INCOME TAXES

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

INCOME TAXES

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, 2022, 2021, and 2020 were as follows, in thousands:

	2022		2021		2020
Current:
Federal	$	45,911	$	32,440	$	34,513
State	13,549		11,352		12,450
Total current expense	$	59,460	$	43,792	$	46,963
Deferred:
Federal	$	(3,637)	$	8,938	$	(8,498)
State	(250)		2,605		(2,412)
Total deferred expense (benefit)	(3,887)		11,543		(10,910)
Total income tax expense	$	55,573	$	55,335	$	36,053

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, 2022 and 2021, were as follows, in thousands:

	2022		2021
Deferred tax assets:
Tax effect of net unrealized loss on securities carried at fair value reflected in stockholders' equity	$	159,763	$	1,715
Tax effect of net unrealized loss on derivatives reflected in stockholders’ equity	210		367
Tax effect of net unrealized loss on securities transferred from carried at fair value to held to maturity reflected in stockholders' equity	45,174		—
Allowance for credit losses	28,732		28,149
Deferred compensation	12,861		11,299
Net operating loss carryforwards	21,844		18,874
Investments in partnerships	2,843		958
Deferred loan fees	—		1,691
Other	5,476		5,673
Total deferred tax assets	276,903		68,726
Valuation allowance for deferred tax assets	(19,001)		(15,120)
Total deferred tax assets after valuation allowance	$	257,902	$	53,606

Deferred tax liabilities:
Premises, furniture and equipment	$	9,227	$	10,502
Purchase accounting	7,954		7,977
Deferred loan costs	6,078		5,164
Other	3,297		5,560
Total deferred tax liabilities	26,556		29,203
Net deferred tax assets	$	231,346	$	24,403

As a result of acquisitions, HTLF had net operating loss carryforwards for federal income tax purposes of approximately $17.2 million at December 31, 2022, and $20.5 million at December 31, 2021. The associated deferred tax asset was $3.6 million at December 31, 2022, and $4.3 million at December 31, 2021. These net carryforwards expire during the period from December 31, 2026, through December 31, 2039, and are subject to an annual limitation of approximately $3.5 million. Net operating loss carryforwards for state income tax purposes were approximately $203.4 million at December 31, 2022, and $183.3 million at December 31, 2021. The associated deferred tax asset, net of federal tax, was $16.3 million at December 31, 2022, and $14.3 million at December 31, 2021. 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 $15.5 million at December 31, 2022, and $13.2 million at December 31, 2021. During both 2022 and 2021, 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 $1.5 million at December 31, 2022, and $1.9 million at December 31, 2021. HTLF released valuation allowances of $165,000 and $491,000 in 2022 and 2021, 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, 2022, 2021, and 2020, (computed by applying the U.S. federal corporate tax rate of 21% for 2022, 2021, and 2020 income before income taxes) are as follows, in thousands:

	2022			2021			2020
Computed "expected" tax on net income	$	56,228		$	57,804		$	36,538
Increase (decrease) resulting from:
Nontaxable interest income	(5,804)			(5,504)			(4,011)
State income taxes, net of federal tax benefit	10,523			11,026			7,930
Tax credits	(6,613)			(7,613)			(4,521)
Valuation allowance	13			(440)			(374)
Excess tax expense/(benefit) on stock compensation	(113)			(270)			80
Other	1,339			332			411
Income taxes	$	55,573		$	55,335		$	36,053
Effective tax rates	20.8		%	20.1		%	20.7		%

HTLF's income taxes included solar energy tax credits totaling $4.2 million, $6.1 million, and $2.3 million during 2022, 2021 and 2020, respectively. Federal historic rehabilitation tax credits included in HTLF's income taxes totaled $1.0 million, $720,000, and $1.1 million in 2022, 2021, and 2020, respectively. Additionally, investments in certain low-income housing partnerships totaled $10.4 million at December 31, 2022, $5.1 million at December 31, 2021, and $5.6 million at December 31, 2020. These investments generated federal low-income housing tax credits of $1.1 million during 2022, $538,000 at December 31, 2021 and $780,000 at December 31, 2020. These investments are expected to generate federal low-income housing tax credits of approximately $1.2 million for 2023, $1.0 million for 2024, $790,000 for 2025 and $740,000 for 2026. Additionally, HTLF had new markets tax credits of $300,000 in both 2022 and 2021, respectively.

On December 31, 2022, the amount of unrecognized tax benefits was $719,000, including $91,000 of accrued interest and penalties. On December 31, 2021, the amount of unrecognized tax benefits was $724,000, including $87,000 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, 2019, and later remain subject to examination by the Internal Revenue Service. For state purposes, the tax years ended December 31, 2017, and later remain open for examination. HTLF does not anticipate any significant increase or decrease in unrecognized tax benefits during the next twelve months.