Heartland Financial USA(HTLF) - 2020 Q4 - Annual Report

Part I Business Heartland Financial USA, Inc. operates as a multi-bank holding company offering commercial and retail banking services across 12 states, focusing on organic growth and strategic acquisitions Company Snapshot (as of December 31, 2020) | Metric | Value (USD) | | :--- | :--- | | Total Assets | $17.91 billion | | Total Loans Held to Maturity | $10.02 billion | | Total Deposits | $14.98 billion | | Total Stockholders' Equity | $2.08 billion | | Net Income (2020) | $133.5 million | - Heartland operates through 11 independently branded community banks with a total of 133 banking locations across Iowa, Illinois, Wisconsin, New Mexico, Arizona, Montana, Colorado, Minnesota, Kansas, Missouri, Texas, and California[17][20] - The company's business model combines a customer-centric community banking approach with centralized back-office functions for efficiency in areas like loan processing, IT, and risk management[23][25] General Description - Heartland's operating strategy is to expand through acquisitions and grow organically. The company focuses on markets with growth potential in the Midwestern, Southwestern, and Western regions. A key goal is for each bank charter to reach at least $1 billion in assets, a target achieved in ten of its eleven charters by year-end 2020[26][30] - In 2020, Heartland acquired Johnson Bank's Arizona operations and AimBank in Texas, adding to its long history of expansion through acquisition[27][30] - Primary business lines include Commercial Banking (with a strong emphasis on treasury management), Small Business Banking, Agricultural Loans (7% of total loan portfolio), Residential Real Estate Mortgage Lending, Retail Banking, and Wealth Management/Retirement Plan Services (with $3.42 billion in trust assets under management)[34][46][53] - The company actively participated in the Paycheck Protection Program (PPP), providing SBA-guaranteed loans to small businesses affected by the COVID-19 pandemic[39] Market Areas - Heartland maintains a geographically diversified franchise across the Midwest, West, and Southwest, which helps balance the risk of regional economic fluctuations. The company views its Midwest markets as stable and its Western/Southwestern markets as offering higher growth potential[56] Deposits by Bank Charter (as of December 31, 2020) | Bank Name | State | Total Deposits (in millions USD) | | :--- | :--- | :--- | | Dubuque Bank and Trust Company | IA | $1,456.9 | | Illinois Bank & Trust | IL | $1,338.7 | | Wisconsin Bank & Trust | WI | $1,057.4 | | New Mexico Bank & Trust | NM | $1,750.0 | | Arizona Bank & Trust | AZ | $1,357.2 | | Rocky Mountain Bank | MT | $538.0 | | Citywide Banks | CO | $2,181.5 | | Minnesota Bank & Trust | MN | $789.6 | | Bank of Blue Valley | KS | $1,138.3 | | Premier Valley Bank | CA | $837.0 | | First Bank & Trust | TX | $2,622.7 | Competition - The company faces intense competition from a wide range of financial service providers, including other commercial banks, credit unions, thrifts, mortgage companies, and online providers[58][59] - Key competitive factors in the industry are personal service, product selection, convenience, and technology. Heartland believes its customer-centric approach and comprehensive product suite allow it to compete effectively with larger institutions[58][62] - Regulatory changes, such as the Economic Growth Act of 2018, have altered the competitive landscape by raising the asset threshold for certain enhanced prudential standards, potentially increasing M&A activity among mid-sized banks[60] Human Capital - As of December 31, 2020, Heartland employed 2,013 full-time equivalent employees. Employee engagement scores reached their highest level in 2020[63] - In response to the COVID-19 pandemic, Heartland instituted "pandemic pay," provided 100% coverage for preventative healthcare, and enabled virtual medical care to support employee health and safety[64][68] - The company is committed to diversity and inclusion, having adopted a formal diversity statement and implemented "listen and learn" sessions with executive leadership[67][69] - Heartland invests in employee development, providing over 2,100 hours of training in 2020 and graduating 10 employees from its leadership program[66] Supervision and Regulation - Heartland and its subsidiary banks are extensively regulated by federal and state authorities, including the Federal Reserve, FDIC, and various state banking departments. This regulatory framework is primarily for the protection of depositors and the financial system[70][71][72] - The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 provided regulatory relief by raising asset thresholds for requirements like stress testing and resolution planning, exempting bank holding companies with less than $100 billion in assets[76][82] - Heartland and its banks are subject to Basel III capital requirements, including a minimum Common Equity Tier 1 Capital Ratio of 7.0% (including the conservation buffer). As of December 31, 2020, Heartland and its banks were considered "well-capitalized"[87][89][92] - Due to its asset size exceeding $10 billion, Heartland became subject to the Durbin Amendment on July 1, 2019, which restricts interchange fees on debit card transactions[141] Risk Factors The company faces material risks from the COVID-19 pandemic, economic downturns, interest rate volatility, credit concentrations, cybersecurity threats, and extensive regulatory compliance - COVID-19 Pandemic Risks: The pandemic could continue to adversely affect business through increased credit losses (especially in lodging, retail, restaurants, and oil/gas), pressure on net interest margins, loan modifications, and operational disruptions[143][147] - Economic and Market Conditions Risks: Business is vulnerable to economic downturns, interest rate volatility, and the planned phasing out of LIBOR. Goodwill of $576.0 million (28% of stockholders' equity) is subject to impairment risk[149][156][159] - Credit Risks: A large concentration of commercial real estate loans presents a key risk, as this segment is subject to volatile cash flows and collateral values. The adoption of the CECL model for credit losses could also increase volatility in the allowance[170][184] - Operational Risks: The company faces significant risks from cybersecurity threats, reliance on third-party vendors, potential for business interruption, and employee error or fraud[193][195][200] - Legal and Compliance Risks: Operating in a highly regulated environment brings risks of increased costs and enforcement actions. As assets grow, the company becomes subject to additional regulations, such as the Durbin Amendment[211][213][219] Unresolved Staff Comments As of December 31, 2020, Heartland Financial USA, Inc. reported no unresolved comments from the SEC staff - As of December 31, 2020, Heartland had no unresolved staff comments[227] Properties Heartland's corporate office and its 11 subsidiary banks operate from a mix of owned and leased properties across 133 locations, with the main office in Dubuque, Iowa Principal Operating Facilities (as of December 31, 2020) | Name | Main Facility Address | Square Footage | Owned/Leased | Total Locations | | :--- | :--- | :--- | :--- | :--- | | Heartland Financial USA, Inc. | Dubuque, IA | 65,000 | Owned | 3 | | Dubuque Bank and Trust Company | Dubuque, IA | 65,500 | Owned | 6 | | Illinois Bank & Trust | Rockford, IL | 8,000 | Owned | 10 | | Wisconsin Bank & Trust | Madison, WI | 19,000 | Owned | 13 | | New Mexico Bank & Trust | Albuquerque, NM | 11,400 | Leased | 17 | | Arizona Bank & Trust | Phoenix, AZ | 14,000 | Owned | 10 | | Rocky Mountain Bank | Billings, MT | 16,600 | Owned | 9 | | Citywide Banks | Denver, CO | 8,700 | Leased | 23 | | Minnesota Bank & Trust | Edina, MN | 6,100 | Leased | 2 | | Bank of Blue Valley | Overland Park, KS | 38,000 | Owned | 11 | | Premier Valley Bank | Fresno, CA | 17,600 | Leased | 8 | | First Bank & Trust | Lubbock, TX | 64,500 | Owned | 32 | Legal Proceedings The company faces routine litigation not expected to materially impact its financial condition, with a $5.3 million holdback for specific AimBank acquisition-related litigation - Heartland and its subsidiaries are subject to ordinary routine litigation incidental to their business, which management does not expect to have a material impact[684] - A $5.3 million holdback from the AimBank acquisition consideration was established to cover potential losses from a specific pending litigation. Management believes this amount is sufficient to cover any potential settlement and legal expenses[685] Mine Safety Disclosures This item is not applicable to Heartland Financial USA, Inc. - Not applicable[231] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Heartland's common stock trades on Nasdaq under 'HTLF', with 2,900 stockholders of record, and the board authorized a 5% share repurchase program, though no shares were bought in Q4 2020 - Heartland's common stock is listed on The Nasdaq Global Select Market under the trading symbol 'HTLF'[242] - As of February 16, 2021, there were approximately 2,900 stockholders of record and an additional 16,160 stockholders holding shares in street name[242] - The board of directors has authorized management to acquire up to 5% of capital ($98.4 million as of Dec 31, 2020) as treasury shares. No common stock was repurchased during the quarter ended December 31, 2020[243] Comparison of 5-Year Cumulative Total Return | Index | 12/31/2015 | 12/31/2020 | Cumulative Return | | :--- | :--- | :--- | :--- | | Heartland Financial USA, Inc. | $100.00 | $138.45 | 38.45% | | Nasdaq Composite Index | $100.00 | $271.64 | 171.64% | | SNL U.S. Bank NASDAQ Index | $100.00 | $132.56 | 32.56% | | SNL Bank and Thrift Index | $100.00 | $144.61 | 44.61% | Selected Financial Data Heartland's financial data from 2016-2020 shows significant asset growth to $17.91 billion, fluctuating net income, and consistent increases in cash dividends per share Selected Financial Data (2016-2020) | (in millions USD, except per share) | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net Income Available to Common Stockholders | $133.5 | $149.1 | $117.0 | $75.2 | $80.1 | | Net Income – Diluted (per share) | $3.57 | $4.14 | $3.52 | $2.65 | $3.22 | | Cash Dividends (per share) | $0.80 | $0.68 | $0.59 | $0.51 | $0.50 | | Total Assets | $17,908.3 | $13,209.6 | $11,408.0 | $9,810.7 | $8,247.1 | | Total Net Loans | $10,023.1 | $8,367.9 | $7,407.7 | $6,391.5 | $5,351.7 | | Total Deposits | $14,979.9 | $11,044.3 | $9,396.4 | $8,146.9 | $6,847.4 | | Common Stockholders' Equity | $1,968.5 | $1,578.1 | $1,325.2 | $990.5 | $739.6 | Key Performance Ratios (2016-2020) | Ratio | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Return on Average Assets | 0.90% | 1.24% | 1.09% | 0.83% | 0.98% | | Return on Average Common Equity | 8.06% | 10.12% | 9.93% | 8.63% | 11.80% | | Net Interest Margin | 3.65% | 4.00% | 4.26% | 4.04% | 3.95% | | Efficiency Ratio (non-GAAP) | 56.65% | 62.50% | 62.59% | 64.05% | 65.61% | Management's Discussion and Analysis of Financial Condition and Results of Operations Heartland's 2020 performance was impacted by COVID-19, acquisitions, and CECL adoption, leading to a decrease in net income to $133.5 million despite 36% asset growth to $17.91 billion and increased net interest income Critical Accounting Policies - The determination of the Allowance for Credit Losses (ACL) is a critical accounting policy. It requires significant management estimates and judgments about current expected credit losses, using historical data, current conditions, and economic forecasts. The accuracy of this estimate can materially impact earnings[257][262] - Accounting for Business Combinations, Goodwill, and Core Deposit Intangibles is also critical. It involves estimating the fair value of acquired assets and liabilities, which relies on subjective judgments and valuation techniques. Goodwill is tested for impairment annually or more frequently if triggering events occur[264][265] Overview 2020 vs. 2019 Performance | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Net Income Available to Common Stockholders | $133.5 million | $149.1 million | | Diluted EPS | $3.57 | $4.14 | | Return on Average Assets | 0.90% | 1.24% | | Return on Average Common Equity | 8.06% | 10.12% | - 2020 Developments: - Acquisitions: Completed the acquisition of AimBank (adding $1.97 billion in assets) and Johnson Bank's Arizona operations (adding $419.7 million in assets)[273][274] - CECL Adoption: Adopted the new credit loss standard on Jan 1, 2020, resulting in a $14.9 million after-tax cumulative-effect adjustment to retained earnings[279][280] - COVID-19 Response: Implemented a pandemic management plan, originated $1.2 billion in PPP loans, and provided various forms of relief to customers and employees[281][282] - Capital: Issued $115.0 million of Series E Preferred Stock, raising net proceeds of $110.7 million[283] - Branch Optimization: Approved plans to consolidate eight branch locations, resulting in $3.5 million of fixed asset write-downs[283] - 2019 Developments: - Acquisitions: Completed the acquisition of Blue Valley Ban Corp. and Rockford Bank and Trust Company[289] - Divestitures: Sold several branches and its consumer finance loan portfolios, generating significant net gains which were reinvested into technology and process improvements like nCino and Salesforce[290][291][292] Results of Operations Net Interest Margin | Year | Net Interest Margin (GAAP) | Net Interest Margin (Tax-Equivalent, non-GAAP) | | :--- | :--- | :--- | | 2020 | 3.65% | 3.69% | | 2019 | 4.00% | 4.04% | | 2018 | 4.26% | 4.32% | - Net interest income increased by $58.0 million (13%) in 2020, driven by a 24% increase in average earning assets, partially offset by a 77 basis point decrease in the average rate on those assets due to the low-rate environment[300] - Provision for credit losses increased significantly to $67.1 million in 2020 from $16.7 million in 2019, primarily due to the deteriorated economic outlook from the COVID-19 pandemic and specific provisions for two large commercial loans[311][312][319] - Noninterest income increased 4% to $120.3 million in 2020, driven by an $13.0 million increase in net gains on sale of loans from higher mortgage refinancing activity. This was partially offset by a $4.7 million decrease in service charges and fees, mainly from lower debit card income due to the Durbin Amendment and reduced overdraft fees[318][320][331] - Noninterest expense increased 6% to $371.0 million in 2020. The increase was driven by higher professional fees (including FDIC insurance assessments) and a $24.5 million swing from gains on asset sales in 2019 to losses in 2020[334][336][339] - The efficiency ratio (non-GAAP) improved to 56.65% in 2020 from 62.50% in 2019, achieving the company's goal of being below 57%[343] Financial Condition - Total assets grew 36% to $17.91 billion at year-end 2020, largely due to the AimBank and Johnson Bank branch acquisitions which added a combined $2.39 billion in assets[345] - Total loans held to maturity increased 20% to $10.02 billion. This includes $1.24 billion from acquisitions and $904.7 million in legacy PPP loans. Excluding these, organic loans decreased 6%[360] - The allowance for credit losses for loans increased to 1.31% of total loans at year-end 2020, up from 0.84% at year-end 2019, reflecting the adoption of CECL and the pandemic's economic impact[314][387] - Total deposits grew 36% to $14.98 billion, including $2.09 billion from acquisitions. Organic deposit growth was strong at 17% ($1.85 billion)[271][417] - The company maintained a strong capital position, with all banks categorized as well-capitalized. The consolidated Common Equity Tier 1 ratio was 10.92% at year-end 2020[439][441] Quantitative and Qualitative Disclosures About Market Risk Heartland manages interest rate risk through its asset/liability committee, with simulations showing net interest income sensitivity of +5.65% in a +200 basis point rate shift and -1.07% in a -100 basis point shift - The company's main market risk is interest rate risk. This risk is managed by the asset/liability committee through regular reviews and simulations of various interest rate scenarios[468][469] Net Interest Income Simulation (as of Dec 31, 2020) | Interest Rate Scenario | Year 1 % Change from Base | Year 2 % Change from Base | | :--- | :--- | :--- | | Down 100 Basis Points | (1.07)% | (5.16)% | | Up 200 Basis Points | 5.65% | 9.88% | - Heartland uses derivative financial instruments, including interest rate swaps and forward commitments on mortgage loans, to manage the impact of interest rate changes[470][472] Financial Statements and Supplementary Data This section presents Heartland's audited consolidated financial statements for 2018-2020, including balance sheets and income statements, with an unqualified auditor's opinion from KPMG LLP Consolidated Balance Sheet Highlights (in billions USD) | | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Assets | $17.91 | $13.21 | | Total Net Loans | $9.89 | $8.30 | | Total Deposits | $14.98 | $11.04 | | Total Liabilities | $15.83 | $11.63 | | Total Stockholders' Equity | $2.08 | $1.58 | Consolidated Income Statement Highlights (in millions USD) | | 2020 | 2019 | 2018 | | :--- | :--- | :--- | | Net Interest Income | $491.7 | $433.7 | $414.0 | | Provision for Credit Losses | $67.1 | $16.7 | $24.0 | | Noninterest Income | $120.3 | $116.2 | $109.2 | | Noninterest Expenses | $371.0 | $349.2 | $353.9 | | Net Income | $137.9 | $149.1 | $117.0 | - The independent auditor, KPMG LLP, issued an unqualified opinion on the consolidated financial statements and on the effectiveness of internal control over financial reporting. The report notes the change in accounting for credit losses due to the adoption of ASC Topic 326 (CECL)[782][783][784] - Critical Audit Matters identified by the auditor include: the assessment of the allowance for credit losses (ACL) under the new CECL standard, the valuation of goodwill for certain reporting units, and the initial measurement of the fair value of acquired loans in the AimBank business combination[788][793][796] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with accountants on accounting and financial disclosure during the reporting period - None reported[802] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2020, excluding the recently acquired AimBank - Management concluded that disclosure controls and procedures were effective as of December 31, 2020[803] - Management's assessment concluded that internal control over financial reporting was effective as of December 31, 2020, based on the COSO 2013 framework[804] - The recently acquired AimBank (11% of total assets) was excluded from the scope of management's assessment of internal control over financial reporting for 2020[805] Other Information There was no other information to be reported under this item - None[817] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2021 Proxy Statement - The required information is incorporated by reference from the Proxy Statement for the 2021 Annual Meeting of Stockholders[817] Executive Compensation Information on director and executive officer compensation is incorporated by reference from the 2021 Proxy Statement - The required information is incorporated by reference from the 2021 Proxy Statement[818] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership of beneficial owners, management, and related stockholder matters is incorporated by reference from the 2021 Proxy Statement - The required information is incorporated by reference from the 2021 Proxy Statement[819] Certain Relationships and Related Transactions, and Director Independence Information on related person transactions and director independence is incorporated by reference from the 2021 Proxy Statement - The required information is incorporated by reference from the 2021 Proxy Statement[820] Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the 2021 Proxy Statement - The required information is incorporated by reference from the 2021 Proxy Statement[821] Part IV Exhibits and Financial Statement Schedules This section lists documents filed as part of the Form 10-K, with consolidated financial statements in Item 8 and a detailed Index of Exhibits - The consolidated financial statements of Heartland Financial USA, Inc. are included in Item 8 of this report[822] - A list of all exhibits filed with this report is available in the 'Index of Exhibits'[823] Form 10-K Summary No Form 10-K summary was provided - None[824]