those that we will be able to offer, which would put us at a competitive disadvantage. In addition, the COVID-19 pandemic has accelerated the need to implement technological changes as a result of modifications to our business practices implemented in order to address governmental restriction and requirements to address the needs, preferences and best interests of our employees, customers and business partners.
Our operations are affected by risks associated with our use of vendors and other third-party service providers.
We rely on vendor and third-party relationships for a variety of products and services necessary to maintain our day-to-day activities, particularly in the areas of correspondent relationships, operations, treasury management, information technology and security. This reliance exposes us to risks of those third parties failing to perform financially or contractually or to our expectations. These risks could include material adverse impacts on our business, such as credit loss or fraud loss, disruption or interruption of business activities, cyber-attacks and information security breaches, poor performance of services affecting our customer relationships and/or reputation, and possibilities that we could be responsible to our customers for legal or regulatory violations committed by those third parties while performing services on our behalf. In addition, the COVID-19 pandemic has increased the risk of third-party disruptions, including negative effects on network providers and other suppliers, which have been, and may further be, affected by, stay-at-home orders, market volatility and other factors that increase their risks of business disruption or that may otherwise affect their ability to perform under the terms of any agreements with us or provide essential services. While we have implemented an active program of oversight to address this risk, there can be no assurance that our vendor and third-party relationships will not have a material adverse impact on our business.
Security breaches, cyber-attacks or other similar incidents with respect to our or our vendors’ systems or network security, as well as the resulting theft or compromise of business and customer information, including personal information, could adversely affect our business or reputation, and create significant legal, regulatory or financial exposure.
We rely heavily on communications and information systems and networks to conduct our business, and as part of our business, we collect, maintain and otherwise process significant amounts of data (including confidential, personal, proprietary and other information) about our business, our customers and the products and services they use. Our operations are dependent upon our ability to protect our communications and information systems and networks against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, cyber-attacks or other similar incidents. Our business relies on the secure processing, transmission, storage and retrieval of confidential, personal, proprietary and other information in our communication and information systems and networks, and in communication and information systems and networks of third parties with which we do business.
We, our customers, our vendors and other third parties, including other financial service institutions and companies engaging in data processing, have been subject to, and are likely to continue to be the target of security breaches, cyber-attacks and other similar incidents. These security breaches, cyber-attacks and other similar incidents include, denial of service attacks, worms, computer viruses, malicious or destructive code, social engineering, phishing attacks, ransomware, malware, theft, malfeasance or improper access by employees or vendors, human error, fraud, attacks on personal emails of employees or other disruptive problems that could result in material disruptions, damage to systems or networks or the unauthorized release, accessing, gathering, monitoring, loss, destruction modification, acquisition, transfer, use or other processing of confidential, personal, proprietary or any other information of ours, our employees, our customers, our vendors, or other third parties with which we do business. Attacks of this nature are increasing in frequency, levels of persistence, sophistication and intensity, are evolving in nature, and are conducted by sophisticated and organized groups and individuals with a wide range of motives and expertise, including organized criminal groups, "hacktivists," terrorists, nation states, nation state-supported actors, and others. As cybersecurity threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate or remediate any information security vulnerabilities, threats, security breaches, cyber-attacks or other similar incidents. Despite efforts to protect our systems and networks and implement controls, processes, policies, and other measures, we may not be able to anticipate all security breaches, cyber-attacks or other similar incidents, detect or react to such incidents in a timely manner, implement guaranteed preventive measures against such incidents, or adequately remediate any such incident.
Cybersecurity risks for banking organizations have significantly increased in recent years in part because of the proliferation and rapid evolution of new technologies, and the use of the internet and telecommunication technologies to conduct financial transactions. For example, cybersecurity risks may increase in the future as we continue to increase our mobile-payment and other internet-based products offerings and increase our internal usage of web-based products and applications. Given the continued and rapid evolution of cybersecurity threats, we may not be able to anticipate or prevent, and could be held liable for, any security breach, cyber-attack or other similar incident. Additionally, concerns regarding the effectiveness of our measures to safeguard our communications and information systems and networks, and information stored therein, or even the perception that those measures are inadequate, could cause us to lose existing or potential customers and thereby reduce our revenues. Further, the COVID-19 pandemic has increased cybersecurity and payment fraud risk due to increased online and remote activity.
We also face indirect technology, cybersecurity and operational risks relating to the vendors, customers, clients and other third parties with whom we do business or upon whom we rely to facilitate or enable our business activities, including for example financial counterparties, regulators, and providers of critical infrastructure such as internet access or electrical power. Due to the increasing consolidation, interdependence, and complexity of financial entities and technology systems, a security breach, cyber-attack or other similar incident that significantly degrades, deletes or comprises the systems, networks or data of one or
more financial entities could have a material impact on counterparties or other market participants, including us. This consolidation, interconnectivity and complexity may increase the risk of operational failure on both an individual and industry-wide basis. While we generally perform cybersecurity diligence on our key vendors, because we do not control our vendors and our ability to monitor their cybersecurity is limited, we cannot ensure the cybersecurity measures they take will be sufficient to protect any information we share with them. Due to applicable laws and regulations or contractual obligations, we may be held responsible for security breaches, cyber-attacks or other similar incidents attributed to our vendors as they relate to the information we share with them.
The occurrence of any security breach, cyber-attack or other similar incident with respect to our or our vendors’ communications or information systems or networks, or our failure to make adequate or timely disclosures to the public, regulators, or law enforcement agencies following any such event, could result in violations of applicable data privacy, cybersecurity and other laws and regulations, notification obligations, damage to our reputation, and loss of customer business, or subject us to additional regulatory scrutiny or expose us to civil litigation, fines, damages or injunctions, any of which could have a material adverse effect on our business, financial condition and results of operations. We cannot ensure that any limitations of liability provisions in our agreements with customers, vendors and other third parties with which we do business would be enforceable or adequate or would otherwise protect us from any liabilities or damages with respect to any particular claim in connection with a security breach, cyber-attack or other similar incident. Additionally, we cannot be certain that our insurance coverage will be adequate for cybersecurity liabilities actually incurred, that insurance will continue to be available to us on economically reasonable terms, or at all, or that our insurer will not deny coverage as to any future claim.
The potential for business interruption or failure exists throughout our organization.
Integral to our performance is the continued efficacy of our technical systems, operational infrastructure, relationships with third parties and the ability of our employees to perform their jobs day-to-day to support our on-going operations. Failure by any or all of these resources subjects us to risks that may vary in size, scale and scope. These risks include, but are not limited to, operational or technical failures, ineffectiveness or exposure due to interruption in third party support, as well as the loss of key individuals, including those with specialized skills, or in general, the failure of key individuals to perform properly. These risks are heightened during necessary data system changes or conversions and system integrations of newly acquired entities. Although management has established policies and procedures to address such interruptions or failures, the occurrence of any such event could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations.
We are subject to risks from employee errors, customer or employee fraud and data processing system failures and errors.
Employee errors and employee or customer misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence. We maintain a system of internal controls and insurance coverage to mitigate against operational risks, including data processing system failures and errors and customer or employee fraud. Should our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition and results of operations.
Our Bank Markets and growth strategy rely heavily on our management team, and the unexpected loss of key managers may adversely affect our operations.
Much of our success to date has been influenced strongly by our ability to attract and to retain senior management experienced in banking and financial services and familiar with the communities in our different market areas. Because our service areas are spread over such a wide geographical area, our executive management headquartered in Dubuque, Iowa, is dependent on the effective leadership and capabilities of the senior management in our Bank Markets for the continued success of HTLF. Our ability to retain executive officers, the current senior management teams and loan officers of our operating subsidiaries will continue to be important to the successful implementation of our strategy and could be difficult during times of low unemployment. It is also critical, as we grow, to be able to attract and retain qualified additional management and loan officers with the appropriate level of experience and knowledge about our market area to implement our community-based operating strategy. The unexpected loss of services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, financial condition and results of operations.
New lines of business, products and services are essential to our ability to compete but may subject us to additional risks.
We continually implement new lines of business and offer new products and services within existing lines of business to offer our customers a competitive array of products and services. There can be substantial risks and uncertainties associated with these efforts, particularly in instances where such products and services are still developing. In developing and marketing new lines of business and/or new products or services, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved, and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on our business, financial condition and results of operations.
Our analytical and forecasting models may be improper or ineffective.
The processes we use to estimate our current expected credit losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on our financial condition and results of operations, depends upon the use of analytical and forecasting models. These models could reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the models may prove to be inadequate or inaccurate because of other flaws and limitations in their design or their implementation. If the models we use to guide management's decisions and oversight relating to interest rate risk and asset-liability management are inadequate, we may incur increased or unexpected losses upon changes in market interest rates or other market measures. If the models we use for determining our probable loan losses are inadequate, the allowance for credit losses may not be appropriate to support future charge-offs. If the models we use to measure the fair value of financial instruments are inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what we could realize upon sale or settlement of such financial instruments. Any such failure in our analytical or forecasting models could have a material adverse effect on our business, financial condition and results of operations.
Our internal controls may be ineffective.
Management regularly reviews and updates our internal controls, disclosure controls and procedures and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the controls are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls, policies and procedures could have a material adverse effect on our business, financial condition and results of operation.
Strategic and External Risks
The soundness of other financial institutions could adversely affect our liquidity and operations.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different counterparties, and we routinely execute transactions with counterparties in the financial industry, including brokers and dealers, commercial banks, government sponsored entities, investment banks, and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by HTLF or the Banks or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due us. There is no assurance that any such losses would not materially and adversely affect our results of operations.
We may experience difficulties in achieving and managing our growth and our growth strategy involves risks that may negatively impact our net income. Strong organic growth is an integral component to allow us to achieve business and financial results necessary to make appropriate investments in people, processes and systems which allow HTLF to remain competitive in attracting and retaining employees and customers.
As part of our general growth strategy, we have acquired, and may acquire, additional banks and fee income and other financial services businesses that we believe provide a strategic and geographic fit with our business. We expect to continue to make such acquisitions in the future. We cannot predict the number, size or timing of acquisitions. Economic conditions as well as the need for technological investment by regional banks could result in increased competition for merger or acquisition partners, potentially resulting in higher acquisition prices or an inability to complete desired acquisitions. Moreover, changing attitudes by the federal banking regulators about mergers may slow or prevent mergers. Failure to successfully identify and complete acquisitions likely will result in HTLF achieving slower growth.
To the extent that we grow through acquisitions, we cannot provide assurance that we will be able to manage this growth adequately and profitably. Acquiring other banks and businesses will involve risks commonly associated with acquisitions, including:
•potential exposure to unknown or contingent liabilities of the banks and businesses we acquire;
•exposure to potential asset quality issues of the acquired bank or related business;
•difficulty and expense of integrating the operations and personnel of banks and businesses we acquire;
•potential disruption to our business;
•potential restrictions on our business resulting from the regulatory approval process;
•inability to realize the expected revenue increases, costs savings, market presence and/or other anticipated benefits;
•potential diversion of our management's time and attention; and
•the possible loss of key employees and customers of the banks and businesses we acquire.
In addition to acquisitions, we may expand into additional communities or attempt to strengthen our position in our current Bank Markets by undertaking additional de novo bank formations or branch openings. Based on our experience, we believe that it generally takes three years or more for new banking facilities to first achieve operational profitability, due to the impact of organization and overhead expenses and the start-up phase of generating loans and deposits. To the extent that we undertake additional branching and de novo bank and business formations, we are likely to continue to experience the effects of higher operating expenses relative to operating income from the new operations, which may have an adverse effect on our levels of reported net income, return on average equity and return on average assets.
Attractive acquisition opportunities may not be available to us in the future.
While we seek continued organic growth, we anticipate continuing to evaluate merger and acquisition opportunities presented to us in our Bank Markets. We expect that other banking and financial companies, many of which have significantly greater resources, will compete with us to acquire financial services businesses. This competition, as the number of appropriate merger targets decreases, could increase prices for potential acquisitions which could reduce our potential returns, and reduce the attractiveness of these opportunities to us. In addition, acquisitions are subject to various regulatory approvals, and if we fail to receive the appropriate regulatory approvals, we will not be able to consummate an acquisition that we believe is in our best interests. Among other things, our regulators consider our capital, liquidity, profitability, risk management, regulatory compliance, including with respect to BSA/AML, consumer protection laws, CRA obligations, and levels of goodwill and intangibles when considering acquisition and expansion proposals. The federal banking agencies are currently reevaluating their existing requirements and policies for reviewing mergers and acquisitions involving banking organizations, which could make it more difficult for us to pursue mergers and acquisitions in the future. Any acquisition could be dilutive to our earnings and shareholders’ equity per share of our common stock.
We face intense competition in all phases of our business and competitive factors could adversely affect our business.
The banking and financial services business in our Bank Markets is highly competitive and is currently undergoing significant change. Our competitors include large regional banks, local community banks, online banks, thrifts, fintech firms, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market mutual funds, credit unions and other non-bank financial service providers, and increasingly these competitors provide integrated financial services over a broad geographic area. In particular, technology companies are increasingly focusing on the financial sector, either in partnership with competitor banking organizations or on their own. These companies generally are not subject to the same regulatory burdens as main street financial institutions and may accordingly realize certain cost strategies and offer products and services at more favorable rates and with greater convenience to the client. This competition could result in the loss of clients and revenue in areas where fintechs are operating. As the pace of technology and change advance, continuous innovation is expected to exert long-term pressure on the financial services industry. Some of our competitors may also have access to governmental programs that impact their position in the marketplace favorably.
The adoption of new technologies by competitors, including internet banking services, mobile applications, advanced ATM functionality and cryptocurrencies could require HTLF to make substantial investments to modify or adapt its existing products and services or even radically alter the way HTLF conducts business. These and other capital investments in HTLF’s business may not produce expected growth in earnings anticipated at the time of the expenditure.
Increased competition in our Bank Markets may result in changes in our business model, sales of certain assets or business units, decreases in the amounts of our loans and deposits, reduced spreads between loan rates and deposit rates or loan terms that are more favorable to the borrower. Any of these results could have a material adverse effect on our ability to grow and remain profitable.
Legal, Compliance and Reputational Risks
Government regulation can result in limitations on our growth strategy.
We operate in a highly regulated environment and are subject to supervision and regulation by a number of governmental regulatory agencies, including the Federal Reserve, the FDIC, Housing and Urban Development ("HUD") and the various state agencies where we have a bank presence. We will also become subject to regulation by the CFPB upon consolidation of our Banks into a single charter. Regulations adopted by these agencies, which are generally intended to provide protection for depositors and customers rather than for the benefit of stockholders, govern a comprehensive range of matters relating to ownership and control of our shares, our acquisition of other companies and businesses, our ability to offer new products and services, our ability to obtain financing and other aspects of our strategy. In addition, the federal banking agencies are currently reevaluating their existing requirements and policies for reviewing mergers and acquisitions involving banking organizations, which could make it more difficult for us to pursue mergers and acquisitions in the future.
We are subject to extensive and evolving government regulation and supervision, which can increase the cost of doing business and lead to enforcement actions.
Federal and state banking laws impose a comprehensive system of supervision, regulation and enforcement on the operations of FDIC-insured institutions, their holding companies and affiliates that is intended primarily for the protection of the FDIC-insured deposits and depositors of banks, rather than shareholders. These laws, and the regulations of the bank regulatory agencies issued under them, affect, among other things, the scope of our business, the kinds and amounts of investments that we and the Banks may make, reserve requirements, required capital levels relative to assets, the nature and amount of collateral for loans, the establishment of branches, our ability to merge, consolidate and acquire, dealings with our and the Banks' insiders and affiliates and our payment of dividends.
Both the scope of the laws and regulations and the intensity of the supervision to which our business is subject have increased in recent years, as well as other factors such as technological and market changes. For example, as cybersecurity and data privacy risks for banking organizations and the broader financial system have significantly increased in recent years, cybersecurity and data privacy issues have become the subject of increasing legislative and regulatory focus. Regulatory enforcement and fines also remain high across the banking and financial services sector. We expect that our business will remain subject to extensive regulation and supervision.
We expect that the current presidential administration will continue to implement a regulatory reform agenda that is significantly different than that of the previous administration. This reform agenda could include a heightened focus on consumer protection, fair lending, the regulation of loan portfolios and credit concentrations to borrowers impacted by climate change, heightened scrutiny on Bank Secrecy Act and AML requirements, topics related to social equity, executive compensation, and increased capital and liquidity, as well as limits on share buybacks and dividends. For example, we currently derive a portion of our noninterest income from consumer overdraft fees, which have recently come under scrutiny by regulators, members of Congress and consumer rights groups. Regulators or Congress could impose additional restrictions on overdraft fee programs, which could reduce our noninterest income. It is uncertain whether and to what extent the current administration will increase the regulatory burden on community banks, and changes in existing regulations and their enforcement may require modification to HTLF's existing regulatory compliance and risk management infrastructure and practices.
In the routine course of regulatory oversight, proposals to change the laws and regulations governing the operations of banks and other financial institutions are frequently raised in the U.S. Congress, state legislatures and before bank regulatory authorities. Similarly, proposals to change the accounting and financial reporting requirements applicable to banks and other depository financial institutions are frequently raised by the SEC, the federal banking agencies and other authorities. The likelihood of significant changes in laws and regulations in the future and the effect such changes might have on our operations are impossible to determine. Recent changes in the laws and regulations that apply to us have been significant. Moreover, dramatic changes in statutes, regulations or policies could affect us in substantial and unpredictable ways, including limiting the types of financial products and services that we offer and/or increasing the ability of non-banks to offer competing financial products and services.
Stringent requirements related to capital and liquidity may limit our ability to return earnings to stockholders or operate or invest in our business.
As a banking organization, we are subject to regulations that require us to maintain certain capital ratios, such as the ratio of our Tier 1 capital to our risk-weighted assets. Failure to satisfy certain capital requirements could result in restrictions on our ability to make capital distributions. If our regulatory capital ratios decline, as a result of decreases in the value of our loan portfolio or
otherwise, we may be required to improve such ratios by either raising additional capital or by disposing of assets. If we choose to dispose of assets, we cannot be certain that we will be able to do so at prices that we believe to be appropriate, and our future operating results could be negatively affected. If we choose to raise additional capital, we may accomplish this by selling additional shares of common stock, or securities convertible into or exchangeable for common stock, which could significantly dilute the ownership percentage of holders of our common stock and cause the market price of our common stock to decline. Additionally, events or circumstances in the capital markets generally may increase our capital costs and impair our ability to raise capital at any given time.
Additional requirements may be imposed in the future. The Basel Committee continues to examine ways to strengthen the regulation, supervision and practices of banks and has produced, and continues to produce a number of consultation and discussion papers which point to a significant revision of the Basel Framework, including improvements to the calculation of risk-weighted assets and the comparability of capital ratios. The ultimate impact on our capital and liquidity will depend on the implementation of further changes in the United States.
We are becoming subject to additional regulatory requirements as our total assets increase, and these additional requirements could have an adverse effect on our financial condition or results of operations.
Various federal banking laws and regulations impose heightened requirements on larger banks and bank holding companies. These heightened requirements have added, and will continue to add, restrictions and complexity to our business operations, as we expand. For example, we were required to comply with the Durbin Amendment effective July 1, 2019, which imposes interchange fee restrictions to debit card issuers. In addition, should we receive regulatory approval and complete the consolidation of our Banks, we will become subject to additional regulation as a bank with assets over $10 billion.
The Economic Growth Act exempted bank holding companies under $100 billion in assets from certain Dodd-Frank Act requirements that were otherwise applicable to bank holding companies with greater than $10 billion and $50 billion in total consolidated assets. As required by the Economic Growth Act, the federal banking agencies adopted rules further tailoring their supervision and regulation of large bank holding companies with more than $100 billion in assets. However, federal banking agencies have also indicated through interagency guidance that the capital planning and risk management practices of institutions with total assets less than $100 billion would continue to be reviewed through the regular supervisory process, which may offset the impact of the relief from stress testing and risk management requirements provided by the Economic Growth Act.
We are subject to complex and evolving laws, regulations, rules, standards and contractual obligations regarding data privacy and cybersecurity, which can increase the cost of doing business, compliance risks and potential liability.
We are subject to complex and evolving laws, regulations, rules and standards governing the privacy and protection of personal information of individuals. Such individuals include our customers, our employees, and the employees of our vendors, counterparties and other third parties with which we do business. Ensuring that our collection, use, transfer, storage and other processing of personal information complies with applicable laws, regulations, rules and standards regarding data privacy and cybersecurity in relevant jurisdictions can increase operating costs, impact the development of new products or services, and reduce operational efficiency. Any actual or perceived mishandling or misuse of the personal information by HTLF or a third party affiliated with HTLF could expose us to litigation, regulatory fines, penalties or other sanctions, reputational harm, and other adverse impacts.
At the federal level, we are subject to the GLBA, which requires financial institutions to, among other things, periodically disclose their privacy policies and practices relating to sharing personal information and, in some cases, enables retail customers to opt out of the sharing of certain personal information with unaffiliated third parties. The GLBA also requires financial institutions to implement an information security program that includes administrative, technical and physical safeguards to ensure the security and confidentiality of customer records and information. Additionally, like other lenders, the Banks use credit bureau data in their underwriting activities. Use of such data is regulated under the Fair Credit Reporting Act ("FCRA"), and the FCRA also regulates reporting information to credit bureaus, prescreening individuals for credit offers, sharing of information between affiliates, and using affiliate data for marketing purposes. We are also subject to the rules and regulations promulgated under the authority of the Federal Trade Commission, which regulates unfair or deceptive acts or practices, including with respect to data privacy and cybersecurity. Moreover, the United States Congress has recently considered, and is currently considering, various proposals for more comprehensive data privacy and cybersecurity legislation, to which we may be subject if passed. Additionally, the federal banking regulators, as well as the SEC and related self-regulatory organizations, regularly issue guidance regarding cybersecurity that is intended to enhance cyber risk management among financial institutions.
Data privacy and cybersecurity are also areas of increasing state legislative focus and we are, or may in the future become, subject to various state laws and regulations regarding data privacy and cybersecurity. For example, the California Consumer Protection Act of 2018 (the "CCPA"), which became effective on January 1, 2020, applies to for-profit businesses that conduct business in California and meet certain revenue or data collection thresholds. The CCPA gives California residents the right to, among other things, request disclosure of information collected about them and whether that information has been sold to others, request deletion of personal information (subject to certain exceptions), opt out of the sale of their personal information, and not be discriminated against for exercising these rights. The CCPA contains several exemptions, including an exemption applicable to personal information that is collected, processed, sold or disclosed pursuant to the GLBA. Further, effective in most material respects starting on January 1, 2023, the California Privacy Rights Act ("CPRA") (which was passed via a ballot initiative as part of the November 2020 election) will significantly modify the CCPA, including by expanding California residents’ rights with respect to certain sensitive personal information. The CPRA also creates a new state agency which will be vested with authority to implement and enforce the CCPA and the CPRA. Other states where we do business, or may in the future do business, or from which we otherwise collect, or may in the future otherwise collect, personal information of residents have adopted or are considering adopting similar laws. For example, Virginia and Colorado have recently adopted comprehensive data privacy laws similar to the CCPA, which will go into effect in January and July of 2023, respectively. In addition, laws in all 50 U.S. states generally require businesses to provide notice under certain circumstances to consumers whose personal information has been disclosed as a result of a data breach. Certain state laws and regulations may be more stringent, broader in scope, or offer greater individual rights, with respect to personal information than federal or other state laws and regulations, and such laws and regulations may differ from each other, which may complicate compliance efforts and increase compliance costs. Aspects of the CCPA, the CPRA, and other federal and state laws and regulations relating to data privacy and cybersecurity, as well as their enforcement, remain unclear, and we may be required to modify our practices in an effort to comply with them.
Further, while we strive to publish and prominently display privacy policies that are accurate, comprehensive, and compliant with applicable laws, regulations, rules and industry standards, we cannot ensure that our privacy policies and other statements regarding our practices will be sufficient to protect us from claims, proceedings, liability or adverse publicity relating to data privacy or cybersecurity. Although we endeavor to comply with our privacy policies, we may at times fail to do so or be alleged to have failed to do so. The publication of our privacy policies and other documentation that provide promises and assurances about privacy, data protection and cybersecurity can subject us to potential federal or state action if they are found to be deceptive, unfair, or misrepresentative of our actual practices. Additional risks could arise in connection with any failure or perceived failure by us, our vendors or other third parties with which we do business to provide adequate disclosure or transparency to our customers about the personal information collected from them and its use, to receive, document or honor the privacy preferences expressed by our customers, to protect personal information from unauthorized disclosure, or to maintain proper training on privacy practices for all employees or third parties who have access to personal information in our possession or control.
Any failure or perceived failure by us to comply with our privacy policies, or applicable data privacy and cybersecurity laws, regulations, rules, standards or contractual obligations, or any compromise of security that results in unauthorized access to, or unauthorized loss, destruction, use, modification, acquisition, disclosure, release or transfer of personal information, may result in requirements to modify or cease certain operations or practices, the expenditure of substantial costs, time and other resources, proceedings or actions against us, legal liability, governmental investigations, enforcement actions, claims, fines, judgments, awards, penalties, sanctions and costly litigation (including class actions). Any of the foregoing could harm our reputation, distract our management and technical personnel, increase our costs of doing business, adversely affect the demand for our products and services, and ultimately result in the imposition of liability, any of which could have a material adverse effect on our business, financial condition and results of operations.
Litigation and enforcement actions could result in negative publicity and could adversely impact our business and financial results.
We face significant legal and regulatory risks in our business, and the volume of claims and amount of damages and penalties claimed in litigation and governmental proceedings against financial institutions have increased in recent years. Reputation risk, or the risk to our earnings and capital from the resulting negative publicity, is inherent to our business. Current public uneasiness with the United States banking system heightens this risk, as banking customers often transfer news regarding consumer fraud, financial difficulties or even failure of some institutions, to fear of fraud, financial difficulty or failure of even the most secure institutions. In this climate, any negative news may become cause for curtailment of business relationships, withdrawal of funds or other actions that can have a compounding effect and could adversely affect our operations.
Substantial legal liability or significant governmental action against us could materially impact our business and financial results. Also, the resolution of a litigation or regulatory matter could result in additional accruals or exceed established accruals for a particular period, which could materially impact our results from operations for that period.
Our reputation and our business are subject to negative publicity risk.
Reputation risk, or the risk to our earnings and capital from negative public opinion, is inherent in our business. Negative public opinion could adversely affect our ability to keep and attract customers and expose us to adverse legal and regulatory consequences. Negative public opinion could result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance, regulatory compliance, mergers and acquisitions, and disclosure, sharing or inadequate protection of customer information, and from actions taken by government regulators and community organizations in response to that conduct.
Risks of Owning Stock in HTLF
Our stock price can be volatile.
Our stock price can fluctuate widely in response to a variety of factors, including: actual or anticipated variations in our quarterly operating results; recommendations by securities analysts; acquisitions or business combinations; capital commitments by or involving HTLF or our Banks; operating and stock price performance of other companies that investors deem comparable to us; new technology used or services offered by our competitors; new reports relating to trends, concerns and other issues in the financial services industry; and changes in government regulations. General market fluctuations, industry factors and general economic and political conditions and events have caused a decline in our stock price in the past, and these factors, as well as, interest rate changes, continued unfavorable credit loss trends, or unforeseen events such as terrorist attacks could cause our stock price to be volatile regardless of our operating results.
Stockholders may experience dilution as a result of future equity offerings and acquisitions.
In order to raise capital for future acquisitions or for general corporate purposes, we may offer additional shares of our common stock or other securities convertible into or exchangeable for our common stock at a price per share that may be lower than the current price. In addition, investors purchasing shares or other securities in the future could have rights superior to existing stockholders. The price per share at which we sell additional shares of our common stock, or securities convertible or exchangeable into common stock, may be higher or lower than the price paid by existing stockholders.
Certain banking laws and the HTLF Stockholder Rights Plan may have an anti-takeover effect.
Certain federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire HTLF, even if doing so would be perceived to be beneficial to HTLF’s stockholders. HTLF's Amended and Restated Rights Agreement (the "Rights Plan") also made it difficult for any person to acquire 15% or more of HTLF's outstanding stock (with certain limited exceptions) without the permission of our board of directors. This Rights Plan expired effective January 17, 2022 and has not been reinstated or replaced by a similar plan.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
As of December 31, 2021, HTLF had no unresolved staff comments.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
The following table is a listing of HTLF’s principal operating facilities and the home offices of each of the Banks as of December 31, 2021:
Name and Main Facility Address Main Facility
Square Footage
Main Facility
Owned or Leased
Number of
Locations(1)
Heartland Financial USA, Inc.
700 Locust Street
Suite 400
Dubuque, IA 52001 111,800 Leased 1
Dubuque Bank and Trust Company
1398 Central Avenue
Dubuque, IA 52001
65,500 Owned 8
Illinois Bank & Trust
4571 Guilford Rd.
Rockford, IL 61107 8,000 Owned 11
Wisconsin Bank & Trust
119 Junction Road
Madison, WI 53717 19,000 Owned 12
New Mexico Bank & Trust
320 Gold NW
Suite 100
Albuquerque, NM 87102 11,400 Lease term
through 2026 24
Arizona Bank & Trust
2036 E. Camelback Road
Phoenix, AZ 85016
14,000 Owned 9
Rocky Mountain Bank
2615 King Avenue West
Billings, MT 59108 16,600 Owned 9
Citywide Banks
1800 Larimer Street
Suite 100
Denver, CO 80202
8,700 Lease term
through 2030
Minnesota Bank & Trust
7701 France Avenue South
Suite 110
Edina, MN 55435 6,100 Lease term
through 2023
Bank of Blue Valley
11935 Riley Street
Overland Park, KS 66213 38,000 Owned 10
Premier Valley Bank
255 East River Park Circle
Suite 180
Fresno, CA 93720 17,600 Lease term
through 2023
First Bank & Trust
9816 Slide Road
Lubbock, TX 79424 64,500 Owned 30
(1) Includes loan production offices
The corporate office of HTLF moved from Dubuque Bank and Trust Company's main office to 700 Locust Street, Suite 400 in Dubuque, Iowa in 2021. A majority of the support functions provided to the Banks by HTLF are also performed in the same leased facility located at 700 Locust Street, Suites 500 and 600 in Dubuque, Iowa. In December 2019, HTLF formed a limited liability corporation with an unrelated third party to purchase the location on Locust Street, and HTLF has a lease with the limited liability corporation.
For information on obligations related to our leased facilities, see Note 23, "Leases," to the consolidated financial statements.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
The information required by this item is set forth in Part II, Item 8, Financial Statements and Supplementary Data, under Note 15, "Commitments, Off-Balance Sheet Arrangements, and Legal Proceedings."

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
The names and ages of the executive officers of HTLF, the position held by these officers with HTLF, and the positions held with HTLF subsidiaries, are set forth below:
Name Age Position with HTLF and Subsidiaries and Principal Occupation
Lynn B. Fuller 72 Executive Operating Chairman and Director of HTLF; Vice Chairman of Dubuque Bank and Trust Company, New Mexico Bank & Trust, Rocky Mountain Bank, Citywide Banks, Minnesota Bank & Trust, Bank of Blue Valley, Premier Valley Bank and First Bank & Trust; Director of Heartland Financial USA, Inc. Insurance Services
Bruce K. Lee 61 Chief Executive Officer, President and Director of HTLF; Director of Citywide Banks and First Bank & Trust; President of Heartland Financial USA, Inc. Insurance Services
Bryan R. McKeag 61 Executive Vice President and Chief Financial Officer of HTLF; Director of Heartland Financial USA, Inc. Insurance Services
Janet M. Quick 56 Executive Vice President, Deputy Chief Financial Officer, and Principal Accounting Officer of HTLF
Deborah K. Deters 57 Executive Vice President and Chief Human Resources Officer of HTLF
Lynn H. Fuller 38 Executive Vice President, Regional Bank President of HTLF, Director of Dubuque Bank and Trust Company, Illinois Bank & Trust, Wisconsin Bank & Trust, Bank of Blue Valley and First Bank & Trust
Nathan R. Jones 49 Executive Vice President and Chief Credit Officer of HTLF
Jay L. Kim 58 Executive Vice President, Corporate Secretary and General Counsel of HTLF; Secretary of Heartland Financial USA, Inc. Insurance Services
Tamina L. O'Neill 52 Executive Vice President and Chief Risk Officer of HTLF
David A. Prince 51 Executive Vice President and Commercial Banking of HTLF
Daniel C. Stevens 66 Executive Vice President and Operations of HTLF
Lynn B. Fuller was named Executive Operating Chairman of HTLF in 2018. Mr. Fuller has been a Director of HTLF since 1987 and Chairman of the Board since 2000. Mr. Fuller was the Chief Executive Officer of HTLF from 1999 to 2018 and was President of HTLF from 1990 to 2015. Mr. Fuller currently serves as a Director and Vice Chairman on the following HTLF subsidiary boards: Dubuque Bank and Trust Company since 1984, New Mexico Bank & Trust since 1998, Rocky Mountain Bank since 2004, Citywide Banks since 2006, Minnesota Bank & Trust since 2008, Bank of Blue Valley since 2013, Heartland Financial USA, Inc. Insurance Services since 2015, Premier Valley Bank since 2015 and First Bank & Trust since 2018. Mr. Fuller served as a Director on the Wisconsin Bank & Trust board from 1997 to 2021 and the Arizona Bank & Trust board from 2003 to 2021. Mr. Fuller joined Dubuque Bank and Trust Company in 1971 as a consumer loan officer and was named Dubuque Bank and Trust Company's Executive Vice President and Chief Executive Officer in 1987. Mr. Fuller was President of Dubuque Bank and Trust Company from 1987 until 1999 at which time he was named Chief Executive Officer of HTLF. He was a Director of Galena State Bank & Trust Co. from 1992 to 2004 and of Illinois Bank & Trust from 1995 until 2004 and Heritage Bank, N.A. from 2012 until its merger with Arizona Bank & Trust in 2013. Mr. Fuller is the father of Lynn H. Fuller, Executive Vice President, Regional Bank President, of HTLF.
Bruce K. Lee was named Chief Executive Officer of HTLF in 2018. Mr. Lee joined HTLF in 2015 as President and was elected a Director of HTLF in 2017. Mr. Lee currently serves as a Director on the following HTLF subsidiary boards: Heartland Financial USA, Inc. Insurance Services since 2015, Citywide Banks since 2017 and First Bank & Trust since 2018. Prior to joining HTLF, Mr. Lee held various leadership positions at Fifth Third Bancorp from 2001 to 2013, serving most recently as Executive Vice President, Chief Credit Officer from 2011 to 2013. Mr. Lee previously served as President and CEO of a Fifth Third affiliate bank in Ohio. Prior to Fifth Third, Mr. Lee served as an Executive Vice President and board member for Capital Bank, a community bank located in Sylvania, Ohio. Mr. Lee was a Director of Rocky Mountain Bank from 2015 to 2018 and Bank of Blue Valley from 2019 to 2021.
Bryan R. McKeag joined HTLF in 2013 as Executive Vice President, Chief Financial Officer. Mr. McKeag was named Director of Heartland Financial USA, Inc. Insurance Services in 2015. Prior to joining HTLF, Mr. McKeag served as Executive Vice President, Corporate Controller and Principal Accounting Officer with Associated Banc-Corp in Green Bay, Wisconsin. Prior to his 13 years at Associated Banc-Corp, Mr. McKeag spent 9 years in various finance positions at JP Morgan and 9 years in public accounting at KPMG in Minneapolis. He is an inactive holder of the certified public accountant certification.
Janet M. Quick was named Executive Vice President, Deputy Chief Financial Officer and Principal Accounting Officer in 2016. Ms. Quick had served as Senior Vice President, Deputy Chief Financial Officer since 2013. Ms. Quick has been with HTLF since 1994, serving in various audit, finance and accounting positions. Prior to joining HTLF, Ms. Quick was with Hawkeye Bancorporation in the corporate finance area. She is an active holder of the certified public accountant certification.
Deborah K. Deters joined HTLF in 2017 as Executive Vice President, Chief Human Resource Officer where she oversees Organizational Development, Talent Management, Talent Acquisition, Total Rewards, Payroll, and Employee Relations. Prior to HTLF Ms. Deters served as the Senior Vice President and Chief Human Resources Officer at HUB International, LTD., a North American insurance brokerage based in Chicago, Illinois. While at HUB she was named the organization's first Chief Human Resources Officer and transformed its Human Resources function while supporting the company’s growth from 4,000 to over 10,000 employees. Prior to HUB, Ms. Deters held several positions over 17 years with Bally Entertainment, finishing as Senior Vice President, Chief Human Resource Officer of Bally Total Fitness.
Lynn H. Fuller was named Executive Vice President, Regional Bank President of HTLF in 2021. Mr. Fuller joined HTLF in 2013 as Executive Vice President, Corporate Director of Retail. In 2016, Mr. Fuller assumed the position of Market President of Dubuque Bank and Trust Company, and from 2017 to 2021, Mr. Fuller was the President and Chief Executive Officer of Dubuque Bank and Trust Company. In 2021, he was named Executive Vice President, Regional Bank President of HTLF. Prior to joining HTLF, from 2010 to 2013, Mr. Fuller was a Case Team Leader at Bain & Company in Chicago, Illinois, where he led his team in providing expert advice on client issues and industry topics and recommended solutions. Subsequent to December 31, 2021, Mr. Fuller left HTLF, effective on February 15, 2022.
Nathan R. Jones joined HTLF in July 2020 as Executive Vice President, Chief Credit Officer. Prior to joining HTLF, Mr. Jones was the Chief Credit Officer for Fulton Financial Corporation, a regional financial holding company based in Lancaster, Pennsylvania from 2018 until joining HTLF. Mr. Jones previously served as the Executive Vice President Credit Administration and Analytics for First Horizon National Corporation, a regional financial holding company based in Memphis, Tennessee from 2011 to 2018. Mr. Jones has managed large scale credit and banking operations while developing and delivering new business processes and capabilities within global and regional financial institutions. He has previously worked for Bank of America and BMO Harris primarily in the risk management areas.
Jay L. Kim joined HTLF in January 2020 as Executive Vice President, General Counsel and was named as Corporate Secretary in October 2020. Mr. Kim was most recently a partner with Dorsey & Whitney LLP, based in Minneapolis, Minnesota, in their Banking and Financial Services Industry group and focused on advising banks, trust companies, wealth management firms, commercial and residential mortgage brokers and retirement plan administrators on mergers and acquisitions and regulatory and operational matters. Mr. Kim rejoined Dorsey & Whitney LLP in 2017 after serving as Executive Vice President, General Counsel and Director of Corporate Development for Alerus Financial Corporation headquartered in Grand Forks, North Dakota from 2012 to 2017. His responsibilities at Alerus included oversight of the risk management, audit and compliance functions as well as acquisitions and investor relations. Prior to joining Alerus in 2012, he was a partner at Dorsey & Whitney LLP and another Minneapolis law firm, and he also served as Senior Vice President and General Counsel with Marquette Financial Companies.
Tamina L. O'Neill joined HTLF in 2019 as Executive Vice President, Chief Risk Officer. Ms. O’Neill was most recently the Director of Enterprise and Operational Risk Management at MB Financial Bank, a Chicago based mid-size institution from 2013 until joining HTLF. Ms. O’Neill’s experience spans small, mid-size and larger global financial institutions as her financial services and risk management career started approximately 30 years ago with LaSalle Bank/ABN AMRO, a multi-national global financial institution. Over the course of her career, she has built programs and led teams in government lending, commercial banking compliance, corporate compliance, operational risk and enterprise risk management.
David A. Prince joined HTLF in 2018 as Executive Vice President, Commercial Banking. Prior to joining HTLF, Mr. Prince was the Commercial Banking Group Executive Vice President at Associated Banc-Corp., headquartered in Green Bay, Wisconsin from 2010 until joining HTLF. Mr. Prince has served in leadership roles at GE Capital Commercial Finance and National City Bank and has extensive commercial lending experience.
Daniel C. Stevens joined HTLF in 2019 as Executive Vice President, Operations. He most recently served as the Chief Operating Officer for Rabobank, NA based in Roseville, California from 2014 through 2019 and its Chief Financial Officer from 2008 through 2014. Mr. Stevens has over 35 years of financial services experience, which includes serving as a Chief Financial Officer and Chief Operating Officer at both international and domestic banks. Mr. Stevens started his professional career at Arthur Andersen & Co. in Chicago, Illinois. He is an inactive holder of the certified public accountant certification. Subsequent to December 31, 2021, Mr. Stevens announced his retirement from HTLF, which will be effective in March 2022.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
HTLF's common stock was held by approximately 2,700 stockholders of record as of February 14, 2022, and approximately 19,200 additional stockholders held shares in street name. The common stock of HTLF has been quoted on the Nasdaq Stock Market since May 2003 under the symbol "HTLF" and is a Nasdaq Global Select Market security.
On March 17, 2020, HTLF's board of directors authorized management to acquire and hold up to 5% of capital or $103.6 million as of December 31, 2021, as treasury shares at any one time. HTLF and its affiliated purchasers made no purchases of its common stock during the quarter ended December 31, 2021.
The following table and graph show a five-year comparison of cumulative total returns for HTLF, the Nasdaq Composite Index, the KBW Nasdaq Bank Index and the S&P U.S. BMI Banks Index, in each case assuming investment of $100 on December 31, 2016, and reinvestment of dividends. The table and graph were prepared at our request by S&P Global Market Intelligence.
Cumulative Total Return Performance
As of December 31,
2016 2017 2018 2019 2020 2021
Heartland Financial USA, Inc. $ 100.00 $ 112.96 $ 93.56 $ 107.47 $ 89.22 $ 114.08
Nasdaq Composite Index 100.00 129.64 125.96 172.18 249.51 304.85
KBW Nasdaq Bank Index 100.00 118.59 97.58 132.84 119.14 164.80
S&P U.S. BMI Banks Index 100.00 118.21 98.75 135.64 118.33 160.89
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
ASSUMES $100 INVESTED ON DECEMBER 31, 2016
* Total return assumes reinvestment of dividends

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. [RESERVED]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s discussion and analysis of the consolidated financial condition and results of operations of HTLF as of the dates and for the periods indicated is presented below. This discussion should be read in conjunction with the consolidated financial statements and the notes thereto and other financial data appearing elsewhere in this Annual Report on Form 10-K. The consolidated financial statements include the accounts of HTLF and its subsidiaries, all of which are wholly-owned.
For a discussion of 2019 results of operations, including a discussion of the financial results for the fiscal year ended December 31, 2020, compared to the fiscal year ended December 31, 2019, refer to Part I, Item 7 of our Annual Report on Form 10-K, which was filed with the SEC on February 24, 2021.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, income and expenses. These estimates are based upon historical experience and on various other assumptions that management believes are reasonable under the circumstances. Among other things, the estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Refer to Note 1, "Summary of Significant Accounting Policies," for further discussion on HTLF's critical accounting policies.
The estimates and judgments that management believes have the most effect on HTLF’s reported financial position and results of operations are as follows:
Allowance For Credit Losses
The process utilized by HTLF to estimate the allowance for credit losses is considered a critical accounting estimate for HTLF. The allowance for credit losses represents management’s estimate of identified and unidentified current expected credit losses in the existing loan portfolio. Therefore, the accuracy of this estimate could have a material impact on HTLF’s earnings.
For certain commercial and agricultural loans and any related unfunded loan commitments, the expected credit losses are calculated on a pool basis through a transition matrix model derived life of loan probability of default and loss given default methodology. The probability of default and loss given default methodology have been developed using HTLF’s historical loss experience over the look back period, currently over the most recent 13 years. For smaller commercial and agricultural loans, residential real estate loans and consumer loans and any related unfunded loan commitments, a lifetime average historical loss rate is established for each pool of loans based upon an average loss rate calculated using HTLF historical loss experience over the look back-period. The loss rates used in the allowance calculation are periodically re-evaluated and adjusted to reflect changes in historical loss levels or other risks.
If a loan no longer shares similar risk characteristics with other loans in the pool, it is evaluated on an individual basis and is not included in the collective evaluation. All individually assessed loan calculations are completed at least semi-annually.
HTLF's allowance methodology also has a qualitative component, the purpose of which is to provide management with a means to take into consideration changes in current conditions that could potentially have an effect, up or down, on the level of recognized loan losses, that, for whatever reason, may not be represented in the quantitative analysis performed in determining its base loan loss rates.
Additionally, our allowance calculation utilizes an overlay approach for its economic forecasting component, similar to the method utilized for the qualitative factors. The length of the reasonable and supportable forecast period is a judgmental determination based on the level to which HTLF can reasonably support its forecast of economic conditions that drive its estimate of expected loss.
The economic indices utilized from the economic forecast include the national unemployment rate, national gross domestic product, capacity index manufacturing growth, national commercial real estate price index, national home price index and the national farm products price index. The economic indices utilized in the calculation which may be the most sensitive in the allowance calculation are the national unemployment rate and the national gross domestic product because management believes changes in these indices, positive or negative, will be impactful to all loan pools.
The appropriateness of the allowance for credit losses is monitored on an ongoing basis by the credit administration group, loan review staff, executive and senior management and the boards of directors of HTLF and each Bank. There can be no assurances that the allowance for credit losses will be adequate to cover all current expected credit losses, but management believes that the allowance for credit losses was appropriate at December 31, 2021. While management uses available information to provide for credit losses, the ultimate collectability of a substantial portion of the loan portfolio and the need for future additions to the allowance will be based on changes in economic conditions.
Should the economic climate deteriorate, borrowers may experience financial difficulty, and the level of nonperforming loans, charge-offs, and delinquencies could rise and require further increases in the provision for credit losses. Conversely, improvement in credit quality and economic conditions may allow for a reduction of provision for credit losses. Any unanticipated changes, positive or negative, could have a significant impact on the results of operations.
In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for credit losses carried by the Banks. Such agencies may require us to make additional provisions to the allowance based upon their judgment about information available to them at the time of their examinations.
Business Combinations, Goodwill and Core Deposit Intangibles
We record all assets and liabilities purchased in an acquisition, including intangibles, at fair value. Determining the fair value of assets and liabilities acquired often involves estimates based on third-party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques that may include the use of estimates. Goodwill and indefinite-lived assets are not amortized but are subject to, at a minimum, annual tests for impairment. In certain situations, interim impairment tests may be required if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Core deposit intangibles assets are amortized over their estimated useful lives using straight-line and accelerated methods and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount.
The initial fair value measurement of loans and core deposit intangibles require us to make subjective judgments concerning estimates of how the acquired assets will perform in the future using valuation methods. The fair value of acquired loans is based on a discounted cash flow methodology that projects principal and interest payments using key assumptions related to the discount rate and loss rates. The fair value of core deposit intangibles is based on the cost savings approach under a discounted cash flow methodology, whereby projected net cash flow benefits are derived from estimating costs to carry deposits compared to alternative funding costs, and includes key assumptions related to the discount rate, deposit attrition rates and net costs, including discounted cash flow analyses. Events and factors that may significantly affect the estimates include, among others, competitive forces, customer behaviors, changes in revenue growth trends, cost structures, technology, changes in discount rates and market conditions. In determining the reasonableness of cash flow estimates, HTLF reviews historical performance of the underlying assets or similar assets in an effort to assess and validate assumptions utilized in its estimates.
OVERVIEW
HTLF is a multi-bank holding company providing banking, mortgage, wealth management, investments and insurance services to businesses and consumers. As of the date of this Annual Report on Form 10-K, HTLF has eleven separately chartered banking subsidiaries with 129 locations in Iowa, Illinois, Wisconsin, New Mexico, Arizona, Montana, Colorado, Minnesota, Kansas, Missouri, Texas and California. Our primary objectives are to increase profitability and diversify our deposits, assets and overall customer base through organic growth and acquisitions in the Bank Markets we serve.
Our results of operations depend primarily on net interest income, which is the difference between interest income from interest earning assets and interest expense on interest bearing liabilities. Noninterest income, which includes service charges and fees, loan servicing income, trust fees, brokerage and insurance commissions, securities gains, net, net gains on sale of loans held for sale and income on bank owned life insurance also affects our results of operations. Our principal operating expenses, aside from interest expense, consist of the provision for credit losses, salaries and employee benefits, occupancy, furniture and equipment costs, professional fees, advertising, core deposit intangibles and customer relationship intangibles amortization, other real estate and loan collection expenses and acquisition, integration and restructuring costs.
2021 Overview
Net income available to common stockholders was $211.9 million, or $5.00 per diluted common share, for the year ended December 31, 2021, compared to $133.5 million or $3.57 per diluted common share for the year ended December 31, 2020. Return on average common equity was 10.49%, and return on average assets was 1.19% for the year ended December 31, 2021, compared to 8.06% and 0.93%, respectively, for the year ended December 31, 2020.
Total assets of HTLF were $19.27 billion at December 31, 2021, an increase of $1.37 billion or 8% since December 31, 2020. Securities represented 40% of total assets at December 31, 2021 compared to 35% of total assets at December 31, 2020.
Total loans held to maturity were $9.95 billion at December 31, 2021 compared to $10.02 billion at December 31, 2020, which was a decrease of $68.5 million or 1%. Excluding total PPP loans, total loan held to maturity increased $689.4 million or 8% since year-end 2020.
Total deposits were $16.42 billion as of December 31, 2021 compared to $14.98 billion as of December 31, 2020, an increase of $1.44 billion or 10%.
Common stockholders' equity was $2.07 billion at December 31, 2021, compared to $1.97 billion at year-end 2020. Book value per common share was $49.00 at December 31, 2021, compared to $46.77 at year-end 2020. HTLF's unrealized gains and losses on securities available for sale, net of applicable taxes, reflected an unrealized loss of $4.4 million compared to an unrealized gain of $76.8 million at December 31, 2020.
2020 Overview
Net income available to common stockholders was $133.5 million, or $3.57 per diluted common share, for the year ended December 31, 2020, compared to $149.1 million, or $4.14 per diluted common share, earned during the prior year. Return on average common equity was 8.06% and return on average assets was 0.93% for 2020, compared to 10.12% and 1.24%, respectively, for 2019.
Total assets of HTLF were $17.91 billion at December 31, 2020, an increase of $4.70 billion or 36% from $13.21 billion at year-end 2019. Included in this increase, at fair value, were $1.97 billion of assets acquired in the AimBank transaction and $419.7 million of assets acquired in the Johnson Bank branch transaction. Exclusive of these transactions, total assets increased $2.31 billion or 17% since December 31, 2019. Securities represented 35% of HTLF's total assets at December 31, 2020, compared to 26% at year-end 2019.
Total loans held to maturity were $10.02 billion at December 31, 2020, compared to $8.37 billion at year-end 2019, an increase of $1.66 billion or 20%. This change includes $1.24 billion of total loans held to maturity acquired at fair value in the AimBank and Johnson Bank branch transactions, which included $53.1 million of PPP loans. Excluding the loans acquired in the AimBank and Johnson Bank branch transactions and legacy PPP loans of $904.7 million, total loans held to maturity organically decreased $487.3 million or 6% since December 31, 2020.
Total deposits were $14.98 billion as of December 31, 2020, compared to $11.04 billion at year-end 2019, an increase of $3.94 billion or 36%. This increase includes $2.09 billion of deposits acquired at fair value in the AimBank and Johnson Bank branch transactions. Exclusive of the deposits acquired at fair value in the AimBank and Johnson Bank branch transactions, total deposits organically grew $1.85 billion or 17% since December 31, 2019.
Common stockholders' equity was $1.97 billion at December 31, 2020, compared to $1.58 billion at year-end 2019. Book value per common share was $46.77 at December 31, 2020, compared to $43.00 at year-end 2019. HTLF's unrealized gains and losses on securities available for sale, net of applicable taxes, reflected an unrealized gain of $76.8 million at December 31, 2020, compared to an unrealized gain of $969,000 at December 31, 2019.
2021 Developments
AimBank Systems Conversion
On February 19, 2021, HTLF successfully completed the systems conversion of AimBank, which was acquired by HTLF in the fourth quarter of 2020 and merged into HTLF's Texas subsidiary, First Bank & Trust. Subsequent to the systems conversion, seven of AimBank's twenty-five bank branches were transferred to HTLF's New Mexico Bank & Trust subsidiary.
Branding Change
On April 14, 2021, a branding change from Heartland Financial to HTLF was announced and rolled out across the organization. The branding was refreshed to better reflect the financial and non-financial strengths of HTLF, including a diverse footprint and the continued growth of the company.
Paycheck Protection Program Loans
HTLF originated a second round of Paycheck Protection Program loans ("PPP II") totaling $473.9 million since the beginning of 2021. PPP II loans are 100% United States SBA guaranteed, and borrowers may be eligible to have an amount up to the entire principal balance forgiven and paid by the SBA. As of December 31, 2021, approximately 98% of PPP loans originated in 2020 ("PPP I") loans have been forgiven, and approximately 63% of PPP II loans have been forgiven.
Total interest income on PPP loans increased $15.3 million or 61% to $40.6 million for the year ended December 31, 2021, compared to $25.3 million for the year ended December 31, 2020.
Issuance of Subordinated Debt
On September 8, 2021, HTLF closed its public offering of $150.0 million aggregate principal amount of its 2.75% Fixed-to-Floating Rate Subordinated Notes due 2031 (the "2021 subordinated notes"). The 2021 subordinated notes were issued at par with an underwriting discount of $1.9 million, and the net proceeds totaled $147.6 million. The 2021 subordinated notes were registered under HTLF’s effective shelf registration statement and qualify as Tier 2 capital for regulatory purposes. The net proceeds are being used for general corporate purposes, which includes, without limitation, providing capital to support HTLF's organic growth or growth through strategic acquisitions, financing investments, capital expenditures, investments in the subsidiary banks as regulatory capital, and repaying indebtedness. The 2021 subordinated notes have a fixed interest rate of 2.75% until September 15, 2026, at which time the interest rate will be reset quarterly to a benchmark interest rate, which is expected to be three-month term Secure Overnight Financing Rate ("SOFR") plus a spread of 210 basis points. The 2021 subordinated notes mature on September 15, 2031, and become redeemable at HTLF's option on September 15, 2026.
Branch Optimization
During 2021, HTLF consolidated eight legacy bank branches, which included two branches in Midwestern markets, four branches in Southwestern markets, and five branches in Western markets, and sold one branch in a Midwestern market as it continues to respond to customer preferences and closely manage expenses. HTLF plans to reduce branch locations by approximately 10% in 2022 through closures, consolidations or sales. HTLF continues to review its branch network for optimization and consolidation opportunities, which may result in additional write-downs of fixed assets in future periods.
Common Stock Dividend Increase
Since 2020, the common stock dividend has been increased from $0.20 per common share in each quarter of 2020 to $0.22 for the first and second quarters of 2021, $0.25 for the third quarter of 2021, and $0.27 per common share in fourth quarter of 2021.
Charter Consolidation
In the fourth quarter of 2021, HTLF completed evaluating the consolidation of its eleven bank charters as part of its ongoing efforts to improve operational efficiency. As a result, the HTLF Board of Directors approved a plan to consolidate its eleven bank charters into a single Colorado based charter, "HTLF Bank," that will continue to operate under separate bank brands in each market. The plan is subject to regulatory approval.
The consolidation project is underway and is expected to be completed by the end of 2023. The first bank consolidation is expected to occur in mid-2022. The estimated restructuring costs of the project are approximately $20.0 million, of which $1.9 million was incurred in 2021. The ongoing financial benefits from consolidation are expected to be approximately $20.0 million annually when the project is completed and are expected to arise from the elimination of redundancies and improved operating processes. The consolidation will also increase operating capacity to be leveraged with future growth and provide better alignment of our products and services.
COVID-19 Pandemic Update
In March 2020, the outbreak of the novel COVID-19 was recognized as a pandemic by the World Health Organization. The spread of COVID-19 has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally in 2021 and 2020.
In the first quarter of 2020, HTLF implemented and continues to operate under its pandemic management plan to assure workplace and employee safety and business resiliency, and the pandemic management plan continues to evolve in response to the recent developments relating to the COVID-19 pandemic.
The ultimate impact of the COVID-19 pandemic on HTLF's financial condition and results of operations will depend on the severity and duration of the pandemic, including the emergence of COVID-19 variants, related restrictions on business and consumer activity, efficacy and distribution of vaccines and the availability of government programs to alleviate the economic stress of the pandemic. See "COVID-19 Pandemic Risks" in Part 1A Risk Factors of this Annual Report on Form 10-K.
2020 Developments
Adoption of ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)"
On January 1, 2020, HTLF adopted ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)," commonly referred to as "CECL." The impact of HTLF's adoption of CECL on January 1, 2020 ("Day 1") resulted in the following:
•an increase of $12.1 million to the allowance for credit losses related to loans, which included a reclassification of $6.0 million of purchased credit impaired loan discount on previously acquired loans, and a cumulative-effect adjustment to retained earnings totaling $4.6 million, net of taxes of $1.5 million;
•an increase of $13.6 million to the allowance for unfunded commitments and a cumulative-effect adjustment to retained earnings totaling $10.2 million, net of taxes of $3.4 million, and
•established an allowance for credit losses for HTLF's held to maturity debt securities of $158,000 and a cumulative-effect adjustment to retained earnings totaling $118,000, net of taxes of $40,000.
The allowance calculation under CECL is an expected loss model, which encompasses expected losses over the life of the loan and held to maturity securities portfolios, including expected losses due to changes in economic conditions and forecasts, such as those caused by the COVID-19 pandemic. For more information, see Note 1, "Basis of Presentation" and Note 6, "Allowance for Credit Losses" to the consolidated financial statements contained herein.
Issued $115.0 Million of Preferred Equity
On June 26, 2020, HTLF issued and sold 4.6 million depositary shares, each representing a 1/400th interest in a share of 7.00% Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, Series E. The depositary shares are listed on The Nasdaq Global Select Market under the symbol "HTLFP." The net proceeds of $110.7 million are being used for general corporate purposes, which may include organic and acquired growth, financing investments, capital expenditures, investments in wholly-owned subsidiaries as regulatory capital and repayment of debt.
Branch Optimization
In the second half of 2020, HTLF's member banks approved plans to consolidate eight branch locations, which included two branches in the Midwest region, five branches in the Western region and one in the Southwestern region and resulted in $1.2 million and $2.3 million of fixed asset write-downs in the third and fourth quarters of 2020, respectively. The branch consolidations were completed in early 2021.
Johnson Bank Arizona Operations Purchase and Assumption
On December 4, 2020, Arizona Bank & Trust ("AB&T"), HTLF's wholly-owned subsidiary headquartered in Phoenix, Arizona, acquired certain assets and assumed substantially all of the deposits and certain other liabilities of Johnson Bank’s Arizona operations, which included four branches. Johnson Bank is a wholly-owned subsidiary of Johnson Financial Group, Inc. headquartered in Racine, Wisconsin. As of the closing date, AB&T acquired, at fair value, total assets of $419.7 million, which included gross loans of $150.7 million, and deposits of $415.5 million. The systems conversion occurred simultaneously with the closing of the transaction.
AimBank Acquisition
On December 4, 2020, HTLF completed the acquisition of AimBank, headquartered in Levelland, Texas. Based on HTLF's closing common stock price of $41.89 on December 4, 2020, the aggregate consideration paid to AimBank common shareholders was $264.5 million, which was paid by delivery of common stock of $217.2 million and cash of $47.3 million, subject to certain hold-back provisions of the merger agreement relating to the cash consideration. AimBank was merged with and into HTLF's wholly-owned Texas subsidiary, First Bank and Trust, and the combined entity operates as First Bank and Trust. As of the closing date, AimBank had, at fair value, total assets of $1.97 billion, which included gross loans of $1.09 billion, and deposits of $1.67 billion. The systems conversion for this transaction occurred in February 2021.
FINANCIAL HIGHLIGHTS (Dollars in thousands, except per share data)
As of and For the Years Ended
December 31,
2021 2020 2019
STATEMENT OF INCOME DATA
Interest income $ 588,760 $ 536,612 $ 514,329
Interest expense 28,200 44,883 80,600
Net interest income 560,560 491,729 433,729
Provision (benefit) for credit losses (17,575) 67,066 16,657
Net interest income after provision for credit losses 578,135 424,663 417,072
Noninterest income 128,935 120,291 116,208
Noninterest expenses 431,812 370,963 349,161
Income taxes 55,335 36,053 34,990
Net income 219,923 137,938 149,129
Preferred dividends (8,050) (4,451) -
Net income available to common stockholders $ 211,873 $ 133,487 $ 149,129
PER COMMON SHARE DATA
Net income - diluted $ 5.00 $ 3.57 $ 4.14
Cash dividends $ 0.96 $ 0.80 $ 0.68
Dividend payout ratio 19.20 % 22.41 % 16.43 %
Book value per common share (GAAP) $ 49.00 $ 46.77 $ 43.00
Tangible book value per common share (non-GAAP)(1)
$ 34.59 $ 32.07 $ 29.51
Weighted average shares outstanding-diluted 42,410,611 37,356,524 36,061,908
Tangible common equity ratio (non-GAAP)(1)
7.84 % 7.81 % 8.52 %
BALANCE SHEET DATA
Investments $ 7,697,650 $ 6,292,067 $ 3,435,441
Loans held for sale 21,640 57,949 26,748
Total net loans receivable held to maturity 9,954,572 10,023,051 8,367,917
Allowance for credit losses-loans 110,088 131,606 70,395
Total assets 19,274,549 17,908,339 13,209,597
Total deposits 16,417,255 14,979,905 11,044,331
Long-term obligations 372,072 457,042 275,773
Preferred equity 110,705 110,705 -
Common stockholders’ equity 2,071,473 1,968,526 1,578,137
FINANCIAL HIGHLIGHTS (Dollars in thousands, except per share data)
As of and For the Years Ended
December 31,
2021 2020 2019
EARNINGS PERFORMANCE DATA
Annualized return on average assets 1.19 % 0.93 % 1.24 %
Annualized return on average common equity 10.49 8.06 10.12
Annualized return on average tangible common equity (non-GAAP)(1)
15.59 12.28 15.73
Annualized net interest margin 3.29 3.65 4.00
Annualized net interest margin, fully tax-equivalent (non-GAAP)(1)
3.33 3.69 4.04
Efficiency ratio, fully tax-equivalent (non-GAAP)(1)
59.48 56.65 62.50
ASSET QUALITY RATIOS
Nonperforming assets to total assets 0.37 % 0.53 % 0.66 %
Nonperforming loans to total loans 0.70 0.88 0.96
Net loan charge-offs to average loans 0.04 0.32 0.11
Allowance for credit losses to total loans 1.11 1.31 0.84
Allowance for credit losses to total loans excluding PPP loans 1.13 1.45 NA
Allowance for lending related credit losses to total loans 1.26 1.47 NA
Allowance for lending related credit losses to total loans excluding PPP loans 1.29 1.62 NA
Allowance for credit losses to nonperforming loans 157.45 149.37 87.28
CONSOLIDATED CAPITAL RATIOS
Average equity to average assets 11.51 % 11.59 % 12.26 %
Average common equity to average assets 10.92 11.21 12.26
Total capital to risk-adjusted assets 15.90 14.71 13.75
Tier 1 capital 12.39 11.85 12.31
Common equity tier 1 11.53 10.92 10.88
Tier 1 leverage 8.57 9.02 10.10
(1) Refer to the "Non-GAAP Financial Measures" section after these financial tables for additional information on the usage and presentation of these non-GAAP measures, and refer to these tables for reconciliations to the most directly comparable GAAP measures.
NON-GAAP RECONCILIATIONS (Dollars in thousands, except per share data)
As of and For the Years Ended
December 31,
2021 2020 2019
Reconciliation of Tangible Book Value Per Common Share (non-GAAP)
Common stockholders' equity (GAAP) $ 2,071,473 $ 1,968,526 $ 1,578,137
Less goodwill 576,005 576,005 446,345
Less other intangible assets, net 32,988 42,383 48,688
Tangible common stockholders' equity (non-GAAP) $ 1,462,480 $ 1,350,138 $ 1,083,104
Common shares outstanding, net of treasury stock 42,275,264 42,093,862 36,704,278
Common stockholders' equity (book value) per share (GAAP) $ 49.00 $ 46.77 $ 43.00
Tangible book value per common share (non-GAAP) $ 34.59 $ 32.07 $ 29.51
NON-GAAP RECONCILIATIONS (Dollars in thousands, except per share data)
As of and For the Years Ended
December 31,
2021 2020 2019
Reconciliation of Tangible Common Equity Ratio (non-GAAP)
Total assets (GAAP) $ 19,274,549 $ 17,908,339 $ 13,209,597
Less goodwill 576,005 576,005 446,345
Less core deposit intangibles and customer relationship intangibles, net 32,988 42,383 48,688
Total tangible assets (non-GAAP) $ 18,665,556 $ 17,289,951 $ 12,714,564
Tangible common equity ratio (non-GAAP) 7.84 % 7.81 % 8.52 %
Reconciliation of Annualized Return on Average Tangible Common Equity (non-GAAP)
Net income available to common stockholders (GAAP) $ 211,873 $ 133,487 $ 149,129
Plus core deposit and customer intangibles amortization, net of tax(1)
7,422 8,429 9,458
Adjusted net income available to common stockholders (non-GAAP) $ 219,295 $ 141,916 $ 158,587
Average common stockholders' equity (GAAP) $ 2,020,200 $ 1,656,708 $ 1,473,396
Less average goodwill 576,005 456,854 415,841
Less average other intangibles, net 37,554 44,298 49,377
Average tangible common equity (non-GAAP) $ 1,406,641 $ 1,155,556 $ 1,008,178
Annualized return on average common equity (GAAP) 10.49 % 8.06 % 10.12 %
Annualized return on average tangible common equity (non-GAAP) 15.59 % 12.28 % 15.73 %
Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP)
Net interest income (GAAP) $ 560,560 $ 491,729 $ 433,729
Plus tax-equivalent adjustment(1)
7,212 5,466 4,929
Net interest income, fully tax-equivalent (non-GAAP) $ 567,772 $ 497,195 $ 438,658
Average earning assets $ 17,025,088 $ 13,481,613 $ 10,845,940
Net interest margin (GAAP) 3.29 % 3.65 % 4.00 %
Net interest margin, fully tax-equivalent (non-GAAP) 3.33 % 3.69 % 4.04 %
NON-GAAP RECONCILIATIONS (Dollars in thousands, except per share data)
As of and For the Years Ended
December 31,
2021 2020 2019
Reconciliation of Efficiency Ratio (non-GAAP)
Net interest income (GAAP) $ 560,560 $ 491,729 $ 433,729
Plus tax-equivalent adjustment(1)
7,212 5,466 4,929
Net interest income, fully tax-equivalent 567,772 497,195 438,658
Noninterest income 128,935 120,291 116,208
Securities gains, net (5,910) (7,793) (7,659)
Unrealized gain on equity securities, net (58) (640) (525)
Gain on extinguishment of debt - - (375)
Valuation adjustment on servicing rights (1,088) 1,778 911
Adjusted revenue (non-GAAP) $ 689,651 $ 610,831 $ 547,218
Total noninterest expenses (GAAP) $ 431,812 $ 370,963 $ 349,161
Less:
Core deposit intangibles and customer relationship intangibles amortization 9,395 10,670 11,972
Partnership investment in tax credit projects 6,303 3,801 8,030
(Gain)/loss on sales/valuations of assets, net 588 5,101 (19,422)
Acquisition, integration and restructuring costs 5,331 5,381 6,580
Adjusted noninterest expenses (non-GAAP) $ 410,195 $ 346,010 $ 342,001
Efficiency ratio, fully tax-equivalent (non-GAAP) 59.48 % 56.65 % 62.50 %
Acquisition, integration and restructuring costs
Salaries and employee benefits $ 578 $ 398 $ 816
Occupancy 10 - 1,215
Furniture and equipment 655 958 87
Professional fees 2,867 3,399 2,365
Advertising 173 143 203
(Gain)/loss on sales/valuations of assets, net 39 - 1,003
Other noninterest expenses 1,009 483 891
Total acquisition, integration and restructuring costs $ 5,331 $ 5,381 $ 6,580
(1) Computed on a tax-equivalent basis using an effective tax rate of 21%.
Non-GAAP Financial Measures
This Annual Report on Form 10-K contains references to financial measures which are not defined by generally accepted accounting principles ("GAAP"). Management believes the non-GAAP measures are helpful for investors to analyze and evaluate HTLF's financial condition and operating results. However, these non-GAAP measures have inherent limitations and should not be considered a substitute for operating results determined in accordance with GAAP. Additionally, because non-GAAP measures are not standardized, it may not be possible to compare the non-GAAP measures presented in this section with other companies' non-GAAP measures. Reconciliations of each non-GAAP measure to the most directly comparable GAAP measure may be found in the financial tables above.
The non-GAAP measures presented in this Annual Report on Form 10-K, management's reason for including each measure and the method of calculating each measure are presented below:
•Tangible book value per common share is total common equity less goodwill and core deposit and customer relationship intangibles, net, divided by common shares outstanding, net of treasury. This measure is included as it is considered to be a critical metric to analyze and evaluate use of equity, financial condition and capital strength.
•Tangible common equity ratio is total common equity less goodwill and core deposit and customer relationship intangibles, net, divided by total assets less goodwill and core deposit and customer relationship intangibles, net. This measure is included as it is considered to be a critical metric to analyze and evaluate financial condition and capital strength.
•Annualized return on average tangible common equity is net income excluding intangible amortization calculated as (1) net income excluding tax-effected core deposit and customer relationship intangibles amortization, divided by (2) average common equity less goodwill and core deposit and customer relationship intangibles, net. This measure is included as it is considered to be a critical metric to analyze and evaluate use of equity, financial condition and capital strength.
•Net interest income, fully tax equivalent, is net income adjusted for the tax-favored status of certain loans and securities. Management believes this measure enhances the comparability of net interest income arising from taxable and tax-exempt sources.
•Annualized net interest margin, fully tax-equivalent, adjusts net interest income for the tax-favored status of certain loans and securities. Management believes this measure enhances the comparability of net interest income arising from taxable and tax-exempt sources.
•Efficiency ratio, fully tax equivalent, expresses noninterest expenses as a percentage of fully tax-equivalent net interest income and noninterest income. This efficiency ratio is presented on a tax-equivalent basis which adjusts net interest income and noninterest expenses for the tax favored status of certain loans, securities, and tax credit projects. Management believes the presentation of this non-GAAP measure provides supplemental useful information for proper understanding of the financial results as it enhances the comparability of income and expenses arising from taxable and nontaxable sources and excludes specific items as noted in the reconciliation contained in this Annual Report on Form 10-K.
•Organic deposit growth is exclusive of deposits obtained through acquisitions. Management believes that this measure provides a more complete understanding of underlying trends in deposit growth notwithstanding acquisitions.
•Organic loan growth is exclusive of loans obtained through acquisitions and PPP loans. Management believes that this measure provides a more complete understanding of underlying trends in loan growth notwithstanding acquisitions.
RESULTS OF OPERATIONS
Net Interest Margin and Net Interest Income
HTLF's management monitors and manages net interest income and net interest margin and shares the results with investors because they are key indicators of HTLF's profitability and growth of earning assets.
Net interest income is the difference between interest income earned on earning assets and interest expense paid on interest bearing liabilities. As such, net interest income is affected by changes in the volume and yields on earning assets and the volume and rates paid on interest bearing liabilities. Net interest margin is the ratio of net interest income to average earning assets.
Our success in maintaining competitive net interest margin despite the low-interest rate environment has been the result of an increase in average earning assets, including earning assets acquired in recent acquisitions and PPP loans, and a favorable deposit mix. Also contributing to our ability to maintain net interest margin has been the amortization of purchase accounting discounts associated with acquisitions completed since 2015. For the years ended December 31, 2021, 2020 and 2019, our net interest margin included 9 basis points, 12 basis points and 18 basis points, respectively, of purchase accounting discount amortization.
See "Analysis of Average Balances, Tax-Equivalent Yields and Rates" for a description of our use of net interest income and net interest margin on a fully tax-equivalent basis, which is not defined by GAAP, and a reconciliation of annualized net interest margin on a fully tax-equivalent basis to GAAP.
Net interest margin, expressed as a percentage of average earning assets, was 3.29% (3.33% on a fully tax-equivalent basis) during 2021, compared to 3.65% (3.69% on a fully tax-equivalent basis) during 2020 and 4.00% (4.04% on a fully tax-equivalent basis) during 2019. Excluding the impact of PPP loans, HTLF's net interest margin on a fully-tax equivalent basis (non-GAAP) was 3.24% during 2021 compared to 3.72% during 2020.
Total interest income and average earning asset changes for 2021 compared to 2020 were:
•Total interest income increased $52.1 million or 10% to $588.8 million from $536.6 million due to an increase in average earning assets, which was partially offset by a decrease in the average rate on earning assets.
•Total interest income on a tax-equivalent basis (non-GAAP) was $596.0 million compared to $542.1 million, which was an increase of $53.9 million or 10%.
•Average earning assets increased $3.54 billion or 26% to $17.03 billion from $13.48 billion, which was primarily attributable to recent acquisitions, increases in securities and loan growth.
•The average rate on earning assets decreased 52 basis points to 3.50% compared to 4.02%, which was primarily due to recent decreases in market interest rates and a shift in earning asset mix. Total average securities were 41% of earning assets compared to 32%.
Total interest expense and average interest bearing liability changes for 2021 compared to 2020 were:
•Total interest expense decreased $16.7 million or 37% to $28.2 million compared to $44.9 million.
•The average rate paid on HTLF's interest bearing liabilities decreased to 0.28% compared to 0.54%, which was primarily due to recent decreases in market interest rates.
•Average interest bearing deposits increased $1.64 billion or 21% to $9.45 billion from $7.81 billion, which was primarily attributable to recent acquisitions and deposit growth.
•The average rate paid on HTLF's interest bearing deposits decreased 23 basis points to 0.16% compared to 0.39%, which was primarily attributable to recent decreases in market interest rates.
•Average borrowings decreased $17.3 million or 3% to $520.9 million from $538.2 million. The average interest rate paid on HTLF's borrowings was 2.57% compared to 2.71%.
Net interest income changes for 2021 compared to 2020 were:
•Net interest income totaled $560.6 million compared to $491.7 million, which was an increase of $68.8 million or 14%.
•Net interest income on a tax equivalent basis (non-GAAP) totaled $567.8 million compared to $497.2 million, which was an increase of $70.6 million or 14%.
Total interest income and average earning asset changes for 2020 compared to 2019 were:
•Total interest income increased $22.3 million or 4% to $536.6 million from $514.3 million due to an increase in average earning assets, which was partially offset by a decrease in the average rate on earning assets.
•Total interest income on a tax-equivalent basis (non-GAAP) was $542.1 million compared to $519.3 million, which was an increase of $22.8 million or 4%.
•Average earning assets increased $2.64 billion or 24% to $13.48 billion from $10.85 billion, which was primarily attributable to recent acquisitions, increases in securities and loan growth, including PPP loans.
•The average rate on earning assets decreased 77 basis points to 4.02% compared to 4.79%, which was primarily due to recent decreases in market interest rates and the lower yield on PPP loans, which was 3.25%.
Total interest expense and average interest bearing liability changes for 2020 compared to 2019 were:
•Total interest expense decreased $35.7 million or 44% during 2020 to $44.9 million from $80.6 million during 2019.
•The average rate paid on HTLF's interest bearing liabilities decreased to 0.54% compared to 1.14%, which was primarily due to recent decreases in market interest rates.
•Average interest bearing deposits increased $1.16 billion or 17% to $7.81 billion from $6.65 billion, which was primarily attributable to recent acquisitions and deposit growth, including deposits from government stimulus payments and other COVID-19 relief programs.
•The average rate paid on HTLF's interest bearing deposits decreased 57 basis points to 0.39% compared to 0.96%, which was primarily attributable to recent decreases in market interest rates.
•Average borrowings increased $135.9 million or 34% to $538.2 million from $402.3 million. The average interest rate paid on HTLF's borrowings was 2.71% compared to 4.19%.
Net interest income changes for 2020 compared to 2019 were:
•Net interest income totaled $491.7 million compared to $433.7 million, which was an increase of $58.0 million or 13%.
•Net interest income on a tax equivalent basis (non-GAAP) totaled $497.2 million compared to $438.7 million, which was an increase of $58.5 million or 13%.
Management believes net interest margin in dollars will continue to increase as the amount of earning assets grows, however the current low interest rate environment may result in a decrease to the net interest margin as a percentage of average earning assets. The Federal Reserve has indicated it will closely assess economic data, but has signaled it will begin to raise the Federal funds interest rate in early 2022. Ultimately,the timing and magnitude of any such changes are uncertain and will depend on domestic and global economic conditions. Any increase to the Federal Funds rate in 2022 would positively impact HTLF's net interest income due to its asset sensitive balance sheet.
We attempt to manage our balance sheet to minimize the effect that a change in interest rates has on our net interest margin. We plan to continue to work toward improving both our earning assets and funding mix through targeted organic growth strategies, which we believe will result in additional net interest income. We believe our net interest income simulations reflect a well-balanced and manageable interest rate posture. Item 7A of this Annual Report on Form 10-K contains additional information about the results of our most recent net interest income simulations. Note 12, "Derivative Financial Instruments" to the consolidated financial statements contains a detailed discussion of the derivative instruments we have utilized to manage interest rate risk.
The following table provides certain information relating to our average consolidated balance sheets and reflects the yield on average earning assets and the cost of average interest bearing liabilities for the years indicated, in thousands. Dividing income or expense by the average balance of assets or liabilities derives such yields and costs. Average balances are derived from daily balances, and nonaccrual loans and loans held for sale are included in each respective loan category. Assets with tax favorable treatment are evaluated on a tax-equivalent basis assuming a federal income tax rate of 21%. Tax favorable assets generally have lower contractual pre-tax yields than fully taxable assets. A tax-equivalent yield is calculated by adding the tax savings to the interest earned on tax favorable assets and dividing by the average balance of the tax favorable assets.
For the Year Ended December 31,
2021 2020 2019
Average
Balance Interest Rate Average
Balance Interest Rate Average
Balance Interest Rate
Earning Assets
Securities:
Taxable $ 6,135,732 $ 125,010 2.04 % $ 3,901,202 $ 98,263 2.52 % $ 2,522,365 $ 73,147 2.90 %
Nontaxable(1)
799,283 24,390 3.05 424,199 15,802 3.73 313,197 12,491 3.99
Total securities 6,935,015 149,400 2.15 4,325,401 114,065 2.64 2,835,562 85,638 3.02
Interest bearing deposits with other banks and other short-term investments 254,630 344 0.14 225,024 924 0.41 313,373 6,695 2.14
Federal funds sold 3,457 1 0.03 107 - - 138 4 2.90
Loans:(2)
Commercial and industrial(1)
2,543,514 111,473 4.38 2,437,183 118,513 4.86 2,445,552 127,796 5.23
PPP loans 734,139 40,627 5.53 779,183 25,285 3.25 - - -
Owner occupied commercial real estate 1,950,014 81,717 4.19 1,480,109 72,215 4.88 1,337,910 74,853 5.59
Non-owner occupied commercial real estate 1,969,910 87,728 4.45 1,589,932 78,178 4.92 1,173,233 73,067 6.23
Real estate construction 824,055 37,891 4.60 1,007,086 46,785 4.65 947,933 52,668 5.56
Agricultural and agricultural real estate 681,493 29,822 4.38 538,646 25,713 4.77 563,944 29,625 5.25
Residential real estate 846,573 36,768 4.34 793,821 38,210 4.81 862,663 42,876 4.97
Consumer 407,592 20,201 4.96 410,013 22,190 5.41 429,856 26,036 6.06
Less: allowance for credit losses (125,304) - - (104,892) - - (64,224) - -
Net loans 9,831,986 446,227 4.54 8,931,081 427,089 4.78 7,696,867 426,921 5.55
Total earning assets 17,025,088 595,972 3.50 % 13,481,613 542,078 4.02 % 10,845,940 519,258 4.79 %
Nonearning Assets 1,483,185 1,300,992 1,175,977
Total Assets $ 18,508,273 $ 14,782,605 $ 12,021,917
Interest Bearing Liabilities
Savings $ 8,311,825 $ 9,063 0.11 % $ 6,718,413 $ 16,560 0.25 % $ 5,530,503 $ 47,069 0.85 %
Time deposits 1,137,097 5,734 0.50 1,088,185 13,727 1.26 1,115,785 16,665 1.49
Short-term borrowings 181,165 471 0.26 155,467 610 0.39 126,337 1,748 1.38
Other borrowings 339,733 12,932 3.81 382,733 13,986 3.65 275,982 15,118 5.48
Total interest bearing liabilities 9,969,820 28,200 0.28 % 8,344,798 44,883 0.54 % 7,048,607 80,600 1.14 %
Noninterest Bearing Liabilities
Noninterest bearing deposits 6,230,851 4,554,479 3,384,341
Accrued interest and other liabilities 176,697 169,450 115,573
Total noninterest bearing liabilities 6,407,548 4,723,929 3,499,914
Stockholders' Equity 2,130,905 1,713,878 1,473,396
Total Liabilities and Equity $ 18,508,273 $ 14,782,605 $ 12,021,917
Net interest income, fully tax-equivalent (non-GAAP)(1)
$ 567,772 $ 497,195 $ 438,658
Net interest spread(1)
3.22 % 3.48 % 3.65 %
Net interest income, fully tax-equivalent (non-GAAP) to total earning assets 3.33 % 3.69 % 4.04 %
(1) Computed on a tax-equivalent basis using an effective tax rate of 21%.
(2) Nonaccrual loans and loans held for sale are included in the average loans outstanding.
The following table presents the dollar amount of changes in interest income and interest expense for the major components of interest earning assets and interest bearing liabilities, in thousands. It quantifies the changes in interest income and interest expense related to changes in the average outstanding balances (volume) and those changes caused by fluctuating interest rates. For each category of interest earning assets and interest bearing liabilities, information is provided on changes attributable to (i) changes in volume, calculated by multiplying the difference between the average balance for the current period and the average balance for the prior period by the rate for the prior period, and (ii) changes in rate, calculated by multiplying the difference between the rate for the current period and the rate for the prior period by the average balance for the prior period. The
unallocated change has been allocated pro rata to volume and rate variances.
For the Years Ended December 31,
2021 Compared to 2020
Change Due to 2020 Compared to 2019
Change Due to
Volume Rate Net Volume Rate Net
Earning Assets/Interest Income
Investment securities:
Taxable $ 48,218 $ (21,471) $ 26,747 $ 35,749 $ (10,633) $ 25,116
Nontaxable(1)
11,875 (3,287) 8,588 4,181 (870) 3,311
Interest bearing deposits 108 (688) (580) (1,493) (4,278) (5,771)
Federal funds sold - 1 1 (1) (3) (4)
Loans(1)(2)
41,624 (22,486) 19,138 63,383 (63,215) 168
Total earning assets 101,825 (47,931) 53,894 101,819 (78,999) 22,820
Liabilities/Interest Expense
Interest bearing deposits:
Savings 3,274 (10,771) (7,497) 8,443 (38,952) (30,509)
Time deposits 591 (8,584) (7,993) (403) (2,535) (2,938)
Short-term borrowings 90 (229) (139) 333 (1,471) (1,138)
Other borrowings (1,619) 565 (1,054) 4,801 (5,933) (1,132)
Total interest bearing liabilities 2,336 (19,019) (16,683) 13,174 (48,891) (35,717)
Net interest income $ 99,489 $ (28,912) $ 70,577 $ 88,645 $ (30,108) $ 58,537
(1) Computed on a tax-equivalent basis using an effective tax rate of 21%.
(2) Nonaccrual loans and loans held for sale are included in average loans outstanding.
PROVISION FOR CREDIT LOSSES
A provision for credit losses is charged to expense to provide, in HTLF management’s opinion, an appropriate allowance for credit losses. The following table shows the components of HTLF's provision for credit losses for the years ended December 31, 2021, 2020 and 2019, in thousands:
For the Years Ended December 31,
Provision (benefit) for credit losses-loans $ (17,706) $ 65,745 $ 16,657
Provision (benefit) for credit losses-unfunded commitments(1)
182 1,428 -
Provision (benefit) for credit losses-held to maturity securities(2)
(51) (107) -
Total provision expense (benefit) $ (17,575) $ 67,066 $ 16,657
(1) Prior to the adoption of ASU 2016-13, the provision for unfunded commitments was immaterial and therefore, prior periods are not presented.
(2) Prior to the adoption of ASU 2016-13, there was no requirement to record provision for credit losses for held to maturity securities.
The provision benefit for credit losses was $17.6 million during 2021 compared to expense of $67.1 million during 2020 and $16.7 million during 2019. The provision benefit for 2021 was impacted by several factors, including:
•increases in balances of loans held to maturity of $689.4 million excluding total PPP loans from year end-2020, which included an increase of $358.3 million of government guaranteed loans for which no provision was required,
•decrease in nonperforming loans of $18.2 million to $69.9 million or 0.70% of total loans compared to $88.1 million or 0.88% of total loans at December 31, 2020,
•net charge-offs of $3.8 million, and
•improved macroeconomic factors compared to 2020.
Provision expense for credit losses for loans increased $49.1 million during 2020 to $65.7 million compared to $16.7 million for the year ended December 31, 2019. The increase in 2020 was primarily attributable to a deteriorated economic outlook due
to the COVID-19 pandemic. The following items contributed to the remainder of the increase during 2020:
•Provision expense of $11.6 million was recorded for one owner-occupied commercial real estate fracking sand company that was individually assessed for allowance for credit losses.
•Provision expense of $5.9 million was recorded for one commercial and industrial loan that was fully charged off.
•HTLF recorded $9.6 million of provision expense for non-purchased credit deteriorated ("PCD") loans acquired in the fourth quarter.
At December 31, 2021, the allowance for credit losses for loans was 1.11% of total loans and 157.45% of nonperforming loans compared to 1.31% of total loans and 149.37% of nonperforming loans at December 31, 2020, and 0.84% of loans and 87.28% of nonperforming loans at December 31, 2019.
Given the size of HTLF's loan portfolio, the level of organic loan growth including government guaranteed loans, changes in credit quality and the variability that can occur in the factors, such as economic conditions, considered when determining the appropriateness of the allowance for credit losses, HTLF's provision for credit losses will vary from year to year. For additional details on the specific factors considered in establishing the allowance for credit losses, refer to the discussion under the captions "Critical Accounting Estimates," "Provision for Credit Losses" and "Allowance for Credit Losses" in Item 8 of this Annual Report on Form 10-K, and the information in Note 1, "Basis of Presentation," and Note 6, "Allowance for Credit Losses" to the consolidated financial statements contained herein.
HTLF believes the allowance for credit losses as of December 31, 2021, was at a level commensurate with the overall risk exposure of the loan portfolio. However, deterioration in current economic conditions could cause certain borrowers to experience financial difficulty. Due to the uncertainty of future economic conditions resulting from the COVID-19 pandemic and other economic headwinds, including recent concerns over COVID-19 variants, supply chain challenges and workforce shortages and wage pressures, the provision for credit losses could be volatile in future periods.
NONINTEREST INCOME
The table below summarizes HTLF's noninterest income for the years indicated, in thousands:
For the Years Ended December 31, % Change
2021 2020 2019 2021/2020 2020/2019
Service charges and fees $ 59,703 $ 47,467 $ 52,157 26 % (9) %
Loan servicing income 3,276 2,977 4,843 10 (39)
Trust fees 24,417 20,862 19,399 17 8
Brokerage and insurance commissions 3,546 2,756 3,786 29 (27)
Securities gains, net 5,910 7,793 7,659 (24) 2
Unrealized gain on equity securities, net 58 640 525 (91) 22
Net gains on sale of loans held for sale 20,605 28,515 15,555 (28) 83
Valuation adjustment on servicing rights 1,088 (1,778) (911) 161 (95)
Income on bank owned life insurance 3,762 3,554 3,785 6 (6)
Other noninterest income 6,570 7,505 9,410 (12) (20)
Total noninterest income $ 128,935 $ 120,291 $ 116,208 7 % 4 %
Notable changes in the components of noninterest income are as follows:
Service Charges and Fees
The following table summarizes the changes in service charges and fees for the years ended indicated, in thousands:
For the Years Ended December 31, % Change
2021 2020 2019 2021/2020 2020/2019
Service charges and fees on deposit accounts $ 16,414 $ 14,441 $ 12,790 14 % 13 %
Overdraft fees 11,005 9,166 11,543 20 (21)
Customer service fees 220 177 331 24 (47)
Credit card fee income 21,623 16,026 15,594 35 3
Debit card income 10,441 7,657 11,899 36 (36)
Total service charges and fees $ 59,703 $ 47,467 $ 52,157 26 % (9) %
Total service charges and fees were $59.7 million in 2021, which was an increase of $12.2 million or 26% from $47.5 million in 2020. Total service charges and fees in 2020 were $47.5 million, which was a decrease of $4.7 million or 9% from $52.2 million in 2019.
The changes detailed in the table above were primarily attributable to HTLF's larger customer base as a result of recent acquisitions. Additionally, HTLF waived retail and small business service charges and fees through much of the second and third quarters of 2020 in recognition of the impact of the COVID-19 pandemic on those customers. Credit card and debit card transaction volumes were lower throughout the most of 2020 due to the COVID-19 pandemic.
Management does not anticipate making changes to its consumer overdraft fee structure. However, management is monitoring and assessing the industry changes related to consumer overdraft fees, and any future changes could negatively impact overdraft fee income.
Trust Fees
Trust fees totaled $24.4 million for the year ended December 31, 2021, an increase of $3.6 million or 17% from $20.9 million for the year ended December 31, 2020. Trust fees increased $1.5 million or 8% to $20.9 million for the year ended December 31, 2020 from $19.4 million for the year ended December 31, 2019. The increase was primarily attributable to an increase in the market value of trust assets under management, which were $3.79 billion, $3.42 billion and $3.03 billion at December 31, 2021, 2020, and 2019, respectively.
Loan Servicing Income
The following tables show the changes in loan servicing income for the years indicated, in thousands:
For the Years Ended December 31, % Change
2021 2020 2019 2021/2020 2020/2019
Commercial and agricultural loan servicing fees(1)
$ 2,826 $ 3,287 $ 3,110 (14) % 6 %
Residential mortgage servicing fees(2)
1,837 1,726 4,901 6 (65)
Mortgage servicing rights amortization (1,387) (2,036) (3,168) (32) (36)
Total loan servicing income $ 3,276 $ 2,977 $ 4,843 10 % (39) %
(1) Includes servicing fees for commercial, commercial real estate, agricultural and agricultural real estate loans and amortization of capitalized commercial servicing rights.
(2) Mortgage loans serviced by HTLF, primarily for GSEs, totaled $723.3 million, $743.3 million and $616.7 million as of December 31, 2021, 2020 and 2019, respectively.
Loan servicing income includes the fees collected for the servicing of commercial, agricultural, and mortgage loans, which are dependent upon the aggregate outstanding balance of these loans, rather than quarterly production and sale of these loans. Total loan servicing income totaled $3.3 million for 2021 compared to $3.0 million for 2020 and $4.8 million for 2019.
Included in and offsetting loan servicing income is the amortization of capitalized servicing rights, which was $1.4 million during 2021 compared to $2.0 million during 2020 and $3.2 million during 2019. Stable residential mortgage interest rates during 2021 caused mortgage refinancing activity to decrease during the year, which resulted in lower mortgage servicing rights
amortization. The decrease in mortgage loan servicing income and the amortization of servicing rights in 2020 was primarily due to the sale of Dubuque Bank and Trust Company's mortgage servicing portfolio on April 30, 2019.
Note 8, "Goodwill, Core Deposit Intangibles and Other Intangible Assets," to the consolidated financial statements contains a discussion of our servicing rights.
Net Gains on Sale of Loans Held for Sale
Net gains on sale of loans held for sale totaled $20.6 million during 2021 compared to $28.5 million during 2020 and $15.6 million during 2019. These gains result primarily from the gain or loss on sales of mortgage loans into the secondary market, related fees and fair value marks on the associated derivatives. Loans sold to investors in 2021 totaled $466.1 million compared to $621.5 million during 2020, which was a decrease of $155.4 million or 25%. The decrease in 2021 was primarily attributable to stable residential mortgage interest rates which caused mortgage refinancing activity to decrease. The increase during 2020 was primarily due to an increase in residential mortgage loan refinancing activity in response to declines in mortgage interest rates.
Valuation Adjustment on Servicing Rights
The valuation adjustment on servicing rights decreased $1.1 million for the year ending December 31, 2021, compared to increasing $1.8 million for the year ended December 31, 2020, which was a change of $2.9 million or 161%, and the valuation adjustment increased $867,000 to $1.8 million for the year ended December 31, 2020 from $911,000 for the year ended December 31, 2019. The change for the year ended December 31, 2021 was primarily due to increases in residential mortgage interest rates during 2021 compared to declines in residential mortgage interest rates during 2020.
NONINTEREST EXPENSES
The following table summarizes HTLF's noninterest expenses for the years indicated, in thousands:
For the Years Ended December 31, % Change
2021 2020 2019 2021/2020 2020/2019
Salaries and employee benefits $ 240,114 $ 202,668 $ 200,341 18 % 1 %
Occupancy 29,965 26,554 25,429 13 4
Furniture and equipment 13,323 12,514 12,013 6 4
Professional fees 64,600 54,068 47,697 19 13
Advertising 7,257 5,235 9,825 39 (47)
Core deposit intangibles and customer relationship intangibles amortization 9,395 10,670 11,972 (12) (11)
Other real estate and loan collection expenses 990 1,340 1,035 (26) 29
(Gain)/loss on sales/valuations of assets, net 588 5,101 (19,422) 88 (126)
Acquisition, integration and restructuring costs 5,331 5,381 6,580 (1) (18)
Partnership investment in tax credit projects 6,303 3,801 8,030 66 (53)
Other noninterest expenses 53,946 43,631 45,661 24 (4)
Total noninterest expenses $ 431,812 $ 370,963 $ 349,161 16 % 6 %
Notable changes in the components of noninterest expenses are as follows:
Salaries and Employee Benefits
The largest component of noninterest expense, salaries and employee benefits, increased $37.4 million or 18% to $240.1 million in 2021 and $2.3 million or 1% to $202.7 million in 2020. Full-time equivalent employees totaled 2,249 on December 31, 2021, compared to 2,013 on December 31, 2020, and 1,908 on December 31, 2019.
The increase in salaries and employee benefits during 2021 was primarily attributable to higher salaries expense, normalized health care usage, and an increase in full-time equivalent employees, which included the addition of specialized commercial and agribusiness lending teams. The increase in full-time equivalent employees as of December 31, 2020 was primarily due to the acquisitions completed in the fourth quarter of 2020.
Professional Fees
Professional fees increased $10.5 million or 19% to $64.6 million during 2021 and $6.4 million or 13% to $54.1 million during 2020. The increase in 2021 was primarily attributable to technology and automation projects completed during the year and the acquisitions completed in the fourth quarter of 2020. Included in professional fees for 2020 was $5.7 million of FDIC insurance assessments compared to $860,000 in 2019. The increase for 2020 was due to the expiration of small bank credits, which were applied to FDIC assessments for the year ended December 31, 2019.
Advertising
Advertising expense increased $2.0 million or 39% to $7.3 million during 2021, which was primarily attributable to the resumption of in-person customer events. Advertising expense decreased $4.6 million or 47% to $5.2 million during 2020. The decrease for the year ended December 31, 2020 was primarily attributable to a reduction of in-person customer events and an overall managed reduction in marketing spend in response to operational environment changes caused by the COVID-19 pandemic.
Core Deposit Intangibles and Customer Relationship Intangibles Amortization
Core deposit intangibles and customer relationship intangibles amortization totaled $9.4 million during 2021 compared to $10.7 million during 2020 and $12.0 million during 2019, which was a decrease of $1.3 million or 12% and a decrease of $1.3 million or 11%. The changes for the years ended December 31, 2021 and 2020 were attributable to recent acquisitions.
Net Gains/Losses on Sales/Valuations of Assets
Net losses on sales/valuations of assets totaled $588,000 during 2021 compared to $5.1 million during 2020 and net gains of $19.4 million during 2019. During the fourth quarter of 2021, HTLF recorded $424,000 of fixed asset write-downs related to twelve properties, which included seven bank branches and five operation centers, listed as held for sale at the end of 2021. During the second half of 2020, HTLF recorded $3.5 million of fixed asset write-downs related to eight branch consolidations.
Partnership Investment in Tax Credit Projects
Partnership investment in tax credit projects totaled $6.3 million, $3.8 million and $8.0 million for the years ended December 31, 2021, 2020 and 2019, respectively. The expense is dependent upon the number of tax credit projects placed in service during the year.
Excluding the items noted above, increases in all other noninterest expense categories for the years ended December 31, 2021, and 2020, were primarily attributable to recent acquisitions.
EFFICIENCY RATIO
One of HTLF's top priorities has been to improve its efficiency ratio, on a fully tax-equivalent basis (non-GAAP), with the goal of reducing it to below 57%. The efficiency ratio, fully tax-equivalent (non-GAAP), was 59.48% for 2021 compared to 56.65% for 2020 and 62.50% for 2019.
HTLF continues to explore strategies to improve operational efficiency, which include the following items:
•The consolidation of its eleven bank charters. Two key tenets of the charter consolidation project are the retention of brand identities and local market decision-making and management and the maintenance of operational and administrative functions in Dubuque, Iowa. The ongoing financial benefits from consolidation are expected to be approximately $20.0 million annually when the project is completed and are expected to arise from the elimination of redundancies and improved operating processes. The consolidation will also increase operating capacity to be leveraged with future growth and provide better alignment of our products and services. The charter consolidation is expected to be complete by the end of 2023.
•A reduction in HTLF's branch network by approximately 10% is expected through its branch optimization strategy.
In spite of cost savings initiatives, management believes the efficiency ratio could remain elevated due to the continued low interest rate environment, wage pressure and workforce shortages, supply chain disruptions and inflation.
See "Financial Highlights" in Item 7 of this Annual Report on Form 10-K for a description of the calculation of the efficiency ratio on a fully tax-equivalent basis, which is a non-GAAP financial measure.
INCOME TAXES
HTLF's effective tax rate was 20.1% for 2021 compared to 20.7% for 2020 and 19.0% for 2019. The following items impacted HTLF's 2021, 2020 and 2019 tax calculations:
•Solar energy tax credits of $6.1 million, $2.3 million and $4.0 million.
•Federal low-income housing tax credits of $540,000, $780,000 and $1.1 million.
•Historic rehabilitation tax credits of $720,000, $1.1 million and $1.8 million.
•New markets tax credits of $300,000, $300,000 and $0.
•Tax-exempt interest income as a percentage of pre-tax income of 9.9%, 11.8% and 10.1%.
•The tax-equivalent adjustment for this tax-exempt interest income was $7.2 million, $5.5 million and $4.9 million.
•Tax benefits of $491,000, $617,000 and $1.9 million related to the release of valuation allowances on deferred tax assets.
FINANCIAL CONDITION
HTLF's total assets were $19.27 billion at December 31, 2021, an increase of $1.37 billion or 8% since December 31, 2020. HTLF's total assets were $17.91 billion at December 31, 2020, an increase of $4.70 billion or 36% compared to $13.21 billion at December 31, 2019. Included in the increase for 2020 were $1.97 billion of assets acquired at fair value in the AimBank transaction and $419.7 million of assets acquired at fair value in the Johnson Bank branch transaction.
LENDING ACTIVITIES
HTLF's board of directors establishes an acceptable level of credit risk appetite, and the subsidiary banks have certain lending policies and procedures in place that are designed to provide for an acceptable level of credit risk. 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.
HTLF originates commercial and industrial loans and owner occupied commercial real estate loans for a wide variety of business purposes, including lines of credit for working capital and operational purposes and term loans for the acquisition of equipment and real estate. Although most loans are made on a secured basis, loans may be made on an unsecured basis if warranted by the overall financial condition of the borrower. Terms of commercial business loans generally range from one to five years. Commercial loans are primarily made based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The risks in the commercial and industrial portfolio include the unpredictability of the cash flow of the borrowers and the variability in the value of the collateral securing the loans. Owner occupied commercial real estate loans are dependent upon the cash flow of the borrowers and the collateral value of the real estate.
In 2021, HTLF originated $473.9 million of PPP loans ("PPP II"). HTLF originated $1.20 billion of PPP loans ("PPP I") during 2020, and HTLF acquired $53.1 million of PPP loans in the AimBank transaction. At December 31, 2021, HTLF had $27.1 million of PPP I loans outstanding, which was net of $118,000 of unamortized deferred fees, and $172.8 million of PPP II loans outstanding, which was net of $6.4 million of unamortized deferred fees. Under the CARES Act, all PPP loans are 100% SBA guaranteed, and borrowers may be eligible to have an amount up to the entire principal balance forgiven and paid by the SBA. All PPP loans also carry a zero risk rating for regulatory capital purposes. Because these loans are 100% guaranteed by the SBA, there is no allowance recorded related to the PPP loans.
Non-owner occupied commercial real estate loans provide financing for various non-owner occupied or income producing properties. Real estate construction loans are generally short-term or interim loans that provide financing for acquiring or developing commercial income properties, multi-family projects or single-family residential homes. The collateral that HTLF requires for most of these loans is based upon the discounted market value of the collateral. Non-owner occupied commercial real estate loans are typically dependent, in large part, on sufficient income from the properties securing the loans to cover the operating expenses and debt service. Real estate construction loans involve additional risks because funds are advanced based upon estimates of costs and the estimated value of the completed project. Additionally, real estate construction loans have a greater risk of default in a weaker economy because the source of repayment is reliant on the successful and timely sale of the project. Personal guarantees are frequently required as a tertiary form of repayment. In addition, when underwriting loans for commercial real estate, careful consideration is given to the property's operating history, future operating projections, current and projected occupancy, location and physical condition.
Agricultural and agricultural real estate loans, many of which are secured by crops, machinery and real estate, are provided to finance capital improvements and farm operations as well as acquisitions of livestock and machinery. Agricultural and agricultural real estate loans present unique credit risks relating to adverse weather conditions, loss of livestock due to disease or other reasons, declines in market prices for agricultural products and the impact of government regulations. The ultimate repayment of agricultural and agricultural real estate loans is dependent upon the profitable operation or management of the agricultural entity. Loans secured by farm equipment, livestock or crops may not provide an adequate source of repayment because of damage or depreciation. In underwriting agricultural and agricultural real estate loans, lending personnel work closely with their customers to review budgets and cash flow projections for crop production for the ensuing year. These budgets and cash flow projections are monitored closely during the year and reviewed with the customers at least annually. Lending personnel work closely with governmental agencies, including the U.S. Small Business Administration and U.S. Department of Agriculture's Rural Development Business and Industry Program Farm Service Agency, to help agricultural customers obtain credit enhancement products, such as loan guarantees, longer-term funding or interest assistance, to reduce risk.
Lenders at each subsidiary bank are complimented by HTLF Specialized Industries, a centralized team of middle-market lenders focused on specific industries and more complex loan structures. The expertise of this team includes the commercial real estate, healthcare, and food and agribusiness industries, as well as syndications and franchise finance.
Residential real estate loans are originated for the purchase or refinancing of single family residential properties. Residential real estate loans are dependent upon the borrower's ability to repay the loan and the underlying collateral value. The acquisition of First Bank & Trust in Lubbock, Texas, in 2018 included its wholly owned mortgage subsidiary, PrimeWest Mortgage Corporation, which was merged into First Bank & Trust in April 2020. First Bank & Trust provides mortgage loans to customers in Texas and has expanded to also serve the mortgage needs of customers in many of HTLF's Bank Markets. First Bank & Trust services the conventional loans it sells into the secondary market.
Consumer lending includes motor vehicle, home improvement, home equity and small personal credit lines. Consumer loans typically have shorter terms, lower balances, higher yields and higher risks of default than one-to-four-family residential mortgage loans. Consumer loan collections are dependent on the borrower's continuing financial stability and are therefore more likely to be affected by adverse personal circumstances. Risk is reduced through underwriting criteria, which include credit verification, appraisals, a review of the borrower's financial condition, and personal cash flows. A security interest, with title insurance when necessary, is taken in the underlying real estate.
At December 31, 2021, $212.6 million or 51% of the consumer loan portfolio were in home equity lines of credit ("HELOCs") compared to $234.4 million or 57% at December 31, 2020. Under our policy guidelines for the underwriting of these lines of credit, the customer may generally receive advances of up to 80% of the value of the property.
The Banks have not been active in the origination of subprime loans. Consistent with our community banking model, which includes meeting the legitimate credit needs within the communities served, the Banks may make loans to borrowers possessing subprime characteristics if there are mitigating factors present that reduce the potential default risk of the loan.
HTLF’s major source of income is interest on loans. The table below presents the composition of HTLF’s loan portfolio at the end of the years indicated, in thousands:
As of December 31,
2021 2020 2019
Amount % Amount % Amount %
Loans receivable held to maturity:
Commercial and industrial $ 2,645,085 26.57 % $ 2,534,799 25.29 % $ 2,530,809 30.24 %
Paycheck Protection Program ("PPP") 199,883 2.01 957,785 9.56 - -
Owner occupied commercial real estate 2,240,334 22.51 1,776,406 17.72 1,472,704 17.60
Non-owner occupied commercial real estate 2,010,591 20.20 1,921,481 19.17 1,495,877 17.88
Real estate construction 856,119 8.60 863,220 8.61 1,027,081 12.27
Agricultural and agricultural real estate 753,753 7.57 714,526 7.13 565,837 6.76
Residential real estate 829,283 8.33 840,442 8.39 832,277 9.95
Consumer 419,524 4.21 414,392 4.13 443,332 5.30
Total loans receivable held to maturity 9,954,572 100.00 % 10,023,051 100.00 % 8,367,917 100.00 %
Allowance for credit losses (110,088) (131,606) (70,395)
Loans receivable, net $ 9,844,484 $ 9,891,445 $ 8,297,522
Loans held for sale totaled $21.6 million at December 31, 2021, and $57.9 million at December 31, 2020, which were primarily residential mortgage loans.
The table below sets forth the remaining maturities of loans held to maturity by category as of December 31, 2021, in thousands. Maturities are based upon contractual dates.
Over 1 Year
Through 5 Years Over 5 Years Through 15 Years Over 15 Years
One Year
or Less Fixed
Rate Floating
Rate Fixed
Rate Floating
Rate Fixed
Rate Floating
Rate Total
Commercial and industrial $ 866,630 $ 554,904 $ 489,022 $ 397,724 $ 202,267 $ 105,541 $ 28,997 $ 2,645,085
PPP 199,883 - - - - 199,883
Owner occupied commercial real estate 298,073 564,587 299,473 451,667 377,021 70,746 178,767 2,240,334
Non-owner occupied commercial real estate 316,697 616,856 414,998 261,683 341,720 8,829 49,808 2,010,591
Real estate construction 307,750 211,028 169,468 73,024 91,534 - 3,315 856,119
Agricultural and agricultural real estate 298,356 174,915 106,213 81,550 53,674 25,193 13,852 753,753
Residential real estate 102,148 181,573 64,914 232,911 112,679 45,629 89,429 829,283
Consumer 45,028 97,785 240,824 33,238 1,795 663 191 419,524
Total $ 2,434,565 $ 2,401,648 $ 1,784,912 $ 1,531,797 $ 1,180,690 $ 256,601 $ 364,359 $ 9,954,572
Total loans
Total loans held to maturity were $9.95 billion at December 31, 2021, compared to $10.02 billion at year-end 2020, a decrease of $68.5 million or 1%. Excluding changes in total PPP loans, loans increased $689.4 million or 8% since year end 2020.
Total loans held to maturity were $10.02 billion at December 31, 2020, compared to $8.37 billion at year-end 2019, an increase of $1.66 billion or 20%. This change includes $1.24 billion of total loans held to maturity acquired at fair value in the fourth quarter in the AimBank and Johnson Bank branch transactions, which included $53.1 million of PPP loans. Excluding the loans acquired in the AimBank and Johnson Bank branch transactions and legacy PPP loans of $904.7 million, total loans held to maturity organically decreased $487.3 million or 6% since December 31, 2019.
The table below shows the changes in loan balances by loan category for the years indicated, in thousands:
As of December 31, % Change
2021 2020 2019 2021/2020 2020/2019
Commercial and industrial $ 2,645,085 $ 2,534,799 $ 2,530,809 4 % - %
PPP 199,883 957,785 - (79) 100
Owner occupied commercial real estate 2,240,334 1,776,406 1,472,704 26 21
Non-owner occupied commercial real estate 2,010,591 1,921,481 1,495,877 5 28
Real estate construction 856,119 863,220 1,027,081 (1) (16)
Agricultural and agricultural real estate 753,753 714,526 565,837 5 26
Residential real estate 829,283 840,442 832,277 (1) 1
Consumer 419,524 414,392 443,332 1 (7)
Total $ 9,954,572 $ 10,023,051 $ 8,367,917 (1) % 20 %
Commercial and industrial loans
Commercial and industrial loans totaled $2.65 billion at December 31, 2021, compared to $2.53 billion at both December 31, 2020 and December 31, 2019. Changes to commercial and industrial loans for the years ended December 31, 2021 and 2020 were:
•Commercial and industrial loans increased $110.3 million or 4% since December 31, 2020, and included an increase of $25.8 million of government guaranteed loans.
•During the year ended December 31, 2020, commercial and industrial loans increased $4.0 million or less than 1%.
•Excluding $186.8 million of loans acquired in the AimBank and Johnson Bank branch transactions, loans organically decreased $182.8 million or 7% during the year ended December 31, 2020.
PPP loans
At December 31, 2021, HTLF had $27.1 million of PPP I loans outstanding, which was net of $118,000 of unamortized deferred fees, and $172.8 million of PPP II loans outstanding, which was net of $6.4 million of unamortized deferred fees. As of December 31, 2021, approximately 98% of PPP I loans had been forgiven, and approximately 63% of PPP II loans had been forgiven.
At December 31, 2020, HTLF had $957.8 million of PPP I loans outstanding, which was net of $19.3 million of unamortized deferred fees, and included $53.1 million of loans acquired in the AimBank transaction.
Owner occupied commercial real estate loans
Owner occupied commercial real estate loans totaled $2.24 billion at December 31, 2021, compared to $1.78 billion at year-end 2020 and $1.47 billion at year-end 2019. Changes to owner occupied real estate loans for the years ended December 31, 2021 and 2020 were:
•Owner occupied commercial real estate loans increased $463.9 million or 26% during 2021, and included an increase of $249.7 million of government guaranteed loans.
•During the year ended December 31, 2020, owner occupied commercial real estate loans increased $303.7 million or 21%.
•Excluding $182.1 million of loans acquired in the AimBank and Johnson Bank branch transactions, loans organically increased $121.6 million or 8% during the year ended December 31, 2020.
Non-owner occupied commercial real estate loans
Non-owner occupied commercial real estate loans totaled $2.01 billion at December 31, 2021, compared to $1.92 billion at year-end 2020 and $1.50 billion at year-end 2019. Changes to non-owner occupied commercial real estate loans for the years ended December 31, 2021 and 2020 were:
•Non-owner occupied commercial loans increased $89.1 million or 5% during the year ended December 31, 2021, and included an increase of $46.2 million of government guaranteed loans.
•During the year ended December 31, 2020, non-owner occupied commercial real estate loans increased $425.6 million or 28%.
•Excluding $218.7 million of loans acquired in the AimBank and Johnson Bank branch transactions, loans organically increased $206.9 million or 14% during the year ended December 31, 2020.
Real estate construction loans
Real estate construction loans totaled $856.1 million at December 31, 2021, compared to $863.2 million at year-end 2020 and $1.03 billion at year-end 2019. Changes to real estate construction loans for the years ended December 31, 2021 and 2020 were:
•Real estate construction loans decreased $7.1 million or 1% during the year ended December 31, 2021.
•During the year ended December 31, 2020, real estate construction loans decreased $163.9 million or 16%.
•Excluding $100.9 million of loans acquired in the AimBank and Johnson Bank branch transactions, loans organically decreased $264.8 million or 26% since December 31, 2019.
Agricultural and agricultural real estate loans
Agricultural and agricultural real estate loans totaled $753.8 million at December 31, 2021, compared to $714.5 million at year-end 2020 and $565.8 million at year-end 2019. Changes to agricultural and agricultural real estate loans for the years ended December 31, 2021 and 2020 were:
•Agricultural and agricultural real estate loans increased $39.2 million or 5% since December 31, 2020, and included an increase of $36.7 million of government guaranteed loans.
•During the year ended December 31, 2020, agricultural and agricultural real estate loans increased $148.7 million or 26%.
•Excluding $247.5 million of loans acquired in the AimBank transaction, loans organically decreased $98.8 million or 17% since December 31, 2019.
Residential real estate loans
Residential real estate loans totaled $829.3 million at December 31, 2021, compared to $840.4 million at December 31, 2020, and $832.3 million at December 31, 2019. Changes to residential real estate loans for the years ended December 31, 2021 and 2020 were:
•Residential real estate loans decreased $11.2 million or 1% during the year end December 31, 2021.
•Residential real estate loans increased $8.2 million or 1% during the year ended December 31, 2020.
•Excluding $197.3 million of loans acquired in the AimBank and Johnson Bank branch transactions, loans organically decreased $189.2 million or 23% since December 31, 2019.
Consumer loans
Consumer loans totaled $419.5 million at December 31, 2021, compared to $414.4 million at year-end 2020 and $443.3 million at year-end 2019. Changes to consumer loans for the years ended December 31, 2021 and 2020 were:
•For the year ended December 31, 2021, consumer loans increased $5.1 million or 1%.
•For the year ended December 31, 2020, consumer loans decreased $28.9 million or 7%.
•Excluding $51.4 million of loans acquired in the AimBank and Johnson Bank branch transactions, loans organically decreased $80.3 million or 18% since December 31, 2019.
Although repayment risk exists on all loans, different factors influence repayment risk for each type of loan. The primary risks associated with commercial, commercial real estate and agricultural loans are the quality of the borrower’s management and the health of national and regional economies. Additionally, repayment of commercial real estate, real estate construction and agricultural real estate loans may be influenced by fluctuating property values and concentrations of loans in a specific type of real estate. Repayment on loans to individuals, including those secured by residential real estate, are dependent on the borrower’s continuing financial stability as well as the value of the collateral underlying these credits, and thus are more likely to be affected by adverse personal circumstances and deteriorating economic conditions. These risks are described in more detail in Item 1A. "Risk Factors" of this Annual Report on Form 10-K. We monitor loan concentrations and do not believe we have excessive concentrations in any specific industry.
Our strategy with respect to the management of these types of risks, whether loan demand is weak or strong, is to encourage the Banks to follow tested and prudent loan policies and underwriting practices, which include: (i) making loans on a sound and collectible basis; (ii) verifying that primary and secondary sources of repayment are adequate in relation to the amount of the loan; (iii) administering loan policies through a board of directors; (iv) developing and maintaining adequate diversification of the loan portfolio as a whole and of the loans within each loan category; and (v) appropriately documenting each loan and augmenting government guaranteed lending programs and adequate insurance.
We regularly monitor and continue to develop systems to oversee the quality of our loan portfolio. Under our internal loan review program, loan review officers are responsible for reviewing existing loans, testing loan ratings assigned by loan officers,
identifying potential problem loans and monitoring the adequacy of the allowance for credit losses at the Banks. An integral part of our loan review program is a loan rating system, under which a rating is assigned to each loan within the portfolio based on the borrower’s financial position, repayment ability, collateral position and repayment history.
While HTLF has seen overall improvement in customers' financial position since the onset of the COVID-19 pandemic, further economic disruption resulting from COVID-19 and its variants and the cessation of government support programs could make it difficult for some customers to repay the principal and interest on their loans.
ALLOWANCE FOR CREDIT LOSSES
The process utilized by HTLF to determine the appropriateness of the allowance for credit losses is considered a critical accounting practice for HTLF and has been updated to be in accordance with CECL as of January 1, 2020. All prior periods are presented in accordance with prior GAAP. The allowance for credit losses represents management's estimate of lifetime losses in the existing loan portfolio. For additional details on the specific factors considered in determining the allowance for credit losses, refer to the critical accounting estimates section of this Annual Report on Form 10-K for the year ended December 31, 2021 and Note 1, "Basis of Presentation," of the consolidated financial statements included in this Annual Report on Form 10-K.
Total Allowance for Lending Related Credit Losses
The following table shows, in thousands, the components of HTLF's total allowance for lending related credit losses, which includes the allowance for credit losses for loans and the allowance for unfunded commitments, as of the dates indicated:
December 31, 2021 December 31, 2020 January 1, 2020
Amount % of Allowance Amount % of Allowance Amount % of Allowance
Quantitative $ 88,635 70.59 % $ 102,398 69.71 % $ 82,829 85.99 %
Qualitative 25,445 20.27 29,101 19.81 11,468 11.91
Economic forecast 11,470 9.14 15,387 10.48 2,021 2.10
Total $ 125,550 100.00 % $ 146,886 100.00 % $ 96,318 100.00 %
Quantitative Allowance
The quantitative allowance of HTLF's total allowance for lending related credit losses totaled $88.6 million at December 31, 2021, which was a decrease of $13.8 million or 13% from $102.4 million at December 31, 2020. The following items impacted the quantitative allowance at December 31, 2021:
•Nonpass loans totaled $741.3 million at December 31, 2021, which was a decrease of $341.4 million or 32% from $1.08 billion at December 31, 2020.
•Government guaranteed loans, for which no provision is required, increased $358.3 million during 2021.
•Specific reserves for individually assessed loans totaled $7.6 million, which was a decrease of $1.8 million or 19% from $9.4 million at December 31, 2020.
The following items impacted the quantitative allowance at December 31, 2020:
•The quantitative allowance increased $17.5 million for loans acquired in the AimBank and Johnson Bank branch transactions in the fourth quarter of 2020.
•Specific reserves for individually assessed loans totaled $9.4 million.
Qualitative Allowance
The qualitative allowance of HTLF's total allowance decreased $3.7 million or 13% to $25.4 million at December 31, 2021, compared to $29.1 million at December 31, 2020. Management assesses several risk factors in the qualitative calculation, and in making its assessment for December 31, 2021, decreased the level of qualitative adjustment based on improving market conditions and credit quality trends.
At the end of the first quarter of 2020, in making its assessment, management increased the level of other external factors risk from the initial day 1 (January 1, 2020) assessment of moderate to high, which remained high at December 31, 2020. This level reflected the uncertainty of both the economic forecasting and quantitative allowance component results given the high level of market and economic volatility that existed due to the COVID-19 pandemic. While several of the qualitative factors increased,
the change in the other external factors was the primary driver of the overall increase in the qualitative allowance for the year ended December 31, 2020.
Economic Forecasting
The economic forecast allowance was $11.5 million at December 31, 2021, which was a decrease of $3.9 million or 25% from $15.4 million at December 31, 2020. HTLF has access to various third-party economic forecast scenarios provided by Moody's, which are updated quarterly in HTLF's methodology. At December 31, 2021, Moody's December 6, 2021 baseline forecast scenario was utilized, which was the most currently available forecast, and HTLF continued to use a one year reasonable and supportable forecast period.
For the December 31, 2021 calculation, the economic outlook factors used to develop the allowance retained a measured level of caution and uncertainty that management deemed appropriate for lingering economic headwinds, such as COVID-19 variants, supply chain challenges, and workforce shortages and wage pressures, that are yet to be resolved.
At December 31, 2020, HTLF utilized Moody's December 7, 2020, baseline forecast scenario, which included implications of COVID-19, and HTLF used a one year reasonable and supportable forecast period.
Allowance for Credit Losses-Loans
The table below presents the changes in the allowance for credit losses for loans for the years ended December 31, 2021 and 2020, in thousands:
For the Year Ended December 31,
2021 2020
Balance at beginning of period $ 131,606 $ 70,395
Impact of ASU 2016-13 adoption on January 1, 2020 - 12,071
Adjusted balance January 1, 2020 131,606 82,466
Allowance for purchased credit deteriorated loans - 12,313
Provision (benefit) for credit losses (17,706) 65,745
Recoveries on loans previously charged off 4,931 3,804
Charge-offs on loans (8,743) (32,722)
Balance at end of period $ 110,088 $ 131,606
Allowance for credit losses for loans as a percent of loans 1.11 % 1.31 %
Allowance for credit losses for loans as a percentage of nonaccrual loans 158.70 150.60
Allowance for credit losses for loans a percentage of non-performing loans 157.45 149.37
The allowance for credit losses for loans totaled $110.1 million and $131.6 million at December 31, 2021, and December 31, 2020, respectively. The allowance for credit losses for loans at December 31, 2021, was 1.11% of loans compared to 1.31% of loans at December 31, 2020. The following items impacted HTLF's allowance for credit losses for loans for the year ended December 31, 2021:
•Provision benefit totaled $17.7 million, which was primarily attributable to improved macroeconomic factors compared to 2020.
•Net charge offs totaled $3.8 million or 0.04% of average loans outstanding.
•Nonpass loans totaled $741.3 million at December 31, 2021, which was a decrease of $341.4 million or 32% from $1.08 billion at December 31, 2020.
•Government guaranteed loans, for which no provision is required, increased $358.3 million during 2021.
The following items impacted HTLF's allowance for credit losses for loans for the year ended December 31, 2020:
•The allowance for credit losses for loans increased $12.1 million after the adoption of CECL on January 1, 2020.
•Provision expense totaled $65.7 million, which included $9.6 million of provision expense for loans acquired in the fourth quarter of 2020.
•Net charge offs totaled $28.9 million or 0.32% of average loans outstanding, which included $13.9 million of charge offs related to three individually assessed loans with principal balances of $17.1 million.
The table below summarizes activity in the allowance for credit losses for loans for the years indicated, including amounts of loans charged off, amounts of recoveries and additions to the allowance charged to income. the ratio of net charge-offs to average loans outstanding, in thousands:
As of December 31,
2021 2020 2019
Balance at beginning of year $ 131,606 $ 70,395 $ 61,963
Impact of ASU 2016-13 adoption on January 1, 2020 - 12,071 -
Adjusted balance 131,606 82,466 61,963
Allowance for purchased credit deteriorated loans - 12,313 -
Charge-offs:
Commercial and industrial 2,150 14,974 7,129
PPP - - -
Owner occupied commercial real estate 296 13,671 119
Non-owner occupied commercial real estate 1,637 45 21
Real estate construction 10 105 156
Agricultural and agricultural real estate 1,902 1,201 2,633
Residential real estate 181 515 458
Consumer 2,567 2,211 3,074
Total charge-offs 8,743 32,722 13,590
Recoveries:
Commercial and industrial 3,058 1,277 2,462
PPP - - -
Owner occupied commercial real estate 152 205 178
Non-owner occupied commercial real estate 33 30 201
Real estate construction 10 220 255
Agricultural and agricultural real estate 531 971 529
Residential real estate 13 108 139
Consumer 1,134 993 1,601
Total recoveries 4,931 3,804 5,365
Net charge-offs(1)
3,812 28,918 8,225
Provision (benefit) for credit losses (17,706) 65,745 16,657
Balance at end of year $ 110,088 $ 131,606 $ 70,395
Net charge-offs to average loans 0.04 % 0.32 % 0.11 %
(1) Includes net charge-offs (recoveries) at Citizens Finance Parent Co. of $(631) for 2019.
The following table shows the ratio of net charge offs (recoveries) to average loans outstanding, which include nonaccrual loans and loans held for sale, by loan type for the years indicated, dollars in thousands:
For the Years Ended December 31,
2021 2020 2019
Commercial and industrial
Net charge offs (recoveries) $ (908) $ 13,697 $ 4,667
Average loans 2,543,514 2,437,183 2,445,552
Net charge offs (recoveries) to average loans (0.04) % 0.56 % 0.19 %
PPP
Net charge offs (recoveries) $ - $ - N/A
Average loans 734,139 779,183 N/A
Net charge offs (recoveries) to average loans - - N/A
Owner occupied commercial real estate
Net charge offs (recoveries) $ 144 $ 13,466 $ (59)
Average loans 1,950,014 1,480,109 1,337,910
Net charge offs (recoveries) to average loans 0.01 % 0.91 % - %
Non-owner occupied commercial real estate
Net charge offs (recoveries) $ 1,604 $ 15 $ (180)
Average loans 1,969,910 1,589,932 1,173,233
Net charge offs (recoveries) to average loans 0.08 % - % (0.02) %
Real estate construction
Net charge offs (recoveries) $ - $ (115) $ (99)
Average loans 824,055 1,007,086 947,933
Net charge offs (recoveries) to average loans - % (0.01) % (0.01) %
Agricultural and agricultural real estate
Net charge offs (recoveries) $ 1,371 $ 230 $ 2,104
Average loans 681,493 538,646 563,944
Net charge offs (recoveries) to average loans 0.20 % 0.04 % 0.37 %
Residential real estate
Net charge offs (recoveries) $ 168 $ 407 $ 319
Average loans 846,573 793,821 862,663
Net charge offs (recoveries) to average loans 0.02 % 0.05 % 0.04 %
Consumer
Net charge offs (recoveries)(1)
$ 1,433 $ 1,218 $ 1,473
Average loans 407,592 410,013 429,856
Net charge offs (recoveries) to average loans 0.35 % 0.30 % 0.34 %
(1) Includes net charge-offs (recoveries) at Citizens Finance Parent Co. of $(631) for 2019.
The table below shows our allocation of the allowance for credit losses for loans by types of loans, in thousands:
As of December 31,
2021 2020 2019
Amount Loan Category to Gross Loans Receivable Amount Loan Category to Gross Loans Receivable Amount Loan Category to Gross Loans Receivable
Commercial and industrial $ 27,738 26.57 % $ 38,818 25.29 % $ 34,207 30.24 %
PPP - 2.01 - 9.56 - -
Owner occupied commercial real estate 19,214 22.51 20,001 17.72 7,921 17.60
Non-owner occupied commercial real estate 17,908 20.20 20,873 19.17 7,584 17.88
Real estate construction 22,538 8.60 20,080 8.61 8,677 12.27
Agricultural and agricultural real estate 5,213 7.57 7,129 7.13 5,680 6.76
Residential real estate 8,427 8.33 11,935 8.39 1,504 9.95
Consumer 9,050 4.21 12,770 4.13 4,822 5.30
Total allowance for credit losses for loans $ 110,088 100.00 % $ 131,606 100.00 % $ 70,395 100.00 %
Management allocates the allowance for credit losses for loans by pools of risk within each loan portfolio. The allocation of the allowance for credit losses by loan portfolio is made for analytical purposes and is not necessarily indicative of the trend of future loan losses in any particular category. The total allowance for credit losses is available to absorb losses from any segment of the loan portfolio.
Allowance for Unfunded Commitments
The following table shows, in thousands, the changes in HTLF's allowance for unfunded commitments for the years ended December 31, 2021 and December 31, 2020:
For the Year Ended December 31,
2021 2020
Balance at beginning of year $ 15,280 $ 248
Impact of ASU 2016-13 adoption on January 1, 2020 - 13,604
Adjusted balance at January 1, 2020 15,280 13,852
Provision (benefit) for credit losses 182 1,428
Balance at end of year $ 15,462 $ 15,280
The allowance for unfunded commitments totaled $15.5 million as of December 31, 2021, compared to $15.3 million as of December 31, 2020. Unfunded commitments totaled $3.83 billion at December 31, 2021, and $3.26 billion at December 31, 2020.
HTLF's allowance for unfunded commitments totaled $13.9 million after the adoption of CECL on January 1, 2020. HTLF recorded a benefit to provision for credit losses for unfunded commitments of $894,000 during 2020, and $2.3 million of provision for credit losses related to unfunded loan commitments related to the acquisitions completed in the fourth quarter of 2020.
CREDIT QUALITY AND NONPERFORMING ASSETS
HTLF's internal rating system for the credit quality of its loans is a series of grades reflecting management's risk assessment, based on its analysis of the borrower's financial condition. The "pass" category consists of all loans that are not in the "nonpass" category and categorized into a range of loan grades that reflect increasing, though still acceptable, risk. Movement of risk through the various grade levels in the pass category is monitored for early identification of credit deterioration. For more information on this internal rating system, see Note 5, "Loans" of HTLF’s consolidated financial statements in this Annual Report on Form 10-K.
HTLF's nonpass loans totaled $741.3 million or 7.4% of total loans as of December 31, 2021 compared to $1.08 billion or 10.8% of total loans as of December 31, 2020. As of December 31, 2021, HTLF's nonpass loans consisted of approximately 50% watch loans and 50% substandard loans. The percent of nonpass loans on nonaccrual status as of December 31, 2021 was 9%. Included in HTLF's nonpass loans at December 31, 2021 were $27.8 million of nonpass PPP loans as a result of risk ratings on related credits. HTLF's risk rating methodology assigns a risk rating to the whole lending relationship. HTLF has no allowance recorded related to the PPP loans because of the 100% SBA guarantee.
As of December 31, 2020, HTLF's nonpass loans were comprised of approximately 56% watch loans and 44% substandard loans. The percent of nonpass loans on nonaccrual status as of December 31, 2020, was 8%.
Loans delinquent 30 to 89 days as a percent of total loans were 0.07% at December 31, 2021 compared to 0.23% at December 31, 2020.
The table below presents the amounts of nonperforming loans and other nonperforming assets on the dates indicated, in thousands:
As of December 31,
2021 2020 2019
Nonaccrual loans $ 69,369 $ 87,386 $ 76,548
Loans contractually past due 90 days or more 550 720 4,105
Total nonperforming loans 69,919 88,106 80,653
Other real estate 1,927 6,624 6,914
Other repossessed assets 43 240 11
Total nonperforming assets $ 71,889 $ 94,970 $ 87,578
Restructured loans(1)
$ 817 $ 2,370 $ 3,794
Nonaccrual loans to total loans receivable 0.70 % 0.87 % 0.91 %
Nonperforming loans to total loans receivable 0.70 0.88 0.96
Nonperforming assets to total loans receivable plus repossessed property 0.72 0.95 1.05
Nonperforming assets to total assets 0.37 0.53 0.66
(1) Represents accruing restructured loans performing according to their restructured terms.
The performing troubled debt restructured loans above do not include any loan modifications initially made under COVID-19 modification programs.
The tables below summarize the changes in HTLF's nonperforming assets, including other real estate owned ("OREO") during 2021 and 2020, in thousands:
Nonperforming
Loans
Other
Real Estate
Owned
Other
Repossessed
Assets
Total
Nonperforming
Assets
December 31, 2020 $ 88,106 $ 6,624 $ 240 $ 94,970
Loan foreclosures (3,252) 2,807 445 -
Net loan charge offs (3,812) - - (3,812)
New nonperforming loans 35,719 - - 35,719
Reduction of nonperforming loans(1)
(46,842) - - (46,842)
OREO/Repossessed sales proceeds - (7,749) (589) (8,338)
OREO/Repossessed assets gains/(write-downs), net - 245 (53) 192
December 31, 2021 $ 69,919 $ 1,927 $ 43 $ 71,889
(1) Includes principal reductions and transfers to performing status.
Nonperforming
Loans
Other
Real Estate
Owned
Other
Repossessed
Assets
Total
Nonperforming
Assets
December 31, 2019 $ 80,653 $ 6,914 $ 11 $ 87,578
Loan foreclosures (3,789) 3,511 278 -
Net loan charge offs (28,918) - - (28,918)
New nonperforming loans 63,151 - - 63,151
Acquired nonperforming assets 11,662 1,119 - 12,781
Reduction of nonperforming loans(1)
(34,653) - - (34,653)
OREO/Repossessed sales proceeds - (3,876) (37) (3,913)
OREO/Repossessed assets gains/(write-downs), net - (1,044) (12) (1,056)
December 31, 2020 $ 88,106 $ 6,624 $ 240 $ 94,970
(1) Includes principal reductions and transfers to performing status.
Nonperforming loans were $69.9 million or 0.70% of total loans at December 31, 2021, compared to $88.1 million or 0.88% of total loans at December 31, 2020.
Approximately 58%, or $40.8 million, of HTLF's nonperforming loans at December 31, 2021, had individual loan balances exceeding $1.0 million, the largest of which was $7.6 million. At December 31, 2020, approximately 54%, or $47.4 million, of HTLF's nonperforming loans had individual loan balances exceeding $1.0 million, the largest of which was $7.3 million. The portion of HTLF's nonresidential real estate nonperforming loans covered by government guarantees was $14.5 million at December 31, 2021, compared to $14.6 million at December 31, 2020.
Other real estate owned
Other real estate owned was $1.9 million at December 31, 2021, compared to $6.6 million at December 31, 2020, and $6.9 million at December 31, 2019. Liquidation strategies have been identified for all the assets held in other real estate owned. Management continues to market these properties through a systematic liquidation process instead of an immediate liquidation process in order to avoid discounts greater than the projected carrying costs. Proceeds from the sale of other real estate owned totaled $7.7 million in 2021 compared to $3.9 million in 2020 and $7.7 million in 2019.
Troubled debt restructured loans
In certain circumstances, we may modify the terms of a loan to maximize the collection of amounts due. In most cases, the modification is either a reduction in interest rate, conversion to interest only payments, extension of the maturity date or a reduction in the principal balance. Generally, the borrower is experiencing financial difficulties or is expected to experience difficulties in the near-term, so a concessionary modification is granted to the borrower that would otherwise not be considered. Restructured loans accrue interest as long as the borrower complies with the revised terms and conditions and has demonstrated repayment performance at a level commensurate with the modified terms over several payment cycles. Many of our loan restructurings occur on a case-by-case basis in connection with ongoing loan collection processes. We have also participated in
certain restructuring programs for residential real estate borrowers. In general, certain residential real estate borrowers facing an interest rate reset that are current in their repayment status are allowed to retain the lower of their existing interest rate or the market interest rate as of their interest reset date.
We had an aggregate balance of $10.4 million in restructured loans at December 31, 2021, of which $9.5 million were classified as nonaccrual and $817,000 were accruing according to the restructured terms. At December 31, 2020, we had an aggregate balance of $6.2 million in restructured loans, of which $3.8 million were classified as nonaccrual and $2.4 million were accruing according to the restructured terms.
SECURITIES
The composition of HTLF's securities portfolio is managed to ensure liquidity needs are met while maximizing the return on the portfolio within the established risk appetite parameters. Securities represented 40% of HTLF's total assets at December 31, 2021, compared to 35% at December 31, 2020, and 26% at December 31, 2019. Whenever possible, management intends to use a portion of the proceeds from maturities, paydowns and sales of securities to fund loan growth and paydown borrowings. Total securities carried at fair value as of December 31, 2021, were $7.53 billion, an increase of $1.40 billion or 23% since December 31, 2020. Total securities carried at fair value as of December 31, 2020, were $6.13 billion, an increase of $2.82 billion or 85% since December 31, 2019. The increase includes $267.9 million of securities acquired in 2020.
The table below presents the composition of the securities portfolio, including securities carried at fair value, held to maturity net of allowance for credit losses and other, by major category, in thousands:
As of December 31,
2021 2020 2019
Amount % of
Portfolio Amount % of
Portfolio Amount % of
Portfolio
U.S. treasuries $ 1,008 0.01 % $ 2,026 0.03 % $ 8,503 0.25 %
U.S. agencies 193,384 2.51 166,779 2.65 184,676 5.38
Obligations of states and political subdivisions 2,169,742 28.19 1,724,066 27.40 798,514 23.24
Mortgage-backed securities - agency 2,349,289 30.52 1,355,270 21.54 766,726 22.32
Mortgage-backed securities - non-agency 1,743,379 22.65 1,449,116 23.03 430,497 12.53
Commercial mortgage-backed securities - agency 123,912 1.61 174,153 2.77 68,865 2.00
Commercial mortgage-backed securities - non-agency 600,888 7.81 252,767 4.02 436,325 12.70
Asset-backed securities 409,653 5.32 1,069,266 16.99 691,579 20.13
Corporate bonds 3,040 0.04 3,742 0.06 - -
Equity securities 20,788 0.27 19,629 0.31 18,435 0.54
Other securities 82,567 1.07 75,253 1.20 % 31,321 0.91
Total securities $ 7,697,650 100.00 % $ 6,292,067 100.00 % $ 3,435,441 100.00 %
HTLF's securities portfolio had an expected modified duration of 5.26 years as of December 31, 2021, compared to 5.52 years as of December 31, 2020, and 6.17 years as of December 31, 2019.
At December 31, 2021, we had $82.6 million of other securities, including capital stock in the various Federal Home Loan Banks ("FHLB") of which the Banks are members. All securities classified as other are held at cost.
The table below presents the contractual maturities for the debt securities classified as available for sale at December 31, 2021, by major category, in thousands. Expected maturities will differ from contractual maturities, as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Within
One Year
After One But Within
Five Years
After Five But Within
Ten Years
After
Ten Years
Mortgage and asset-backed and
equity securities
Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
U.S. treasuries $ 1,008 1.70 % $ - - % $ - - % $ - - % $ - - % $ 1,008 1.70 %
U.S. agencies - - 1,264 2.73 33,561 1.48 158,559 1.53 - - 193,384 1.53
Obligations of states and political subdivisions 1,473 4.00 18,061 3.27 139,159 2.59 1,926,340 2.41 - - 2,085,033 2.43
Mortgage-backed securities - agency - - - - - - - - 2,349,289 0.81 2,349,289 0.81
Mortgage-backed securities - non-agency - - - - - - - - 1,743,379 2.70 1,743,379 2.70
Commercial mortgage-backed securities - agency - - - - - - - - 123,912 1.69 123,912 1.69
Commercial mortgage-backed securities - non-agency - - - - - - - - 600,888 3.81 600,888 3.81
Asset-backed securities - - - - - - - - 409,653 1.76 409,653 1.76
Corporate bonds - - 572 3.98 2,468 4.78 - - - - 3,040 4.63
Equity securities - - - - - - - - 20,788 - 20,788 -
Total $ 2,481 3.07 % $ 19,897 3.25 % $ 175,188 2.41 % $ 2,084,899 2.35 % $ 5,247,909 1.88 % $ 7,530,374 2.02 %
The table below presents the contractual maturities for the debt securities classified as held to maturity at December 31, 2021, by major category, in thousands. Expected maturities will differ from contractual maturities, as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Within
One Year
After One But Within
Five Years
After Five But Within
Ten Years
After
Ten Years
Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
Obligations of states and political subdivisions $ 5,096 5.43 % $ 38,787 5.10 % $ 34,824 4.87 % $ 6,002 5.31 % $ 84,709 5.04 %
Total $ 5,096 5.43 % $ 38,787 5.10 % $ 34,824 4.87 % $ 6,002 5.31 % $ 84,709 5.04 %
The unrealized losses on HTLF's debt securities are the result of changes in market interest rates or widening of market spreads subsequent to the initial purchase of the securities and not related to concerns regarding the underlying credit of the issuers or the underlying collateral. For this reason and because we have the intent and ability to hold these investments until a market price recovery or to maturity and does not believe it will be required to sell the securities before maturity, no credit losses were recognized on these securities during the year ended December 31, 2021. See Note 4, "Securities" of the consolidated financial statements for further discussion regarding unrealized losses on our securities portfolio.
DEPOSITS
Total deposits were $16.42 billion as of December 31, 2021, compared to $14.98 billion as of December 31, 2020, an increase of $1.44 billion or 10%, The mix of total deposits remains favorable, with demand deposits representing 40% at December 31, 2021, and 38% at December 31, 2020. Savings deposits represented 54% at both December 31, 2021 and December 31, 2020.
The table below sets forth the distribution of our average deposit account balances and the average interest rates paid on each category of deposits for the years indicated, in thousands:
For the Years Ended December 31,
2021 2020 2019
Average
Deposits Percent
of Deposits Average
Interest
Rate Average
Deposits Percent
of Deposits Average
Interest
Rate Average
Deposits Percent
of Deposits Average
Interest
Rate
Demand deposits $ 6,230,851 39.74 % - % $ 4,554,479 36.85 % - % $ 3,384,341 33.74 % - %
Savings 8,311,825 53.01 0.11 6,718,413 54.35 0.25 5,530,503 55.14 0.85
Time deposits 1,137,097 7.25 0.50 1,088,185 8.80 1.26 1,115,785 11.12 1.49
Total deposits $ 15,679,773 100.00 % $ 12,361,077 100.00 % $ 10,030,629 100.00 %
Total Average Deposits
•Total average deposits increased $3.32 billion or 27% during 2021 to $15.68 billion.
•In 2021, 38% of our total average deposits were from our Midwestern Bank Markets, 38% were from our Southwestern Bank Markets, and 24% were from our Western Bank Markets.
•Total average deposits increased $2.33 billion or 23% during 2020 to $12.36 billion, which included approximately $153.9 million of deposits acquired in 2020.
•Excluding acquired deposits, total average deposits increased $2.18 billion or 22% during 2020.
Average Demand Deposits
•Average demand deposits increased $1.68 billion or 37% to $6.23 billion during 2021.
•In 2021, 33% of our demand deposits were from our Midwestern Bank Markets, 40% were from our Southwestern Bank Markets, and 27% were from our Western Bank Markets.
•Average demand deposits increased $1.17 billion or 35% to $4.55 billion during 2020.
•Excluding acquired demand deposits of approximately $57.3 million, average demand deposits increased $1.11 billion or 33% during 2020.
Average Savings Deposits
•Average savings deposits increased $1.59 billion or 24% to $8.31 billion during 2021.
•In 2021, 43% of our savings deposits were from our Midwestern Bank Markets, 36% were from our Southwestern Bank Markets, and 21% were from our Western Bank Markets.
•Average savings deposit balances increased by $1.19 billion or 21% to $6.72 billion during 2020.
•Excluding acquired savings deposits of approximately $72.0 million, average savings deposits increased $1.12 billion or 20% during 2020.
Growth in non-time deposits in 2021 was positively impacted by payments related to federal government stimulus and other COVID-19 relief programs.
Average Time Deposits
•Average time deposits increased $48.9 million or 4% to $1.14 billion during 2021.
•In 2021, 28% of time deposits were from our Midwestern Bank Markets, 52% were from our Southwestern Bank Markets, and 20% were from our Western Bank Markets.
•Average time deposits decreased $27.6 million or 2% to $1.09 billion during 2020.
•Excluding acquired time deposits of approximately $24.6 million, average time deposits decreased $52.2 million or 5% during 2020.
Average brokered time deposits as a percentage of total average deposits were less than 1% during 2021, 2020 and 2019.
The following table sets forth the amount and maturities of time deposits of $100,000 or more at December 31, 2021, in thousands:
December 31, 2021
3 months or less $ 170,248
Over 3 months through 6 months 131,284
Over 6 months through 12 months 166,413
Over 12 months 137,282
Total $ 605,227
The following table sets for the amount and maturities of time deposits of $250,000 or more, at December 31, 2021, in thousands:
December 31, 2021
3 months or less $ 89,140
Over 3 months through 6 months 67,751
Over 6 months through 12 months 96,839
Over 12 months 80,002
Total $ 333,732
SHORT-TERM BORROWINGS
Short-term borrowings, which HTLF defines as borrowings with an original maturity of one year or less, were as follows as of December 31, 2021, 2020, and 2019 in thousands:
As of December 31, % Change
2021 2020 2019 2021/2020 2020/2019
Retail repurchase agreements $ 122,996 $ 118,293 84,486 4 % 40 %
Federal funds purchased - 2,100 2,450 (100) (14)
Advances from the FHLB - - 81,198 - (100)
Advances from the federal discount window - 35,000 - (100) 100
Other short-term borrowings 8,601 12,479 14,492 (31) (14)
Total $ 131,597 $ 167,872 $ 182,626 (22) % (8) %
Short-term borrowings generally include federal funds purchased, securities sold under agreements to repurchase, short-term FHLB advances and discount window borrowings from the Federal Reserve Bank. These funding alternatives are utilized in varying degrees depending on their pricing and availability. All of the Banks own FHLB stock in one of the Chicago, Dallas, Des Moines, San Francisco or Topeka FHLBs, enabling them to borrow funds from their respective FHLB for short- or long-term purposes under a variety of programs. As of December 31, 2021, the amount of short-term borrowings was $131.6 million compared to $167.9 million at year-end 2020, a decrease of $36.3 million or 22%.
All of the Banks provide retail repurchase agreements to their customers as a cash management tool, which sweep excess funds from demand deposit accounts into these agreements. This source of funding does not increase the bank's reserve requirements. Although the aggregate balance of these retail repurchase agreements is subject to variation, the account relationships represented by these balances are principally local. The balances of retail repurchase agreements were $123.0 million at December 31, 2021, compared to $118.3 million at December 31, 2020, an increase of $4.7 million or 4%.
HTLF renewed its revolving credit line agreement with an unaffiliated bank on June 14, 2021. This revolving credit line agreement, which has $75.0 million of borrowing capacity, is included in short-term borrowings, and the primary purpose of this credit line agreement is to provide liquidity to HTLF. HTLF had no advances on this line during 2021 or 2020, and no balance was outstanding on this line at December 31, 2021, and December 31, 2020.
OTHER BORROWINGS
The outstanding balances of other borrowings, which HTLF defines as borrowings with an original maturity date of more than one year, are shown in the table below, net of unamortized discount and issuance costs, in thousands, as of December 31, 2021 and 2020:
As of December 31, % Change
2021 2020 2021/2020
Advances from the FHLB $ 898 $ 1,018 (12) %
Paycheck Protection Program Liquidity Fund - 188,872 (100)
Trust preferred securities 147,316 146,323 1
Note payable to unaffiliated bank - 44,417 (100)
Contracts payable for purchase of real estate and other assets 1,593 1,983 (20)
Subordinated notes 222,265 74,429 199
Total $ 372,072 $ 457,042 (19) %
Other borrowings include all debt arrangements HTLF and its subsidiaries have entered into with original maturities that extend beyond one year, as listed in the table above. As of December 31, 2021, the amount of other borrowings was $372.1 million, a decrease of $85.0 million or 19% from $457.0 million as of year-end 2020.
Each of the Banks was approved in 2020 by their respective Federal Reserve Bank to borrow from the Paycheck Protection Program Liquidity Fund ("PPPLF"). The PPPLF program ended on July 31, 2021, and all advances were repaid by September 30, 2021.
On September 8, 2021, HTLF closed its public offering of $150.0 million aggregate principal amount of its 2.75% Fixed-to-Floating Rate Subordinated Notes due 2031 (the "2021 subordinated notes"). The notes were issued at par with an underwriting discount of $1.9 million. The net proceeds of the 2021 subordinated notes totaled $147.6 million. The 2021 subordinated notes were registered under HTLF’s effective shelf registration statement and qualify as Tier 2 capital for regulatory purposes. The net proceeds are expected to be used for general corporate purposes, which may include, without limitation, providing capital to support HTLF's organic growth or growth through strategic acquisitions, financing investments, capital expenditures, investments in the subsidiary banks as regulatory capital, and repaying indebtedness. The 2021 subordinated notes have a fixed interest rate of 2.75% until September 15, 2026, at which time the interest rate will be reset quarterly to a benchmark interest rate, which is expected to be three-month term Secure Overnight Financing Rate ("SOFR") plus a spread of 210 basis points. The 2021 subordinated notes mature on September 15, 2031, and become redeemable at HTLF's option on September 15, 2026.
In 2014, HTLF issued $75.0 million of subordinated notes with a maturity date of December 30, 2024. The notes were issued at par with an underwriting discount of $1.1 million. The interest rate on the notes is fixed at 5.75% per annum payable semi-annually. The notes were sold to qualified institutional buyers, and the proceeds were used for general corporate purposes.
For regulatory purposes, $177.5 million of total subordinated notes qualified as Tier 2 capital as of December 31, 2021.
HTLF has a non-revolving credit facility with an unaffiliated bank, and at December 31, 2021, no balance was outstanding on this non-revolving credit line compared to $44.4 million outstanding at December 31, 2020. The decrease in this non-revolving credit line was primarily attributable to a paydown of $20.3 million in conjunction with the renewal of the credit line in the second quarter of 2021, and the remainder was repaid with proceeds from the subordinated notes issued in September 2021. At December 31, 2021, $3.5 million of borrowing capacity was available on this non-revolving credit facility, of which no balance was drawn.
A schedule of HTLF's trust preferred offerings outstanding as of December 31, 2021, is as follows, in thousands:
Amount
Issued
Issuance
Date
Interest
Rate
Interest
Rate as of
12/31/21 Maturity
Date
Callable
Date
Heartland Financial Statutory Trust IV $ 10,310 03/17/2004 2.75% over LIBOR 2.97 % 03/17/2034 03/17/2022
Heartland Financial Statutory Trust V 20,619 01/27/2006 1.33% over LIBOR 1.45 04/07/2036 04/07/2022
Heartland Financial Statutory Trust VI 20,619 06/21/2007 1.48% over LIBOR 1.68 09/15/2037 03/15/2022
Heartland Financial Statutory Trust VII 18,042 06/26/2007 1.48% over LIBOR 1.65 09/01/2037 03/01/2022
Morrill Statutory Trust I 9,276 12/19/2002 3.25% over LIBOR 3.47 12/26/2032 03/26/2022
Morrill Statutory Trust II 8,976 12/17/2003 2.85% over LIBOR 3.07 12/17/2033 03/17/2022
Sheboygan Statutory Trust I 6,703 09/17/2003 2.95% over LIBOR 3.17 09/17/2033 03/17/2022
CBNM Capital Trust I 4,508 09/10/2004 3.25% over LIBOR 3.45 12/15/2034 03/15/2022
Citywide Capital Trust III 6,549 12/19/2003 2.80% over LIBOR 2.93 12/19/2033 04/23/2022
Citywide Capital Trust IV 4,411 09/30/2004 2.20% over LIBOR 2.36 09/30/2034 05/23/2022
Citywide Capital Trust V 12,198 05/31/2006 1.54% over LIBOR 1.74 07/25/2036 03/15/2022
OCGI Statutory Trust III 3,012 06/27/2002 3.65% over LIBOR 3.89 09/30/2032 03/30/2022
OCGI Capital Trust IV 5,455 09/23/2004 2.50% over LIBOR 2.70 12/15/2034 03/15/2022
BVBC Capital Trust II 7,278 04/10/2003 3.25% over LIBOR 3.38 04/24/2033 04/24/2022
BVBC Capital Trust III 9,404 07/29/2005 1.60% over LIBOR 1.82 09/30/2035 03/30/2022
Total trust preferred offerings 147,360
Less: deferred issuance costs (44)
$ 147,316
CAPITAL RESOURCES
The Federal Reserve has adopted capital adequacy guidelines that are used to assess the adequacy of capital in supervising a bank holding company. Under Basel III, HTLF must hold a conservation buffer above the adequately capitalized risk-based capital ratios; however, the transition provision related to the conservation buffer have been extended indefinitely.
The most recent notification from the FDIC categorized HTLF and each of its banks as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the categorization of any of these entities.
HTLF's capital ratios are calculated in accordance with Federal Reserve Board instructions and are required regulatory financial measures. The following table illustrates HTLF's capital ratios and the Federal Reserve's current capital adequacy guidelines for the dates indicated, in thousands. The table also indicates the fully-phased in capital conservation buffer, but the requirements to comply have been extended indefinitely.
Total
Capital
(to Risk-
Weighted
Assets)
Tier 1
Capital
(to Risk-
Weighted
Assets)
Common
Equity
Tier 1
(to Risk-
Weighted
Assets)
Tier 1
Capital
(to Average
Assets)
December 31, 2021 15.90 % 12.39 % 11.53 % 8.57 %
Minimum capital requirement 8.00 6.00 4.50 4.00
Well capitalized requirement 10.00 8.00 6.50 5.00
Minimum capital requirement, including fully-phased in capital conservation buffer 10.50 8.50 7.00 N/A
Risk-weighted assets $ 12,829,318 $ 12,829,318 $ 12,829,318 N/A
Average assets N/A N/A N/A $ 18,553,872
Total
Capital
(to Risk-
Weighted
Assets)
Tier 1
Capital
(to Risk-
Weighted
Assets)
Common
Equity
Tier 1
(to Risk-
Weighted
Assets)
Tier 1
Capital
(to Average
Assets)
December 31, 2020 14.71 % 11.85 % 10.92 % 9.02 %
Minimum capital requirement 8.00 6.00 4.50 4.00
Well capitalized requirement 10.00 8.00 6.50 5.00
Minimum capital requirement, including fully-phased in capital conservation buffer 10.50 8.50 7.00 N/A
Risk-weighted assets $ 11,819,037 $ 11,819,037 $ 11,819,037 N/A
Average assets N/A N/A N/A $ 15,531,884
December 31, 2019 13.75 % 12.31 % 10.88 % 10.10 %
Minimum capital requirement 8.00 6.00 4.50 4.00
Well capitalized requirement 10.00 8.00 6.50 5.00
Minimum capital requirement, including fully-phased in capital conservation buffer (2019) 10.50 8.50 7.00 N/A
Risk-weighted assets $ 10,098,515 $ 10,098,515 $ 10,098,515 N/A
Average assets N/A N/A N/A $ 12,318,135
At December 31, 2021, retained earnings that could be available for the payment of dividends to meet the most restrictive minimum capital requirements totaled $758.6 million. Retained earnings that could be available for the payment of dividends to HTLF from its Banks totaled approximately $502.1 million at December 31, 2021, under the capital requirements to remain well capitalized. These dividends are the principal source of funds to pay dividends on HTLF's common and preferred stock and to pay interest and principal on its debt.
On December 4, 2020, HTLF completed the acquisition of AimBank, headquartered in Levelland, Texas in a transaction valued at approximately $264.5 million, which was paid by delivery of 5,185,045 shares of HTLF common stock and cash of $47.3 million, subject to certain hold-back provisions.
On June 26, 2020, HTLF issued and sold 4.6 million depositary shares, each representing a 1/400th interest in a share of 7.00% Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, Series E. The depositary shares are listed on The Nasdaq Global Select Market under the symbol "HTLFP." If declared, dividends are paid quarterly in arrears at a rate of 7.00% per annum beginning on October 15, 2020. For the dividend period beginning on the first reset date of July 15, 2025, and for dividend periods beginning every fifth anniversary thereafter, each a reset date, the rate per annum will be reset based on a recent five-year treasury rate plus 6.675%. The earliest redemption date for the preferred shares is July 15, 2025. Dividends payable on common shares are subject to quarterly dividends payable on these outstanding preferred shares at the applicable dividend rate. The net proceeds of $110.7 million are being used for general corporate purposes, which include organic and acquired growth, financing investments, capital expenditures, investments in wholly-owned subsidiaries as regulatory capital and repayment of debt.
On August 8, 2019, HTLF filed a universal shelf registration statement with the SEC to register debt or equity securities. This shelf registration statement, which was effective immediately, provided HTLF with the ability to raise capital, subject to market conditions and SEC rules and limitations, if HTLF's board of directors decided to do so. This registration statement permitted HTLF, from time to time, in one or more public offerings, to offer debt securities, subordinated notes, common stock, preferred stock, rights or any combination of these securities. The amount of securities that may have been offered was not specified in the registration statement, and the terms of any future offerings were to be established at the time of the offering.
Common stockholders' equity was $2.07 billion at December 31, 2021, compared to $1.97 billion at year-end 2020. Book value per common share was $49.00 at December 31, 2021, compared to $46.77 at year-end 2020. Changes in common stockholders' equity and book value per common share are the result of earnings, dividends paid, stock transactions and mark-to-market adjustments for unrealized gains and losses on securities available for sale. HTLF's unrealized gains and losses on securities
available for sale, net of applicable taxes, reflected an unrealized loss of $4.4 million and an unrealized gain of $76.8 million at December 31, 2021, and December 31, 2020, respectively.
COMMITMENTS, CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
The following table presents material fixed and determinable contractual obligations as of December 31, 2021, in thousands. Further discussion of each obligation is included in the referenced note to the consolidated financial statements.
Payments Due In
Obligation Note Reference One Year or Less More than One Year Total
Demand deposits 9 $ 6,495,326 $ - $ 6,495,326
Savings deposits 9 8,897,909 - 8,897,909
Time deposits 9 795,813 228,207 1,024,020
Repurchase agreements 10 122,996 - 122,996
Other borrowings 11 2 372,070 372,072
Total $ 16,312,046 $ 600,277 $ 16,912,323
We also enter into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit, and are described in Note 15, "Commitments," to the consolidated financial statements for additional information on these commitments. As of December 31, 2021, and December 31, 2020, commitments to extend credit aggregated $3.83 billion and $3.26 billion, and standby letters of credit aggregated $51.4 million and $73.2 million, respectively.
We continue to explore opportunities to expand our footprint of independent community banks, and these acquisitions may be financed from dividends collected from our subsidiaries, the issuance of equity or debt securities, drawing on our existing lines of credit or other sources of funding. Future expenditures relating to expansion efforts cannot be estimated at this time.
We enter into mortgage banking derivatives, which are classified as free standing derivatives. These derivatives include interest rate lock commitments provided to customers to fund certain mortgage loans to be sold into the secondary market and forward commitments for the future delivery of such loans. We enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of future interest rate changes on the commitments to fund the loans as well as on the residential mortgage loans available for sale. We enter into risk participation agreements for credit protection should borrowers fail to perform on their interest rate derivative contracts. See Note 12, "Derivative Financial Instruments," to the consolidated financial statements for additional information on our derivative financial instruments.
Refer to "Liquidity" in Item 7 of this Annual Report on Form 10-K for further discussion regarding our cash flow and funding sources.
LIQUIDITY
Liquidity refers to our ability to maintain a cash flow that is adequate to meet maturing obligations and existing commitments, to withstand fluctuations in deposit levels, to fund operations and to provide for customers’ credit needs. The liquidity of HTLF principally depends on cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings and its ability to borrow funds in the money or capital markets. For COVID-19 trends and uncertainties impacting HTLF’s liquidity, see the discussion of "Liquidity and Interest Rate Risks" under Item 1A, Risk Factors.
At December 31, 2021, HTLF had $435.6 million of cash and cash equivalents, time deposits in other financial institutions of $2.9 million and securities carried at fair value of $7.53 billion.
Management of investing and financing activities, and market conditions, determine the level and the stability of net interest cash flows. Management attempts to mitigate the impact of changes in market interest rates to the extent possible, so that balance sheet growth is the principal determinant of growth in net interest cash flows.
HTLF's short-term borrowing balances are dependent on commercial cash management and smaller correspondent bank relationships and, as a result, will normally fluctuate. Management believes these balances, on average, to be stable sources of
funds; however, HTLF intends to rely on deposit growth and additional FHLB and discount window borrowings as needed in the future.
Additional funding is provided by long-term debt and short-term borrowings. In the event of short-term liquidity needs, HTLF's banks may purchase federal funds from each other or from correspondent banks and may also borrow from the Federal Reserve Bank. As of December 31, 2021, HTLF had $131.6 million of short-term borrowings outstanding.
As of December 31, 2021, HTLF had $372.1 million of long-term debt outstanding, and it is an important funding source because of its multi-year borrowing structure. Additionally, the subsidiary banks' FHLB memberships give them the ability to borrow funds for short-term and long-term purposes under a variety of programs, and at December 31, 2021, HTLF had $913.5 million of borrowing capacity under these programs. Additionally, at December 31, 2021, HTLF had $895.6 million of borrowing capacity at the Federal Reserve Banks' discount window.
On a consolidated basis, HTLF maintains a large balance of short-term securities that, when combined with cash from operations, HTLF believes are adequate to meet its funding obligations.
At the parent company level, routine funding requirements consist primarily of dividends paid to stockholders, debt service on revolving credit arrangements and trust preferred securities issuances, repayment requirements under other debt obligations and payments for acquisitions. The parent company obtains the funding to meet these obligations from dividends paid by its bank subsidiaries and the issuance of debt and equity securities.
As of December 31, 2021, the parent company had cash of $259.8 million. Additionally, HTLF has a revolving credit agreement and non-revolving credit line with an unaffiliated bank, which is renewed annually, most recently on June 14, 2021. HTLF's revolving credit agreement has $75.0 million of maximum borrowing capacity, of which none was outstanding at December 31, 2021. At December 31, 2021, $3.5 million was available on the non-revolving credit line. These credit agreements contain specific financial covenants, all of which HTLF complied with as of December 31, 2021.
The ability of HTLF to pay dividends to its stockholders is dependent upon dividends paid by its subsidiaries. The Banks are subject to statutory and regulatory restrictions on the amount they may pay in dividends. To maintain acceptable capital ratios in the HTLF 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 HTLF under the regulatory capital requirements to remain well-capitalized totaled approximately $502.1 million as of December 31, 2021.
HTLF has filed a universal shelf registration statement with the SEC that provides HTLF the ability to raise both debt and capital, subject to SEC rules and limitations, if HTLF's board of directors decides to do so. This registration statement expires in August 2022.
Management believes that cash on hand, cash flows from operations and cash availability under existing borrowing programs and facilities will be sufficient to meeting any recurring and additional operating cash needs in 2022.
EFFECTS OF INFLATION
Consolidated financial data included in this report has been prepared in accordance with U.S. GAAP. Presently, these principles require reporting of financial position and operating results in terms of historical dollars, except for available for sale securities, trading securities, derivative instruments, certain impaired loans and other real estate which require reporting at fair value. Changes in the relative value of money due to inflation or recession are generally not considered.
In management’s opinion, changes in interest rates affect the financial condition of a financial institution to a far greater degree than changes in the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do not change at the same rate or in the same magnitude as the inflation rate. Rather, interest rate volatility is based on changes in the expected rate of inflation, as well as on changes in monetary and fiscal policies. A financial institution’s ability to be relatively unaffected by changes in interest rates is a good indicator of its capability to perform in today’s volatile economic environment. HTLF seeks to insulate itself from interest rate volatility by ensuring that rate-sensitive assets and rate-sensitive liabilities respond to changes in interest rates in a similar time frame and to a similar degree. See Item 7A of this Annual Report on Form 10-K for a discussion on the process HTLF utilizes to mitigate market risk.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market prices and rates. HTLF's market risk is comprised primarily of interest rate risk resulting from its core banking activities of lending and deposit gathering. Interest rate risk measures the impact on earnings from changes in interest rates and the effect on current fair market values of HTLF's assets, liabilities and off-balance sheet contracts. The objective is to measure this risk and manage the balance sheet to avoid unacceptable potential for economic loss.
Management continually develops and applies strategies to mitigate market risk. Exposure to market risk is reviewed on a regular basis by the asset/liability committees of HTLF's bank subsidiaries and, on a consolidated basis, by HTLF's executive management and board of directors. At least quarterly, a detailed review of the balance sheet risk profile is performed for HTLF and each of its bank subsidiaries. Included in these reviews are interest rate sensitivity analyses, which simulate changes in net interest income in response to various interest rate scenarios. These analyses consider current portfolio rates, existing maturities, repricing opportunities and market interest rates, in addition to prepayments and growth under different interest rate assumptions. Selected strategies are modeled prior to implementation to determine their effect on HTLF's interest rate risk profile and net interest income.
The core interest rate risk analysis utilized by HTLF examines the balance sheet under increasing and decreasing interest rate scenarios that are neither too modest nor too extreme. All rate changes are ramped over a 12-month horizon based upon a parallel shift in the yield curve and then maintained at those levels over the remainder of the simulation horizon. Using this approach, management is able to see the effect that both a gradual change of rates (year 1) and a rate shock (year 2 and beyond) could have on HTLF's net interest income. Starting balances in the model reflect actual balances on the "as of" date, adjusted for material and significant transactions. Pro-forma balances remain static. This methodology enables interest rate risk embedded within the existing balance sheet structure to be isolated from the interest rate risk often caused by growth in assets and liabilities. Due to the low interest rate environment, the simulations under a decreasing interest rate scenario were prepared using a 100 basis point shift in rates. The most recent reviews at December 31, 2021, and 2020, provided the results below, in thousands.
2021 2020
Net Interest
Margin % Change
From Base Net Interest
Margin % Change
From Base
Year 1
Down 100 Basis Points $ 506,362 (2.54) % $ 506,247 (1.07) %
Base 519,573 511,697
Up 200 Basis Points 549,027 5.67 % 540,625 5.65 %
Year 2
Down 100 Basis Points 466,779 (10.16) % 485,312 (5.16) %
Base 503,949 (3.01) % 501,288 (2.03) %
Up 200 Basis Points 565,414 8.82 % 562,247 9.88 %
We use derivative financial instruments to manage the impact of changes in interest rates on our future interest income or interest expense. We are exposed to credit-related losses in the event of nonperformance by the counterparties to these derivative instruments but believe we have minimized the risk of these losses by entering into the contracts with large, stable financial institutions. The estimated fair market values of these derivative instruments are presented in Note 12 to the consolidated financial statements.
We enter into financial instruments with off balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract relating to the commitment. Commitments generally have fixed expiration dates and may require collateral from the borrower. Standby letters of credit are conditional commitments issued by HTLF to guarantee the performance of a customer to a third party up to a stated amount and with specified terms and conditions. These commitments to extend credit and standby letters of credit are not recorded on the balance sheet until the loan is made or the letter of credit is issued.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
As of December 31,
Notes 2021 2020
ASSETS
Cash and due from banks 3 $ 163,895 $ 219,243
Interest bearing deposits with other banks and other short-term investments 271,704 118,660
Cash and cash equivalents 435,599 337,903
Time deposits in other financial institutions 2,894 3,129
Securities:
Carried at fair value (cost of $7,536,338 at December 31, 2021, and cost of $6,024,225 at December 31, 2020)
4 7,530,374 6,127,975
Held to maturity, net of allowance for credit losses of $0 at December 31, 2021, and $51 at December 31, 2020 (fair value of $94,139 at December 31, 2021, and $100,041 at December 31, 2020)
4 84,709 88,839
Other investments, at cost 4 82,567 75,253
Loans held for sale 21,640 57,949
Loans receivable: 5
Held to maturity 9,954,572 10,023,051
Allowance for credit losses 5, 6 (110,088) (131,606)
Loans receivable, net 9,844,484 9,891,445
Premises, furniture and equipment, net 7 204,999 219,595
Premises, furniture and equipment held for sale 10,828 6,499
Other real estate, net 1,927 6,624
Goodwill 2, 8 576,005 576,005
Core deposit intangibles and customer relationship intangibles, net 8 32,988 42,383
Servicing rights, net 8 6,890 6,052
Cash surrender value on life insurance 191,722 187,664
Other assets 246,923 281,024
TOTAL ASSETS $ 19,274,549 $ 17,908,339
LIABILITIES AND EQUITY
LIABILITIES:
Deposits: 9
Demand $ 6,495,326 $ 5,688,810
Savings 8,897,909 8,019,704
Time 1,024,020 1,271,391
Total deposits 16,417,255 14,979,905
Short-term borrowings 10 131,597 167,872
Other borrowings 11 372,072 457,042
Accrued expenses and other liabilities 171,447 224,289
TOTAL LIABILITIES 17,092,371 15,829,108
STOCKHOLDERS' EQUITY: 16, 17, 18
Preferred stock (par value $1 per share; authorized 6,104 shares; none issued or outstanding at both December 31, 2021, and December 31, 2020)
- -
Series A Junior Participating preferred stock (par value $1 per share; authorized 16,000 shares; none issued or outstanding at both December 31, 2021, and December 31, 2020)
- -
Series B Fixed-Rate Reset Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares authorized at both December 31, 2021, and December 31, 2020, none issued or outstanding at both December 31, 2021, and December 31, 2020)
- -
Series C Senior Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares authorized at both December 31, 2021, and December 31, 2020, none issued or outstanding at both December 31, 2021, and December 31, 2020)
- -
Series D Senior Non-Cumulative Perpetual Convertible Preferred Stock (par value $1 per share; 3,000 shares authorized at both December 31, 2021, and December 31, 2020; none issued or outstanding at December 31, 2021, and December 31, 2020)
- -
Series E Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 11,500 shares authorized at both December 31, 2021, and December 31, 2020; 11,500 shares issued and outstanding at both December 31, 2021, and December 31, 2020)
110,705 110,705
Common stock (par value $1 per share; 60,000,000 shares authorized at both December 31, 2021 and December 31, 2020; issued 42,275,264 shares at December 31, 2021, and 42,093,862 shares at December 31, 2020)
42,275 42,094
Capital surplus 1,071,956 1,062,083
Retained earnings 962,994 791,630
Accumulated other comprehensive income (loss) (5,752) 72,719
TOTAL STOCKHOLDERS' EQUITY 2,182,178 2,079,231
TOTAL LIABILITIES AND EQUITY $ 19,274,549 $ 17,908,339
See accompanying notes to consolidated financial statements.
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
For the Years Ended December 31,
Notes 2021 2020 2019
INTEREST INCOME:
Interest and fees on loans 5 $ 444,137 $ 424,941 $ 424,615
Interest on securities:
Taxable 125,010 98,263 73,147
Nontaxable 19,268 12,484 9,868
Interest on federal funds sold 1 - 4
Interest on interest bearing deposits in other financial institutions 344 924 6,695
TOTAL INTEREST INCOME 588,760 536,612 514,329
INTEREST EXPENSE:
Interest on deposits 9 14,797 30,287 63,734
Interest on short-term borrowings 471 610 1,748
Interest on other borrowings (includes $1,601, $(1,820), and $170 of interest expense (benefit) related to derivatives reclassified from accumulated other comprehensive income (loss) for the years ended December 31, 2021, 2020, and 2019, respectively)
11, 12 12,932 13,986 15,118
TOTAL INTEREST EXPENSE 28,200 44,883 80,600
NET INTEREST INCOME 560,560 491,729 433,729
Provision (benefit) for credit losses 5, 6 (17,575) 67,066 16,657
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 578,135 424,663 417,072
NONINTEREST INCOME:
Service charges and fees 21 59,703 47,467 52,157
Loan servicing income 8 3,276 2,977 4,843
Trust fees 21 24,417 20,862 19,399
Brokerage and insurance commissions 21 3,546 2,756 3,786
Securities gains, net (includes $5,910, $7,592, and $7,659 of net security gains reclassified from accumulated other comprehensive income (loss) for the years ended December 31, 2021, 2020, and 2019, respectively)
4 5,910 7,793 7,659
Unrealized gain on equity securities, net 4 58 640 525
Net gains on sale of loans held for sale 20,605 28,515 15,555
Valuation adjustment on servicing rights 8 1,088 (1,778) (911)
Income on bank owned life insurance 3,762 3,554 3,785
Other noninterest income 6,570 7,505 9,410
TOTAL NONINTEREST INCOME 128,935 120,291 116,208
NONINTEREST EXPENSES:
Salaries and employee benefits 14, 16 240,114 202,668 200,341
Occupancy 15, 23 29,965 26,554 25,429
Furniture and equipment 7 13,323 12,514 12,013
Professional fees 64,600 54,068 47,697
Advertising 7,257 5,235 9,825
Core deposit intangibles and customer relationship intangibles amortization 8 9,395 10,670 11,972
Other real estate and loan collection expenses 990 1,340 1,035
(Gain) loss on sales/valuations of assets, net 588 5,101 (19,422)
Acquisition, integration and restructuring costs 5,331 5,381 6,580
Partnership investment in tax credit projects 6,303 3,801 8,030
Other noninterest expenses 53,946 43,631 45,661
TOTAL NONINTEREST EXPENSES 431,812 370,963 349,161
INCOME BEFORE INCOME TAXES 275,258 173,991 184,119
Income taxes (includes $1,896, $2,376, and $1,890 of income tax expense reclassified from accumulated other comprehensive income (loss) for the years ended December 31, 2021, 2020, and 2019, respectively)
13 55,335 36,053 34,990
NET INCOME 219,923 137,938 149,129
Preferred dividends (8,050) (4,451) -
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 211,873 $ 133,487 $ 149,129
EARNINGS PER COMMON SHARE - BASIC 1 $ 5.01 $ 3.58 $ 4.14
EARNINGS PER COMMON SHARE - DILUTED 1 $ 5.00 $ 3.57 $ 4.14
CASH DIVIDENDS DECLARED PER COMMON SHARE $ 0.96 $ 0.80 $ 0.68
See accompanying notes to consolidated financial statements.
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
For the Years Ended December 31,
2021 2020 2019
NET INCOME $ 219,923 $ 137,938 $ 149,129
OTHER COMPREHENSIVE INCOME (LOSS)
Securities:
Net change in unrealized gain (loss) on securities (103,807) 109,972 52,557
Reclassification adjustment for net gains realized in net income (5,910) (7,592) (7,659)
Income taxes 28,573 (26,578) (11,429)
Other comprehensive income (loss) on securities (81,144) 75,802 33,469
Derivatives used in cash flow hedging relationships:
Net change in unrealized gain (loss) on derivatives 5,037 (904) (3,639)
Reclassification adjustment for net (gains) losses on derivatives realized in net income (1,601) (1,820) 170
Income taxes (763) 567 723
Other comprehensive income (loss) on cash flow hedges 2,673 (2,157) (2,746)
Other comprehensive income (loss) (78,471) 73,645 30,723
TOTAL COMPREHENSIVE INCOME $ 141,452 $ 211,583 $ 179,852
See accompanying notes to consolidated financial statements.
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Dollars in thousands, except per share data)
Heartland Financial USA, Inc. Stockholders' Equity
Preferred
Stock
Common
Stock
Capital
Surplus
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Equity
Balance at January 1, 2019 $ - $ 34,477 $ 743,095 $ 579,252 $ (31,649) $ 1,325,175
Comprehensive income (loss) 149,129 30,723 179,852
Cumulative effect adjustment from the adoption of ASU 2016-02 on January 1, 2019 (1,272) (1,272)
Cash dividends declared:
Common, $0.68 per share
(24,607) (24,607)
Issuance of 2,226,779 shares of common stock
2,227 90,692 92,919
Stock based compensation 6,070 6,070
Balance at December 31, 2019 $ - $ 36,704 $ 839,857 $ 702,502 $ (926) $ 1,578,137
Balance at January 1, 2020 $ - $ 36,704 $ 839,857 $ 702,502 $ (926) $ 1,578,137
Cumulative effect adjustment from the adoption of ASU 2016-13 on January 1, 2020 (14,891) (14,891)
Adjusted balance on January 1, 2020 - 36,704 839,857 687,611 (926) 1,563,246
Comprehensive income (loss) 137,938 73,645 211,583
Cash dividends declared:
Preferred, $386.94 per share
(4,451) (4,451)
Common, $0.80 per share
(29,468) (29,468)
Issuance of 11,500 shares of Series E preferred stock
110,705 110,705
Issuance of 5,389,584 shares of common stock
5,390 214,816 220,206
Stock based compensation 7,410 7,410
Balance at December 31, 2020 $ 110,705 $ 42,094 $ 1,062,083 $ 791,630 $ 72,719 $ 2,079,231
Balance at January 1, 2021 $ 110,705 $ 42,094 $ 1,062,083 $ 791,630 $ 72,719 $ 2,079,231
Comprehensive income (loss) 219,923 (78,471) 141,452
Cash dividends declared:
Preferred, $700.00 per share
(8,050) (8,050)
Common, $0.96 per share
(40,509) (40,509)
Issuance of 181,402 shares of common stock
181 1,130 1,311
Stock based compensation 8,743 8,743
Balance at December 31, 2021 $ 110,705 $ 42,275 $ 1,071,956 $ 962,994 $ (5,752) $ 2,182,178
See accompanying notes to consolidated financial statements.
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the Years Ended December 31,
2021 2020 2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 219,923 $ 137,938 $ 149,129
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 26,894 27,289 30,797
Provision (benefit) for credit losses (17,575) 67,066 16,657
Net amortization of premium on securities 52,145 16,042 20,326
Provision for deferred taxes 11,543 (10,910) (414)
Securities gains, net (5,910) (7,793) (7,659)
Unrealized gain on equity securities, net (58) (640) (525)
Stock based compensation 8,743 7,410 6,070
(Gain) loss on sales/valuations of assets, net 2,222 5,101 (8,394)
Loans originated for sale (466,071) (621,507) (384,603)
Proceeds on sales of loans held for sale 521,463 615,439 396,290
Net gains on sales of loans held for sale (19,083) (25,133) (14,661)
(Increase) decrease in accrued interest receivable (1,590) (9,971) 1,301
Increase in prepaid expenses (1,102) (3,504) (8,566)
Increase (decrease) in accrued interest payable (497) (2,915) 421
Gain on extinguishment of debt - - (375)
Capitalization of servicing rights (1,522) (3,484) (1,011)
Valuation adjustment on servicing rights (1,088) 1,778 911
Net excess tax (expense) benefit from stock based compensation 312 (93) 266
Other, net (2,712) (1,745) (34,786)
NET CASH PROVIDED BY OPERATING ACTIVITIES 326,037 190,368 161,174
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of time deposits in other financial institutions (10) - (258)
Proceeds from the sale of securities available for sale 1,475,598 1,097,378 1,628,467
Proceeds from the sale of securities held to maturity - 1,056 -
Proceeds from the sale, maturity of and principal paydowns on other investments 4,858 8,506 10,325
Proceeds from the maturity of and principal paydowns on securities available for sale 1,059,292 567,884 402,946
Proceeds from the maturity of and principal paydowns on securities held to maturity 5,659 3,458 3,158
Proceeds from the maturity of time deposits in other financial institutions 245 585 1,216
Purchase of securities available for sale (4,094,661) (4,119,814) (2,577,106)
Purchase of other investments (12,172) (49,228) (6,446)
Net (increase) decrease in loans 50,437 (444,146) (90,749)
Purchase of bank owned life insurance policies (288) (292) (28)
Proceeds from bank owned life insurance policies - 606 1,402
Proceeds from sale of mortgage servicing rights - - 35,017
Capital expenditures and investments (17,203) (18,542) (17,928)
Net cash and cash equivalents received in acquisitions - 641,315 76,071
Net cash expended in divestitures (15,682) - (49,264)
Proceeds from sale of equipment 10,489 5,895 903
Proceeds on sale of OREO and other repossessed assets 8,338 3,913 8,304
NET CASH USED BY INVESTING ACTIVITIES (1,525,100) (2,301,426) (573,970)
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Dollars in thousands)
For the Years Ended December 31,
2021 2020 2019
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits 813,600 1,367,903 51,178
Net increase in savings accounts 893,569 735,968 680,641
Net decrease in time deposit accounts (242,321) (254,540) (81,251)
Net increase (decrease) in short-term borrowings (36,275) 40,137 (51,314)
Proceeds from short term FHLB advances 141,700 516,545 512,085
Repayments of short term FHLB advances (141,700) (597,742) (546,725)
Proceeds from other borrowings 147,614 314,397 50
Repayments of other borrowings (233,794) (134,244) (20,693)
Proceeds from issuance of preferred stock - 110,705 -
Payment for the redemption of debt - - (2,125)
Proceeds from issuance of common stock 2,925 3,004 661
Dividends paid (48,559) (31,906) (24,607)
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,296,759 2,070,227 517,900
Net increase (decrease) in cash and cash equivalents 97,696 (40,831) 105,104
Cash and cash equivalents at beginning of year 337,903 378,734 273,630
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 435,599 $ 337,903 $ 378,734
Supplemental disclosures:
Cash paid for income/franchise taxes $ 49,914 $ 33,402 $ 37,609
Cash paid for interest 28,703 47,798 80,238
Loans transferred to OREO 2,807 3,511 8,066
Transfer of premises from premises, furniture and equipment held for sale to premises, furniture and equipment, net 396 855 4,306
Purchases of securities available for sale, accrued, not paid - - 11,106
Transfer of premises from premises, furniture and equipment, net to premises, furniture and equipment held for sale 12,662 8,134 4,655
Securities transferred from held to maturity to available for sale - - 148,030
Securities transferred from available for sale to held to maturity - 462 -
Loans transferred to held for sale - - 32,111
Deposits transferred to held for sale - - 76,968
Dividends declared, not paid 2,013 2,013 -
Stock consideration granted for acquisitions - 217,202 92,258
See accompanying notes to consolidated financial statements.
HEARTLAND FINANCIAL USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ONE
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - Heartland Financial USA, Inc. ("HTLF") 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 HTLF, which are provided through its subsidiaries, are FDIC-insured deposit accounts and related services, and loans to businesses and consumers. 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 HTLF 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 HTLF’s subsidiaries are wholly-owned as of December 31, 2021.
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 - HTLF 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, HTLF 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 HTLF intends to actively trade and are stated at fair value with changes in fair value reflected in noninterest income. HTLF had no trading securities at both December 31, 2021 and 2020.
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.
HTLF 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 HTLF 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, HTLF 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, HTLF 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) are included in securities gains, net 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. HTLF has not recorded any impairment or other adjustments to the carrying amount of these investments during the years ended December 31, 2021, and December 31, 2020.
Allowance for Credit Losses on AFS Debt Securities - HTLF 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 HTLF 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, HTLF 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, HTLF 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 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 HTLF does not intend to sell nor does it believe it will be required to sell the security before the recovery of its cost basis. HTLF had no allowance for credit losses on AFS debt securities recorded at December 31, 2021, and December 31, 2020.
Securities Held to Maturity - Securities which HTLF 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.
Allowance for Credit Losses on Held to Maturity Debt Securities - HTLF 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. HTLF'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. HTLF had no allowance for credit losses on held to maturity debt securities recorded at December 31, 2021, compared to $51,000 at December 31, 2020.
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. HTLF has a loan policy which establishes the credit risk appetite, lending standards and underwriting criteria designed so that HTLF may extend credit in a prudent and sound manner. The HTLF 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.
HTLF 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. HTLF’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 - HTLF 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. HTLF 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 HTLF 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 - 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 HTLF are added back to the allowance.
HTLF'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 HTLF 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 13 years, on a pool basis for loans with similar risk characteristics. HTLF 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 HTLF’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 HTLF 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 HTLF 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
HTLF'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.
HTLF utilizes the following qualitative factors, all of which are equally weighted:
•changes in lending policies and procedures
•changes in the nature 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. HTLF 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 HTLF expects current conditions to differ from the conditions that existed for the period over which historical information was evaluated. HTLF 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 current quantitative allowance 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 HTLF’s assets. HTLF 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. HTLF compares forecasted macro-economic indices, such as unemployment and gross domestic product, to the economic conditions that existed over HTLF's look back period.
HTLF uses Moody's baseline economic forecast scenario, which is updated quarterly in HTLF's methodology. The economic forecast reverts to the historical mean immediately at the end of the reasonable and supportable forecast period. Because of the economic uncertainty associated with COVID-19, HTLF utilized a one-year reasonable and supportable forecast period for the calculation of the December 31, 2021, and 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. 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 TDRs 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. HTLF has adopted the CARES Act rule for TDR classification and has enhanced its procedures for deferral monitoring. The National Emergency Declaration was in effect during 2021, and therefore, HTLF followed the CARES Act rule for TDR classification during the year ended December 31, 2021.
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 HTLF'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, 2021 and 2020, loans held for sale primarily consisted of 1-4 family residential mortgages.
Allowance for Credit Losses on Unfunded Loan Commitments - HTLF 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 HTLF using the same collective 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 - HTLF 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. HTLF generally retains the right to service the sold loans for a fee. HTLF's First Bank and Trust subsidiary serviced mortgage loans primarily for government sponsored entities with aggregate unpaid principal balance of $723.3 million and $743.3 million, at December 31, 2021 and 2020, 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. HTLF 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, HTLF 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 HTLF 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 HTLF concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then HTLF 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.
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, HTLF 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, 2021, a valuation allowance of $327,000 was required on HTLF's mortgage servicing rights with an original term of 15 years, and a valuation allowance of $1.3 million was required on HTLF's mortgage servicing rights with an original term of 30 years. At December 31, 2020, a valuation allowance of $422,000 was required on HTLF's mortgage servicing rights with an original term of 15 years, and a valuation allowance of $1.4 million was required on HTLF's mortgage servicing rights with an original term of 30 years.
Cash Surrender Value on Life Insurance - HTLF 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 - HTLF 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. HTLF 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. HTLF recognizes interest and penalties related to income tax matters in income tax expense.
Derivative Financial Instruments - HTLF 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, HTLF 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, HTLF 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. HTLF 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.
HTLF has fair value hedging relationships at December 31, 2021. HTLF 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. HTLF 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.
HTLF does not use derivatives for trading or speculative purposes. Derivatives not designated as hedges are not speculative and are used to manage HTLF’s exposure to interest rate movements and other identified risks, but do not meet the strict hedge accounting requirements of ASC 815.
Mortgage Derivatives - HTLF 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 HTLF 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. HTLF'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. HTLF had no treasury stock at December 31, 2021 and December 31, 2020.
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 HTLF 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, 2021, 2020 and 2019, are shown in the table below, dollars and number of shares in thousands, except per share data:
2021 2020 2019
Net income attributable to HTLF $ 219,923 $ 137,938 $ 149,129
Preferred dividends (8,050) (4,451) -
Net income available to common stockholders $ 211,873 $ 133,487 $ 149,129
Weighted average common shares outstanding for basic earnings per share 42,260 37,269 35,991
Assumed incremental common shares issued upon vesting of restricted stock units 151 88 71
Weighted average common shares for diluted earnings per share 42,411 37,357 36,062
Earnings per common share - basic $ 5.01 $ 3.58 $ 4.14
Earnings per common share - diluted $ 5.00 $ 3.57 $ 4.14
Number of antidilutive stock units excluded from diluted earnings per share computation 1 - -
Subsequent Events - HTLF 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 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. HTLF has a formal working group that is responsible for the planning, assessment and execution of the transition from LIBOR as an interest rate benchmark to term SOFR. Currently, HTLF has adjustable rate loans, several debt obligations and derivative instruments in place that reference LIBOR-based rates. HTLF's transition plan provided for the cessation in new contracts of the use of LIBOR as a reference rate by December 31, 2021.
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. HTLF 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 2020-04
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. HTLF 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 HTLF 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 branches. 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, HTLF entered into an Amended and Restated Agreement and Plan of Merger (the "agreement") with First Bank & Trust ("FBT"), HTLF'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 HTLF 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 HTLF 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 HTLF 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 HTLF 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
HTLF 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.
HTLF 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.
THREE
CASH AND DUE FROM BANKS
The HTLF 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, and as a result, there was no reserve requirement at both December 31, 2021, and December 31, 2020.
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, 2021, and December 31, 2020, are summarized in the table below, in thousands:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
December 31, 2021
U.S. treasuries $ 997 $ 11 $ - $ 1,008
U.S. agencies 193,932 264 (812) 193,384
Obligations of states and political subdivisions 2,045,386 56,263 (16,616) 2,085,033
Mortgage-backed securities - agency 2,388,601 11,870 (51,182) 2,349,289
Mortgage-backed securities - non-agency 1,749,838 4,570 (11,029) 1,743,379
Commercial mortgage-backed securities - agency 125,397 1,429 (2,914) 123,912
Commercial mortgage-backed securities - non-agency 600,253 998 (363) 600,888
Asset-backed securities 408,167 2,803 (1,317) 409,653
Corporate bonds 2,979 61 - 3,040
Total debt securities 7,515,550 78,269 (84,233) 7,509,586
Equity securities with a readily determinable fair value 20,788 - - 20,788
Total $ 7,536,338 $ 78,269 $ (84,233) $ 7,530,374
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 19,629 - - 19,629
Total $ 6,024,225 $ 127,866 $ (24,116) $ 6,127,975
The amortized cost, gross unrealized gains and losses and estimated fair values of held to maturity securities as of December 31, 2021, and December 31, 2020, 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, 2021
Obligations of states and political subdivisions $ 84,709 $ 9,430 $ - $ 94,139 $ -
Total $ 84,709 $ 9,430 $ - $ 94,139 $ -
December 31, 2020
Obligations of states and political subdivisions $ 88,890 $ 11,151 $ - $ 100,041 $ (51)
Total $ 88,890 $ 11,151 $ - $ 100,041 $ (51)
As of December 31, 2021, HTLF had $29.4 million compared to $20.8 million at December 31, 2020, of accrued interest receivable, which is included in other assets on the consolidated balance sheets. HTLF 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, 2021, 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, 2021
Amortized Cost Estimated Fair Value
Due in 1 year or less $ 2,455 $ 2,481
Due in 1 to 5 years 19,058 19,897
Due in 5 to 10 years 173,467 175,188
Due after 10 years 2,048,314 2,084,899
Total debt securities 2,243,294 2,282,465
Mortgage and asset-backed securities 5,272,256 5,227,121
Equity securities with a readily determinable fair value 20,788 20,788
Total investment securities $ 7,536,338 $ 7,530,374
The amortized cost and estimated fair value of debt securities held to maturity at December 31, 2021, 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, 2021
Amortized Cost Estimated Fair Value
Due in 1 year or less $ 5,096 $ 5,112
Due in 1 to 5 years 38,787 40,561
Due in 5 to 10 years 34,824 39,871
Due after 10 years 6,002 8,595
Total investment securities $ 84,709 $ 94,139
As of December 31, 2021, securities with a carrying value of $1.66 billion compared to $2.12 billion at December 31, 2020, 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, 2021, 2020 and 2019 are summarized as follows, in thousands:
2021 2020 2019
Available for Sale Securities sold:
Proceeds from sales $ 1,475,598 $ 1,097,378 $ 1,628,467
Gross security gains 11,892 13,208 11,774
Gross security losses 5,982 5,616 4,115
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 HTLF's securities portfolio as of December 31, 2021, and December 31, 2020. 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, 2021, and December 31, 2020, 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, 2021
U.S. agencies $ 100,839 $ (812) 2 $ - $ - - $ 100,839 $ (812) 2
Obligations of states and political subdivisions 596,866 (10,115) 113 236,329 (6,501) 49 833,195 (16,616) 162
Mortgage-backed securities - agency 1,383,808 (33,291) 83 474,724 (17,891) 19 1,858,532 (51,182) 102
Mortgage-backed securities - non-agency 929,515 (10,870) 27 23,821 (159) 5 953,336 (11,029) 32
Commercial mortgage-backed securities - agency 26,999 (689) 8 53,025 (2,225) 5 80,024 (2,914) 13
Commercial mortgage-backed securities - non-agency 74,450 (145) 3 14,124 (218) 2 88,574 (363) 5
Asset-backed securities 113,945 (1,201) 6 13,799 (116) 6 127,744 (1,317) 12
Total temporarily impaired securities $ 3,226,422 $ (57,123) 242 $ 815,822 $ (27,110) 86 $ 4,042,244 $ (84,233) 328
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
HTLF had no securities held to maturity with unrealized losses at December 31, 2021, or December 31, 2020.
The unrealized losses on HTLF'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 HTLF 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 years ended December 31, 2021 and December 31, 2020.
The unrealized losses on HTLF'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 HTLF 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 years ended December 31, 2021 and December 31, 2020.
The credit loss model 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 obligations of states and political subdivisions for the years ended December 31, 2021 and December 31, 2020:
Year Ended
December 31,
2021 2020
Beginning balance $ 51 $ -
Impact of ASU 2016-13 adoption - 158
Adjusted balance 51 158
Provision (benefit) for credit losses (51) (107)
Ending balance
$ - $ 51
The following table summarizes, in thousands, the carrying amount of HTLF's held to maturity debt securities by investment rating as of December 31, 2021 and December 31, 2020, which are updated quarterly and used to monitor the credit quality of the securities:
December 31, 2021 December 31, 2020
Rating
AAA $ 3,265 $ -
AA, AA+, AA- 61,471 64,385
A+, A, A- 15,034 18,353
BBB 4,939 4,208
Not Rated - 1,944
Total $ 84,709 $ 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 $22.6 million at December 31, 2021 and $19.5 million at December 31, 2020.
The HTLF 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. HTLF considers its FHLB stock as a long-term investment that provides access to competitive products and liquidity. HTLF evaluates impairment in these investments based on the ultimate recoverability of the par value and at December 31, 2021, did not consider the investments to be other than temporarily impaired.
FIVE
LOANS
Loans as of December 31, 2021, and December 31, 2020, were as follows, in thousands:
December 31, 2021 December 31, 2020
Loans receivable held to maturity:
Commercial and industrial $ 2,645,085 $ 2,534,799
Paycheck Protection Program ("PPP") 199,883 957,785
Owner occupied commercial real estate 2,240,334 1,776,406
Non-owner occupied commercial real estate 2,010,591 1,921,481
Real estate construction 856,119 863,220
Agricultural and agricultural real estate 753,753 714,526
Residential real estate 829,283 840,442
Consumer 419,524 414,392
Total loans receivable held to maturity 9,954,572 10,023,051
Allowance for credit losses (110,088) (131,606)
Loans receivable, net $ 9,844,484 $ 9,891,445
As of December 31, 2021, HTLF had $35.3 million compared to $42.4 million as of December 31, 2020, of accrued interest receivable, which is included in other assets on the consolidated balance sheets. HTLF 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, 2021, and December 31, 2020, and the related loan balances, disaggregated on the basis of measurement methodology, in thousands. 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. All other loans are collectively evaluated for losses.
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, 2021
Commercial and industrial $ 4,562 $ 23,176 $ 27,738 $ 13,551 $ 2,631,534 $ 2,645,085
PPP - - - - 199,883 199,883
Owner occupied commercial real estate 105 19,109 19,214 8,552 2,231,782 2,240,334
Non-owner occupied commercial real estate 610 17,298 17,908 12,557 1,998,034 2,010,591
Real estate construction - 22,538 22,538 - 856,119 856,119
Agricultural and agricultural real estate 2,369 2,844 5,213 13,773 739,980 753,753
Residential real estate - 8,427 8,427 855 828,428 829,283
Consumer - 9,050 9,050 - 419,524 419,524
Total $ 7,646 $ 102,442 $ 110,088 $ 49,288 $ 9,905,284 $ 9,954,572
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
HTLF had $10.4 million of troubled debt restructured loans at December 31, 2021, of which $9.5 million were classified as nonaccrual and $817,000 were accruing according to the restructured terms. HTLF 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.
The following table provides information on troubled debt restructured loans that were modified during the years ended December 31, 2021, and December 31, 2020, in thousands:
For the Years Ended
December 31, 2021 December 31, 2020
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
PPP - - - - - -
Owner occupied commercial real estate - - - - - -
Non-owner occupied commercial real estate 2 7,850 7,850 - - -
Real estate construction - - - - - -
Agricultural and agricultural real estate - - - - - -
Residential real estate - - - 2 92 98
Consumer - - - - - -
Total 2 $ 7,850 $ 7,850 3 $ 112 $ 118
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 HTLF’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, 2021, 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, 2021, and December 31, 2020, 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, 2021 December 31, 2020
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
Consumer - - - -
Total - $ - 1 $ 232
HTLF'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 HTLF 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, 2021, and December 31, 2020, HTLF had no loans classified as doubtful and no loans classified as loss.
The following tables show the risk category of loans by loan category and year of origination as of December 31, 2021 and December 31, 2020, in thousands:
As of December 31, 2021 Amortized Cost Basis of Term Loans by Year of Origination
2021 2020 2019 2018 2017 2016 and Prior Revolving Total
Commercial and industrial
Pass $ 604,659 $ 359,533 $ 203,960 $ 89,694 $ 171,709 $ 330,094 $ 708,525 $ 2,468,174
Watch 10,633 12,790 12,550 8,210 3,611 14,976 24,626 87,396
Substandard 19,888 6,391 13,050 8,535 6,619 12,052 22,980 89,515
Commercial and industrial total $ 635,180 $ 378,714 $ 229,560 $ 106,439 $ 181,939 $ 357,122 $ 756,131 $ 2,645,085
PPP
Pass $ 146,370 $ 25,707 $ - $ - $ - $ - $ - $ 172,077
Watch 10,726 127 - - - - - 10,853
Substandard 16,932 21 - - - - - 16,953
PPP total $ 174,028 $ 25,855 $ - $ - $ - $ - $ - $ 199,883
Owner occupied commercial real estate
Pass $ 940,043 $ 328,052 $ 315,497 $ 180,936 $ 115,142 $ 189,647 $ 34,233 $ 2,103,550
Watch 4,676 13,956 7,759 10,501 15,032 6,830 35 58,789
Substandard 11,958 20,769 13,734 2,809 13,912 13,063 1,750 77,995
Owner occupied commercial real estate total $ 956,677 $ 362,777 $ 336,990 $ 194,246 $ 144,086 $ 209,540 $ 36,018 $ 2,240,334
Non-owner occupied commercial real estate
Pass $ 609,968 $ 263,093 $ 315,815 $ 236,823 $ 152,059 $ 166,792 $ 28,728 $ 1,773,278
Watch 4,754 9,109 35,496 29,227 4,865 35,901 - 119,352
Substandard 15,722 10,612 21,798 3,599 14,023 51,766 441 117,961
Non-owner occupied commercial real estate total $ 630,444 $ 282,814 $ 373,109 $ 269,649 $ 170,947 $ 254,459 $ 29,169 $ 2,010,591
Real estate construction
Pass $ 381,283 $ 206,879 $ 169,606 $ 14,197 $ 7,163 $ 7,823 $ 14,507 $ 801,458
Watch 2,704 858 2,145 44,846 - - 14 50,567
Substandard - 50 46 3,944 - 54 - 4,094
Real estate construction total $ 383,987 $ 207,787 $ 171,797 $ 62,987 $ 7,163 $ 7,877 $ 14,521 $ 856,119
Agricultural and agricultural real estate
Pass $ 217,179 $ 102,030 $ 47,927 $ 32,913 $ 22,029 $ 35,548 $ 220,065 $ 677,691
Watch 4,018 10,390 4,688 2,270 33 2,038 2,948 26,385
Substandard 9,250 1,095 4,910 15,825 3,212 8,859 6,526 49,677
Agricultural and agricultural real estate total $ 230,447 $ 113,515 $ 57,525 $ 51,008 $ 25,274 $ 46,445 $ 229,539 $ 753,753
Residential real estate
Pass $ 311,292 $ 86,355 $ 50,762 $ 53,773 $ 43,619 $ 230,566 $ 29,017 $ 805,384
Watch 3,928 1,499 750 1,452 734 1,977 1,000 11,340
Substandard 2,528 444 410 2,317 1,139 5,721 - 12,559
Residential real estate total $ 317,748 $ 88,298 $ 51,922 $ 57,542 $ 45,492 $ 238,264 $ 30,017 $ 829,283
Consumer
Pass $ 69,172 $ 20,258 $ 13,051 $ 9,001 $ 10,986 $ 18,202 $ 271,034 $ 411,704
Watch 555 309 392 373 113 591 2,210 4,543
Substandard 267 204 218 236 363 1,611 378 3,277
Consumer total $ 69,994 $ 20,771 $ 13,661 $ 9,610 $ 11,462 $ 20,404 $ 273,622 $ 419,524
Total pass $ 3,279,966 $ 1,391,907 $ 1,116,618 $ 617,337 $ 522,707 $ 978,672 $ 1,306,109 $ 9,213,316
Total watch 41,994 49,038 63,780 96,879 24,388 62,313 30,833 369,225
Total substandard 76,545 39,586 54,166 37,265 39,268 93,126 32,075 372,031
Total loans $ 3,398,505 $ 1,480,531 $ 1,234,564 $ 751,481 $ 586,363 $ 1,134,111 $ 1,369,017 $ 9,954,572
As of December 31, 2020 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 HTLF's nonpass loans at December 31, 2021 were $27.8 million compared to $77.1 million at December 31, 2020, of nonpass PPP loans as a result of risk ratings on non-PPP related credits. HTLF's risk rating methodology assigns a risk rating
to the whole lending relationship. HTLF has no allowance recorded related to the PPP loans because of the 100% SBA guarantee.
As of December 31, 2021, HTLF had $1.0 million of loans secured by residential real estate property that were in the process of foreclosure.
The following table sets forth information regarding HTLF's accruing and nonaccrual loans at December 31, 2021, and December 31, 2020, 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, 2021
Commercial and industrial $ 1,024 $ 183 $ 541 $ 1,748 $ 2,625,109 $ 18,228 $ 2,645,085
PPP - - - - 199,883 - 199,883
Owner occupied commercial real estate 130 - - 130 2,229,054 11,150 2,240,334
Non-owner occupied commercial real estate 3,929 - - 3,929 1,993,346 13,316 2,010,591
Real estate construction 238 50 - 288 855,463 368 856,119
Agricultural and agricultural real estate 687 - - 687 737,380 15,686 753,753
Residential real estate 767 46 9 822 819,294 9,167 829,283
Consumer 251 57 - 308 417,762 1,454 419,524
Total loans receivable held to maturity $ 7,026 $ 336 $ 550 $ 7,912 $ 9,877,291 $ 69,369 $ 9,954,572
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
Loans delinquent 30 to 89 days as a percent of total loans were 0.07% at December 31, 2021, compared to 0.23% at December 31, 2020. 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.
HTLF recognized $0 of interest income on nonaccrual loans during the years ended December 31, 2021 and December 31, 2020. As of December 31, 2021, HTLF had $25.5 million compared to $32.5 million at December 31, 2020, of nonaccrual loans with no related allowance.
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 HTLF. 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, 2021 and 2020, were as follows, in thousands:
2021 2020
Balance at beginning of year $ 215,449 $ 184,568
Advances 69,204 73,412
Repayments (90,776) (42,531)
Balance at end of year $ 193,877 $ 215,449
SIX
ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses for loans for the years ended December 31, 2021, 2020 and 2019 were as follows, in thousands:
2021 2020 2019
Balance at beginning of year $ 131,606 $ 70,395 $ 61,963
Impact of the adoption of ASU 2016-13 on January 1, 2020 - 12,071 -
Adjusted balance at January 1, 2020 131,606 82,466 61,963
Allowance for purchased credit deteriorated loans - 12,313 -
Provision (benefit) for credit losses (17,706) 65,745 16,657
Recoveries on loans previously charged-off 4,931 3,804 5,365
Charge-offs on loans (8,743) (32,722) (13,590)
Balance at end of year $ 110,088 $ 131,606 $ 70,395
Changes in the allowance for credit losses for loans by loan category for the years ended December 31, 2021, and December 31, 2020, were as follows, in thousands:
Balance at 12/31/2020 Charge-offs Recoveries Provision (Benefit) Balance at 12/31/2021
Commercial and industrial $ 38,818 $ (2,150) $ 3,058 $ (11,988) $ 27,738
Owner occupied commercial real estate 20,001 (296) 152 (643) 19,214
Non-owner occupied commercial real estate 20,873 (1,637) 33 (1,361) 17,908
Real estate construction 20,080 (10) 10 2,458 22,538
Agricultural and agricultural real estate 7,129 (1,902) 531 (545) 5,213
Residential real estate 11,935 (181) 13 (3,340) 8,427
Consumer 12,770 (2,567) 1,134 (2,287) 9,050
Total $ 131,606 $ (8,743) $ 4,931 $ (17,706) $ 110,088
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 (Benefit) Balance at 12/31/2020
Commercial and industrial $ 34,207 (272) $ 33,935 1,707 (14,974) $ 1,277 $ 16,873 $ 38,818
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
Changes in the allowance for credit losses on unfunded commitments for the years ended December 31, 2021 and December 31, 2020, were as follows:
For the Years Ended December 31,
2021 2020
Beginning balance $ 15,280 $ 248
Impact of ASU 2016-13 adoption on January 1, 2020 - 13,604
Adjusted balance 15,280 13,852
Provision (benefit) 182 1,428
Ending balance $ 15,462 $ 15,280
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, 2021, and December 31, 2020, were as follows, in thousands:
2021 2020
Land and land improvements $ 59,195 $ 61,930
Buildings and building improvements 177,296 192,702
Furniture and equipment 73,091 69,468
Total 309,582 324,100
Less accumulated depreciation (104,583) (104,505)
Premises, furniture and equipment, net $ 204,999 $ 219,595
Depreciation expense on premises, furniture and equipment was $13.5 million, $11.8 million and $12.0 million for 2021, 2020 and 2019, respectively. Depreciation expense on buildings and building improvements of $6.9 million, $6.5 million and $6.2 million for the years ended December 31, 2021, 2020, and 2019, respectively, is recorded in occupancy expense on the consolidated statements of income. Depreciation expense on furniture and equipment of $6.6 million, $5.3 million and $5.8 million for the years ended December 31, 2021, 2020, and 2019, respectively, is recorded in furniture and equipment expense on the consolidated statements of income.
EIGHT
GOODWILL, CORE DEPOSIT INTANGIBLES AND OTHER INTANGIBLE ASSETS
HTLF had goodwill of $576.0 million at December 31, 2021, and $576.0 million at December 31, 2020. HTLF 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.
HTLF 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.
HTLF 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.
The core deposit intangibles recorded with the AimBank acquisition 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 acquisition 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 are 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, 2021, and December 31, 2020, are presented in the table below, in thousands:
December 31, 2021 December 31, 2020
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Amortizing intangible assets:
Core deposit intangibles $ 101,185 $ 68,330 $ 32,855 $ 101,185 $ 58,970 $ 42,215
Customer relationship intangible 1,177 1,044 133 1,177 1,009 168
Mortgage servicing rights 12,790 6,378 6,412 11,268 6,079 5,189
Commercial servicing rights 7,054 6,576 478 7,054 6,191 863
Total $ 122,206 $ 82,328 $ 39,878 $ 120,684 $ 72,249 $ 48,435
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,
2022 $ 7,702 $ 34 $ 1,603 $ 171 $ 9,510
2023 6,739 34 1,374 126 8,273
2024 5,591 33 1,145 86 6,855
2025 4,700 32 916 95 5,743
2026 8,123 - 687 - 8,810
Thereafter - - 687 - 687
Total $ 32,855 $ 133 $ 6,412 $ 478 $ 39,878
Projections of amortization expense for mortgage servicing rights are based on existing asset balances and the existing interest rate environment as of December 31, 2021. HTLF'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 $723.3 million and $743.3 million as of December 31, 2021, and December 31, 2020, respectively. Custodial escrow balances maintained in connection with the mortgage loan servicing portfolio at First Bank & Trust were approximately $4.5 million and $5.7 million as of December 31, 2021, and December 31, 2020, respectively.
The following table summarizes, in thousands, the changes in capitalized mortgage servicing rights for the twelve months ended December 31, 2021, and December 31, 2020:
2021 2020
Balance at January 1, $ 5,189 $ 5,621
Originations 1,522 3,383
Amortization (1,387) (2,037)
Valuation adjustment 1,088 (1,778)
Balance at December 31, $ 6,412 $ 5,189
Fair value of mortgage servicing rights $ 6,412 $ 5,189
Mortgage servicing rights, net to servicing portfolio 0.89 % 0.70 %
HTLF'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 HTLF, which totaled $45.4 million at December 31, 2021, and $66.2 million at December 31, 2020. The commercial servicing rights portfolio is separated into two tranches at the respective HTLF 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 $536,000 and $879,000 for the years ended December 31, 2021 and 2020, respectively.
The following table summarizes, in thousands, the changes in capitalized commercial servicing rights for the twelve months ended December 31, 2021, and December 31, 2020:
2021 2020
Balance at January 1, $ 863 $ 1,115
Originations - 102
Amortization (385) (354)
Balance at December 31, $ 478 $ 863
Fair value of commercial servicing rights $ 782 $ 1,288
Commercial servicing rights, net to servicing portfolio 1.05 % 1.30 %
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 HTLF 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 HTLF subsidiary.
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 December 31, 2021, and December 31, 2020:
Book Value
15-Year
Tranche
Fair Value
15-Year
Tranche
Valuation
Allowance
15-Year
Tranche
Book Value
30-Year
Tranche
Fair Value
30-Year
Tranche
Valuation
Allowance
30-Year
Tranche
December 31, 2021 $ 1,607 $ 1,280 $ 327 $ 6,463 $ 5,132 $ 1,331
December 31, 2020 $ 1,522 $ 1,100 $ 422 $ 5,445 $ 4,089 $ 1,356
The following table summarizes, in thousands, the book value, the fair value of each tranche of the commercial servicing rights at December 31, 2021, and December 31, 2020:
Book Value-
Less than
20 Years
Fair Value-
Less than
20 Years
Book Value-
More than
20 Years
Fair Value-
More than
20 Years
December 31, 2021 $ 45 $ 98 $ 433 $ 684
December 31, 2020 $ 87 $ 203 $ 776 $ 1,085
The fair value of HTLF's mortgage servicing rights at First Bank & Trust was estimated at $6.4 million and $5.2 million at December 31, 2021, and December 31, 2020, respectively, and is comprised of loans serviced for the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
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 weighted average constant prepayment rate was 13.40% as of December 31, 2021 compared to 16.20% for the December 31, 2020 valuation. The weighted average discount rate was 9.02% for both the December 31, 2021 and December 31, 2020 valuations. The average capitalization rate for 2021 ranged from 76 to 120 basis points compared to a range of 76 to 116 basis points for 2020. Fees collected for the servicing of mortgage loans for others were $1.8 million, $1.7 million and $4.9 million for the years ended December 31, 2021, 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 12.52% and 16.88% as of December 31, 2021, compared to 14.95%
and 19.25% as of December 31, 2020. The discount rate range was 9.20% and 10.66% for the December 31, 2021 valuations compared to 7.70% and 12.88% for the December 31, 2020 valuations. There were no capitalizations during 2021 and the capitalization rate ranged from 310 to 445 basis points at December 31, 2020. The total fair value of HTLF's commercial servicing rights portfolios was estimated at $782,000 as of December 31, 2021, and $1.3 million as of December 31, 2020.
At December 31, 2021, a valuation allowance of $327,000 was required on the mortgage servicing rights 15-year tranche and a $1.3 million valuation allowance was required on the mortgage servicing rights 30-year tranche. At December 31, 2020, a $422,000 valuation allowance was required on the 15-year tranche and a $1.4 million valuation was required on the 30-year tranche for mortgage servicing rights. At both December 31, 2021 and December 31, 2020, 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.
NINE
DEPOSITS
At December 31, 2021, the scheduled maturities of time certificates of deposit were as follows, in thousands:
2022 $ 795,813
2023 146,326
2024 39,435
2025 17,490
2026 15,458
Thereafter 9,498
Total $ 1,024,020
The aggregate amount of time certificates of deposit in denominations of $100,000 or more as of December 31, 2021, and December 31, 2020, were $605.2 million and $774.2 million, respectively. The aggregate amount of time certificates of deposit in denominations of $250,000 or more as of December 31, 2021, and December 31, 2020 were $333.7 million and $423.3 million, respectively.
Interest expense on deposits for the years ended December 31, 2021, 2020, and 2019, was as follows, in thousands:
2021 2020 2019
Savings and money market accounts $ 9,063 $ 16,560 $ 47,069
Time certificates of deposit in denominations of $100,000 or more 3,463 8,244 9,344
Other time deposits 2,271 5,483 7,321
Interest expense on deposits $ 14,797 $ 30,287 $ 63,734
Total uninsured deposits were $8.21 billion as of December 31, 2021.
TEN
SHORT-TERM BORROWINGS
Short-term borrowings, which HTLF defines as borrowings with an original maturity of one year or less, as of December 31, 2021, and 2020, were as follows, in thousands:
2021 2020
Retail repurchase agreements $ 122,996 $ 118,293
Federal funds purchased - 2,100
Advances from the federal discount window - 35,000
Other short-term borrowings 8,601 12,479
Total $ 131,597 $ 167,872
At December 31, 2021, HTLF had one non-revolving credit facility with an unaffiliated bank, which provided a borrowing capacity not to exceed $25.0 million when combined with the outstanding balance on the amortizing term loan discussed in Note 11, "Other Borrowings." The agreement with the unaffiliated bank for the credit facility contains specific financial covenants, all of which HTLF was in compliance with at December 31, 2021, and December 31, 2020. As of December 31,
2021, there was $3.5 million of borrowing capacity available, and there was no balance outstanding at both December 31, 2021, and December 31, 2020.
HTLF renewed its $75.0 million revolving credit line agreement with the same unaffiliated bank on June 14, 2021. 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 HTLF. HTLF had no advances on this line during 2021, and there was no outstanding balance at both December 31, 2021, and December 31, 2020.
The non-revolving credit facility and revolving credit line agreement mature on June 14, 2022, at which time any outstanding balance is due.
All retail repurchase agreements as of December 31, 2021, and 2020, were due within twelve months.
Average and maximum balances and rates on aggregate short-term borrowings outstanding during the years ended December 31, 2021, December 31, 2020 and December 31, 2019, were as follows, in thousands:
2021 2020 2019
Maximum month-end balance $ 299,457 $ 380,360 $ 226,096
Average month-end balance 173,556 157,348 128,098
Weighted average interest rate for the year 0.26 % 0.39 % 1.38 %
Weighted average interest rate at year-end 0.19 % 0.18 % 1.21 %
All of HTLF's banks have availability to borrow short-term funds under the Discount Window Program based upon pledged securities with an outstanding balance of $1.66 billion and pledged commercial loans under the Borrower-In Custody of Collateral Program of $235.5 million, which provided total borrowing capacity of $895.6 million. There were no borrowings outstanding at December 31, 2021 compared to $35.0 million at December 31, 2020.
ELEVEN
OTHER BORROWINGS
Other borrowings, which HTLF defines as borrowings with an original maturity date of more than one year, outstanding at December 31, 2021 and 2020, are shown in the table below, net of unamortized discount and issuance costs, in thousands:
2021 2020
Advances from the FHLB; weighted average interest rates were 3.03% at both December 31, 2021 and 2020, respectively
$ 898 $ 1,018
Paycheck Protection Program Liquidity Fund - 188,872
Trust preferred securities 147,316 146,323
Note payable to unaffiliated bank - 44,417
Contracts payable for purchase of real estate and other assets 1,593 1,983
Subordinated notes 222,265 74,429
Total $ 372,072 $ 457,042
Each of HTLF's subsidiary banks had been approved by their respective Federal Reserve Bank for the Paycheck Protection Program Liquidity Fund ("PPPLF"). The PPPLF program ended on July 31, 2021, and the balance at December 31, 2021, was $0. The balance outstanding at December 31, 2020 was $188.9 million.
The HTLF banks are members of the FHLB of Des Moines, Chicago, Dallas, San Francisco and Topeka. At December 31, 2021, none of HTLF's FHLB advances had call features. The advances from the FHLB are collateralized by a portion of the HTLF banks' investments in FHLB stock of $8.5 million and $13.6 million at December 31, 2021 and 2020, respectively. In addition, the FHLB advances are collateralized with pledges of one- to four-family residential mortgages, commercial and agricultural mortgages and securities totaling $4.43 billion at December 31, 2021, and $4.96 billion at December 31, 2020. At December 31, 2021, HTLF had $913.5 million of remaining FHLB borrowing capacity.
At December 31, 2021, HTLF 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 HTLF and were in turn used by HTLF for general corporate purposes. HTLF has the
option to shorten the maturity date to a date not earlier than the callable date. HTLF 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. In connection with these offerings of trust preferred securities, the balance of deferred issuance costs included in other borrowings was $44,000 and $74,000 as of December 31, 2021 and December 31, 2020, respectively. 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 HTLF’s trust preferred offerings outstanding, as of December 31, 2021, were as follows, in thousands:
Amount
Issued
Interest
Rate
Interest Rate as
of 12/31/21 Maturity
Date
Callable
Date
Heartland Financial Statutory Trust IV $ 10,310 2.75% over LIBOR
2.97% 03/17/2034 03/17/2022
Heartland Financial Statutory Trust V 20,619 1.33% over LIBOR
1.45% 04/07/2036 04/07/2022
Heartland Financial Statutory Trust VI 20,619 1.48% over LIBOR
1.68% 09/15/2037 03/15/2022
Heartland Financial Statutory Trust VII 18,042 1.48% over LIBOR
1.65% 09/01/2037 03/01/2022
Morrill Statutory Trust I 9,276 3.25% over LIBOR
3.47% 12/26/2032 03/26/2022
Morrill Statutory Trust II 8,976 2.85% over LIBOR
3.07% 12/17/2033 03/17/2022
Sheboygan Statutory Trust I 6,703 2.95% over LIBOR
3.17% 09/17/2033 03/17/2022
CBNM Capital Trust I 4,508 3.25% over LIBOR
3.45% 12/15/2034 03/15/2022
Citywide Capital Trust III 6,549 2.80% over LIBOR
2.93% 12/19/2033 04/23/2022
Citywide Capital Trust IV 4,411 2.20% over LIBOR
2.36% 09/30/2034 05/23/2022
Citywide Capital Trust V 12,198 1.54% over LIBOR
1.74% 07/25/2036 03/15/2022
OCGI Statutory Trust III 3,012 3.65% over LIBOR
3.89% 09/30/2032 03/30/2022
OCGI Capital Trust IV 5,455 2.50% over LIBOR
2.70% 12/15/2034 03/15/2022
BVBC Capital Trust II 7,278 3.25% over LIBOR
3.38% 04/24/2033 04/24/2022
BVBC Capital Trust III 9,404 1.60% over LIBOR
1.82% 09/30/2035 03/30/2022
Total trust preferred offerings 147,360
Less: deferred issuance costs (44)
$ 147,316
For regulatory purposes, $147.3 million of the trust preferred securities qualified as Tier 2 capital as of December 31, 2021 and $146.3 million of the trust preferred securities qualified as Tier 2 capital as of December 31, 2020.
In addition to the credit line described in Note 10, "Short-Term Borrowings," HTLF entered into a non-revolving credit facility with the same unaffiliated bank, which provided a borrowing capacity not to exceed $100.0 million when combined with the outstanding balance on its then existing amortizing term loan with the same unaffiliated bank. At December 31, 2021, a balance of $0 was outstanding on this term debt compared to $44.4 million at December 31, 2020. At December 31, 2021, $3.5 million was available on the non-revolving credit facility, of which no balance was outstanding.
On September 8, 2021, HTLF closed its public offering of $150.0 million aggregate principal amount of its 2.75% Fixed-to-Floating Rate Subordinated Notes due 2031 (the "2021 subordinated notes"). The notes were issued at par with an underwriting discount of $1.9 million. The 2021 subordinated notes were registered under HTLF’s effective shelf registration statement, and the net proceeds were used for general corporate purposes. The 2021 subordinated notes have a fixed interest rate of 2.75% until September 15, 2026, at which time the interest rate will be reset quarterly to a benchmark interest rate, which is expected to be three-month term Secure Overnight Financing Rate ("SOFR") plus a spread of 210 basis points. Interest is payable quarterly. The 2021 subordinated notes mature on September 15, 2031, and become redeemable at HTLF's option on September 15, 2026. In connection with the sale of the notes, the balance of deferred issuance costs included in other borrowings was $494,000 at December 31, 2021, These deferred costs are amortized on a straight-line basis over the life of the notes.
On December 17, 2014, HTLF 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. In connection with the sale of the notes, the balance of deferred issuance costs included in other borrowings was $114,000 at December 31, 2021, and $151,000 at December 31, 2020. These deferred costs are amortized on a straight-line basis over the life of the notes.
For regulatory purposes, $177.5 million of the total $222.3 million of subordinated notes qualified as Tier 2 capital as of December 31, 2021.
Future payments, net of unamortized discount and issuance costs, at December 31, 2021, for other borrowings at their maturity date follow in the table below, in thousands.
2022 $ 2
2023 80
2024 74,572
2025 -
2026 -
Thereafter 297,418
Total $ 372,072
TWELVE
DERIVATIVE FINANCIAL INSTRUMENTS
HTLF uses derivative financial instruments as part of its interest rate risk management strategy. As part of the strategy, HTLF considers the use of interest rate swaps, risk participation agreements, caps, floors and collars and certain interest rate lock commitments and forward sales of securities related to mortgage banking activities. HTLF's current strategy includes the use of interest rate swaps, interest rate lock commitments and forward sales of mortgage securities. In addition, HTLF is facilitating back-to-back loan swaps to assist customers in managing interest rate risk. HTLF'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. HTLF is exposed to credit risk in the event of nonperformance by counterparties to financial instruments. HTLF minimizes this risk by entering into derivative contracts with large, stable financial institutions. HTLF has not experienced any losses from nonperformance by these counterparties. HTLF 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. HTLF was required to pledge no cash as collateral at December 31, 2021, and $3.8 million of cash at December 31, 2020. No collateral was required to be pledged by HTLF's counterparties at both December 31, 2021 and December 31, 2020.
HTLF'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
HTLF 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, HTLF 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 HTLF's variable-rate liabilities. For the twelve months ended December 31, 2021, 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 $1.4 million.
HTLF entered into forward starting interest rate swap transactions to effectively convert Heartland Financial Statutory Trust VI
and VII, which total $40.0 million, from variable rate debt to fixed rate debt. For accounting purposes, these swap transactions are designated as a cash flow hedge of the changes in LIBOR, the benchmark interest rate being hedged, associated with the interest payments made on $40.0 million of HTLF's subordinated debentures that reset quarterly on a specified reset date.
During the third quarter of 2021, the interest rate swap transactions associated with Heartland Financial Statutory VI and VII were terminated, and the debt was converted to variable rate subordinated debentures. In addition, HTLF had two swap transactions associated with an unaffiliated bank, one of which matured in the second quarter, and the other was terminated in the third quarter. The underlying debt with the unaffiliated bank was paid off in the third quarter of 2021. For the next twelve months, HTLF estimates that cash payments and reclassification from accumulated other comprehensive income to interest expense related to the terminated swaps will total $733,000.
At December 31, 2021, HTLF had no derivative instruments designated as cash flow hedges. The table below identifies the balance sheet category and fair values of HTLF's derivative instruments designated as cash flow hedges at December 31, 2020, in thousands:
Notional
Amount
Fair
Value
Balance Sheet
Category
Receive
Rate
Weighted Average
Pay Rate
Maturity
December 31, 2020
Interest rate swap $ 25,000 $ (127) Other Liabilities 0.229 % 2.255 % 03/17/2021
Interest rate swap 21,667 (91) Other Liabilities 2.649 3.674 05/10/2021
Interest rate swap 22,750 (2,220) 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) Other Liabilities 0.217 1.866 06/15/2021
Interest rate swap 3,000 (25) Other Liabilities 0.241 1.878 06/30/2021
The table below identifies the gains and losses recognized on HTLF's derivative instruments designated as cash flow hedges for the years ended December 31, 2021, and December 31, 2020, in thousands:
Year Ended December 31,
2021 2020
Effective Portion
Gain (loss) recognized in other comprehensive income on interest rate swaps $ 5,380 $ (2,698)
Gain (loss) reclassified from accumulated other comprehensive income into income (expense) on interest rate swaps 1,403 1,794
Fair Value Hedges
HTLF uses interest rate swaps to convert certain long term fixed rate loans to floating rates to hedge interest rate risk exposure. HTLF 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. HTLF 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.
HTLF was required to pledge $3.8 million and $4.2 million of cash as collateral for these fair value hedges at December 31, 2021, and December 31, 2020, respectively.
The table below identifies the notional amount, fair value and balance sheet category of HTLF's fair value hedges at December 31, 2021, and December 31, 2020, in thousands:
Notional Amount Fair Value Balance Sheet Category
December 31, 2021
Fair value hedges $ 16,755 $ (1,208) Other liabilities
December 31, 2020
Fair value hedges $ 20,841 $ (2,480) Other liabilities
The table below identifies the gains and losses recognized on HTLF's fair value hedges for the years ended December 31, 2021, and December 31, 2020, in thousands:
Year Ended December 31,
2021 2020
Gain (loss) recognized in interest income on fair value hedges $ 1,272 $ (1,227)
Embedded Derivatives
HTLF 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 HTLF's embedded derivatives as of December 31, 2021, and December 31, 2020, in thousands:
Notional Amount Fair Value Balance Sheet Category
December 31, 2021
Embedded derivatives $ 7,496 $ (317) Other liabilities
December 31, 2020
Embedded derivatives $ 9,198 $ 680 Other assets
The table below identifies the gains and losses recognized on HTLF's embedded derivatives for the years ended December 31, 2021 and December 31, 2020, in thousands:
Year Ended December 31,
2021 2020
Gain (loss) recognized in other noninterest income on embedded derivatives $ (997) $ 215
Back-to-Back Loan Swaps
HTLF has interest rate swap loan relationships with customers to meet their financing needs. Upon entering into these loan swaps, HTLF 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. HTLF was required to post $24.1 million and $46.5 million as of December 31, 2021, and December 31, 2020, respectively, as collateral related to these back-to-back swaps. HTLF's counterparties were required to pledge $0 at both December 31, 2021 and December 31, 2020, 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, 2021, and December 31, 2020, no gains or losses were recognized. The table below identifies the balance sheet category and fair values of HTLF's derivative instruments designated as loan swaps at December 31, 2021 and 2020, in thousands:
Notional
Amount
Fair
Value
Balance Sheet
Category
Weighted
Average
Receive
Rate
Weighted
Average
Pay
Rate
December 31, 2021
Customer interest rate swaps $ 463,069 $ 23,574 Other Assets 4.44 % 2.35 %
Customer interest rate swaps 463,069 (23,574) Other Liabilities 2.35 % 4.44 %
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 %
Other Free Standing Derivatives
HTLF 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. HTLF 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. HTLF was required to pledge $0 at both December 31, 2021, and December 31, 2020, as collateral for these forward commitments. HTLF's counterparties were required to pledge no cash as collateral at both December 31, 2021, and December 31, 2020, as collateral for these forward commitments.
HTLF 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 HTLF's other free standing derivative instruments not designated as hedging instruments at December 31, 2021, and December 31, 2020, in thousands:
Notional
Amount
Fair
Value
Balance Sheet
Category
December 31, 2021
Interest rate lock commitments (mortgage) $ 37,046 $ 1,306 Other Assets
Forward commitments 19,000 32 Other Assets
Forward commitments 35,500 (95) Other Liabilities
Undesignated interest rate swaps 7,496 317 Other Assets
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
HTLF recognizes gains and losses on other free standing derivatives in two separate income statement categories. Interest rate lock commitments and forward commitments are recognized in net gains on sale of loans held for sale and undesignated interest rate swaps are recognized in other noninterest income. The table below identifies the gains and losses recognized in income on HTLF's other free standing derivative instruments not designated as hedging instruments for the years ended December 31, 2021, and December 31, 2020, in thousands:
Year Ended December 31,
2021 2020
Interest rate lock commitments (mortgage) $ (2,345) $ 2,803
Forward commitments 32 (15)
Forward commitments 602 (585)
Undesignated interest rate swaps 997 (215)
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, 2021, 2020, and 2019 were as follows, in thousands:
2021 2020 2019
Current:
Federal $ 32,440 $ 34,513 $ 24,106
State 11,352 12,450 11,298
Total current expense $ 43,792 $ 46,963 $ 35,404
Deferred:
Federal $ 8,938 $ (8,498) $ 760
State 2,605 (2,412) (1,174)
Total deferred expense (benefit) 11,543 (10,910) (414)
Total income tax expense $ 55,335 $ 36,053 $ 34,990
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, 2021 and 2020, were as follows, in thousands:
2021 2020
Deferred tax assets:
Tax effect of net unrealized loss on securities carried at fair value reflected in stockholders’ equity $ 1,715 $ -
Tax effect of net unrealized loss on derivatives reflected in stockholders’ equity 367 1,130
Allowance for credit losses 28,149 33,393
Deferred compensation 11,299 9,623
Net operating loss carryforwards 18,874 17,585
Investments in partnerships 958 467
Deferred loan fees 1,691 5,006
Other 5,673 5,563
Total deferred tax assets 68,726 72,767
Valuation allowance for deferred tax assets (15,120) (12,828)
Total deferred tax assets after valuation allowance $ 53,606 $ 59,939
Deferred tax liabilities:
Tax effect of net unrealized gain on securities carried at fair value reflected in stockholders’ equity $ - $ 26,858
Securities 1,232 635
Premises, furniture and equipment 10,502 8,311
Purchase accounting 7,977 5,326
Prepaid expenses 2,078 2,675
Deferred loan costs 5,164 4,107
Other 2,250 3,905
Total deferred tax liabilities 29,203 51,817
Net deferred tax assets $ 24,403 $ 8,122
As a result of acquisitions, HTLF had net operating loss carryforwards for federal income tax purposes of approximately $20.5 million at December 31, 2021, and $25.8 million at December 31, 2020. The associated deferred tax asset was $4.3 million at December 31, 2021, and $5.4 million at December 31, 2020. 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 $183.3 million at December 31, 2021, and $159.1 million at
December 31, 2020. The associated deferred tax asset, net of federal tax, was $14.3 million at December 31, 2021, and $11.8 million at December 31, 2020. 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 $13.2 million at December 31, 2021, and $10.5 million at December 31, 2020. During both 2021 and 2020, HTLF had book write-downs on investments that, for tax purposes, would generate capital losses upon disposal. Due to the uncertainty of HTLF's ability to utilize the potential capital losses, a valuation allowance for these potential losses totaled $1.9 million at December 31, 2021, and $2.3 million at December 31, 2020. HTLF released valuation allowances of $491,000 and $617,000 in 2021 and 2020, respectively, on deferred tax assets for capital losses it expects to realize on the disposal of partnership investments. HTLF generated capital gains from its strategic activities, which included various branch sales not conducted in the ordinary course of its business strategy. As a result of its net capital gains, HTLF was able to realize the benefit of its capital losses.
Realization of the deferred tax asset over time is dependent upon the existence of taxable income in carryback periods or the ability to generate sufficient taxable income in future periods. In determining that realization of the deferred tax asset was more likely than not, HTLF 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, 2021, 2020, and 2019, (computed by applying the U.S. federal corporate tax rate of 21% for 2021, 2020, and 2019 income before income taxes) are as follows, in thousands:
2021 2020 2019
Computed "expected" tax on net income $ 57,804 $ 36,538 $ 38,665
Increase (decrease) resulting from:
Nontaxable interest income (5,504) (4,011) (3,281)
State income taxes, net of federal tax benefit 11,026 7,930 8,509
Tax credits (7,613) (4,521) (6,860)
Valuation allowance (440) (374) (1,648)
Excess tax expense/(benefit) on stock compensation (270) 80 (229)
Other 332 411 (166)
Income taxes $ 55,335 $ 36,053 $ 34,990
Effective tax rates 20.1 % 20.7 % 19.0 %
HTLF's income taxes included solar energy tax credits totaling $6.1 million, $2.3 million, and $4.0 million during 2021, 2020 and 2019, respectively. Federal historic rehabilitation tax credits included in HTLF's income taxes totaled $720,000, $1.1 million, and $1.8 million in 2021, 2020, and 2019, respectively. Additionally, investments in certain low-income housing partnerships totaled $5.1 million at December 31, 2021, $5.6 million at December 31, 2020, and $6.1 million at December 31, 2019. These investments generated federal low-income housing tax credits of $538,000 during 2021, $780,000 at December 31, 2020 and $1.1 million at December 31, 2019 These investments are expected to generate federal low-income housing tax credits of approximately $538,000 for 2022 through 2023, $322,000 for 2024, $86,000 for 2025 and $34,000 for 2026. Additionally, HTLF had new markets tax credits of $300,000 in both 2021 and 2020, respectively.
On December 31, 2021, the amount of unrecognized tax benefits was $724,000, including $87,000 of accrued interest and penalties. On December 31, 2020, the amount of unrecognized tax benefits was $702,000, including $79,000 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, 2018, and later remain subject to examination by the Internal Revenue Service. For state purposes, the tax years ended December 31, 2016, and later remain open for examination. HTLF does not anticipate any significant increase or decrease in unrecognized tax benefits during the next twelve months.
FOURTEEN
EMPLOYEE BENEFIT PLANS
HTLF 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.
HTLF's subsidiaries made matching contributions of up to 3% of participants' wages in 2021, 2020, and 2019. Costs charged to operating expenses with respect to the matching contributions were $5.1 million, $4.1 million, and $3.9 million for 2021, 2020 and 2019, respectively.
Non-elective contributions to this plan are subject to approval by the HTLF Board of Directors. The HTLF subsidiaries fund and record as an expense all approved contributions. Costs of these contributions, charged to operating expenses, were $5.1 million, $4.8 million, and $4.8 million for 2021, 2020 and 2019, respectively.
In addition, HTLF has a non-qualified defined contribution plan that allows eligible employees to make voluntary contributions into a deferred compensation plan. Any non-elective contributions to this plan are subject to approval by the HTLF Board of Directors.
FIFTEEN
COMMITMENTS AND CONTINGENT LIABILITIES
HTLF 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 HTLF 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. HTLF'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 HTLF'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, 2021, and at December 31, 2020, commitments to extend credit aggregated $3.83 billion and $3.26 billion, respectively, and standby letters of credit aggregated $51.4 million and $73.2 million, respectively.
HTLF 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. HTLF 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 HTLF's usual underwriting procedures and are most often sold on a nonrecourse basis. HTLF'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 HTLF to repurchase certain loans affected. HTLF had no repurchase obligation at both December 31, 2021 and December 31, 2020. HTLF had no new requests for repurchases during 2021 and 2020.
There are certain legal proceedings pending against HTLF and its subsidiaries at December 31, 2021, 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. The balance of the holdback as of December 31, 2021 was $4.9 million. HTLF incurred $388,000 of legal expenses in 2021 associated with the pending litigation.
HTLF 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 HTLF's consolidated financial position or results of operations.
SIXTEEN
STOCK-BASED COMPENSATION
HTLF may grant, through its Compensation, Nominating 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, 2021, 1,192,760 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, HTLF 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.
HTLF's income tax expense included $312,000 of tax benefit for the year ended December 31, 2021, compared to a tax expense of $93,000 for the year ended December 31, 2020, 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"). The time-based RSUs represent the right, without payment, to receive shares of HTLF common stock at a specified date in the future. Generally, the time-based RSUs vest over three years in equal installments in March of each of the three years following the year of the grant.
The Compensation Committee has granted three-year performance-based RSUs. These performance-based RSUs will be earned based upon satisfaction of performance targets for the three-year performance period, which is defined in the RSU agreement. These performance-based RSUs or a portion thereof may vest after measurement of performance in relation to the performance targets.
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), and the three-year performance-based RSUs vest to the extent that they are earned upon death or disability or upon a "qualified retirement" (as defined in the RSU agreement) after measurement of performance.
All of HTLF's RSUs will be settled in common stock upon vesting and are not entitled to dividends until vested.
A summary of the status of RSUs as of December 31, 2021, 2020 and 2019, and changes during the years ended December 31, 2021, 2020, and 2019, follows:
2021 2020 2019
Shares Weighted-Average Grant Date Fair Value Shares Weighted-Average Grant Date Fair Value Shares Weighted-Average Grant Date Fair Value
Outstanding at January 1 348,275 $ 38.22 254,383 $ 46.76 266,995 $ 43.89
Granted 216,560 51.44 232,586 32.06 162,465 45.09
Vested (149,350) 40.83 (119,916) 44.47 (148,158) 39.27
Forfeited (25,600) 40.96 (18,778) 46.10 (26,919) 49.20
Outstanding at December 31 389,885 $ 44.19 348,275 $ 38.22 254,383 $ 46.76
Total compensation costs recorded for RSUs were $8.5 million, $7.2 million and $5.8 million, for 2021, 2020 and 2019, respectively. As of December 31, 2021, there were $7.4 million of total unrecognized compensation costs related to the Plan for RSUs which are expected to be recognized through 2024.
Employee Stock Purchase Plan
HTLF 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 HTLF common stock at a discounted price as determined by the Compensation Committee. Under ASC Topic 718, compensation expense related to the ESPP of $228,000 was recorded in 2021, $186,000 was recorded in 2020, and $222,000 was recorded in 2019.
A maximum of 500,000 shares is available for purchase under the ESPP, and as of December 31, 2021, 290,236 shares remain available for purchase. Beginning with the 2020 plan year, the Compensation Committee authorized HTLF 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 2021 plan year, shares purchased in 2021 totaled 46,899. 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 employee deferrals made during the plan year ended December 31, 2019.
SEVENTEEN
STOCKHOLDER RIGHTS PLAN
HTLF 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 Extended Rights Plan expired on January 17, 2022 and has not been renewed or extended.
In 2002, when the Rights Plan was originally created, HTLF designated 16,000 shares, par value $1.00 per share, of Series A Preferred Stock. There were no shares of Series A Preferred issued and outstanding at December 31, 2021 or December 31, 2020.
EIGHTEEN
CAPITAL ISSUANCES
Common Stock
For a description of the issuance of shares of HTLF common stock in connection with acquisitions, see Note 2, "Acquisitions," of the consolidated financial statements. For a description of the issuance of shares of HTLF 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, HTLF issued 4,600,000 depositary shares, each representing a 1/400th ownership interest in a share of HTLF'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 HTLF’s liquidation, dissolution, or winding-up, the Series E Preferred Stock ranks:
•senior to HTLF’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 HTLF’s Series A Junior Participating Preferred Stock;
•on parity with, or equally to, any class or series of HTLF’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 HTLF’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.
HTLF 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.
HTLF 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 HTLF 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
HTLF 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 HTLF the ability to raise capital, subject to market conditions and SEC rules and limitations, if HTLF's board of directors decides to do so. This registration statement permits HTLF, 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 HTLF 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 HTLF 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 HTLF 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, 2021 and 2020, that the HTLF banks met all capital adequacy requirements to which they were subject.
As of December 31, 2021 and 2020, the FDIC categorized each of the HTLF banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the HTLF 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, 2021, that management believes have changed each institution’s category.
The HTLF 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, 2021
Total Capital (to Risk-Weighted Assets)
Consolidated $ 2,040,500 15.90 % $ 1,026,345 8.00 % N/A
Dubuque Bank and Trust Company 180,934 13.07 110,758 8.00 $ 138,447 10.00 %
Illinois Bank & Trust 135,986 12.88 84,466 8.00 105,583 10.00
Wisconsin Bank & Trust 124,009 14.27 69,499 8.00 86,874 10.00
New Mexico Bank & Trust 213,981 12.10 141,530 8.00 176,912 10.00
Arizona Bank & Trust 157,475 12.61 99,886 8.00 124,858 10.00
Rocky Mountain Bank 64,366 13.07 39,385 8.00 49,231 10.00
Citywide Banks 265,964 15.09 140,999 8.00 176,248 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, 2021
Minnesota Bank & Trust 87,263 14.79 47,194 8.00 58,993 10.00
Bank of Blue Valley 160,694 16.74 76,785 8.00 95,982 10.00
Premier Valley Bank 111,741 12.82 69,720 8.00 87,151 10.00
First Bank & Trust 282,231 15.48 145,823 8.00 182,279 10.00
Tier 1 Capital (to Risk-Weighted Assets)
Consolidated $ 1,590,111 12.39 % $ 769,759 6.00 % N/A
Dubuque Bank and Trust Company 168,321 12.16 83,068 6.00 $ 110,758 8.00 %
Illinois Bank & Trust 126,869 12.02 63,350 6.00 84,466 8.00
Wisconsin Bank & Trust 114,825 13.22 52,124 6.00 69,499 8.00
New Mexico Bank & Trust 198,728 11.23 106,147 6.00 141,530 8.00
Arizona Bank & Trust 147,098 11.78 74,915 6.00 99,886 8.00
Rocky Mountain Bank 59,159 12.02 29,538 6.00 39,385 8.00
Citywide Banks 244,722 13.89 105,749 6.00 140,999 8.00
Minnesota Bank & Trust 81,637 13.84 35,396 6.00 47,194 8.00
Bank of Blue Valley 150,305 15.66 57,589 6.00 76,785 8.00
Premier Valley Bank 104,336 11.97 52,290 6.00 69,720 8.00
First Bank & Trust 263,096 14.43 109,367 6.00 145,823 8.00
Common Equity Tier 1 (to Risk-Weighted Assets)
Consolidated $ 1,479,406 11.53 % $ 577,319 4.50 % N/A
Dubuque Bank and Trust Company 168,321 12.16 62,301 4.50 $ 89,991 6.50 %
Illinois Bank & Trust 126,869 12.02 47,512 4.50 68,629 6.50
Wisconsin Bank & Trust 114,825 13.22 39,093 4.50 56,468 6.50
New Mexico Bank & Trust 198,728 11.23 79,611 4.50 114,993 6.50
Arizona Bank & Trust 147,098 11.78 56,186 4.50 81,158 6.50
Rocky Mountain Bank 59,159 12.02 22,154 4.50 32,000 6.50
Citywide Banks 244,722 13.89 79,312 4.50 114,561 6.50
Minnesota Bank & Trust 81,637 13.84 26,547 4.50 38,346 6.50
Bank of Blue Valley 150,305 15.66 43,192 4.50 62,388 6.50
Premier Valley Bank 104,336 11.97 39,218 4.50 56,648 6.50
First Bank & Trust 263,096 14.43 82,025 4.50 118,481 6.50
Tier 1 Capital (to Average Assets)
Consolidated $ 1,590,111 8.57 % $ 742,155 4.00 % N/A
Dubuque Bank and Trust Company 168,321 8.02 83,982 4.00 $ 104,978 5.00 %
Illinois Bank & Trust 126,869 7.55 67,212 4.00 84,016 5.00
Wisconsin Bank & Trust 114,825 9.66 47,551 4.00 59,439 5.00
New Mexico Bank & Trust 198,728 7.78 102,173 4.00 127,716 5.00
Arizona Bank & Trust 147,098 7.99 73,605 4.00 92,006 5.00
Rocky Mountain Bank 59,159 8.27 28,614 4.00 35,767 5.00
Citywide Banks 244,722 9.54 102,587 4.00 128,233 5.00
Minnesota Bank & Trust 81,637 9.69 33,698 4.00 42,123 5.00
Bank of Blue Valley 150,305 10.75 55,921 4.00 69,901 5.00
Premier Valley Bank 104,336 9.22 45,256 4.00 56,570 5.00
First Bank & Trust 263,096 9.84 106,986 4.00 133,732 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, 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
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
Actual For Capital
Adequacy Purposes
To Be Well Capitalized Under Prompt Corrective Action Provisions
Amount Ratio Amount Ratio Amount Ratio
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
The ability of HTLF to pay dividends to its stockholders is dependent upon dividends paid by its subsidiaries. The HTLF 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 HTLF totaled approximately $758.6 million as of December 31, 2021, under the most restrictive minimum capital requirements. Retained earnings that could be available for the payment of dividends to HTLF totaled approximately $502.1 million as of December 31, 2021, under the capital requirements to remain well capitalized.
TWENTY
FAIR VALUE
HTLF 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, HTLF 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. 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 HTLF'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, HTLF classifies loans held for sale subjected to nonrecurring fair value adjustments as Level 2.
Loans Held to Maturity
HTLF 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
HTLF values premises, furniture and equipment held for sale based on third-party appraisals less estimated disposal costs. HTLF 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. HTLF 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. HTLF 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 HTLF. HTLF 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. HTLF classifies commercial servicing rights as nonrecurring with Level 3 measurement inputs.
Derivative Financial Instruments
HTLF'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, HTLF 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, HTLF has considered the impact of netting any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Although HTLF 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, 2021, and December 31, 2020, HTLF 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, HTLF has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
Interest Rate Lock Commitments
HTLF 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 is estimated using an internal valuation model, which includes current trade pricing for similar financial instruments in active markets that HTLF 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. HTLF 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. HTLF 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 tables below present HTLF's assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2021, and December 31, 2020, 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, 2021
Assets
Securities available for sale
U.S. treasuries $ 1,008 $ 1,008 $ - $ -
U.S. agencies 193,384 - 193,384 -
Obligations of states and political subdivisions 2,085,033 - 2,085,033 -
Mortgage-backed securities - agency 2,349,289 - 2,349,289 -
Mortgage-backed securities - non-agency 1,743,379 - 1,743,379 -
Commercial mortgage-backed securities - agency 123,912 - 123,912 -
Commercial mortgage-backed securities - non-agency 600,888 - 600,888 -
Asset-backed securities 409,653 - 409,653 -
Corporate bonds 3,040 - 3,040 -
Equity securities with a readily determinable fair value 20,788 - 20,788 -
Derivative financial instruments(1)
23,891 - 23,891 -
Total Fair Value Level 1 Level 2 Level 3
Interest rate lock commitments 1,306 - - 1,306
Forward commitments 32 - 32 -
Total assets at fair value $ 7,555,603 $ 1,008 $ 7,553,289 $ 1,306
Liabilities
Derivative financial instruments(2)
$ 25,099 $ - $ 25,099 $ -
Forward commitments 95 - 95 -
Total liabilities at fair value $ 25,194 $ - $ 25,194 $ -
(1) Includes back-to-back loan swaps and free standing derivative instruments.
(2) Includes embedded derivatives, fair value hedges and back-to-back loan swaps.
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 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 $ -
(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 HTLF's assets that are measured at fair value on a nonrecurring basis, in thousands:
Fair Value Measurements at December 31, 2021
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 $ 8,989 $ - $ - $ 8,989 $ 275
Owner occupied commercial real estate 8,447 - - 8,447 -
Non-owner occupied commercial real estate 11,946 - - 11,946 1,637
Real estate construction - - - - -
Agricultural and agricultural real estate 11,404 - - 11,404 372
Residential real estate 855 - - 855 -
Consumer - - - - -
Total collateral dependent individually assessed loans $ 41,641 $ - $ - $ 41,641 $ 2,284
Loans held for sale $ 21,640 $ - $ 21,640 $ - $ (813)
Other real estate owned 1,927 - - 1,927 686
Premises, furniture and equipment held for sale 10,828 - - 10,828 241
Servicing rights 6,890 - - 6,890 (1,088)
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 impaired 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
The following tables present additional quantitative information about assets measured at fair value on a recurring and nonrecurring basis and for which HTLF has utilized Level 3 inputs to determine fair value, in thousands:
Fair Value at 12/31/21 Valuation Technique Unobservable Input Range (Weighted Average)
Interest rate lock
commitments $ 1,306 Discounted cash flows Closing ratio 0 - 99% (88%)(1)
Premises, furniture and equipment held for sale 10,828 Modified appraised value Third party appraisal (2)
Appraisal discount 0-10%(3)
Fair Value at 12/31/21 Valuation Technique Unobservable Input Range (Weighted Average)
Other real estate owned 1,927 Modified appraised value Third party appraisal (2)
Appraisal discounts 0-10%(3)
Servicing rights 6,890 Discounted cash flows Discount rate 9 - 11% (9.02%)(4)
Constant prepayment rate 13.1 - 18.6% (13.4%)(4)
Collateral dependent individually assessed loans:
Commercial and industrial $ 8,989 Modified appraised value Third party appraisal (2)
Appraisal discount 0-6%(3)
Owner occupied commercial real estate 8,447 Modified appraised value Third party appraisal (2)
Appraisal discount 0-7%(3)
Non-owner occupied commercial real estate 11,946 Modified appraised value Third party appraisal (2)
Appraisal discount 0-10%(3)
Agricultural and agricultural real estate 11,404 Modified appraised value Third party appraisal (2)
Appraisal discount 0%-7%%(3)
Residential real estate 855 Modified appraised value Third party appraisal (2)
Appraisal discount 0-7%(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 inputs used in the discounted cash flow analysis are the discount rate and constant prepayment rate.
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 Discount rate 9 - 11% (9.02%)(4)
Constant prepayment rate 7.3 - 18.8% (16.2%)(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 discounts 0-12%(3)
Non-owner occupied commercial real estate 4,907 Modified appraised value Third party appraisal (2)
Appraisal discounts 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 inputs used in the discounted cash flow analysis are the discount rate and constant prepayment rate.
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, 2021 December 31, 2020
Balance at January 1, $ 1,827 $ 681
Total gains (losses), net, included in earnings (2,345) 2,803
Issuances 15,403 17,221
Settlements (13,579) (18,878)
Balance at period end, $ 1,306 $ 1,827
Gains included in net gains on sale of loans held for sale attributable to interest rate lock commitments held at December 31, 2021, and December 31, 2020, were $1.3 million and $1.8 million, respectively.
The table below is a summary of the estimated fair value of HTLF's financial instruments (as defined by ASC 825) as of December 31, 2021, and December 31, 2020, 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.
HTLF does not believe that the estimated information presented below is representative of the earnings power or value of HTLF. 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 HTLF 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, 2021
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 $ 435,599 $ 435,599 $ 435,599 $ - $ -
Time deposits in other financial institutions 2,894 2,894 2,894 - -
Securities:
Carried at fair value 7,530,374 7,530,374 1,008 7,529,366 -
Held to maturity 84,709 94,139 - 94,139 -
Other investments 82,567 82,567 - 82,567 -
Loans held for sale 21,640 21,640 - 21,640 -
Loans, net:
Commercial 2,617,347 2,603,001 - 2,594,012 8,989
PPP 199,883 199,883 - 199,883 -
Owner occupied commercial real estate 2,221,120 2,222,030 - 2,213,583 8,447
Non-owner occupied commercial real estate 1,992,683 1,998,161 - 1,986,215 11,946
Real estate construction 833,581 844,578 - 844,578 -
Agricultural and agricultural real estate 748,540 749,238 - 737,834 11,404
Residential real estate 820,856 819,178 - 818,323 855
Consumer 410,474 415,487 - 415,487 -
Total Loans, net 9,844,484 9,851,556 - 9,809,915 41,641
Cash surrender value on life insurance 191,722 191,722 - 191,722 -
Derivative financial instruments(1)
23,891 23,891 - 23,891 -
Interest rate lock commitments 1,306 1,306 - - 1,306
Forward commitments 32 32 - 32 -
Financial liabilities:
Deposits
Demand deposits 6,495,326 6,495,326 - 6,495,326 -
Savings deposits 8,897,909 8,897,909 - 8,897,909 -
Time deposits 1,024,020 1,024,020 - 1,024,020 -
Short term borrowings 131,597 131,597 - 131,597 -
Other borrowings 372,072 373,194 - 373,194 -
Derivative financial instruments(2)
25,099 25,099 - 25,099 -
Forward commitments 95 95 - 95 -
(1) Includes back-to-back loan swaps and free standing derivative instruments.
(2) Includes embedded derivatives, fair value hedges and back-to-back loan swaps.
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 and industrial 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.
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, HTLF 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, HTLF 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 HTLF 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 HTLF 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
ASC 606, Revenue from Contracts with Customers, requires revenue to be recognized at an amount that reflects the consideration to which HTLF 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 HTLF'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 and other service charges, 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. HTLF'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 transaction 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. HTLF'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 HTLF's banks or a non-bank cardholder uses HTLF-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. HTLF'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. HTLF 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. HTLF'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 HTLF 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. HTLF acts as an insurance agent between the customer and the insurance carrier. HTLF'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, 2021, 2020, and 2019, in thousands:
For the Years Ended December 31,
2021 2020 2019
In-scope of Topic 606
Service charges and fees
Service charges and fees on deposit accounts $ 16,414 $ 14,441 $ 12,790
Overdraft fees 11,005 9,166 11,543
Customer service and other service fees 220 177 331
Credit card fee income 21,623 16,026 15,594
Debit card income 10,441 7,657 11,899
Total service charges and fees 59,703 47,467 52,157
Trust fees 24,417 20,862 19,399
Brokerage and insurance commissions 3,546 2,756 3,786
Total noninterest income in-scope of Topic 606 $ 87,666 $ 71,085 $ 75,342
Out-of-scope of Topic 606
Loan servicing income $ 3,276 $ 2,977 $ 4,843
Securities gains, net 5,910 7,793 7,659
Unrealized gain on equity securities, net 58 640 525
Net gains on sale of loans held for sale 20,605 28,515 15,555
Valuation adjustment on servicing rights 1,088 (1,778) (911)
Income on bank owned life insurance 3,762 3,554 3,785
Other noninterest income 6,570 7,505 9,410
Total noninterest income out-of-scope of Topic 606 41,269 49,206 40,866
Total noninterest income $ 128,935 $ 120,291 $ 116,208
Contract Balances
HTLF does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of December 31, 2021, 2020, and 2019, HTLF 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,
2021 2020
Assets:
Cash and interest bearing deposits $ 259,830 $ 84,728
Investment in subsidiaries 2,263,037 2,234,813
Other assets 81,020 68,263
Total assets $ 2,603,887 $ 2,387,804
Liabilities and Stockholders’ equity:
Other borrowings $ 369,581 $ 265,168
Accrued expenses and other liabilities 52,128 43,405
Total liabilities 421,709 308,573
Stockholders’ equity:
Preferred stock 110,705 110,705
Common stock 42,275 42,094
Capital surplus 1,071,956 1,062,083
Retained earnings 962,994 791,630
Accumulated other comprehensive income (loss) (5,752) 72,719
Total stockholders’ equity 2,182,178 2,079,231
Total liabilities and stockholders’ equity $ 2,603,887 $ 2,387,804
INCOME STATEMENTS
(Dollars in thousands)
For the Years Ended December 31,
2021 2020 2019
Operating revenues:
Dividends from subsidiaries $ 163,500 $ 83,000 $ 137,000
Other 1,885 1,948 893
Total operating revenues 165,385 84,948 137,893
Operating expenses:
Interest 12,851 13,573 15,044
Salaries and employee benefits 7,509 8,147 4,072
Professional fees 5,161 4,310 3,029
Other operating expenses 10,984 4,939 15,559
Total operating expenses 36,505 30,969 37,704
Equity in undistributed earnings 75,368 73,430 34,307
Income before income tax benefit 204,248 127,409 134,496
Income tax benefit 15,675 10,529 14,633
Net income 219,923 137,938 149,129
Preferred dividends (8,050) (4,451) -
Net income available to common stockholders $ 211,873 $ 133,487 $ 149,129
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the Years Ended December 31,
2021 2020 2019
Cash flows from operating activities:
Net income $ 219,923 $ 137,938 $ 149,129
Adjustments to reconcile net income to net cash provided by operating activities:
Undistributed earnings of subsidiaries (75,368) (73,430) (34,307)
Gain on extinguishment of debt - - (375)
Increase in accrued expenses and other liabilities 8,723 8,419 3,274
Increase in other assets (13,069) (19,168) (12,248)
Excess tax (expense) benefit from stock based compensation 312 (93) 270
Other, net 12,632 6,375 4,103
Net cash provided by operating activities 153,153 60,041 109,846
Cash flows from investing activities:
Capital contributions to subsidiaries (34,000) (70,000) (46,583)
Repayment of advances from subsidiaries - - 6,000
Net assets acquired - (41,982) (594)
Net cash used by investing activities (34,000) (111,982) (41,177)
Cash flows from financing activities:
Proceeds on short-term revolving credit line - - -
Proceeds from borrowings 147,614 - -
Repayments on short-term revolving credit line - - -
Repayments of borrowings (44,417) (7,000) (20,023)
Payment for the redemption of debt - - (2,500)
Cash dividends paid (48,559) (31,906) (24,607)
Proceeds from issuance of preferred stock - 110,705 -
Proceeds from issuance of common stock 1,311 3,004 661
Net cash provided by (used in) by financing activities 55,949 74,803 (46,469)
Net increase in cash and cash equivalents 175,102 22,862 22,200
Cash and cash equivalents at beginning of year 84,728 61,866 39,666
Cash and cash equivalents at end of year $ 259,830 $ 84,728 $ 61,866
Supplemental disclosure:
Cumulative effect adjustment from the adoption of ASU 2016-13
on January 1, 2020 $ - $ 14,891 $ -
Dividends declared, not paid 2,013 2,013 -
Stock consideration granted for acquisitions - 217,202 92,258
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 HTLF is the lessee are comprised of real estate property for branches, ATM locations, and office space with terms extending through 2031. All of HTLF'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. HTLF elected not to include short-term leases (i.e., leases with initial terms of twelve months or less), or equipment leases (deemed immaterial) on the consolidated balance sheets.
The table below presents HTLF's ROU assets and lease liabilities as of December 31, 2021 and December 31, 2020, in thousands:
As of December 31,
Classification 2021 2020
Operating lease right-of-use assets Other assets $ 22,630 $ 21,557
Operating lease liabilities Accrued expenses and other liabilities $ 26,125 $ 25,337
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. HTLF’s lease agreements often include one or more options to renew at HTLF’s discretion. If at lease inception, HTLF considers the exercising of a renewal option to be reasonably certain, HTLF 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, HTLF 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, 2021, 2020 and 2019, in thousands:
Income Statement Category As of December 31,
Lease Cost 2021 2020 2019
Operating lease cost Occupancy expense $ 8,013 $ 6,071 $ 6,031
Variable lease cost Occupancy expense 47 72 145
Total lease cost $ 8,060 $ 6,143 $ 6,176
Supplemental Information
Noncash reduction of ROU assets Occupancy expense $ 1,244 $ 1,037 $ 1,771
Noncash reduction lease liabilities Occupancy expense - 389 1,789
Supplemental balance sheet information As of December 31, 2021
Weighted-average remaining operating lease term (in years) 5.99
Weighted-average discount rate for operating leases 2.69 %
Included in the noncash reduction of ROU assets in 2021 and 2020 are expenses related to lease modifications and ROU acceleration related to lease abandonments.
HTLF did not record any impairment on leases in 2021. HTLF 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. No impairment losses were recorded in 2019.
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, 2021 is as follows, in thousands:
Year ending December 31,
2022 $ 6,595
2023 5,154
2024 3,484
2025 3,363
2026 2,940
Thereafter 6,837
Total lease payments $ 28,373
Less interest (2,248)
Present value of lease liabilities $ 26,125
TWENTY-FOUR
SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(Dollars in thousands, except per share data)
As of and for the Quarter Ended
2021 December 31 September 30 June 30 March 31
Net interest income $ 137,194 $ 142,543 $ 141,218 $ 139,605
Provision (benefit) for credit losses (5,313) (4,534) (7,080) (648)
Net interest income after provision for credit losses 142,507 147,077 148,298 140,253
Noninterest income 32,730 32,724 33,164 30,317
Noninterest expense 115,386 110,627 103,376 102,423
Income taxes 10,271 13,250 16,481 15,333
Net income 49,580 55,924 61,605 52,814
Preferred dividends (2,012) (2,013) (2,012) (2,013)
Net income available to common stockholders $ 47,568 $ 53,911 $ 59,593 $ 50,801
Per share:
Earnings per share-basic $ 1.12 $ 1.27 $ 1.41 $ 1.20
Earnings per share-diluted 1.12 1.27 1.41 1.20
Cash dividends declared on common stock 0.27 0.25 0.22 0.22
Book value per common share 49.00 48.79 48.50 46.13
Weighted average common shares outstanding 42,309,003 42,302,780 42,242,893 42,174,092
Weighted average diluted common shares outstanding 42,479,442 42,415,993 42,359,873 42,335,747
(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 (benefit) 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
KPMG LLP
2500 Ruan Center
666 Grand Avenue
Des Moines, IA 50309
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Heartland Financial USA, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Heartland Financial USA, Inc. and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 24, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for the recognition and measurement of credit losses as of January 1, 2020 due to the adoption of ASC Topic 326, Financial Instruments - Credit Losses.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Assessment of the allowance for credit losses for loans and unfunded loan commitments collectively evaluated
As discussed in Notes 1, 5, and 6 to the consolidated financial statements, the Company’s allowance for credit losses related to loans and unfunded loan commitments collectively evaluated for credit losses is comprised of an allowance for credit losses on loans and an allowance for credit losses on unfunded loan commitments (the collective ACL). As of December 31, 2021, the total allowance for credit losses related to loans and unfunded loan commitments was $110.1 million and $15.5 million, respectively, of which $102.4 million and $15.5 million, respectively, was related to the collective ACL. The Company estimates the collective ACL using a current expected credit losses methodology which is based on relevant information about past events, current conditions, and a reasonable and supportable forecast that affect the collectability of the reported loan and commitment amounts, including expected defaults and prepayments. The allowance for credit losses on unfunded commitments leverages the same methodology utilized for the allowance for credit losses for loans. The Company estimates the collective ACL on a pool basis for loans and commitments with similar risk characteristics using 1) a transition matrix model derived probability of default (PD) and loss given default (LGD) methodology, which is based on transition of loans between risk ratings and through default based on the Company’s historical loss experience, for certain commercial and agricultural loans, or 2) a lifetime average historical loss model for all other commercial and agricultural loans, residential real estate loans, consumer loans, and commitments. A portion of the collective ACL on outstanding loans and commitments is comprised of qualitative adjustments, based on a comparison of current conditions to the average conditions over the look back period. The qualitative adjustments are determined by the Company using an anchoring approach to determine the minimum and maximum amount of qualitative allowance, which is determined by comparing the highest and lowest historical lifetime average loss rate to the current quantitative allowance rate to calculate the rate for the adjustment. The collective ACL utilizes an overlay approach for its economic forecasting component which incorporates a reasonable and supportable forecast of various macro-economic indices. The Company utilizes an economic forecast scenario which reverts to the historical mean immediately at the end of the reasonable and supportable forecast period. For the allowance for credit losses on unfunded loan commitments, the Company separately estimates the exposure at default using estimated average utilization rates.
We identified the assessment of the collective ACL as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment of the collective ACL estimate. Specifically, the assessment encompassed the evaluation of the collective ACL methodology, including the methods and models used to estimate (1) the PD and LGD and the related assumption of the risk ratings for certain commercial and agricultural loans, (2) the lifetime average historical loss rates and the related assumption of the look back period, and (3) the method used to estimate the economic forecasting component of the qualitative component and determination of that component, certain assumptions related to the qualitative component including the reasonable supportable forecast period, anchoring, weighting, and the determination of the impact of other external factors considered in the qualitative adjustments. The assessment also included an evaluation of the conceptual soundness and performance of the PD, LGD, and lifetime average historical loss models. In addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s measurement of the collective ACL estimates, including controls over the:
•development and approval of the collective ACL methodology
•continued use and appropriateness of changes to the PD, LGD, and lifetime average historical loss models
•performance monitoring of the lifetime average historical loss models
•identification and determination of the assumptions used in the PD and LGD models
•identification and determination of the assumptions used in the lifetime average historical loss models
•development of the qualitative adjustments, including the method used to estimate the economic forecasting component overlay, and related assumptions including the anchoring and weighting approaches, the reasonable and supportable forecast period, and other external factors
•analysis of the collective ACL results, trends and ratios.
We evaluated the Company’s process to develop the collective ACL estimate by testing certain sources of data, factors, and assumptions that the Company used, and considered the relevance and reliability of such data, factors, and assumptions. In addition, we involved credit risk professionals with specialized skills and knowledge, who assisted in evaluating:
•the Company’s collective ACL methodology for compliance with U.S. generally accepted accounting principles
•judgments made by the Company relative to the continued use and performance monitoring of the PD, LGD, and lifetime average historical loss models, by comparing them to relevant Company-specific metrics and trends and applicable industry and regulatory practices
•the conceptual soundness of the PD, LGD, and lifetime average historical loss models by inspecting the model documentation to determine whether the models are suitable for their intended use
•the length of the look back period by comparing it to Company specific portfolio risk characteristics and trends
•the methodology used to develop the qualitative adjustments including the economic forecasting component, the assumptions used in the adjustments including reasonable and supportable forecast period, anchoring, and weighting, and the effect of those adjustments on the collective ACL estimate compared with relevant credit risk factors and consistency with credit trends and identified limitations of the underlying quantitative models
•individual risk ratings for a selection of commercial and agricultural loan relationships by evaluating the financial performance of the borrower, sources of repayment, and any relevant guarantees or underlying collateral.
We also assessed the sufficiency of the audit evidence obtained related to the collective ACL estimates by evaluating the:
•cumulative results of the audit procedures
•qualitative aspects of the Company’s accounting practices
•potential bias in the accounting estimates
/s/ KPMG LLP
We have served as the Company’s auditor since 1994.
Des Moines, Iowa
February 24, 2022

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
Under the direction of our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of December 31, 2021. Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure.
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining effective internal control over financial reporting. Our internal control system was designed to provide reasonable assurance to our management, board of directors and stockholders regarding the reliability of financial reporting and the preparation and fair presentation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our internal control over financial reporting based upon the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013). Based on our assessment, our internal control over financial reporting was effective as of December 31, 2021.
KPMG LLP, the independent registered public accounting firm that audited HTLF’s consolidated financial statements as of and for the year ended December 31, 2021, included herein, has issued a report on HTLF’s internal control over financial reporting. This report follows management’s report.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no significant changes to HTLF's disclosure controls or internal controls over financial reporting during the quarter ended December 31, 2021, that have materially affected or are reasonably likely to materially affect HTLF's internal control over financial reporting.
KPMG LLP
2500 Ruan Center
666 Grand Avenue
Des Moines, IA 50309
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Heartland Financial USA, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Heartland Financial USA, Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements), and our report dated February 24, 2022 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Des Moines, Iowa
February 24, 2022

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
None

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information in the Proxy Statement for HTLF’s 2022 Annual Meeting of Stockholders to be held on May 18, 2022, (the "2021 Proxy Statement") under the captions "Proposal 1-Election of Directors", "Delinquent Section 16(a) Reports," "Corporate Governance and the Board of Directors - Stockholder Communications with the Board, Nomination and Proposal Procedures," "Corporate Governance and the Board of Directors - Committees of the Board," and "Corporate Governance and the Board of Directors - Code of Business Conduct and Ethics" is incorporated by reference. The information regarding executive officers is included in Part I of this report.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
The information in our 2022 Proxy Statement, under the captions "Corporate Governance and the Board of Directors - Director Compensation" and "Executive Officer Compensation" is incorporated by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information in our 2022 Proxy Statement, under the caption "Security Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan Information" is incorporated by reference.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information in the 2022 Proxy Statement under the captions "Related Person Transactions" and "Corporate Governance and the Board of Directors - Our Board of Directors - Director Independence" is incorporated by reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Our independent registered public accounting firm is KPMG, LLP, Des Moines, IA., Auditor Firm ID: 185.
The information in the 2022 Proxy Statement under the caption "Relationship with Independent Registered Public Accounting Firm" is incorporated by reference.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The documents filed as a part of this Annual Report on Form 10-K are listed below:
1. Financial Statements
The consolidated financial statements of Heartland Financial USA, Inc. are included in Item 8 of this Annual Report on Form 10-K.
2. Financial Statement Schedules
None.
3. Exhibits
The exhibits required by Item 601 of Regulation S-K are included along with this Annual Report on Form 10-K and are listed on the "Index of Exhibits" immediately following Item 16 below.