INCOME TAXES

12 Months Ended

Dec. 31, 2020

The current income tax provision reflects the tax consequences of revenue and expenses currently taxable or deductible on various income tax returns for the year reported. The deferred income tax provision generally reflects the net change in deferred income tax assets and liabilities during the year, excluding any deferred income tax assets and liabilities of acquired businesses. The components of the provision for income taxes for the years ended December 31, 2020, 2019, and 2018 were as follows, in thousands:


	2020		2019		2018
Current:
Federal	$	34,513	$	24,106	$	16,769
State	12,450		11,298		8,686
Total current expense	$	46,963	$	35,404	$	25,455
Deferred:
Federal	$	(8,498)	$	760	$	2,615
State	(2,412)		(1,174)		145
Total deferred expense (benefit)	(10,910)		(414)		2,760
Total income tax expense	$	36,053	$	34,990	$	28,215

Temporary differences between the amounts reported in the financial statements and the tax basis of assets and liabilities result in deferred taxes. Deferred tax assets and liabilities at December 31, 2020 and 2019, were as follows, in thousands:


	2020		2019
Deferred tax assets:

Tax effect of net unrealized loss on derivatives reflected in stockholders’ equity	$	1,130	$	563

Allowance for credit losses	33,393		17,686
Deferred compensation	9,623		8,071

Net operating loss carryforwards	17,585		18,459


Tax credit projects	4,746		4,252

Deferred loan fees	3,496		—
Other	5,563		4,754
Total deferred tax assets	75,536		53,785
Valuation allowance for deferred tax assets	(12,828)		(12,379)
Total deferred tax assets after valuation allowance	$	62,708	$	41,406


Deferred tax liabilities:
Tax effect of net unrealized gain on securities carried at fair value reflected in stockholders’ equity	$	26,858	$	279

Securities	4,914		4,240
Premises, furniture and equipment	8,311		6,232


Purchase accounting	5,326		7,824
Prepaid expenses	2,675		2,176

Deferred loan costs	2,597		3,342
Other	3,905		3,713
Total deferred tax liabilities	$	54,586	$	27,806
Net deferred tax assets	$	8,122	$	13,600

As a result of acquisitions, Heartland had net operating loss carryforwards for federal income tax purposes of approximately $25.8 million at December 31, 2020, and $31.9 million at December 31, 2019. The associated deferred tax asset was $5.4 million at December 31, 2020, and $6.7 million at December 31, 2019. These net carryforwards expire during the period from December 31, 2026, through December 31, 2039, and are subject to an annual limitation of approximately $7.3 million. Net operating loss carryforwards for state income tax purposes were approximately $159.1 million at December 31, 2020, and $163.7 million at December 31, 2019. The associated deferred tax asset, net of federal tax, was $11.8 million at both December 31, 2020, and December 31, 2019. These carryforwards have begun to expire and will continue to do so until December 31, 2039.

A valuation allowance against the deferred tax asset due to the uncertainty surrounding the utilization of these state net operating loss carryforwards was $10.5 million at December 31, 2020, and $10.1 million at December 31, 2019. During both 2020 and 2019, Heartland had book write-downs on investments that, for tax purposes, would generate capital losses upon disposal. Due to the uncertainty of Heartland's ability to utilize the potential capital losses, a valuation allowance for these potential losses totaled $2.3 million at both December 31, 2020, and December 31, 2019. Heartland released valuation allowances of $617,000 and $1.9 million in 2020 and 2019, respectively, on deferred tax assets for capital losses it expects to realize on the disposal of partnership investments. Heartland generated capital gains from its 2019 strategic developments, which included various branch sales not conducted in the ordinary course of its business strategy. As a result of its net capital gains, Heartland was able to realize the benefit of its capital losses. The 2020 capital loss is expected to be carried back to an earlier year with capital gains.

Realization of the deferred tax asset over time is dependent upon the existence of taxable income in carryback periods or the ability to generate sufficient taxable income in future periods. In determining that realization of the deferred tax asset was more likely than not, Heartland gave consideration to a number of factors, including its taxable income during carryback periods, its recent earnings history, its expectations for earnings in the future and, where applicable, the expiration dates associated with its tax carryforwards.

The actual income tax expense from continuing operations differs from the expected amounts for the years ended December 31, 2020, 2019, and 2018, (computed by applying the U.S. federal corporate tax rate of 21% for 2020, 2019, and 2018 income before income taxes) are as follows, in thousands:


	2020			2019			2018
Computed "expected" tax on net income	$	36,538		$	38,665		$	30,495
Increase (decrease) resulting from:
Nontaxable interest income	(4,011)			(3,281)			(4,423)
State income taxes, net of federal tax benefit	7,930			8,509			6,976

Tax credits	(4,521)			(6,860)			(4,085)
Valuation allowance	(374)			(1,648)			23
Excess tax expense/(benefit) on stock compensation	80			(229)			(657)

Other	411			(166)			(114)
Income taxes	$	36,053		$	34,990		$	28,215
Effective tax rates	20.7		%	19.0		%	19.4		%

Heartland's income taxes included solar energy credits totaling $2.3 million, $4.0 million, and $2.9 million during 2020, 2019 and 2018, respectively. Federal historic rehabilitation tax credits included in Heartland's income taxes totaled $1.1 million, $1.8 million, and $0 in 2020, 2019, and 2018, respectively. Additionally, investments in certain low-income housing partnerships totaled $5.6 million at December 31, 2020, $6.1 million at December 31, 2019, and $6.9 million at December 31, 2018. These investments generated federal low-income housing tax credits of $780,000 during 2020, $1.1 million at December 31, 2019 and $1.2 million at December 31, 2018. These investments are expected to generate federal low-income housing tax credits of approximately $538,000 for 2021 through 2023, $322,000 for 2024, $86,000 for 2025 and $34,000 for 2026. Additionally, Heartland had new markets tax credits of $300,000 in 2020.

On December 31, 2020, the amount of unrecognized tax benefits was $702,000, including $79,000 of accrued interest and penalties. On December 31, 2019, the amount of unrecognized tax benefits was $657,000, including $69,000 of accrued interest and penalties. If recognized, the entire amount of the unrecognized tax benefits would affect the effective tax rate.

The tax years ended December 31, 2017, and later remain subject to examination by the Internal Revenue Service. For state purposes, the tax years ended December 31, 2015, and later remain open for examination. Heartland does not anticipate any significant increase or decrease in unrecognized tax benefits during the next twelve months.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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