UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For quarterly period ended ~~June~~September 30, 2017

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For transition period __________ to __________

Commission File Number: 001-15393

HEARTLAND FINANCIAL USA, INC.

(Exact name of Registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

42-1405748

(I.R.S. employer identification number)

1398 Central Avenue, Dubuque, Iowa 52001

(Address of principal executive offices)(Zip Code)

(563) 589-2000

(Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “accelerated filer,” “large accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer x		Accelerated Filer ¨
Non-accelerated filer ¨	(Do not check if a smaller reporting company)
Smaller reporting company ¨		Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the Securities Exchange Act of 1934). Yes o No x

Indicate the number of shares outstanding of each of the classes of Registrant's common stock as of the latest practicable date: As of ~~August 2,~~November 6, 2017, the Registrant had outstanding ~~29,917,388~~29,949,070 shares of common stock, $1.00 par value per share.

HEARTLAND FINANCIAL USA, INC.

Form 10-Q Quarterly Report

Table of Contents



Part I
Item 1.	Financial Statements
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
Part II
Item 1.	Legal Proceedings
Item 1A.	Risk Factors
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	Mine Safety Disclosures
Item 5.	Other Information
Item 6.	Exhibits
	~~10.1 Form of Director Restricted Stock Unit Award Agreement under the Heartland Financial USA, Inc. 2012 Long-Term Incentive Plan~~
	~~10.2 Revolving Credit Line Promissory Note dated June 14, 2017, between Heartland Financial USA, Inc. and Bankers Trust Company~~
	~~10.3 Promissory Note dated June 14, 2017, between Heartland Financial USA, Inc. and Bankers Trust Company~~
	31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.
	31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.
	32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	101 Financial statements formatted in Extensible Business Reporting Language: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Changes in Equity, and (vi) the Notes to Consolidated Financial Statements.

PART I

ITEM 1. FINANCIAL STATEMENTS


HEARTLAND FINANCIAL USA, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data)
	June 30, 2017 (Unaudited)			December 31, 2016			September 30, 2017 (Unaudited)			December 31, 2016
ASSETS
Cash and due from banks	$	141,100		$	151,290		$	180,751		$	151,290
Interest bearing deposits with the Federal Reserve Bank and other banks and other short-term investments	40,676			7,434			70,985			7,434
Cash and cash equivalents	181,776			158,724			251,736			158,724
Time deposits in other financial institutions	30,241			2,105			19,793			2,105
Securities:
Available for sale, at fair value (cost of $1,825,837 at June 30, 2017, and $1,893,947 at December 31, 2016)	1,789,441			1,845,864
Held to maturity, at cost (fair value of $273,394 at June 30, 2017, and $274,799 at December 31, 2016)	259,586			263,662
Available for sale, at fair value (cost of $2,124,232 at September 30, 2017, and $1,893,947 at December 31, 2016)							2,093,385			1,845,864
Held to maturity, at cost (fair value of $270,386 at September 30, 2017, and $274,799 at December 31, 2016)							256,355			263,662
Other investments, at cost	21,094			21,560			23,176			21,560
Loans held for sale	48,848			61,261			35,795			61,261
Loans receivable:
Held to maturity	5,325,082			5,351,719			6,373,415			5,351,719
Allowance for loan losses	(54,051		)	(54,324		)	(54,885		)	(54,324		)
Loans receivable, net	5,271,031			5,297,395			6,318,530			5,297,395
Premises, furniture and equipment, net	162,423			163,614			174,533			163,614
Premises, furniture and equipment held for sale	580			414			4,428			414
Other real estate, net	9,269			9,744			13,226			9,744
Goodwill	141,461			127,699			236,615			127,699
Core deposit intangibles and customer relationship intangibles, net	22,850			22,775			37,028			22,775
Servicing rights, net	34,736			35,778			26,599			35,778
Cash surrender value on life insurance	120,281			112,615			142,073			112,615
Other assets	111,104			123,869			122,355			123,869
TOTAL ASSETS	$	8,204,721		$	8,247,079		$	9,755,627		$	8,247,079
LIABILITIES AND EQUITY
LIABILITIES:
Deposits:
Demand	$	2,355,410		$	2,202,036		$	3,009,940		$	2,202,036
Savings	3,704,579			3,788,089			4,227,340			3,788,089
Time	870,180			857,286			994,604			857,286
Total deposits	6,930,169			6,847,411			8,231,884			6,847,411
Short-term borrowings	139,130			306,459			171,871			306,459
Other borrowings	281,096			288,534			301,473			288,534
Accrued expenses and other liabilities	48,356			63,759			68,715			63,759
TOTAL LIABILITIES	7,398,751			7,506,163			8,773,943			7,506,163
STOCKHOLDERS' EQUITY:
Preferred stock (par value $1 per share; authorized 17,604 shares; none issued or outstanding at both June 30, 2017, and December 31, 2016)	—			—
Series A Junior Participating preferred stock (par value $1 per share; authorized 16,000 shares; none issued or outstanding at both June 30, 2017, and December 31, 2016)	—			—
Series C Senior Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares authorized at both June 30, 2017, and December 31, 2016, none issued or outstanding at both June 30, 2017, and December 31, 2016)	—			—
Series D Senior Non-Cumulative Perpetual Convertible Preferred Stock (par value $1 per share; 3,000 shares authorized at both June 30, 2017, and December 31, 2016; 745 shares issued and outstanding at June 30, 2017, and 1,078 shares issued and outstanding at December 31, 2016)	938			1,357
Common stock (par value $1 per share; 40,000,000 shares authorized at June 30, 2017, and 30,000,000 shares authorized at December 31, 2016; issued 26,701,226 shares at June 30, 2017, and 26,119,929 shares at December 31, 2016)	26,701			26,120
Preferred stock (par value $1 per share; authorized 17,604 shares; none issued or outstanding at both September 30, 2017, and December 31, 2016)							—			—
Series A Junior Participating preferred stock (par value $1 per share; authorized 16,000 shares; none issued or outstanding at both September 30, 2017, and December 31, 2016)							—			—
Series C Senior Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares authorized at both September 30, 2017, and December 31, 2016, none issued or outstanding at both September 30, 2017, and December 31, 2016)							—			—
Series D Senior Non-Cumulative Perpetual Convertible Preferred Stock (par value $1 per share; 3,000 shares authorized at both September 30, 2017, and December 31, 2016; 745 shares issued and outstanding at September 30, 2017, and 1,078 shares issued and outstanding at December 31, 2016)							938			1,357
Common stock (par value $1 per share; 40,000,000 shares authorized at September 30, 2017, and 30,000,000 shares authorized at December 31, 2016; issued 29,946,069 shares at September 30, 2017, and 26,119,929 shares at December 31, 2016)							29,946			26,120
Capital surplus	352,500			328,376			503,262			328,376
Retained earnings	450,228			416,109			468,556			416,109
Accumulated other comprehensive income (loss)	(24,397		)	(31,046		)
Treasury stock at cost (0 shares at both June 30, 2017, and December 31, 2016)	—			—
Accumulated other comprehensive loss							(21,018		)	(31,046		)
Treasury stock at cost (0 shares at both September 30, 2017, and December 31, 2016)							—			—
TOTAL STOCKHOLDERS' EQUITY	805,970			740,916			981,684			740,916
TOTAL LIABILITIES AND EQUITY	$	8,204,721		$	8,247,079		$	9,755,627		$	8,247,079

See accompanying notes to consolidated financial statements.


HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands, except per share data)
	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016			2017			2016			2017			2016
INTEREST INCOME:
Interest and fees on loans	$	68,094		$	69,809		$	134,992		$	138,234		$	82,906		$	70,046		$	217,898		$	208,280
Interest on securities:
Taxable	8,599			7,952			16,852			16,687			10,394			7,917			27,246			24,604
Nontaxable	5,020			3,566			10,211			7,076			5,086			3,717			15,297			10,793
Interest on federal funds sold	3			1			3			11			34			1			37			12
Interest on interest bearing deposits in other financial institutions	345			3			554			7			558			6			1,112			13
TOTAL INTEREST INCOME	82,061			81,331			162,612			162,015			98,978			81,687			261,590			243,702
INTEREST EXPENSE:
Interest on deposits	4,163			4,021			7,893			8,194			5,073			4,001			12,966			12,195
Interest on short-term borrowings	90			519			227			848			271			235			498			1,083
Interest on other borrowings (includes $300 and $465 of interest expense related to derivatives reclassified from accumulated other comprehensive income for the three months ended June 30, 2017 and 2016, respectively, and $697 and $971 of interest expense related to derivatives reclassified from accumulated other comprehensive income for the six months ended June 30, 2017 and 2016, respectively)	3,228			3,673			6,884			7,148
Interest on other borrowings (includes $308 and $492 of interest expense related to derivatives reclassified from accumulated other comprehensive income for the three months ended September 30, 2017 and 2016, respectively, and $1,005 and $1,463 of interest expense related to derivatives reclassified from accumulated other comprehensive income for the nine months ended September 30, 2017 and 2016, respectively)													3,790			3,770			10,674			10,918
TOTAL INTEREST EXPENSE	7,481			8,213			15,004			16,190			9,134			8,006			24,138			24,196
NET INTEREST INCOME	74,580			73,118			147,608			145,825			89,844			73,681			237,452			219,506
Provision for loan losses	889			2,118			4,530			4,185			5,705			5,328			10,235			9,513
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	73,691			71,000			143,078			141,640			84,139			68,353			227,217			209,993
NONINTEREST INCOME:
Service charges and fees	9,696			8,022			19,153			15,184			10,138			8,278			29,291			23,462
Loan servicing income	1,351			1,292			3,075			2,560			1,161			873			4,236			3,433
Trust fees	3,979			3,625			7,610			7,438			3,872			3,689			11,482			11,127
Brokerage and insurance commissions	976			886			2,012			1,908			950			1,006			2,962			2,914
Securities gains, net (includes $1,392 and $4,622 of net security gains reclassified from accumulated other comprehensive income for the three months ended June 30, 2017 and 2016, respectively, $3,874 and $8,378 of net security gains reclassified from accumulated other comprehensive income for the six months ended June 30, 2017 and 2016, respectively)	1,392			4,622			3,874			8,148
Securities gains, net (includes $1,679 and $1,586 of net security gains reclassified from accumulated other comprehensive income for the three months ended September 30, 2017 and 2016, respectively, $5,553 and $9,964 of net security gains reclassified from accumulated other comprehensive income for the nine months ended September 30, 2017 and 2016, respectively)													1,679			1,584			5,553			9,732
Net gains on sale of loans held for sale	6,817			11,270			12,964			22,335			4,997			11,459			17,961			33,794
Valuation allowance on commercial servicing rights	19			(46		)	24			(46		)	5			5			29			(41		)
Income on bank owned life insurance	656			591			1,273			1,113			766			620			2,039			1,733
Other noninterest income	738			764			1,532			1,964			1,409			1,028			2,941			2,992
TOTAL NONINTEREST INCOME	25,624			31,026			51,517			60,604			24,977			28,542			76,494			89,146
NONINTEREST EXPENSES:
Salaries and employee benefits	41,126			41,985			82,893			83,699			45,225			40,733			128,118			124,432
Occupancy	5,056			5,220			10,129			10,223			6,223			5,099			16,352			15,322
Furniture and equipment	2,586			2,442			5,087			4,555			2,826			2,746			7,913			7,301
Professional fees	7,583			7,486			15,892			14,496			8,450			5,985			24,342			20,481
FDIC insurance assessments	909			1,120			1,716			2,288			894			1,180			2,610			3,468
Advertising	1,359			1,551			3,783			2,835			1,358			1,339			5,141			4,174
Core deposit intangibles and customer relationship intangibles amortization	1,218			1,297			2,389			3,192			1,863			1,291			4,252			4,483
Other real estate and loan collection expenses	365			659			1,193			1,231			581			640			1,774			1,871
(Gain)/loss on sales/valuations of assets, net	(112		)	(43		)	300			270
Loss on sales/valuations of assets, net													1,342			794			1,642			1,064
Other noninterest expenses	9,208			9,303			17,656			18,540			9,997			8,620			27,653			27,160
TOTAL NONINTEREST EXPENSES	69,298			71,020			141,038			141,329			78,759			68,427			219,797			209,756
INCOME BEFORE INCOME TAXES	30,017			31,006			53,557			60,915			30,357			28,468			83,914			89,383
Income taxes (includes $407 and $1,551 of income tax expense reclassified from accumulated other comprehensive income for the three months ended June 30, 2017 and 2016, respectively, $1,185 and $2,763 of income tax expense reclassified from accumulated other comprehensive income for the six months ended June 30, 2017 and 2016, respectively)	8,059			10,036			13,589			19,936
Income taxes (includes $511 and $408 of income tax expense reclassified from accumulated other comprehensive income for the three months ended September 30, 2017 and 2016, respectively, $1,696 and $3,171 of income tax expense reclassified from accumulated other comprehensive income for the nine months ended September 30, 2017 and 2016, respectively)													8,725			8,260			22,314			28,196
NET INCOME	21,958			20,970			39,968			40,979			21,632			20,208			61,600			61,187
Preferred dividends	(13		)	(52		)	(32		)	(220		)	(13		)	(53		)	(45		)	(273		)
Interest expense on convertible preferred debt	4			31			9			31			3			17			12			48
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS	$	21,949		$	20,949		$	39,945		$	40,790		$	21,622		$	20,172		$	61,567		$	60,962
EARNINGS PER COMMON SHARE - BASIC	$	0.82		$	0.85		$	1.51		$	1.69		$	0.73		$	0.82		$	2.23		$	2.51
EARNINGS PER COMMON SHARE - DILUTED	$	0.81		$	0.84		$	1.49		$	1.66		$	0.72		$	0.81		$	2.21		$	2.48
CASH DIVIDENDS DECLARED PER COMMON SHARE	$	0.11		$	0.10		$	0.22		$	0.20		$	0.11		$	0.10		$	0.33		$	0.30

See accompanying notes to consolidated financial statements.


HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Dollars in thousands)	HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Dollars in thousands)												HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Dollars in thousands)
	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016			2017			2016			2017			2016
NET INCOME	$	21,958		$	20,970		$	39,968		$	40,979		$	21,632		$	20,208		$	61,600		$	61,187
OTHER COMPREHENSIVE INCOME
Securities:
Net change in unrealized gain on securities	9,683			3,903			15,062			23,970			6,940			(5,696		)	22,002			18,274
Reclassification adjustment for net gains realized in net income	(1,392		)	(4,622		)	(3,874		)	(8,378		)	(1,679		)	(1,586		)	(5,553		)	(9,964		)
Net change in non-credit related other than temporary impairment	—			—			—			7			—			—			—			7
Income taxes	(3,238		)	289			(4,349		)	(6,235		)	(2,084		)	2,871			(6,433		)	(3,364		)
Other comprehensive income (loss) on securities	5,053			(430		)	6,839			9,364			3,177			(4,411		)	10,016			4,953
Derivatives used in cash flow hedging relationships:
Net change in unrealized loss on derivatives	(809		)	(2,044		)	(673		)	(5,467		)	17			844			(656		)	(4,623		)
Reclassification adjustment for net losses on derivatives realized in net income	300			465			697			971			308			492			1,005			1,463
Income taxes	1			598			(214		)	1,672			(123		)	(517		)	(337		)	1,155
Other comprehensive loss on cash flow hedges	(508		)	(981		)	(190		)	(2,824		)
Other comprehensive income (loss) on cash flow hedges													202			819			12			(2,005		)
Other comprehensive income (loss)	4,545			(1,411		)	6,649			6,540			3,379			(3,592		)	10,028			2,948
TOTAL COMPREHENSIVE INCOME	$	26,503		$	19,559		$	46,617		$	47,519		$	25,011		$	16,616		$	71,628		$	64,135

See accompanying notes to consolidated financial statements.


HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands)
	Six Months Ended June 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	39,968		$	40,979		$	61,600		$	61,187
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	14,566			14,841			22,738			22,975
Provision for loan losses	4,530			4,185			10,235			9,513
Net amortization of premium on securities	13,997			16,204			20,186			24,093
Securities gains, net	(3,874		)	(8,148		)	(5,553		)	(9,732		)
Stock based compensation	2,763			2,386			3,588			3,073
Write downs and losses on sales of assets, net	300			270
Loans originated for sale	(369,579		)	(546,050		)	(548,768		)	(863,354		)
Proceeds on sales of loans held for sale	390,683			554,427			586,202			883,758
Net gains on sale of loans held for sale	(8,691		)	(16,132		)	(11,968		)	(23,938		)
Decrease in accrued interest receivable	1,876			1,651			(1,449		)	(1,054		)
Decrease in prepaid expenses	936			683
(Increase) decrease in prepaid expenses							838			(128		)
Increase in accrued interest payable	(130		)	(406		)	1,104			332
Capitalization of servicing rights	(4,406		)	(6,203		)	(5,993		)	(9,856		)
Valuation allowance on commercial servicing rights	(24		)	46			(29		)	41
Write downs and losses on sales of assets, net							1,642			1,064
Net excess tax benefit from stock based compensation	989			1,100			1,121			1,121
Other, net	(11,989		)	(8,316		)	(5,637		)	(2,419		)
NET CASH PROVIDED BY OPERATING ACTIVITIES	71,915			51,517			129,857			96,676
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of securities available for sale	624,008			622,375			1,127,091			768,617
Proceeds from the sale of securities held to maturity	—			4,057			—			4,557
Proceeds from the sale of other investments	—			4,116			—			4,722
Proceeds from the redemption of time deposits in other financial institutions	5,867			—			12,171			—
Proceeds from the maturity of and principal paydowns on securities available for sale	102,506			82,513			161,827			130,549
Proceeds from the maturity of and principal paydowns on securities held to maturity	3,655			3,962			6,645			8,271
Proceeds from the maturity of and principal paydowns on time deposits in other financial institutions	14,483			250			24,931			250
Proceeds from the maturity of and principal paydowns on other investments	2,017			—			2,574			—
Purchase of securities available for sale	(666,588		)	(594,135		)	(1,299,492		)	(888,903		)
Purchase of other investments	(1,001		)	(1,867		)	(1,012		)	(1,875		)
Net decrease in loans	113,369			98,232			45,139			138,725
Purchase of bank owned life insurance policies	(2,000		)	—			(2,000		)	—
Proceeds from bank owned life insurance policies							—			111
Proceeds from sale of mortgage servicing rights							5,137			—
Capital expenditures	(5,683		)	(7,360		)	(6,876		)	(8,318		)
Net cash and cash equivalents received in acquisitions	33,698			8,084			71,089			8,084
Proceeds from the sale of equipment	1,692			485			1,845			686
Proceeds on sale of OREO and other repossessed assets	4,352			3,161			7,578			3,266
NET CASH PROVIDED BY INVESTING ACTIVITIES	$	230,375		$	223,873		$	156,647		$	168,742


HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (Unaudited) (Dollars in thousands)
	Six Months Ended June 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits	58,953			71,488			$	181,206		$	160,313
Net decrease in savings deposits	(146,800		)	(9,979		)
Net increase (decrease) in savings deposits							(179,721		)	51,530
Net decrease in time deposit accounts	(10,891		)	(277,871		)	(8,582		)	(353,084		)
Proceeds on short-term revolving credit line							20,000			—
Repayments on short-term revolving credit line							(15,000		)	—
Net decrease in short-term borrowings	(161,963		)	(63,807		)	(168,667		)	(101,409		)
Proceeds from short term FHLB advances	86,139			210,000			186,039			243,100
Repayments of short term FHLB advances	(91,505		)	(172,150		)	(191,405		)	(257,250		)
Proceeds from other borrowings	—			40,000			—			40,000
Repayments of other borrowings	(7,503		)	(14,495		)	(8,573		)	(15,562		)
Redemption of preferred stock	—			(81,698		)	—			(81,698		)
Purchase of treasury stock	(217		)	(1,698		)	(440		)	(2,293		)
Proceeds from issuance of common stock	398			1,101			804			1,863
Dividends paid	(5,849		)	(5,130		)	(9,153		)	(7,638		)
NET CASH USED BY FINANCING ACTIVITIES	(279,238		)	(304,239		)	(193,492		)	(322,128		)
Net increase (decrease) in cash and cash equivalents	23,052			(28,849		)	93,012			(56,710		)
Cash and cash equivalents at beginning of year	158,724			258,799			158,724			258,799
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	181,776		$	229,950		$	251,736		$	202,089
Supplemental disclosures:
Cash paid for income/franchise taxes	$	5,860		$	12,570		$	10,775		$	16,550
Cash paid for interest	$	15,134		$	16,595		$	23,034		$	23,864
Loans transferred to OREO	$	4,912		$	1,359		$	4,955		$	1,359
Purchases of securities available for sale, accrued, not settled	$	—		$	64		$	2,063		$	—
Sales of securities available for sale, accrued, not settled	$	—		$	2,201		$	125		$	250
Conversion of convertible debt to common stock	$	167		$	—		$	558		$	—
Conversion of Series D preferred stock to common stock	$	419		$	—		$	419		$	—
Stock consideration granted for acquisitions	$	22,589		$	57,433		$	175,196		$	57,433

See accompanying notes to consolidated financial statements.


HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited) (Dollars in thousands, except per share data)	HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited) (Dollars in thousands, except per share data)																			HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited) (Dollars in thousands, except per share data)
	Heartland Financial USA, Inc. Stockholders' Equity																			Heartland Financial USA, Inc. Stockholders' Equity
	Preferred Stock			Common Stock		Capital Surplus		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Equity			Preferred Stock			Common Stock		Capital Surplus		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Equity
Balance at January 1, 2016	$	81,698		$	22,436	$	216,436	$	348,630		$	(6,027	)	$	—		$	663,173		$	81,698		$	22,436	$	216,436	$	348,630		$	(6,027	)	$	—		$	663,173
Comprehensive income								40,979			6,540						47,519										61,187			2,948						64,135
Cash dividends declared:
Series C Preferred, $2.50 per share								(168		)							(168		)								(168		)							(168		)
Series D Preferred, $17.50 per share								(52		)							(52		)
Common, $0.20 per share								(4,910		)							(4,910		)
Series D Preferred, $35.00 per share																											(105		)							(105		)
Common, $0.30 per share																											(7,365		)							(7,365		)
Redemption of Series C Preferred Stock	(81,698		)														(81,698		)	(81,698		)														(81,698		)
Issuance of Series D Preferred Stock	3,777																3,777			3,777																3,777
Purchase of 33,503 shares of common stock														(1,698		)	(1,698		)
Issuance of 2,141,186 shares of common stock				2,108		55,860								1,666			59,634
Redemption of Series D Preferred Stock																				(2,420		)														(2,420		)
Purchase of 49,785 shares of common stock																																	(2,293		)	(2,293		)
Issuance of 2,295,472 shares of common stock																							2,247		59,807								2,225			64,279
Stock based compensation						2,386											2,386								3,073											3,073
Balance at June 30, 2016	$	3,777		$	24,544	$	274,682	$	384,479		$	513		$	(32	)	$	687,963
Balance at September 30, 2016																				$	1,357		$	24,683	$	279,316	$	402,179		$	(3,079	)	$	(68	)	$	704,388
Balance at January 1, 2017	$	1,357		$	26,120	$	328,376	$	416,109		$	(31,046	)	$	—		$	740,916		$	1,357		$	26,120	$	328,376	$	416,109		$	(31,046	)	$	—		$	740,916
Comprehensive income								39,968			6,649						46,617										61,600			10,028						71,628
Cash dividends declared:
Series D Preferred, $35.00 per share								(32		)							(32		)
Common, $0.22 per share								(5,817		)							(5,817		)
Series D Preferred, $52.50 per share																											(45		)							(45		)
Common, $0.33 per share																											(9,108		)							(9,108		)
Conversion of Series D preferred stock	(419		)														(419		)	(419		)														(419		)
Purchase of 4,611 shares of common stock														(217		)	(217		)
Issuance of 585,908 shares of common stock				581		21,361								217			22,159
Purchase of 9,392 shares of common stock																																	(440		)	(440		)
Issuance of 3,835,532 shares of common stock																							3,826		171,298								440			175,564
Stock based compensation						2,763											2,763								3,588											3,588
Balance at June 30, 2017	$	938		$	26,701	$	352,500	$	450,228		$	(24,397	)	$	—		$	805,970
Balance at September 30, 2017																				$	938		$	29,946	$	503,262	$	468,556		$	(21,018	)	$	—		$	981,684

See accompanying notes to consolidated financial statements.	See accompanying notes to consolidated financial statements.																			See accompanying notes to consolidated financial statements.

HEARTLAND FINANCIAL USA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: BASIS OF PRESENTATION

The interim unaudited consolidated financial statements contained herein should be read in conjunction with the audited consolidated financial statements and accompanying notes to the consolidated financial statements for the fiscal year ended December 31, 2016, included in the Form 10-K of Heartland Financial USA, Inc. ("Heartland") filed with the Securities and Exchange Commission ("SEC") on March 1, 2017. Footnote disclosures to the interim unaudited consolidated financial statements which would substantially duplicate the disclosure contained in the footnotes to the audited consolidated financial statements have been omitted.

The financial information of Heartland included herein has been prepared in accordance with U.S. generally accepted accounting principles for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X. Such information reflects all adjustments (consisting of normal recurring adjustments), that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of the interim period ended ~~June~~September 30, 2017, are not necessarily indicative of the results expected for the year ending December 31, 2017.

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 three- and ~~six-month~~nine-month periods ended ~~June~~September 30, 2017 and 2016, are shown in the table below:


	Three Months Ended June 30,						Three Months Ended September 30,
(Dollars and number of shares in thousands, except per share data)	2017			2016			2017			2016
Net income	$	21,958		$	20,970		$	21,632		$	20,208
Preferred dividends and discount	(13		)	(52		)	(13		)	(53		)
Interest expense on convertible preferred debt	4			31			3			17
Net income available to common stockholders	$	21,949		$	20,949		$	21,622		$	20,172
Weighted average common shares outstanding for basic earnings per share	26,687			24,524			29,648			24,601
Assumed incremental common shares issued upon exercise of stock options and non-vested restricted stock units	286			451			262			322
Weighted average common shares for diluted earnings per share	26,973			24,975			29,910			24,923
Earnings per common share — basic	$	0.82		$	0.85		$	0.73		$	0.82
Earnings per common share — diluted	$	0.81		$	0.84		$	0.72		$	0.81
Number of antidilutive common stock equivalents excluded from diluted earnings per share computation	—			—			—			—

	Six Months Ended June 30,						Nine Months Ended September 30,
(Dollars and number of shares in thousands, except per share data)	2017			2016			2017			2016
Net income	$	39,968		$	40,979		$	61,600		$	61,187
Preferred dividends	(32		)	(220		)	(45		)	(273		)
Interest expense on convertible preferred debt	9			31			12			48
Net income available to common stockholders	$	39,945		$	40,790		$	61,567		$	60,962
Weighted average common shares outstanding for basic earnings per share	26,512			24,093			27,569			24,262
Assumed incremental common shares issued upon exercise of stock options and non-vested restricted stock units	286			448			265			319
Weighted average common shares for diluted earnings per share	26,798			24,541			27,834			24,581
Earnings per common share — basic	$	1.51		$	1.69		$	2.23		$	2.51
Earnings per common share — diluted	$	1.49		$	1.66		$	2.21		$	2.48
Number of antidilutive common stock equivalents excluded from diluted earnings per share computation	—			—			—			—

Stock-Based Compensation

Heartland may grant, through its Nominating and Compensation 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 2012 Long-Term Incentive Plan (the "Plan"). The Plan was originally approved by stockholders in May 2012 and was amended effective March 8, 2016, to increase the number of shares of common stock authorized for issuance and make certain other changes to the Plan. As of ~~June~~September 30, 2017, ~~494,046~~499,656 shares of common stock were available for issuance under future awards that may be granted under the Plan to employees and directors of, and service providers to, Heartland or its subsidiaries.

Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("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. The fair value of stock options is estimated on the date of grant using the Black-Scholes model. Forfeitures are accounted for as they occur.

The amount of tax benefit related to the exercise, vesting and forfeiture of equity-based awards reflected as a tax benefit in Heartland's income tax expense was ~~$989,000~~$1.1 million during the ~~six~~nine months ended ~~June~~September 30, 2017. Prior to the adoption of ASU 2016-09 on January 1, 2017, $1.1 million of tax benefit related to the exercise, vesting and forfeiture of equity based awards was reflected in additional paid-in-capital during the ~~six~~nine months ended ~~June~~September 30, 2016.

Restricted Stock Units

The Plan permits the Compensation Committee to grant restricted stock units ("RSUs"). In the first quarter of 2017, the Compensation Committee granted time-based RSUs with respect to 55,665 shares of common stock, and in the first quarter of 2016, the Compensation Committee granted time-based RSUs with respect to 72,644 shares of common stock to selected officers and employees. The time-based RSUs represent the right, without payment, to receive shares of Heartland common stock aton a specified future date in ~~the future. These time-based RSUs vest over~~ three ~~years in~~ equal installments onstarting in the ~~first, second and third anniversaries of~~year following the ~~grant date.~~initial grant. The time-based RSUs will be settled in common stock upon vesting, and will not be entitled to dividends until vested. The time-based RSUs may also vest upon death or disability, upon a change in control or upon a "qualified retirement" (as defined in the RSU agreement). The retiree is required to sign a non-solicitation ~~and non-compete~~ agreement as a condition to vesting.

In addition to the time-based RSUs referenced in the preceding paragraph, the Compensation Committee granted performance-based RSUs with respect to 27,570 shares of common stock in the first quarter of 2017, and 35,516 shares of common stock in the first quarter of 2016. These performance-based RSUs are earned based on satisfaction of performance targets for the fiscal years ended December 31, 2017, and December 31, 2016, respectively, and then fully vest ~~two years after~~on a specified date in the ~~end~~third calendar year following the year of the performance period. For the grants awarded in 2017, the portion of the RSUs earned based on performance vests on December 31, 2019, and for the grants awarded in 2016, the portion of the RSUs earned based on performance vests on December 31, 2018, subject to employment on the respective vesting dates.initial grant. The performance-based RSUs vest to the extent that they are earned upon death or disability, upon a change in control or upon a "qualified retirement."

The Compensation Committee also granted three-year performance-based RSUs with respect to 9,032 shares of common stock in the first quarter of 2017, and 11,408 shares of common stock in the first quarter of 2016. These performance-based RSUs will be earned based on satisfaction of performance targets for the three-year performance period ended December 31, 2019, and December 31, 2018, respectively. These performance-based RSUs or a portion thereof may vest in 2020 and 2019, respectively, after measurement of performance in relation to the performance targets.

Upon death, disability, or a "qualified retirement," all performance-based RSUs granted in 2016 remain outstanding and are earned based on actual performance at the end of each performance period. All RSUs granted on or after March 8, 2016, become fully vested upon a change in control if (1) they are not assumed by the successor corporation or (2) upon an involuntary termination of the participant's employment within two years after the change in control.

The Compensation Committee may grant RSUs under the Plan to directors as part of their compensation, to new management level employees at commencement of employment, and to other employees and service providers as incentives. During the ~~six~~nine months ended ~~June~~September 30, 2017, and ~~June~~September 30, 2016, ~~15,978~~16,804 and ~~22,153~~24,153 time-based RSUs, respectively, were granted to directors and new employees.

A summary of the RSUs outstanding as of ~~June~~September 30, 2017 and 2016, and changes during the ~~six~~nine months ended ~~June~~September 30, 2017 and 2016, follows:


	2017				2016				2017				2016
	Shares		Weighted-Average Grant Date Fair Value		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	346,817		$	27.61	353,195		$	25.53	346,817		$	27.61	353,195		$	25.53
Granted	108,245		47.21		141,721		29.79		109,071		47.21		143,721		29.75
Vested	(125,840	)	26.32		(117,898	)	23.40		(136,428	)	26.66		(117,898	)	23.44
Forfeited	(10,563	)	31.78		(10,892	)	27.13		(12,923	)	31.57		(11,547	)	27.12
Outstanding at June 30	318,659		$	34.64	366,126		$	27.60
Outstanding at September 30									306,537		$	34.72	367,471		$	27.60

Total compensation costs recorded for RSUs were ~~$2.7~~$3.6 million and ~~$2.4~~$3.1 million for the ~~six-month~~nine-month periods ended ~~June~~September 30, 2017 and 2016. As of ~~June~~September 30, 2017, there were ~~$5.3~~$4.3 million of total unrecognized compensation costs related to the Plan for RSUs that are expected to be recognized through 2020.

Options

Although the Plan provides authority to the Compensation Committee to grant stock options, no options were granted during the first ~~six~~nine months of 2017 and 2016. Prior to 2009, options were typically granted annually with an expiration date ten years after the date of grant. Vesting was generally over a five-year service period with equal portions of a grant becoming exercisable at three years, four years, and five years after the date of grant. A summary of the stock options outstanding as of ~~June~~September 30, 2017 and 2016, and changes during the ~~six~~nine months ended ~~June~~September 30, 2017 and 2016, follows:


	2017				2016				2017				2016
	Shares		Weighted-Average Exercise Price		Shares		Weighted-Average Exercise Price		Shares		Weighted-Average Exercise Price		Shares		Weighted-Average Exercise Price
Outstanding at January 1	26,400		$	18.60	125,950		$	24.08	26,400		$	18.60	125,950		$	24.08
Granted	—		—		—		—		—		—		—		—
Exercised	(8,250	)	18.60		(35,000	)	23.53		(13,650	)	18.60		(55,250	)	24.82
Forfeited	(500	)	18.60		(1,500	)	21.10		(500	)	18.60		(1,500	)	21.10
Outstanding at June 30	17,650		$	18.60	89,450		$	24.34
Options exercisable at June 30	17,650		$	18.60	89,450		$	24.34
Outstanding at September 30									12,250		$	18.60	69,200		$	23.55
Options exercisable at September 30									12,250		$	18.60	69,200		$	23.55

At ~~June~~September 30, 2017, the vested options totaled ~~17,650~~12,250 shares with a weighted average exercise price of $18.60 per share and a weighted average remaining contractual life of ~~0.57~~0.32 years. The intrinsic value (the difference between the market price and the aggregate exercise price) for the vested options as of ~~June~~September 30, 2017, was ~~$503,000.~~$377,000. The intrinsic value for the total of all options exercised during the ~~six~~nine months ended ~~June~~September 30, 2017, was ~~$237,000.~~$379,000.

The exercise price of stock options granted is established by the Compensation Committee, but the exercise price for the stock options may not be less than the fair market value of the shares on the date that the option is granted or, if greater, the par value of a share of stock. Each option granted is exercisable in full at any time or from time to time, subject to vesting provisions, as determined by the Compensation Committee and as provided in the option agreement, but such time may not exceed ten years from the grant date. Cash received from options exercised was ~~$153,000~~$254,000 for the ~~six~~nine months ended ~~June~~September 30, 2017, and ~~$824,000~~$1.4 million for the ~~six~~nine months ended ~~June~~September 30, 2016.

No compensation costs were recorded for options during ~~both six~~the nine month periods ended ~~June~~September 30, 2017 and 2016. There are no unrecorded compensation costs related to options at ~~June~~September 30, 2017. No stock options vested during the ~~six-month~~nine-month periods ended ~~June~~September 30, 2017 and 2016.

Subsequent Events - Heartland has evaluated subsequent events that may require recognition or disclosure through the filing date of this Quarterly Report on Form 10-Q with the SEC. On July 7, 2017, Heartland completed the acquisition of Citywide Banks of Colorado, Inc., parent company of Citywide Banks, based in Denver, Colorado. See Note 2, "Acquisitions," for further details regarding this transaction.

Effect of New Financial Accounting Standards

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers." The amendment clarifies the principles for recognizing revenue and develops a common revenue standard. The amendment outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” In applying the revenue model to contracts within its scope, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The new guidance does not apply to certain contracts within the scope of other ASC Topics, such as lease contracts, insurance contracts, financing arrangements, financial instruments, guarantees other than product or service warranties and nonmonetary exchanges between entities in the same line of business to facilitate sales to customers. Heartland continues to evaluate noninterest income contracts affected by the new guidance by analyzing contracts and current accounting practices to determine if a change is appropriate. The amendment is largely consistent with existing guidance and current practices. Heartland intends to adopt the accounting standard in 2018, as required, which may require a change in the recognition of certain recurring revenue streams within trust and investment management fees; however, Heartland's preliminary analysis suggests the adoption of these amendments are not expected to have a significant effect on Heartland's results of operations, financial position and ~~liquidity.~~liquidity other than expanded disclosure requirements.

In January 2016, the FASB issued ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities." The amendments in ASU 2016-01 to Subtopic 825-10, Financial Instruments, make the following changes: (1) require equity investments to be measured at fair value with changes in fair value recognized in net income; (2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (3) eliminate the requirement for public entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (4) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (5) require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (6) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or accompanying notes to the financial statements; (7) clarify that the entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity's other deferred tax assets. The amendments are effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. Except for the early application of the amendment noted in item (5) above, early adoption of the amendments in this update is not permitted. Heartland intends to adopt the accounting standard in 2018, as required, and is currently evaluating the potential impact of this guidance on its results of operations, financial position and liquidity.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." Topic 842 requires a lessee to recognize leases on its balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as financing or operating, with such classification affecting the categorization of expense recognition in the income statement. The amendment is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and will be applied on a modified retrospective basis. Heartland leases certain properties and equipment under operating leases that will result in recognition of lease assets and lease liabilities on the consolidated balance sheets under this ASU; however the majority of Heartland's properties and equipment are owned and not leased. Heartland intends to adopt the accounting standard in 2019 as required.

In March 2016, the FASB issued ASU 2016-09, "Compensation-Stock Compensation (Topic 718)." The amendments in this ASU simplify several aspects of the accounting for share-based payments, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The amendments in this ASU are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption was permitted for any interim or annual period prior to the effective date. Heartland adopted this ASU on January 1, 2017, as required, using a prospective transition method. The requirement to report the excess tax benefit or shortfall related to settlements of share-based payment awards in earnings as an increase or decrease to tax expense has been applied to settlements occurring on or after January 1, 2017, and the impact of applying the guidance reduced reported income tax expense by ~~$989,000.~~$1.1 million.

ASU 2016-09 also requires that all income tax related cash flows resulting from share-based payments be reported as an operating activity in the consolidated statements of cash ~~flow.~~flows. Previously income tax benefits resulting from the settlement of a share-based award were reported as a reduction of operating cash flows and an increase to financing cash flows to the extent that those benefits exceeded the income tax benefits reported in earnings during the period in which the share-based awards vested. Heartland elected to adopt the change in cash flow classification on a retrospective basis, which resulted in a $1.1 million increase to net cash from operating activities and a corresponding decrease to net cash from financing activities in the accompanying consolidated statement of cash flows for the ~~six~~nine months ended ~~June~~September 30, 2016. Heartland has elected to account for forfeitures as they occur.

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)." The amendments in this ASU require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The amendments in this ASU indicate that an entity should not use the length of time a security has been in an unrealized loss position to avoid recording a credit loss. In addition, in determining whether a credit loss exists, the amendments in this ASU also remove the requirements to consider the historical and implied volatility of the fair value of a security and recoveries or declines in fair value after the balance sheet date. The amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Heartland intends to adopt the accounting standard in 2020, as required. Heartland has formed a committee to review the standard, understand the potential impact of this guidance on its results of operations, financial position and liquidity, and oversee the implementation of the standard.

In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments." The amendments in this update address eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity adopts the amendments early in an interim period, any adjustments must be reflected as of the beginning of the fiscal year that includes the interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this update must be applied using a retrospective transition method to each period presented. Heartland intends to adopt this ASU in 2018, as required, and is currently evaluating the potential impact on its results of operations, financial position, and liquidity.

In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740) - Intra-Entity Transfer of Assets Other Than Inventory." The amendment requires an entity to recognize income tax consequences on an intra-entity transfer of an asset other than inventory at the time the transaction occurs. The amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The amendments must be applied using a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Heartland intends to adopt this ASU in 2018, as required, and the adoption of this amendment is not expected to have a significant effect on Heartland's results of operations, financial position and liquidity.

In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350)." This amendment is to simplify the subsequent measurement of goodwill by eliminating step two from the goodwill impairment test. Instead, an entity will perform only step one of its quantitative goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and then recognizing the impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized cannot exceed the total amount of goodwill allocated to that reporting unit. An entity will still have the option to perform a qualitative assessment for a reporting unit to determine if the quantitative step one impairment test is necessary. This amendment is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied prospectively. Early adoption is permitted, including in an interim period for impairment tests performed after January 1, 2017. Heartland intends to adopt this ASU in the third quarter of 2020, consistent with the annual impairment test as of September 30, 2020, and is currently evaluating the potential impact of this guidance on its results of operations, financial position and liquidity.

In March 2017, the FASB issued ASU 2017-08, "Receivables - Nonrefundable Fee and Other Costs (Subtopic 310-20)." These amendments shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount. Discounts continue to be amortized to maturity. These amendments are effective for public business entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If any entity early adopts the amendments in an interim period, any adjustments must be reflected as of the beginning of the fiscal year that includes the interim period. The amendments must be applied on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption.

Heartland intends to adopt this ASU in 2019, as required, and is currently evaluating the potential impact on its results of operations, financial position, and liquidity.

In May 2017, the FASB issued ASU 2017-09, "Compensation - Stock Compensation (Topic 718)." The amendments provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless all the following are met; (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The amendments are effective for annual periods and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim periods for public business entities for reporting periods for which financial statements have not yet been issued. The amendments should be applied prospectively to an award modified on or after the adoption date. Heartland intends to adopt this ASU in 2018, as required, and does not believe there will be a material impact to its results of operations, financial position, and liquidity because Heartland has not typically modified share-based payment awards after the original award has been granted.

In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging:Targeted Improvements to Accounting for Hedging Activities." The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. ASU 2017-12 requires a modified retrospective transition method in which Heartland will recognize the cumulative effect of the change on the opening balance of each affected component of equity in the statement of financial position as of the date of adoption. Heartland currently intends to adopt this ASU in 2019, as required, and does not believe there will be a material impact to its results of operations, financial position, and liquidity.

NOTE 2: ACQUISITIONS

Citywide Banks of Colorado, Inc.

On July 7, 2017, Heartland acquired Citywide Banks of Colorado, Inc., parent company of Citywide Banks, headquartered in Aurora, Colorado. The transaction consideration ofwas approximately $211.2 million, of which $58.6 million was cash, and the

remainder was settled by delivery of 3,216,161 shares of Heartland common stock. Simultaneous with the close, Citywide Banks merged into Heartland's Centennial Bank and Trust subsidiary, and the combined entity operates as Citywide Banks. ~~Prior to the acquisition, Citywide Banks had~~The transaction included, at fair value, total assets of ~~$1.38~~$1.49 billion, including ~~$1.00 billion in~~$985.4 million of net loans outstanding, and ~~$1.20~~$1.21 billion of deposits on the acquisition date. Included in this transaction was one bank building with a fair value of $1.4 million that Heartland intends to sell and is classified as premises, furniture and equipment held for sale on the consolidated balance sheet. The transaction was a tax-free reorganization with respect to the stock consideration received by the stockholders of Citywide Banks of Colorado, Inc.

The assets and liabilities of Citywide Banks of Colorado, Inc. were recorded on the consolidated balance sheet at the estimated fair value on the acquisition date. The following table represents, in thousands, the amounts recorded on the consolidated balance sheet as of ~~June~~July 7, 2017:



	As of July 7, 2017
Fair value of consideration paid:
Common stock (3,216,161 shares)	$	152,607
Cash	58,636
Total consideration paid	211,243
Fair value of assets acquired:
Cash and due from banks	21,341
Interest bearing deposits in other financial institutions	74,686
Time deposits in other financial institutions	6,304
Securities:
Securities available for sale	234,390
Other securities	2,628
Loans held to maturity	985,399
Premises, furniture and equipment, net	17,206
Premises, furniture and equipment held for sale	1,350
Other real estate, net	6,916
Other intangible assets, net	16,041
Other assets	32,278
Total assets	1,398,539
Fair value of liabilities assumed:
Deposits	1,210,074
Short term borrowings	34,445
Other borrowings	21,636
Other liabilities	16,295
Total liabilities assumed	1,282,450
Fair value of net assets acquired	116,089
Goodwill resulting from acquisition	$	95,154

Heartland recognized $95.2 million of goodwill in conjunction with the acquisition of Citywide Banks of Colorado, Inc., 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 6 for further information on goodwill.

Pro Forma Information (unaudited): The following pro forma information represents the results of operations for the nine-month periods ended September 30, ~~2017.~~2017, and 2016, as if the Citywide Banks of Colorado, Inc. acquisition occurred on January 1, 2017, and January 1, 2016, respectively:



(Dollars in thousands, except per share data), unaudited	For the Nine Months Ended
	September 30, 2017		September 30, 2016
Net interest income	$	264,485	$	256,579
Net income available to common stockholders	$	61,940	$	68,857
Basic earnings per share	$	2.08	$	2.51
Diluted earnings per share	$	2.06	$	2.48

The above pro forma results are presented for illustrative purposes and are not intended to represent or be indicative of the actual

results of operations of the merged companies that would have been achieved had the acquisition occurred on January 1, 2016, nor are they intended to represent or be indicative of future results of operations. The pro forma results do not include expected

operating cost savings as a result of the acquisition or adjustments for $10.1 million of transaction costs recorded by Citywide Banks of Colorado Inc. prior to the acquisition. These pro forma results require significant estimates and judgments particularly with respect to valuation and accretion of income associated with the acquired loans.

Heartland incurred $3.8 million of pre-tax merger related expenses in the nine months ended September 30, 2017, associated with the Citywide Banks of Colorado, Inc. acquisition. The merger expenses are reflected on the consolidated statements of income for the applicable period and are reported primarily in the categories of salaries and employee benefits, professional fees, loss on sales/valuations of assets, net and other noninterest expenses.

Acquired loans were preliminarily recorded 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. No allowance for credit losses was carried over

from the acquisition. The balance of nonaccrual loans on the acquisition date was $1.1 million.

Founders Bancorp

On February 28, 2017, Heartland acquired Founders Bancorp, parent company of Founders Community Bank, based in San Luis Obispo, California. The purchase price was approximately $31.0 million, which was paid by delivery of 455,877 shares of Heartland common stock and cash of $8.4 million. The transaction included, at fair value, total assets of $213.9 million, loans of $96.4 million, and deposits of $181.5 million on the acquisition date. The transaction also included one bank building with a fair value of $576,000 that Heartland sold during the second quarter of 2017. Simultaneous with the closing of the transaction, Founders Community Bank merged into Heartland's Premier Valley Bank subsidiary. The transaction was a tax-free reorganization with respect to the stock consideration received by the stockholders of Founders Bancorp.

CIC Bancshares, Inc.

On February 5, 2016, Heartland completed the acquisition of CIC Bancshares, Inc., parent company of Centennial Bank, headquartered in Denver, Colorado. The purchase price was approximately $76.9 million, which was paid by delivery of 2,003,235 shares of Heartland common stock and cash of $15.7 million. In addition, Heartland issued a new series of convertible preferred stock with a fair value of $3.8 million and assumed convertible notes and subordinated debt totaling approximately $7.9 million. Simultaneous with the closing of the transaction, Centennial Bank merged into Heartland's Summit Bank & Trust, with the resulting institution operating under the name, Centennial Bank and Trust. As of the close date, the transaction included, at fair value, total assets of $772.6 million, total loans of $581.5 million, and total deposits of $648.1 million. The transaction was a tax-free reorganization with respect to the stock consideration received by the stockholders of CIC Bancshares, Inc.

NOTE 3: SECURITIES

The amortized cost, gross unrealized gains and losses, and estimated fair values of securities available for sale as of ~~June~~September 30, 2017, and December 31, 2016, are summarized in the table below, in thousands:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
June 30, 2017
September 30, 2017
U.S. government corporations and agencies	$	5,474	$	15	$	(18	)	$	5,471	$	7,435	$	14	$	(34	)	$	7,415
Mortgage-backed securities	1,293,984		4,451		(35,907		)	1,262,528		1,593,677		4,656		(32,933		)	1,565,400
Obligations of states and political subdivisions	503,998		3,942		(9,198		)	498,742		506,867		4,307		(7,200		)	503,974
Corporate debt securities	7,164		22		—			7,186
Total debt securities	1,810,620		8,430		(45,123		)	1,773,927		2,107,979		8,977		(40,167		)	2,076,789
Equity securities	15,217		297		—			15,514		16,253		343		—			16,596
Total	$	1,825,837	$	8,727	$	(45,123	)	$	1,789,441	$	2,124,232	$	9,320	$	(40,167	)	$	2,093,385
December 31, 2016
U.S. government corporations and agencies	$	4,716	$	16	$	(32	)	$	4,700	$	4,716	$	16	$	(32	)	$	4,700
Mortgage-backed securities	1,321,760		7,026		(38,286		)	1,290,500		1,321,760		7,026		(38,286		)	1,290,500
Obligations of states and political subdivisions	553,020		2,436		(19,312		)	536,144		553,020		2,436		(19,312		)	536,144
Corporate debt securities	—		—		—			—
Total debt securities	1,879,496		9,478		(57,630		)	1,831,344		1,879,496		9,478		(57,630		)	1,831,344
Equity securities	14,451		69		—			14,520		14,451		69		—			14,520
Total	$	1,893,947	$	9,547	$	(57,630	)	$	1,845,864	$	1,893,947	$	9,547	$	(57,630	)	$	1,845,864

The amortized cost, gross unrealized gains and losses and estimated fair values of held to maturity securities as of ~~June~~September 30, 2017, and December 31, 2016, are summarized in the table below, in thousands:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
June 30, 2017
September 30, 2017
Obligations of states and political subdivisions	$	259,586	$	14,541	$	(733	)	$	273,394	$	256,355	$	14,722	$	(691	)	$	270,386
Total	$	259,586	$	14,541	$	(733	)	$	273,394	$	256,355	$	14,722	$	(691	)	$	270,386
December 31, 2016
Obligations of states and political subdivisions	$	263,662	$	12,282	$	(1,145	)	$	274,799	$	263,662	$	12,282	$	(1,145	)	$	274,799
Total	$	263,662	$	12,282	$	(1,145	)	$	274,799	$	263,662	$	12,282	$	(1,145	)	$	274,799

At ~~June~~September 30, 2017, approximately ~~80%~~74% of Heartland's mortgage-backed securities were issued by government-sponsored enterprises.

The amortized cost and estimated fair value of debt securities available for sale at ~~June~~September 30, 2017, 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.


	June 30, 2017				September 30, 2017
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in 1 year or less	$	—	$	—	$	185	$	186
Due in 1 to 5 years	31,665		31,842		40,716		41,077
Due in 5 to 10 years	109,520		107,787		93,240		91,514
Due after 10 years	375,451		371,770		380,161		378,612
Total debt securities	516,636		511,399		514,302		511,389
Mortgage-backed securities	1,293,984		1,262,528		1,593,677		1,565,400
Equity securities	15,217		15,514		16,253		16,596
Total investment securities	$	1,825,837	$	1,789,441	$	2,124,232	$	2,093,385

The amortized cost and estimated fair value of debt securities held to maturity at ~~June~~September 30, 2017, 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.


	June 30, 2017				September 30, 2017
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in 1 year or less	$	2,540	$	2,571	$	1,510	$	1,533
Due in 1 to 5 years	19,096		20,031		21,157		22,090
Due in 5 to 10 years	91,643		95,611		105,030		109,119
Due after 10 years	146,307		155,181		128,658		137,644
Total investment securities	$	259,586	$	273,394	$	256,355	$	270,386

As of ~~June~~September 30, 2017, and December 31, 2016, securities with a fair value of ~~$688.2~~$758.1 million and $810.6 million, respectively, were pledged to secure public and trust deposits, short-term borrowings and for other purposes as required or permitted by law.

Gross gains and losses realized related to the sales of securities available for sale for the three- and ~~six-month~~nine-month periods ended ~~June~~September 30, 2017 and 2016, are summarized as follows, in thousands:


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016		2017		2016		2017		2016
Proceeds from sales	$	402,371	$	318,927	$	624,008	$	622,375	$	503,083	$	146,242	$	1,127,091	$	768,617
Gross security gains	2,667		5,095		6,497		9,653		2,088		1,763		8,585		11,416
Gross security losses	1,275		473		2,614		1,155		409		177		3,023		1,332

The following tables summarize, in thousands, the amount of unrealized losses, defined as the amount by which cost or amortized cost exceeds fair value, and the related fair value of investments with unrealized losses in Heartland's securities portfolio as of ~~June~~September 30, 2017, and December 31, 2016. 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 months or more. The reference point for determining how long an investment was in an unrealized loss position was ~~June~~September 30, 2016, and December 31, 2015, respectively. Securities for which Heartland has taken credit-related other-than-temporary impairment ("OTTI") write-downs are categorized as being "less than 12 months" or "12 months or longer" in a continuous loss position based on the point in time that the fair value declined to below the cost basis and not the period of time since the credit-related OTTI write-down.


Securities available for sale	Less than 12 months					12 months or longer					Total					Less than 12 months					12 months or longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
June 30, 2017
September 30, 2017
U.S. government corporations and agencies	$	4,956	$	(18	)	$	—	$	—		$	4,956	$	(18	)	$	6,901	$	(34	)	$	—	$	—		$	6,901	$	(34	)
Mortgage-backed securities	572,527		(16,692		)	337,238		(19,215		)	909,765		(35,907		)	761,235		(11,558		)	431,669		(21,375		)	1,192,904		(32,933		)
Obligations of states and political subdivisions	301,940		(8,120		)	16,226		(1,078		)	318,166		(9,198		)	149,931		(1,820		)	153,068		(5,380		)	302,999		(7,200		)
Total debt securities	879,423		(24,830		)	353,464		(20,293		)	1,232,887		(45,123		)	918,067		(13,412		)	584,737		(26,755		)	1,502,804		(40,167		)
Equity securities	—		—			—		—			—		—			—		—			—		—			—		—
Total temporarily impaired securities	$	879,423	$	(24,830	)	$	353,464	$	(20,293	)	$	1,232,887	$	(45,123	)	$	918,067	$	(13,412	)	$	584,737	$	(26,755	)	$	1,502,804	$	(40,167	)
December 31, 2016
U.S. government corporations and agencies	$	4,185	$	(32	)	$	—	$	—		$	4,185	$	(32	)	$	4,185	$	(32	)	$	—	$	—		$	4,185	$	(32	)
Mortgage-backed securities	744,202		(23,527		)	272,449		(14,759		)	1,016,651		(38,286		)	744,202		(23,527		)	272,449		(14,759		)	1,016,651		(38,286		)
Obligations of states and political subdivisions	414,151		(19,309		)	251		(3		)	414,402		(19,312		)	414,151		(19,309		)	251		(3		)	414,402		(19,312		)
Total debt securities	1,162,538		(42,868		)	272,700		(14,762		)	1,435,238		(57,630		)	1,162,538		(42,868		)	272,700		(14,762		)	1,435,238		(57,630		)
Equity securities	—		—			—		—			—		—			—		—			—		—			—		—
Total temporarily impaired securities	$	1,162,538	$	(42,868	)	$	272,700	$	(14,762	)	$	1,435,238	$	(57,630	)	$	1,162,538	$	(42,868	)	$	272,700	$	(14,762	)	$	1,435,238	$	(57,630	)


Securities held to maturity	Less than 12 months					12 months or longer					Total					Less than 12 months					12 months or longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
June 30, 2017
September 30, 2017
Obligations of states and political subdivisions	$	18,925	$	(144	)	$	3,032	$	(589	)	$	21,957	$	(733	)	$	6,278	$	(43	)	$	8,894	$	(648	)	$	15,172	$	(691	)
Total temporarily impaired securities	$	18,925	$	(144	)	$	3,032	$	(589	)	$	21,957	$	(733	)	$	6,278	$	(43	)	$	8,894	$	(648	)	$	15,172	$	(691	)
December 31, 2016
Obligations of states and political subdivisions	$	31,479	$	(884	)	$	2,017	$	(261	)	$	33,496	$	(1,145	)	$	31,479	$	(884	)	$	2,017	$	(261	)	$	33,496	$	(1,145	)
Total temporarily impaired securities	$	31,479	$	(884	)	$	2,017	$	(261	)	$	33,496	$	(1,145	)	$	31,479	$	(884	)	$	2,017	$	(261	)	$	33,496	$	(1,145	)

Heartland reviews the investment securities portfolio on a quarterly basis to monitor its exposure to OTTI. A determination as to whether a security's decline in fair value is other-than-temporary takes into consideration numerous factors and the relative significance of any single factor can vary by security. Some factors Heartland may consider in the OTTI analysis include the length of time the security has been in an unrealized loss position, changes in security ratings, financial condition of the issuer, as well as security and industry specific economic conditions. In addition, with regard to debt securities, Heartland may also evaluate payment structure, whether there are defaulted payments or expected defaults, prepayment speeds and the value of any underlying collateral. For certain debt securities in unrealized loss positions, Heartland prepares cash flow analyses to compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security.

The remaining unrealized losses on Heartland's mortgage-backed securities are the result of changes in market interest rates or widening of market spreads subsequent to the initial purchase of the securities. The losses are not related to concerns regarding the underlying credit of the issuers or the underlying collateral. It is expected that the securities will not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates or widening market spreads and not credit quality, and because Heartland has the intent and ability to hold these investments until a market price recovery or to maturity and does not believe it will be required to sell the securities before maturity, these investments are not considered other-than-temporarily impaired.

The remaining unrealized losses on Heartland's obligations of states and political subdivisions are the result of changes in market interest rates or widening of market spreads subsequent to the initial purchase of the securities. Management monitors the published credit ratings of these securities and the stability of the underlying municipalities. Because the decline in fair value is attributable to changes in interest rates or widening market spreads due to insurance company downgrades and not underlying credit quality, and because Heartland has the intent and ability to hold these investments until a market price recovery or to maturity and does not believe it will be required to sell the securities before maturity, these investments are not considered other-than-temporarily impaired.

There were no available for sale or held to maturity securities with OTTI write-downs held as of or for the ~~six-month~~nine-month period ended ~~June~~September 30, 2017. There were no gross realized gains and $85,000 of gross realized losses on the sale of available for sale securities with OTTI writedowns for the ~~six-month~~nine-month period ended ~~June~~September 30, 2016. Additionally, there were no gross realized gains and $439,000 of gross realized losses on the sale of held to maturity securities with OTTI write-downs for the ~~six-month~~nine-month period ended ~~June~~September 30, 2016.

The following table shows the detail of OTTI write-downs on debt securities included in earnings and the related changes in other accumulated comprehensive income ("AOCI") for the same securities, in thousands:


	Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016			2017		2016		2017		2016
Recorded as part of gross realized losses:
Credit related OTTI	$	—	$	—	$	—	$	—		$	—	$	—	$	—	$	—
Intent to sell OTTI	—		—		—		—			—		—		—		—
Total recorded as part of gross realized losses	—		—		—		—			—		—		—		—
Recorded directly to AOCI for non-credit related impairment:
Residential mortgage backed securities	—		—		—		—			—		—		—		—
Reduction of non-credit related impairment related to security sales	—		—		—		(120		)	—		—		—		(120		)
Accretion of non-credit related impairment	—		—		—		(7		)	—		—		—		(7		)
Total changes to AOCI for non-credit related impairment	—		—		—		(127		)	—		—		—		(127		)
Total OTTI losses (accretion) recorded on debt securities, net	$	—	$	—	$	—	$	(127	)	$	—	$	—	$	—	$	(127	)

Included in other securities at ~~June~~September 30, 2017, and December 31, 2016, were shares of stock in the Federal Home Loan Banks (the "FHLBs") of Des Moines, Chicago, Dallas, San Francisco and Topeka at an amortized cost of $14.0 million and $14.4 million, respectively.

The Heartland banks are required by federal law to maintain FHLB stock as members of the various FHLBs. These equity securities are "restricted" in that they can only be sold back to the respective institutions from which they were acquired or another member institution at par. Therefore, the FHLB stock is less liquid than other marketable equity securities, and the fair value approximates

amortized cost. Heartland considers its FHLB stock as a long-term investment that provides access to competitive products and liquidity. Heartland evaluates impairment in these investments based on the ultimate recoverability of the par value and, at ~~June~~September 30, 2017, did not consider the investments to be other than temporarily impaired.

NOTE 4: LOANS

Loans as of ~~June~~September 30, 2017, and December 31, 2016, were as follows, in thousands:


	June 30, 2017			December 31, 2016			September 30, 2017			December 31, 2016
Loans receivable held to maturity:
Commercial	$	1,344,323		$	1,287,265		$	1,613,903		$	1,287,265
Commercial real estate	2,458,688			2,538,582			3,163,953			2,538,582
Agricultural and agricultural real estate	495,243			489,318			511,764			489,318
Residential real estate	596,385			617,924			635,611			617,924
Consumer	431,052			420,613			450,088			420,613
Gross loans receivable held to maturity	5,325,691			5,353,702			6,375,319			5,353,702
Unearned discount	(639		)	(699		)	(605		)	(699		)
Deferred loan fees	30			(1,284		)	(1,299		)	(1,284		)
Total net loans receivable held to maturity	5,325,082			5,351,719			6,373,415			5,351,719
Allowance for loan losses	(54,051		)	(54,324		)	(54,885		)	(54,324		)
Loans receivable, net	$	5,271,031		$	5,297,395		$	6,318,530		$	5,297,395

Heartland has certain lending policies and procedures in place that are designed to provide for an acceptable level of credit risk. The board of directors reviews and approves these policies and procedures 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, nonperforming loans and potential problem loans. Diversification in the loan portfolio is also a means of managing risk associated with fluctuations in economic conditions.

The commercial and commercial real estate loan portfolio includes a wide range of business loans, 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 collateral that Heartland requires for most of these loans is based upon the discounted market value of the collateral. The primary repayment risks of commercial loans are that the cash flow of the borrowers may be unpredictable, and the collateral securing these loans may fluctuate in value. Heartland seeks to minimize these risks in a variety of ways. The underwriting analysis includes credit verification, analysis of global cash flows, appraisals and a review of the financial condition of the borrower. 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. Heartland also utilizes government guaranteed lending through the U.S. Small Business Administration and the U.S. Department of Agriculture's Rural Development Business and Industry Program to assist customers with longer-term funding and to reduce risk.

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 reasons, 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, 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 also work closely with governmental agencies, including the Farm Service Agency, to help agricultural customers obtain credit enhancement products such as loan guarantees or interest assistance.

Heartland originates first-lien, adjustable-rate and fixed-rate, one-to-four-family residential real estate loans for the construction, purchase or refinancing of a single family residential property. These loans are principally collateralized by owner-occupied properties and are amortized over 10 to 30 years. Heartland typically sells longer-term, low-rate, residential mortgage loans in the

secondary market with servicing rights retained. This practice allows Heartland to better manage interest rate risk and liquidity risk. The Heartland bank subsidiaries participate in lending programs sponsored by U.S. government agencies such as Veterans Administration and Federal Home Administration when justified by market conditions. As of ~~June~~September 30, 2017, Heartland had ~~$5.1~~$4.8 million of loans secured by residential real estate property that were in the process of foreclosure.

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. Heartland's consumer finance subsidiaries, Citizens Finance Co. and Citizens Finance of Illinois Co., typically lend to borrowers with past credit problems or limited credit histories, and these loans comprise approximately ~~18%~~17% of Heartland's total consumer loan portfolio.

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Heartland’s policy is to discontinue the accrual of interest income on any loan when, in the opinion of management, there is a reasonable doubt as to the timely collection of the interest and principal, normally when a loan is 90 days past due. When interest accruals are deemed uncollectible, interest credited to income in the current year is reversed and interest accrued in prior years is charged to the allowance for loan losses. Nonaccrual loans are returned to an accrual status when, in the opinion of management, the financial position of the borrower indicates that there is no longer any reasonable doubt as to the timely payment of interest and principal.

Under Heartland’s credit practices, a loan is impaired when, based on current information and events, it is probable that Heartland will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loan impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except where more practical, impairment is measured at the observable market price of the loan or the fair value of the collateral if the loan is collateral dependent.

The following table shows the balance in the allowance for loan losses at ~~June~~September 30, 2017, and December 31, 2016, and the related loan balances, disaggregated on the basis of impairment methodology, in thousands. Loans evaluated under ASC 310-10-35 include loans on nonaccrual status and troubled debt restructurings, which are individually evaluated for impairment, and other impaired loans deemed to have similar risk characteristics. All other loans are collectively evaluated for impairment under ASC 450-20. Heartland has made no significant changes to the accounting for the allowance for loan losses during 2017.


	Allowance For Loan Losses						Gross Loans Receivable Held to Maturity						Allowance For Loan Losses						Gross Loans Receivable Held to Maturity
	Ending Balance Under ASC 310-10-35		Ending Balance Under ASC 450-20		Total		Ending Balance Evaluated for Impairment Under ASC 310-10-35		Ending Balance Evaluated for Impairment Under ASC 450-20		Total		Ending Balance Under ASC 310-10-35		Ending Balance Under ASC 450-20		Total		Ending Balance Evaluated for Impairment Under ASC 310-10-35		Ending Balance Evaluated for Impairment Under ASC 450-20		Total
June 30, 2017
September 30, 2017
Commercial	$	2,164	$	15,004	$	17,168	$	7,298	$	1,337,025	$	1,344,323	$	2,166	$	14,804	$	16,970	$	6,957	$	1,606,946	$	1,613,903
Commercial real estate	3,018		18,843		21,861		29,639		2,429,049		2,458,688		864		19,676		20,540		27,943		3,136,010		3,163,953
Agricultural and agricultural real estate	143		3,689		3,832		11,781		483,462		495,243		2,353		3,774		6,127		12,792		498,972		511,764
Residential real estate	416		1,847		2,263		28,757		567,628		596,385		393		1,873		2,266		29,833		605,778		635,611
Consumer	1,207		7,720		8,927		5,904		425,148		431,052		1,267		7,715		8,982		6,524		443,564		450,088
Total	$	6,948	$	47,103	$	54,051	$	83,379	$	5,242,312	$	5,325,691	$	7,043	$	47,842	$	54,885	$	84,049	$	6,291,270	$	6,375,319
December 31, 2016
Commercial	$	1,318	$	13,447	$	14,765	$	3,712	$	1,283,553	$	1,287,265	$	1,318	$	13,447	$	14,765	$	3,712	$	1,283,553	$	1,287,265
Commercial real estate	2,671		21,648		24,319		45,217		2,493,365		2,538,582		2,671		21,648		24,319		45,217		2,493,365		2,538,582
Agricultural and agricultural real estate	816		3,394		4,210		16,730		472,588		489,318		816		3,394		4,210		16,730		472,588		489,318
Residential real estate	497		1,766		2,263		25,726		592,198		617,924		497		1,766		2,263		25,726		592,198		617,924
Consumer	1,451		7,316		8,767		5,988		414,625		420,613		1,451		7,316		8,767		5,988		414,625		420,613
Total	$	6,753	$	47,571	$	54,324	$	97,373	$	5,256,329	$	5,353,702	$	6,753	$	47,571	$	54,324	$	97,373	$	5,256,329	$	5,353,702

The following table presents nonaccrual loans, accruing loans past due 90 days or more and troubled debt restructured loans at ~~June~~September 30, 2017, and December 31, 2016, in thousands:


	June 30, 2017		December 31, 2016		September 30, 2017		December 31, 2016
Nonaccrual loans	$	63,277	$	62,591	$	59,451	$	62,591
Nonaccrual troubled debt restructured loans	2,116		1,708		4,005		1,708
Total nonaccrual loans	$	65,393	$	64,299	$	63,456	$	64,299
Accruing loans past due 90 days or more	$	698	$	86	$	2,348	$	86
Performing troubled debt restructured loans	$	11,157	$	10,380	$	10,040	$	10,380

The following tables provide information on troubled debt restructured loans that were modified during the three- and ~~six-month~~nine-month periods ended ~~June~~September 30, 2017, and ~~June~~September 30, 2016, dollars in thousands:


	Three Months Ended June 30,										Three Months Ended September 30,
	2017					2016					2017					2016
	Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment
Commercial	3	$	131	$	131	1	$	100	$	100	—	$	—	$	—	—	$	—	$	—
Commercial real estate	—	—		—		1	179		179		—	—		—		—	—		—
Total commercial and commercial real estate	3	131		131		2	279		279		—	—		—		—	—		—
Agricultural and agricultural real estate	—	—		—		—	—		—		—	—		—		—	—		—
Residential real estate	11	1,455		1,455		—	—		—		8	1,174		1,174		5	651		651
Consumer	—	—		—		—	—		—		—	—		—		—	—		—
Total	14	$	1,586	$	1,586	2	$	279	$	279	8	$	1,174	$	1,174	5	$	651	$	651


	Six Months Ended June 30,										Nine Months Ended September 30,
	2017					2016					2017					2016
	Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment
Commercial	3	$	131	$	131	1	$	100	$	100	3	$	131	$	131	1	$	100	$	100
Commercial real estate	—	—		—		1	179		179		—	—		—		1	179		179
Total commercial and commercial real estate	3	131		131		2	279		279		3	131		131		2	279		279
Agricultural and agricultural real estate	—	—		—		—	—		—		—	—		—		—	—		—
Residential real estate	14	1,803		1,803		—	—		—		22	2,977		2,977		5	651		651
Consumer	—	—		—		—	—		—		—	—		—		—	—		—
Total	17	$	1,934	$	1,934	2	$	279	$	279	25	$	3,108	$	3,108	7	$	930	$	930

The pre-modification and post-modification recorded investment represents amounts as of the date of loan modification. Since the modifications of these loans have been only interest rate concessions and term extensions, not principal reductions, the pre-modification and post-modification recorded investment amounts are the same. At ~~June~~September 30, 2017, there were no commitments to extend credit to any of the borrowers with an existing troubled debt restructuring.

The following table shows troubled debt restructured loans for which there was a payment default during the three- and ~~six-month~~nine-month periods ended ~~June~~September 30, 2017, and ~~June~~September 30, 2016, that had been modified during the twelve-month period prior to default, in thousands:


	With Payment Defaults During the Following Periods						With Payment Defaults During the Following Periods
	Three Months Ended June 30,						Three Months Ended September 30,
	2017			2016			2017			2016
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment		Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
Commercial	—	$	—	1	$	100	—	$	—	—	$	—
Commercial real estate	—	—		—	—		—	—		—	—
Total commercial and commercial real estate	—	—		1	100		—	—		—	—
Agricultural and agricultural real estate	—	—		—	—		—	—		—	—
Residential real estate	2	150		—	—		5	1,221		—	—
Consumer	—	—		—	—		—	—		—	—
Total	2	$	150	1	$	100	5	$	1,221	—	$	—


	With Payment Defaults During the Following Periods						With Payment Defaults During the Following Periods
	Six Months Ended June 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment		Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
Commercial	—	$	—	1	$	100	—	$	—	1	$	95
Commercial real estate	—	—		—	—		—	—		—	—
Total commercial and commercial real estate	—	—		1	100		—	—		1	95
Agricultural and agricultural real estate	—	—		—	—		—	—		—	—
Residential real estate	2	150		—	—		8	1,480		—	—
Consumer	—	—		—	—		—	—		—	—
Total	2	$	150	1	$	100	8	$	1,480	1	$	95

Heartland's internal rating system is a series of grades reflecting management's risk assessment, based on its analysis of the borrower's financial condition. The "pass" category consists of all loans that are not in the "nonpass" category, 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 special mention, substandard, doubtful and loss loans. The "special mention" 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 paying capacity of the borrower and that may be further at risk due to deterioration in the value of collateral pledged. Well-defined weaknesses jeopardize liquidation of the debt. These loans are still considered collectible; however, a distinct possibility exists that Heartland will sustain some loss if deficiencies are not corrected. Substandard loans may exhibit some or all of the following weaknesses: deteriorating financial trends, lack of earnings, inadequate debt service capacity, excessive debt and/or lack of liquidity. The "doubtful" rating is assigned to loans where identified weaknesses in the borrowers' ability to repay the loan make collection or liquidation in full, on the basis of existing facts, conditions and values, highly questionable and improbable. These borrowers are usually in default, lack liquidity and capital, as well as resources necessary to remain as an operating entity. Specific pending events, such as capital injections, liquidations or perfection of liens on additional collateral, may strengthen the credit, thus deferring the rating of the loan as "loss" until the exact status of the loan can be determined. The loss rating is assigned to loans considered uncollectible. As of ~~June~~September 30, 2017, Heartland had one loan relationship with a gross balance of $9.6 million included in the balance of gross loans receivable held to maturity, of which $2.2 million is classified as a loss. Included in the ASC 310-10-35 portion of the allowance as of September 30, 2017, is a $2.2 million specific reserve associated with this loan relationship. Heartland had no loans classified as doubtful ~~and no loans classified~~ as ~~loss.~~of September 30, 2017. Loans are placed on "nonaccrual" when management does not expect to collect payments of principal and interest in

full or when principal or interest has been in default for a period of 90 days or more, unless the loan is both well secured and in the process of collection.

The following table presents loans by credit quality indicator at ~~June~~September 30, 2017, and December 31, 2016, in thousands:


	Pass		Nonpass		Total		Pass		Nonpass		Total
June 30, 2017
September 30, 2017
Commercial	$	1,253,136	$	91,187	$	1,344,323	$	1,523,080	$	90,823	$	1,613,903
Commercial real estate	2,293,014		165,674		2,458,688		2,992,663		171,290		3,163,953
Total commercial and commercial real estate	3,546,150		256,861		3,803,011		4,515,743		262,113		4,777,856
Agricultural and agricultural real estate	428,619		66,624		495,243		445,554		66,210		511,764
Residential real estate	561,650		34,735		596,385		597,987		37,624		635,611
Consumer	420,560		10,492		431,052		437,831		12,257		450,088
Total gross loans receivable held to maturity	$	4,956,979	$	368,712	$	5,325,691	$	5,997,115	$	378,204	$	6,375,319
December 31, 2016
Commercial	$	1,187,557	$	99,708	$	1,287,265	$	1,187,557	$	99,708	$	1,287,265
Commercial real estate	2,379,632		158,950		2,538,582		2,379,632		158,950		2,538,582
Total commercial and commercial real estate	3,567,189		258,658		3,825,847		3,567,189		258,658		3,825,847
Agricultural and agricultural real estate	424,311		65,007		489,318		424,311		65,007		489,318
Residential real estate	584,626		33,298		617,924		584,626		33,298		617,924
Consumer	409,474		11,139		420,613		409,474		11,139		420,613
Total gross loans receivable held to maturity	$	4,985,600	$	368,102	$	5,353,702	$	4,985,600	$	368,102	$	5,353,702

The nonpass category in the table above is comprised of approximately ~~52%~~48% special mention loans and ~~48%~~52% substandard loans as of ~~June~~September 30, 2017. The percent of nonpass loans on nonaccrual status as of ~~June~~September 30, 2017, was ~~18%~~17%. As of December 31, 2016, the nonpass category in the table above was comprised of approximately 47% special mention loans and 53% substandard loans. The percent of nonpass loans on nonaccrual status as of December 31, 2016, was 17%. Loans delinquent 30 to 89 days as a percent of total loans were ~~0.38%~~0.33% at ~~June~~September 30, 2017, compared to 0.37% at December 31, 2016. Changes in credit risk are monitored on a regular basis and changes in risk ratings are made when identified. All impaired loans are reviewed at least annually.

The following table sets forth information regarding Heartland's accruing and nonaccrual loans at ~~June~~September 30, 2017, and December 31, 2016, in thousands:


	Accruing Loans														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		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Nonaccrual		Total Loans
June 30, 2017
September 30, 2017
Commercial	$	3,891	$	64	$	516	$	4,471	$	1,332,816	$	7,036	$	1,344,323	$	2,591	$	133	$	215	$	2,939	$	1,603,397	$	7,567	$	1,613,903
Commercial real estate	7,483		816		166		8,465		2,430,808		19,415		2,458,688		6,140		465		—		6,605		3,140,672		16,676		3,163,953
Total commercial and commercial real estate	11,374		880		682		12,936		3,763,624		26,451		3,803,011		8,731		598		215		9,544		4,744,069		24,243		4,777,856
Agricultural and agricultural real estate	1,436		610		—		2,046		481,415		11,782		495,243		315		782		1,282		2,379		496,593		12,792		511,764
Residential real estate	2,023		196		—		2,219		570,556		23,610		596,385		5,033		449		—		5,482		607,165		22,964		635,611
Consumer	3,349		616		16		3,981		423,521		3,550		431,052		3,001		1,813		851		5,665		440,966		3,457		450,088
Total gross loans receivable held to maturity	$	18,182	$	2,302	$	698	$	21,182	$	5,239,116	$	65,393	$	5,325,691	$	17,080	$	3,642	$	2,348	$	23,070	$	6,288,793	$	63,456	$	6,375,319
December 31, 2016
Commercial	$	1,127	$	219	$	77	$	1,423	$	1,281,241	$	4,601	$	1,287,265	$	1,127	$	219	$	77	$	1,423	$	1,281,241	$	4,601	$	1,287,265
Commercial real estate	886		3,929		—		4,815		2,513,069		20,698		2,538,582		886		3,929		—		4,815		2,513,069		20,698		2,538,582
Total commercial and commercial real estate	2,013		4,148		77		6,238		3,794,310		25,299		3,825,847		2,013		4,148		77		6,238		3,794,310		25,299		3,825,847
Agricultural and agricultural real estate	199		3,191		—		3,390		472,597		13,331		489,318		199		3,191		—		3,390		472,597		13,331		489,318
Residential real estate	4,986		846		—		5,832		590,626		21,466		617,924		4,986		846		—		5,832		590,626		21,466		617,924
Consumer	3,455		1,021		9		4,485		411,925		4,203		420,613		3,455		1,021		9		4,485		411,925		4,203		420,613
Total gross loans receivable held to maturity	$	10,653	$	9,206	$	86	$	19,945	$	5,269,458	$	64,299	$	5,353,702	$	10,653	$	9,206	$	86	$	19,945	$	5,269,458	$	64,299	$	5,353,702

The majority of Heartland's impaired loans are on nonaccrual or have had their terms restructured in a troubled debt restructuring. The following tables present, by category of loan, impaired loans, the unpaid contractual loan balances at ~~June~~September 30, 2017, and December 31, 2016; the outstanding loan balances recorded on the consolidated balance sheets at ~~June~~September 30, 2017, and December 31, 2016; any related allowance recorded for those loans as of ~~June~~September 30, 2017, and December 31, 2016; the average outstanding loan balances recorded on the consolidated balance sheets during the three- and ~~six-months~~nine-months ended ~~June~~September 30, 2017, and year ended December 31, 2016; and the interest income recognized on the impaired loans during the three- and ~~six-month~~nine-month periods ended ~~June~~September 30, 2017, and year ended December 31, 2016, in thousands:


	Unpaid Contractual Balance		Loan Balance		Related Allowance Recorded		Quarter- to- Date Avg. Loan Balance		Quarter- to- Date Interest Income Recognized		Year- to- Date Avg. Loan Balance		Year- to- Date Interest Income Recognized		Unpaid Contractual Balance		Loan Balance		Related Allowance Recorded		Quarter- to- Date Avg. Loan Balance		Quarter- to- Date Interest Income Recognized		Year- to- Date Avg. Loan Balance		Year- to- Date Interest Income Recognized
June 30, 2017
September 30, 2017
Impaired loans with a related allowance:
Commercial	$	5,773	$	5,773	$	2,164	$	3,889	$	2	$	3,311	$	5	$	3,190	$	3,190	$	2,166	$	4,885	$	—	$	3,829	$	1
Commercial real estate	11,395		11,395		3,018		12,182		3		12,847		7		11,272		9,416		864		10,637		—		12,106		7
Total commercial and commercial real estate	17,168		17,168		5,182		16,071		5		16,158		12		14,462		12,606		3,030		15,522		—		15,935		8
Agricultural and agricultural real estate	1,238		1,238		143		784		—		1,407		—		10,289		10,289		2,353		3,532		—		2,140		—
Residential real estate	1,960		1,960		416		1,883		1		2,479		11		1,640		1,640		393		1,633		—		2,197		10
Consumer	2,377		2,377		1,207		2,421		11		2,437		22		2,179		2,179		1,267		2,155		10		2,343		32
Total impaired loans with a related allowance	$	22,743	$	22,743	$	6,948	$	21,159	$	17	$	22,481	$	45	$	28,570	$	26,714	$	7,043	$	22,842	$	10	$	22,615	$	50
Impaired loans without a related allowance:
Commercial	$	1,605	$	1,525	$	—	$	1,660	$	59	$	1,656	$	118	$	4,887	$	3,767	$	—	$	2,727	$	—	$	2,017	$	112
Commercial real estate	19,046		18,244		—		19,502		140		23,505		336		19,132		18,527		—		18,237		201		21,750		536
Total commercial and commercial real estate	20,651		19,769		—		21,162		199		25,161		454		24,019		22,294		—		20,964		201		23,767		648
Agricultural and agricultural real estate	10,543		10,543		—		10,887		—		12,148		—		2,503		2,503		—		8,343		—		10,858		—
Residential real estate	26,800		26,797		—		26,644		41		25,228		118		28,197		28,193		—		27,556		112		26,006		230
Consumer	3,527		3,527		—		3,606		23		3,663		42		4,345		4,345		—		4,222		19		3,849		61
Total impaired loans without a related allowance	$	61,521	$	60,636	$	—	$	62,299	$	263	$	66,200	$	614	$	59,064	$	57,335	$	—	$	61,085	$	332	$	64,480	$	939
Total impaired loans held to maturity:
Commercial	$	7,378	$	7,298	$	2,164	$	5,549	$	61	$	4,967	$	123	$	8,077	$	6,957	$	2,166	$	7,612	$	—	$	5,846	$	113
Commercial real estate	30,441		29,639		3,018		31,684		143		36,352		343		30,404		27,943		864		28,874		201		33,856		543
Total commercial and commercial real estate	37,819		36,937		5,182		37,233		204		41,319		466		38,481		34,900		3,030		36,486		201		39,702		656
Agricultural and agricultural real estate	11,781		11,781		143		11,671		—		13,555		—		12,792		12,792		2,353		11,875		—		12,998		—
Residential real estate	28,760		28,757		416		28,527		42		27,707		129		29,837		29,833		393		29,189		112		28,203		240
Consumer	5,904		5,904		1,207		6,027		34		6,100		64		6,524		6,524		1,267		6,377		29		6,192		93
Total impaired loans held to maturity	$	84,264	$	83,379	$	6,948	$	83,458	$	280	$	88,681	$	659	$	87,634	$	84,049	$	7,043	$	83,927	$	342	$	87,095	$	989



	Unpaid Contractual Balance		Loan Balance		Related Allowance Recorded			Year-to- Date Avg. Loan Balance		Year-to- Date Interest Income Recognized
December 31, 2016
Impaired loans with a related allowance:
Commercial	$	2,852	$	2,840	$	1,318		$	3,136	$	2
Commercial real estate	14,221		14,221		2,671			10,625		21
Total commercial and commercial real estate	17,073		17,061		3,989			13,761		23
Agricultural and agricultural real estate	2,771		2,771		816			912		21
Residential real estate	3,490		3,490		497			3,371		43
Consumer	2,644		2,644		1,451			3,082		42
Total impaired loans with a related allowance	$	25,978	$	25,966	$	6,753		$	21,126	$	129
Impaired loans without a related allowance:
Commercial	$	925	$	872	$	—		$	5,329	$	251
Commercial real estate	31,875		30,996		—			39,632		1,647
Total commercial and commercial real estate	32,800		31,868		—			44,961		1,898
Agricultural and agricultural real estate	13,959		13,959		—			12,722		157
Residential real estate	22,408		22,236		—			18,446		202
Consumer	3,344		3,344		—			2,659		68
Total impaired loans without a related allowance	$	72,511	$	71,407	$	—		$	78,788	$	2,325
Total impaired loans held to maturity:
Commercial	$	3,777	$	3,712	$	1,318		$	8,465	$	253
Commercial real estate	46,096		45,217		2,671			50,257		1,668
Total commercial and commercial real estate	49,873		48,929		3,989			58,722		1,921
Agricultural and agricultural real estate	16,730		16,730		816			13,634		178
Residential real estate	25,898		25,726		497			21,817		245
Consumer	5,988		5,988		1,451			5,741		110
Total impaired loans held to maturity	$	98,489	$	97,373	$	6,753	��	$	99,914	$	2,454

On July 7, 2017, Heartland acquired Citywide Banks of Colorado, Inc., parent company of Citywide Banks, based in Denver, Colorado. As of July 7, 2017, Citywide Banks had gross loans of $1.00 billion, and the estimated fair value of the loans acquired was $985.4 million.

On February 28, 2017, Heartland acquired Founders Bancorp, parent company of Founders Community Bank, based in San Luis Obispo, California. As of February 28, 2017, Founders Community Bank had gross loans of $98.9 million, and the estimated fair value of the loans acquired was $96.4 million.

On February 5, 2016, Heartland acquired CIC Bancshares, Inc., parent company of Centennial Bank, in Denver, Colorado. As of February 5, 2016, Centennial Bank had gross loans of $594.9 million, and the estimated fair value of the loans acquired was $581.5 million.

Heartland uses the acquisition method of accounting for purchased loans in accordance with ASC 805, "Business Combinations." Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date, but the purchaser cannot carry over the related allowance for loan losses. Purchased loans are accounted for under ASC 310-30, "Loans and Debt Securities with Deteriorated Credit Quality," when the loans have evidence of credit deterioration since origination, and when at the date of the acquisition, it is probable that Heartland will not collect all contractually required principal and interest payments. Evidence of credit quality deterioration at the purchase date includes statistics such as past due and nonaccrual status. Generally, acquired loans that meet Heartland’s definition for nonaccrual status fall within the scope of ASC 310-30. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference, which is included in the carrying value of the loans. Subsequent decreases to the expected cash flows of the loan will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges, or a reclassification of the difference from nonaccretable to accretable with a positive impact on future interest income. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred

to as the accretable yield and is recognized into interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.

At ~~June~~September 30, 2017, and December 31, 2016, the carrying amount of loans acquired since 2015 consist of purchased impaired and nonimpaired loans as summarized in the following table, in thousands:


	June 30, 2017						December 31, 2016						September 30, 2017						December 31, 2016
	Impaired Purchased Loans		Non Impaired Purchased Loans		Total Purchased Loans		Impaired Purchased Loans		Non Impaired Purchased Loans		Total Purchased Loans		Impaired Purchased Loans		Non Impaired Purchased Loans		Total Purchased Loans		Impaired Purchased Loans		Non Impaired Purchased Loans		Total Purchased Loans
Commercial	$	1,505	$	70,535	$	72,040	$	2,198	$	99,082	$	101,280	$	968	$	270,241	$	271,209	$	2,198	$	99,082	$	101,280
Commercial real estate	2,539		570,903		573,442		2,079		622,117		624,196		2,509		1,181,333		1,183,842		2,079		622,117		624,196
Agricultural and agricultural real estate	—		1,265		1,265		—		181		181		—		1,251		1,251		—		181		181
Residential real estate	195		137,862		138,057		186		157,468		157,654		211		184,167		184,378		186		157,468		157,654
Consumer loans	—		45,417		45,417		—		47,368		47,368		—		62,491		62,491		—		47,368		47,368
Total loans	$	4,239	$	825,982	$	830,221	$	4,463	$	926,216	$	930,679	$	3,688	$	1,699,483	$	1,703,171	$	4,463	$	926,216	$	930,679

Changes in accretable yield on acquired loans with evidence of credit deterioration at the date of acquisition for the three- and ~~six-month~~nine-month periods ended ~~June~~September 30, 2017, and ~~June~~September 30, 2016, were as follows, in thousands:


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016			2017			2016			2017			2016
Balance at beginning of period	$	136		$	305		$	182		$	557		$	101		$	168		$	182		$	557
Original yield discount, net, at date of acquisitions	—			—			—			19			—			—			—			19
Accretion	(201		)	(193		)	(374		)	(466		)	(700		)	(379		)	(1,074		)	(845		)
Reclassification from nonaccretable difference⁽¹⁾	166			56			293			58			654			331			947			389
Balance at period end	$	101		$	168		$	101		$	168		$	55		$	120		$	55		$	120

(1) Represents increases in estimated cash flows expected to be received, primarily due to lower estimated credit losses.

For loans acquired since January 2015, on the acquisition dates the preliminary estimate of the contractually required payments receivable for all loans with evidence of credit deterioration since origination was ~~$21.0~~$22.2 million, and the estimated fair value of these loans was $13.1 million. At ~~June~~September 30, 2017, a majority of these loans were valued based upon the liquidation value of the underlying collateral, because the expected cash flows are primarily based on the liquidation of such collateral, and the timing and amount of the cash flows could not be reasonably estimated. At ~~June~~September 30, 2017, and December 31, 2016, there was an allowance for loan losses of ~~$128,000~~$132,000 and $588,000, respectively, related to these ASC 310-30 loans. Provision expense of $0$4,000 and ~~$267,000~~$126,000 was recorded for the ~~three month~~three-month periods ended ~~June~~September 30, 2017, and 2016, respectively. Provision expense of ~~$1,000~~$5,000 and ~~$391,000~~$517,000 was recorded for the ~~six month~~nine-month periods ended ~~June~~September 30, 2017, and 2016, respectively.

For loans acquired since January 2015, the preliminary estimate on the acquisition dates of the contractually required payments receivable for all nonimpaired loans acquired was ~~$1.65~~$2.66 billion, and the estimated fair value of the loans was ~~$1.60~~$2.59 billion.

NOTE 5: ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses for the three- and ~~six-month~~nine-month periods ended ~~June~~September 30, 2017, and ~~June~~September 30, 2016, were as follows, in thousands:


	Commercial			Commercial Real Estate			Agricultural			Residential Real Estate			Consumer			Total			Commercial			Commercial Real Estate			Agricultural			Residential Real Estate			Consumer			Total
Balance at March 31, 2017	$	16,180		$	23,797		$	3,983		$	2,183		$	8,856		$	54,999
Balance at June 30, 2017																			$	17,168		$	21,861		$	3,832		$	2,263		$	8,927		$	54,051
Charge-offs	(1,126		)	(1		)	(17		)	(134		)	(1,488		)	(2,766		)	(1,954		)	(1,913		)	—			(142		)	(1,750		)	(5,759		)
Recoveries	54			602			2			5			266			929			347			46			14			63			418			888
Provision	2,060			(2,537		)	(136		)	209			1,293			889			1,409			546			2,281			82			1,387			5,705
Balance at June 30, 2017	$	17,168		$	21,861		$	3,832		$	2,263		$	8,927		$	54,051
Balance at September 30, 2017																			$	16,970		$	20,540		$	6,127		$	2,266		$	8,982		$	54,885

	Commercial			Commercial Real Estate			Agricultural			Residential Real Estate			Consumer			Total			Commercial			Commercial Real Estate			Agricultural			Residential Real Estate			Consumer			Total
Balance at December 31, 2016	$	14,765		$	24,319		$	4,210		$	2,263		$	8,767		$	54,324		$	14,765		$	24,319		$	4,210		$	2,263		$	8,767		$	54,324
Charge-offs	(1,356		)	(609		)	(888		)	(399		)	(3,232		)	(6,484		)	(3,310		)	(2,522		)	(888		)	(541		)	(4,982		)	(12,243		)
Recoveries	288			814			3			7			569			1,681			635			860			17			70			987			2,569
Provision	3,471			(2,663		)	507			392			2,823			4,530			4,880			(2,117		)	2,788			474			4,210			10,235
Balance at June 30, 2017	$	17,168		$	21,861		$	3,832		$	2,263		$	8,927		$	54,051
Balance at September 30, 2017																			$	16,970		$	20,540		$	6,127		$	2,266		$	8,982		$	54,885


	Commercial			Commercial Real Estate			Agricultural		Residential Real Estate			Consumer			Total			Commercial			Commercial Real Estate			Agricultural		Residential Real Estate			Consumer			Total
Balance at March 31, 2016	$	16,374		$	20,495		$	4,028	$	1,851		$	6,990		$	49,738
Balance at June 30, 2016																		$	15,525		$	22,968		$	4,100	$	2,065		$	7,098		$	51,756
Charge-offs	(249		)	(1,103		)	—		(105		)	(1,494		)	(2,951		)	(240		)	(814		)	—		(106		)	(2,123		)	(3,283		)
Recoveries	143			2,443			4		4			257			2,851			119			467			2		1			263			852
Provision	(743		)	1,133			68		315			1,345			2,118			1,487			1,060			904		22			1,855			5,328
Balance at June 30, 2016	$	15,525		$	22,968		$	4,100	$	2,065		$	7,098		$	51,756
Balance at September 30, 2016																		$	16,891		$	23,681		$	5,006	$	1,982		$	7,093		$	54,653

	Commercial			Commercial Real Estate			Agricultural		Residential Real Estate			Consumer			Total			Commercial			Commercial Real Estate			Agricultural		Residential Real Estate			Consumer			Total
Balance at December 31, 2015	$	16,095		$	19,532		$	3,887	$	1,934		$	7,237		$	48,685		$	16,095		$	19,532		$	3,887	$	1,934		$	7,237		$	48,685
Charge-offs	(347		)	(1,415		)	—		(142		)	(2,652		)	(4,556		)	(587		)	(2,229		)	—		(248		)	(4,775		)	(7,839		)
Recoveries	319			2,589			7		24			503			3,442			438			3,056			9		25			766			4,294
Provision	(542		)	2,262			206		249			2,010			4,185			945			3,322			1,110		271			3,865			9,513
Balance at June 30, 2016	$	15,525		$	22,968		$	4,100	$	2,065		$	7,098		$	51,756
Balance at September 30, 2016																		$	16,891		$	23,681		$	5,006	$	1,982		$	7,093		$	54,653

Management allocates the allowance for loan losses by pools of risk within each loan portfolio. The allocation of the allowance for loan 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 loan losses is available to absorb losses from any segment of the loan portfolio.

NOTE 6: GOODWILL, CORE DEPOSIT PREMIUM AND OTHER INTANGIBLE ASSETS

Heartland had goodwill of ~~$141.5~~$236.6 million at ~~June~~September 30, 2017, and $127.7 million at December 31, 2016. Heartland conducts its annual internal assessment of the goodwill both at the consolidated level and at its subsidiaries as of September 30. There was no goodwill impairment as of the most recent assessment.

Heartland recorded $95.2 million of goodwill and $16.0 million of core deposit intangibles in connection with the acquisition of Citywide Banks of Colorado, Inc., parent company of Citywide Banks, headquartered in Aurora, Colorado on July 7, 2017.

Heartland recorded $13.8 million of goodwill and $2.5 million of core deposit intangibles in connection with the acquisition of Founders Bancorp, parent company of Founders Community Bank, based in San Luis Obispo, California on February 28, 2017.

Heartland recorded $29.8 million of goodwill in connection with the acquisition of CIC Bancshares, Inc., parent company of Centennial Bank, based in Denver, Colorado on February 5, 2016. In addition, Heartland recognized core deposit intangibles of $6.4 million and commercial servicing rights of $190,000 with this acquisition.

The core deposit intangibles recorded with the Citywide Banks of Colorado, Inc., Founders Bancorp, and CIC Bancshares, Inc., acquisitions are not deductible for tax purposes and are expected to be amortized over a period of 10 years on an accelerated basis.

Goodwill related to the Citywide Banks of Colorado, Inc., Founders Bancorp, and CIC Bancshares, Inc. acquisitions resulted from expected operational synergies, increased market presence, cross-selling opportunities, and expanded business lines and is not deductible for tax purposes.

Heartland's intangible assets consist of core deposit intangibles, mortgage servicing rights, customer relationship intangibles, and commercial servicing rights. The gross carrying amount of these intangible assets and the associated accumulated amortization at ~~June~~September 30, 2017, and December 31, 2016, are presented in the table below, in thousands:


	June 30, 2017						December 31, 2016						September 30, 2017						December 31, 2016
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Amortizing intangible assets:
Core deposit intangibles	$	45,968	$	23,418	$	22,550	$	43,504	$	21,049	$	22,455	$	62,008	$	25,271	$	36,737	$	43,504	$	21,049	$	22,455
Customer relationship intangibles	1,177		877		300		1,177		857		320		1,177		886		291		1,177		857		320
Mortgage servicing rights	51,969		20,337		31,632		50,467		18,379		32,088		41,903		18,161		23,742		50,467		18,379		32,088
Commercial servicing rights	6,637		3,533		3,104		6,504		2,814		3,690		6,719		3,862		2,857		6,504		2,814		3,690
Total	$	105,751	$	48,165	$	57,586	$	101,652	$	43,099	$	58,553	$	111,807	$	48,180	$	63,627	$	101,652	$	43,099	$	58,553

The following table shows the estimated future amortization expense for amortizable intangible assets, in thousands:


	Core Deposit Intangibles		Customer Relationship Intangibles		Mortgage Servicing Rights		Commercial Servicing Rights		Total		Core Deposit Intangibles		Customer Relationship Intangibles		Mortgage Servicing Rights		Commercial Servicing Rights		Total
Six months ending December 31, 2017	$	2,369	$	20	$	4,937	$	397	$	7,723
Three months ending December 31, 2017											$	1,815	$	10	$	2,463	$	184	$	4,472
Year ending December 31,
2018	4,261		39		6,674		744		11,718		6,712		39		5,319		701		12,771
2019	3,741		38		5,720		596		10,095		5,915		38		4,560		566		11,079
2020	3,264		36		4,767		443		8,510		5,191		37		3,800		442		9,470
2021	2,716		35		3,814		378		6,943		4,425		35		3,040		380		7,880
2022	1,876		34		2,860		304		5,074		3,391		34		2,280		307		6,012
Thereafter	4,323		98		2,860		242		7,523		9,288		98		2,280		277		11,943
Total	$	22,550	$	300	$	31,632	$	3,104	$	57,586	$	36,737	$	291	$	23,742	$	2,857	$	63,627

Projections of amortization expense for mortgage servicing rights are based on existing asset balances and the existing interest rate environment as of ~~June~~September 30, 2017. Heartland's actual experience may be significantly different depending upon changes in mortgage interest rates and market conditions. Mortgage loans serviced for others were approximately ~~$4.34~~$3.56 billion and $4.31 billion as of ~~June~~September 30, 2017, and December 31, 2016, respectively. Custodial escrow balances maintained in connection with the mortgage loan servicing portfolio were approximately ~~$25.8~~$24.3 million and $21.4 million as of ~~June~~September 30, 2017, and December 31, 2016, respectively. The fair value of Heartland's mortgage servicing rights was estimated at $~~43.6~~35.0 million at ~~June~~September 30, 2017, and $45.2 million at December 31, 2016.

Heartland's mortgage servicing rights portfolio is comprised of loans serviced for the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ~~and~~("FHLMC"). Prior to the third quarter of 2017, Heartland also serviced loans for the Government National Mortgage ~~Association.~~Association ("GNMA"). The servicing rights portfolio is separated into 15- and 30-year tranches, and the servicing rights portfolio is an asset of one of Heartland's subsidiaries.

During the third quarter of 2017, Heartland entered into an agreement to sell substantially all of its GNMA servicing portfolio, which contained loans with an unpaid principal balance of approximately $773.9 million. The transaction qualifies as a sale, and $6.9 million of mortgage servicing rights have been de-recognized on the consolidated balance sheet as of September 30, 2017. Cash of approximately $5.1 million was received during the third quarter, and Heartland recorded an estimated loss on the sale

of this portfolio of approximately $183,000. A receivable of approximately $1.6 million was recorded due to the timing of the servicing transfer per the terms of the sale agreement and to address indemnification claims and mortgage loan documentation deficiencies.

The fair value of mortgage servicing rights is calculated based upon either a discounted cash flow analysis or market indication. Cash flow assumptions, including prepayment speeds, servicing costs and escrow earnings are considered in the calculation. The average constant prepayment rate was ~~10.30%~~10.93% and 9.63% for the ~~June~~September 30, 2017, and December 31, 2016, valuations, respectively. The discount rate was ~~9.25%~~9.06% and 9.26% for the ~~June~~September 30, 2017, and December 31, 2016, valuations, respectively. The average capitalization rate for the first ~~six~~nine months of 2017 ranged from 9491 to 150 basis points compared to the range of 88 to 135 basis points for 2016. Fees collected for the servicing of mortgage loans for others were ~~$3.2~~$2.9 million and ~~$3.0~~$3.1 million for the quarters ended ~~June~~September 30, 2017, and ~~June~~September 30, 2016, respectively and ~~$6.4~~$9.3 million and ~~$5.9~~$9.0 million for the ~~six~~nine months ended ~~June~~September 30, 2017, and ~~June~~September 30, 2016, respectively.

The following table summarizes, in thousands, the changes in capitalized mortgage servicing rights for the ~~six~~nine months ended ~~June~~September 30, 2017, and ~~June~~September 30, 2016:


	2017			2016			2017			2016
Balance at January 1,	$	32,088		$	30,314		$	32,088		$	30,314
Originations	4,273			5,799			5,778			9,323
Amortization	(4,729		)	(4,826		)	(7,184		)	(7,795		)
Sale of mortgage servicing rights							(6,940		)	—
Balance at period end	$	31,632		$	31,287		$	23,742		$	31,842
Fair value of mortgage servicing rights	$	43,597		$	39,881		$	35,002		$	38,127
Mortgage servicing rights, net to servicing portfolio	0.73		%	0.74		%	0.67		%	0.75		%

Heartland's commercial servicing portfolio is comprised of loans guaranteed by the Small Business Administration and United States Department of Agriculture that have been sold with servicing retained by Heartland, which totaled ~~$149.2~~$144.4 million at ~~June~~September 30, 2017 and $164.6 million at December 31, 2016. The commercial servicing rights portfolio is separated into two tranches at the respective Heartland subsidiary, loans with a term of less than 20 years and loans with a term of more than 20 years. Fees collected for the servicing of commercial loans for others were ~~$376,000~~$394,000 and ~~$375,000~~$230,000 for the quarter ended ~~June~~September 30, 2017, and ~~June~~September 30, 2016, respectively, and ~~$791,000~~$1.2 million and ~~$455,000~~$685,000 for the ~~six~~nine months ended ~~June~~September 30, 2017, and ~~June~~September 30, 2016, 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 valuations was ~~6.68%~~6.66% to ~~7.78%~~7.99% as of ~~June~~September 30, 2017, compared to 6.96% to 7.88% as of December 31, 2016. The discount rate range was ~~12.15%~~12.52% to ~~13.72%~~14.65% for the ~~June~~September 30, 2017, valuations compared to 12.44% to 13.88% for the December 31, 2016, valuations. The capitalization rate for 2017 ranged from 310 to 445 basis points compared to 310 to 445 basis points for 2016. The total fair value of Heartland's commercial servicing rights was estimated at ~~$3.7~~$3.5 million as of ~~June~~September 30, 2017, and ~~$4.8~~$4.1 million as of December 31, 2016.

The following table summarizes, in thousands, the changes in capitalized commercial servicing rights for the ~~six~~nine months ended ~~June~~September 30, 2017, and ~~June~~September 30, 2016:


	2017			2016			2017			2016
Balance at January 1,	$	3,690		$	4,611		$	3,690		$	4,611
Purchased commercial servicing rights	—			190			—			190
Originations	133			404			215			533
Amortization	(743		)	(792		)	(1,077		)	(1,229		)
Valuation allowance on commercial servicing rights	24			(46		)	29			(41		)
Balance at period end	$	3,104		$	4,367		$	2,857		$	4,064
Fair value of commercial servicing rights	$	3,678		$	4,791		$	3,458		$	4,397
Commercial servicing rights, net to servicing portfolio	2.08		%	2.44		%	1.98		%	2.38		%

Mortgage and commercial servicing rights are initially recorded at fair value in net gains on sale of loans held for sale when they are acquired through loan sales. Fair value is based on market prices for comparable servicing contracts, when available, or based on a valuation model that calculates the present value of estimated future net servicing income.

Mortgage and commercial servicing rights are subsequently measured using the amortization method, which requires the asset to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Servicing rights are evaluated for impairment at each Heartland subsidiary based upon the fair value of the assets as compared to the carrying amount. Impairment is recognized through a valuation allowance for specific tranches to the extent that fair value is less than carrying amount at each Heartland subsidiary. At ~~June~~September 30, 2017, no valuation allowance was required on commercial servicing rights with a term less than 20 years and a ~~$9,000~~$4,000 valuation allowance was required on commercial servicing rights with a term greater than 20 years. At December 31, 2016, no valuation allowance was required on commercial servicing rights with a term less than 20 years and a $33,000 valuation allowance was required on commercial servicing rights with a term greater than 20 years.

The following table summarizes, in thousands, the book value, the fair value of each tranche of the commercial servicing rights and any recorded valuation allowance at each respective subsidiary at ~~June~~September 30, 2017, and December 31, 2016:


June 30, 2017	Book Value- Less than 20 Years		Fair Value- Less than 20 Years		Impairment- Less than 20 Years		Book Value- More than 20 Years		Fair Value- More than 20 Years		Impairment- More than 20 Years
Centennial Bank and Trust	$	14	$	17	$	—	$	50	$	63	$	—
September 30, 2017													Book Value- Less than 20 Years		Fair Value- Less than 20 Years		Impairment- Less than 20 Years		Book Value- More than 20 Years		Fair Value- More than 20 Years		Impairment- More than 20 Years
Citywide Banks													$	12	$	15	$	—	$	54	$	61	$	—
Premier Valley Bank	117		149		—		331		322		9		95		124		—		317		313		4
Wisconsin Bank & Trust	662		860		—		1,939		2,267		—		515		688		—		1,868		2,257		—
Total	$	793	$	1,026	$	—	$	2,320	$	2,652	$	9	$	622	$	827	$	—	$	2,239	$	2,631	$	4
December 31, 2016
Centennial Bank and Trust	$	19	$	23	$	—	$	107	$	114	$	—
Citywide Banks													$	19	$	23	$	—	$	107	$	114	$	—
Premier Valley Bank	156		180		—		359		326		33		156		180		—		359		326		33
Wisconsin Bank & Trust	833		997		—		2,249		2,487		—		833		997		—		2,249		2,487		—
Total	$	1,008	$	1,200	$	—	$	2,715	$	2,927	$	33	$	1,008	$	1,200	$	—	$	2,715	$	2,927	$	33

NOTE 7: DERIVATIVE FINANCIAL INSTRUMENTS

Heartland uses derivative financial instruments as part of its interest rate risk management strategy. As part of the strategy, Heartland considers the use of interest rate swaps, caps, floors, collars, and certain interest rate lock commitments and forward sales of securities related to mortgage banking activities. Heartland's current strategy includes the use of interest rate swaps, interest rate lock commitments and forward sales of mortgage securities. In addition, Heartland is facilitating back-to-back loan swaps to assist customers in managing interest rate risk. Heartland's objectives are to add stability to its net interest margin and to manage its exposure to movements in interest rates. The contract or notional amount of a derivative is used to determine, along with the other terms of the derivative, the amounts to be exchanged between the counterparties. Heartland is exposed to credit risk in the event of nonperformance by counterparties to financial instruments. Heartland minimizes this risk by entering into derivative contracts with counterparties that meet Heartland’s credit standards, and the contracts contain collateral provisions protecting the at-risk party. Heartland has not experienced any losses from nonperformance by these counterparties. Heartland monitors counterparty risk in accordance with the provisions of ASC 815.

In addition, interest rate-related derivative instruments generally contain language outlining collateral pledging requirements for each counterparty. Collateral must be posted when the market value exceeds certain threshold limits which are determined by credit ratings of each counterparty. Heartland was required to pledge ~~$3.1 million and~~ $2.2 million of cash as collateral at ~~June~~both September 30, 2017, and December 31, ~~2016, respectively.~~2016. No collateral was required to be pledged by Heartland's counterparties at both ~~June~~September 30, 2017, and December 31, 2016.

Heartland's derivative and hedging instruments are recorded at fair value on the consolidated balance sheets. See Note 8, “Fair Value,” for additional fair value information and disclosures.

Cash Flow Hedges

Heartland has variable rate funding which creates exposure to variability in interest payments due to changes in interest rates. To manage the interest rate risk related to the variability of interest payments, Heartland has entered into various interest rate swap agreements. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest

expense as interest payments are received or made on Heartland's variable-rate liabilities. For the ~~six~~nine months ended ~~June~~September 30, 2017, 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 ~~$697,000.~~$1.0 million. For the next twelve months, Heartland estimates that cash payments and reclassification from accumulated other comprehensive income to interest expense will total $1.2 million.

Heartland executed an interest rate swap transaction on April 5, 2011, with an effective date of April 20, 2011, to effectively convert $15.0 million of variable rate amortizing debt to fixed rate debt. For accounting purposes, this swap transaction was designated as a cash flow hedge of the changes in cash flows attributable to changes in one-month LIBOR, the benchmark interest rate being hedged. This interest rate swap transaction expired on April 20, 2016.

Heartland entered into five forward starting interest rate swap transactions to effectively convert Heartland Financial Statutory Trust IV, V, and VII, which total $65.0 million, as well as Morrill Statutory Trust I and II, which total $20.0 million, from variable rate subordinated debentures to fixed rate debt. For accounting purposes, these five swap transactions are designated as cash flow hedges of the changes in LIBOR, the benchmark interest rate being hedged, associated with the interest payments made on $85.0

million of Heartland's subordinated debentures that reset quarterly on a specified reset date. At inception, Heartland asserted that the underlying principal balance would remain outstanding throughout the hedge transaction, making it probable that sufficient LIBOR-based interest payments would exist through the maturity date of the swaps.

During the first quarter of 2015, Heartland entered into two additional forward starting interest rate swaps. The first forward starting interest rate swap transaction relates to Heartland's $20.0 million Statutory Trust VI, which converted from a fixed interest rate subordinated debenture to a variable interest rate subordinated debenture effective on June 15, 2017. The forward starting swap transaction expires on June 15, 2024. The second forward starting interest rate swap was effective on March 1, 2017, and replaced the interest rate swap related to Heartland Statutory Trust VII upon its expiration on March 1, 2017.

Heartland entered into an interest rate swap transaction on May 10, 2016, to effectively convert $40.0 million of amortizing term debt from variable rate debt to fixed rate debt. For accounting purposes, this swap is designated as a cash flow hedge of the changes in LIBOR, the benchmark interest rate being hedged, associated with the interest payments on the amortizing term debt that resets monthly on a specified reset date. The swap expires on May 10, 2021.

The table below identifies the balance sheet category and fair values of Heartland's derivative instruments designated as cash flow hedges at ~~June~~September 30, 2017, and December 31, 2016, in thousands:


	Notional Amount		Fair Value			Balance Sheet Category	Receive Rate		Weighted Average Pay Rate		Maturity	Notional Amount		Fair Value			Balance Sheet Category	Receive Rate		Weighted Average Pay Rate		Maturity
June 30, 2017
September 30, 2017
Interest rate swap	$	25,000	$	(425	)	Other liabilities	1.267	%	2.255	%	03/17/2021	$	25,000	$	(346	)	Other liabilities	1.321	%	2.255	%	03/17/2021
Interest rate swap	—		—			Other liabilities	—	%	3.220	%	03/01/2017	—		—			Other liabilities	—	%	3.220	%	03/01/2017
Interest rate swap	20,000		(955		)	Other liabilities	1.150	%	3.355	%	01/07/2020	20,000		(828		)	Other liabilities	1.303	%	3.355	%	01/07/2020
Interest rate swap	10,000		(22		)	Other liabilities	1.296	%	1.674	%	03/26/2019	10,000		(6		)	Other liabilities	1.329	%	1.674	%	03/26/2019
Interest rate swap	10,000		(21		)	Other liabilities	1.267	%	1.658	%	03/18/2019	10,000		(5		)	Other liabilities	1.321	%	1.658	%	03/18/2019
Interest rate swap	35,667		553			Other assets	3.617	%	3.674	%	05/10/2021	35,667		557			Other assets	3.735	%	3.674	%	05/10/2021
Interest rate swap	20,000		(432		)	Other liabilities	1.246	%	2.390	%	06/15/2024	20,000		(393		)	Other liabilities	1.320	%	2.390	%	06/15/2024
Interest rate swap	20,000		(409		)	Other liabilities	1.202	%	2.352	%	03/01/2024	20,000		(365		)	Other liabilities	1.316	%	2.352	%	03/01/2024
December 31, 2016
Interest rate swap	$	25,000	$	(447	)	Other liabilities	0.993	%	2.255	%	03/17/2021	$	25,000	$	(447	)	Other liabilities	0.993	%	2.255	%	03/17/2021
Interest rate swap	20,000		(114		)	Other liabilities	0.931	%	3.220	%	03/01/2017	20,000		(114		)	Other liabilities	0.931	%	3.220	%	03/01/2017
Interest rate swap	20,000		(1,145		)	Other liabilities	0.868	%	3.355	%	01/07/2020	20,000		(1,145		)	Other liabilities	0.868	%	3.355	%	01/07/2020
Interest rate swap	10,000		(42		)	Other liabilities	0.997	%	1.674	%	03/26/2019	10,000		(42		)	Other liabilities	0.997	%	1.674	%	03/26/2019
Interest rate swap	10,000		(41		)	Other liabilities	0.993	%	1.658	%	03/18/2019	10,000		(41		)	Other liabilities	0.993	%	1.658	%	03/18/2019
Interest rate swap	37,667		530			Other assets	3.164	%	3.674	%	05/10/2021	37,667		530			Other assets	3.164	%	3.674	%	05/10/2021
Interest rate swap⁽¹⁾	20,000		(214		)	Other liabilities	—	%	2.390	%	06/15/2024	20,000		(214		)	Other liabilities	—	%	2.390	%	06/15/2024
Interest rate swap⁽²⁾	20,000		(262		)	Other Liabilities	—	%	2.352	%	03/01/2024	20,000		(262		)	Other Liabilities	—	%	2.352	%	03/01/2024

(1) This swap is a forward starting swap with a weighted average pay rate of 2.390% beginning on June 15, 2017. No interest payments are required on this swap until September 15, 2017.
(1) This swap is a forward starting swap with a weighted average pay rate of 2.390% beginning on June 15, 2017. No interest payments were required on this swap until September 15, 2017.												(1) This swap is a forward starting swap with a weighted average pay rate of 2.390% beginning on June 15, 2017. No interest payments were required on this swap until September 15, 2017.
(2) This swap is a forward starting swap with a weighted average pay rate of 2.352% beginning on March 1, 2017. No interest payments were required on this swap until June 1, 2017.

The table below identifies the gains and losses recognized on Heartland's derivative instruments designated as cash flow hedges for the three- and ~~six-month~~nine-month periods ended ~~June~~September 30, 2017, and ~~June~~September 30, 2016, in thousands:


	Effective Portion							Ineffective Portion			Effective Portion							Ineffective Portion
	Recognized in OCI			Reclassified from AOCI into Income				Recognized in Income on Derivatives			Recognized in OCI			Reclassified from AOCI into Income				Recognized in Income on Derivatives
	Amount of Gain (Loss)			Category	Amount of Gain (Loss)			Category	Amount of Gain (Loss)		Amount of Gain (Loss)			Category	Amount of Gain (Loss)			Category	Amount of Gain (Loss)
Three Months Ended June 30, 2017
Three Months Ended September 30, 2017
Interest rate swaps	$	(509	)	Interest expense	$	(300	)	Other income	$	—	$	325		Interest expense	$	(308	)	Other income	$	—
Six Months Ended June 30, 2017
Nine Months Ended September 30, 2017
Interest rate swaps	$	24		Interest expense	$	(697	)	Other income	$	—	$	349		Interest expense	$	(1,005	)	Other income	$	—
Three Months Ended June 30, 2016
Three Months Ended September 30, 2016
Interest rate swaps	$	(1,579	)	Interest expense	$	(465	)	Other income	$	—	$	1,336		Interest expense	$	(492	)	Other income	$	—
Six Months Ended June 30, 2016
Nine Months Ended September 30, 2016
Interest rate swaps	$	(4,496	)	Interest expense	$	(971	)	Other income	$	—	$	(3,160	)	Interest expense	$	(1,463	)	Other income	$	—

Fair Value Hedges

Heartland uses interest rate swaps to convert certain long term fixed rate loans to floating rates to hedge interest rate risk exposure. Heartland uses hedge accounting in accordance with ASC 815, with the unrealized gains and losses, representing the change in fair value of the derivative and the change in fair value of the risk being hedged on the related loan, being recorded in the consolidated statements of income. The ineffective portions of the unrealized gains or losses, if any, are recorded in interest income and interest expense in the consolidated statements of income. Heartland uses statistical regression to assess hedge effectiveness, both at the inception of the hedge as well as on a continual basis. The regression analysis involves regressing the periodic change in the fair value of the hedging instrument against the periodic changes in the fair value of the asset being hedged due to changes in the hedge risk.

Heartland was required to pledge ~~$4.3~~$4.5 million and $5.0 million of cash as collateral for these fair value hedges at ~~June~~September 30, 2017, and December 31, 2016, respectively.

The table below identifies the notional amount, fair value and balance sheet category of Heartland's fair value hedges at ~~June~~September 30, 2017, and December 31, 2016, in thousands:


	Notional Amount		Fair Value			Balance Sheet Category	Notional Amount		Fair Value			Balance Sheet Category
June 30, 2017
September 30, 2017
Fair value hedges	$	35,973	$	(1,474	)	Other liabilities	$	35,813	$	(1,537	)	Other liabilities
December 31, 2016
Fair value hedges	$	40,807	$	(1,626	)	Other liabilities	$	40,807	$	(1,626	)	Other liabilities

The table below identifies the gains and losses recognized on Heartland's fair value hedges for the three- and ~~six-month~~nine-month periods ended ~~June~~September 30, 2017, and ~~June~~September 30, 2016, in thousands:


	Amount of Gain (Loss)			Income Statement Category	Amount of Gain (Loss)			Income Statement Category
Three Months Ended June 30, 2017
Three Months Ended September 30, 2017
Fair value hedges	$	(42	)	Interest income	$	(63	)	Interest income
Six Months Ended June 30, 2017
Nine Months Ended September 30, 2017
Fair value hedges	$	152		Interest income	$	89		Interest income
Three Months Ended June 30, 2016
Three Months Ended September 30, 2016
Fair value hedges	$	(888	)	Interest income	$	(225	)	Interest income
Six Months Ended June 30, 2016
Nine Months Ended September 30, 2016
Fair value hedges	$	(2,110	)	Interest income	$	(2,335	)	Interest income

Embedded Derivatives

Heartland has fixed rate loans with embedded derivatives. The loans contain terms that affect the cash flows or value of the loan similar to a derivative instrument, and therefore are considered to contain an embedded derivative. The embedded derivatives are bifurcated from the loans because the terms of the derivative instrument are not clearly and closely related to the loans. The embedded derivatives are recorded at fair value on the consolidated balance sheets as a part of other assets, and changes in the fair value are a component of noninterest income. The table below identifies the notional amount, fair value and balance sheet category of Heartland's embedded derivatives at ~~June~~September 30, 2017, and December 31, 2016, in thousands:


	Notional Amount		Fair Value		Balance Sheet Category	Notional Amount		Fair Value		Balance Sheet Category
June 30, 2017
September 30, 2017
Embedded derivatives	$	14,294	$	989	Other assets	$	14,175	$	923	Other assets
December 31, 2016
Embedded derivatives	$	14,549	$	1,104	Other assets	$	14,549	$	1,104	Other assets

The table below identifies the gains and losses recognized on Heartland's embedded derivatives for the three- and ~~six-month~~nine-month periods ended ~~June~~September 30, 2017, and ~~June~~September 30, 2016, in thousands:


	Amount of Gain (Loss)			Income Statement Category	Amount of Gain (Loss)			Income Statement Category
Three Months Ended June 30, 2017
Three Months Ended September 30, 2017
Embedded derivatives	$	(2	)	Other noninterest income	$	(296	)	Other noninterest income
Six Months Ended June 30, 2017
Nine Months Ended September 30, 2017
Embedded derivatives	$	115		Other noninterest income	$	(181	)	Other noninterest income
Three Months Ended June 30, 2016
Three Months Ended September 30, 2016
Embedded derivatives	$	144		Other noninterest income	$	(173	)	Other noninterest income
Six Months Ended June 30, 2016
Nine Months Ended September 30, 2016
Embedded derivatives	$	416		Other noninterest income	$	243		Other noninterest income

In conjunction with the CIC Bancshares, Inc. transaction on February 5, 2016, Heartland assumed convertible subordinated debt. The subordinated debt has a face value of $2.0 million, and the embedded conversion option allows the holder to convert the debt to Heartland common equity in any increment and at the discretion of the holder. The conversion option is bifurcated from the debt because the terms of the conversion option are not clearly and closely related to the terms of the debt. On February 5, 2016, the total number of shares to be issued upon conversion was 73,394.

At ~~June 30, 2017, and~~ December 31, 2016, the remaining shares to be issued upon conversion totaled ~~14,353 and~~20,481. During 2017, all of the remaining convertible subordinated debt was converted to common stock, resulting in the issuance of 20,481 ~~respectively.~~shares of common stock. The embedded conversion option iswas reported at fair value on the consolidated balance sheets using the Black-Scholes model. The following table identifies, in thousands, the notional amount, fair value, balance sheet category and income statement category for the change in fair value of the embedded conversion option as of ~~June~~September 30, 2017, and December 31, 2016:


	Notional Amount		Fair Value			Balance Sheet Category	Notional Amount		Fair Value			Balance Sheet Category
June 30, 2017
September 30, 2017
Embedded conversion option	$	391	$	(285	)	Other liabilities	$	—	$	—		Other liabilities
December 31, 2016
Embedded conversion option	$	558	$	(422	)	Other liabilities	$	558	$	(422	)	Other liabilities

The table below identifies the gains and losses recognized on Heartland's embedded conversion options for the three- and ~~six-month~~nine-month periods ended ~~June~~September 30, 2017, and ~~June~~September 30, 2016, in thousands:


	Amount of Gain (Loss)			Income Statement Category	Amount of Gain (Loss)		Income Statement Category
Three Months Ended June 30, 2017
Three Months Ended September 30, 2017
Embedded conversion option	$	40		Other noninterest income	$	285	Other noninterest income
Six Months Ended June 30, 2017
Nine Months Ended September 30, 2017
Embedded conversion option	$	137		Other noninterest income	$	422	Other noninterest income
Three Months Ended June 30, 2016
Three Months Ended September 30, 2016
Embedded conversion option	$	(197	)	Other noninterest income	$	435	Other noninterest income
Six Months Ended June 30, 2016
Nine Months Ended September 30, 2016
Embedded conversion option	$	(297	)	Other noninterest income	$	138	Other noninterest income

Back-to-Back Loan Swaps

Heartland has interest rate swap loan relationships with customers to meet their financing needs. Upon entering into these loan swaps, Heartland enters into offsetting positions with counterparties in order to minimize interest rate risk. These back-to-back loan swaps qualify as free standing financial derivatives with the fair values reported in other assets and other liabilities on the consolidated balance sheets. Heartland was required to post $2.0 million and $1.8 million at both ~~June~~September 30, 2017, and December 31, 2016, respectively, as collateral related to these back-to-back swaps. Heartland's counterparties were required to pledge ~~$768,000~~$190,000 at ~~both June~~September 30, 2017, and $768,000 at December 31, 2016. Any gains and losses on these back-to-back swaps are recorded in noninterest income on the consolidated statements of income, and for the ~~six~~nine months ended ~~June~~September 30, 2017 and ~~June~~September 30, 2016, no gain or loss was recognized. The table below identifies the balance sheet category and fair values of Heartland's derivative instruments designated as loan swaps at ~~June~~September 30, 2017, and December 31, 2016, in thousands:


	Notional Amount		Fair Value			Balance Sheet Category	Weighted Average Receive Rate		Weighted Average Pay Rate		Notional Amount		Fair Value			Balance Sheet Category	Weighted Average Receive Rate		Weighted Average Pay Rate
June 30, 2017
September 30, 2017
Customer interest rate swaps	$	85,391	$	1,822		Other assets	4.72	%	3.90	%	$	90,370	$	1,906		Other assets	4.75	%	3.91	%
Customer interest rate swaps	85,391		(1,822		)	Other liabilities	3.90	%	4.72	%	90,370		(1,906		)	Other liabilities	3.91	%	4.75	%
December 31, 2016
Customer interest rate swaps	$	69,594	$	1,588		Other assets	4.66	%	3.47	%	$	69,594	$	1,588		Other assets	4.66	%	3.47	%
Customer interest rate swaps	69,594		(1,588		)	Other liabilities	3.47	%	4.66	%	69,594		(1,588		)	Other liabilities	3.47	%	4.66	%

Other Free Standing Derivatives

Heartland has entered into interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans and mortgage backed securities that are considered derivative instruments. Heartland enters into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of future changes in interest rates on the commitments to fund the loans as well as on residential mortgage loans available for sale. The fair value of these commitments is recorded on the consolidated balance sheets, with the changes in fair value recorded in the consolidated statements of income as a component of gains on sale of loans held for sale. These derivative contracts are designated as free standing derivative contracts and are not designated against specific assets and liabilities on the consolidated balance sheets or forecasted transactions and therefore do not qualify for hedge accounting treatment. Heartland was required to pledge collateral of ~~$838,000~~$353,000 at ~~June~~September 30, 2017, and $0 at December 31, 2016. Heartland's counterparties were required to pledge $0$29,000 and $2.9 million at ~~June~~September 30, 2017, and December 31, 2016, respectively, as collateral for these forward commitments.

Heartland acquired undesignated interest rate swaps in 2015. These swaps were entered into primarily for the benefit of customers seeking to manage their interest rate risk and are not designated against specific assets or liabilities on the consolidated balance sheet or forecasted transactions and therefore do not qualify for hedge accounting in accordance with ASC 815. These swaps are carried at fair value on the consolidated balance sheets as a component of other liabilities, with changes in the fair value recorded as a component of other noninterest income.

The table below identifies the balance sheet category and fair values of Heartland's other free standing derivative instruments not designated as hedging instruments at ~~June~~September 30, 2017, and December 31, 2016, in thousands:


	Balance Sheet Category	Notional Amount		Fair Value			Balance Sheet Category	Notional Amount		Fair Value
June 30, 2017
September 30, 2017
Interest rate lock commitments (mortgage)	Other assets	$	92,780	$	3,011		Other assets	$	77,910	$	2,463
Forward commitments	Other assets	103,750		323			Other assets	75,192		237
Forward commitments	Other liabilities	101,623		(418		)	Other liabilities	91,865		(261		)
Undesignated interest rate swaps	Other liabilities	14,294		(989		)	Other liabilities	14,175		(923		)
December 31, 2016
Interest rate lock commitments (mortgage)	Other assets	$	80,465	$	2,790		Other assets	$	80,465	$	2,790
Forward commitments	Other assets	142,750		2,546			Other assets	142,750		2,546
Forward commitments	Other liabilities	59,276		(266		)	Other liabilities	59,276		(266		)
Undesignated interest rate swaps	Other liabilities	15,564		(1,126		)	Other liabilities	15,564		(1,126		)

The table below identifies the income statement category of the gains and losses recognized in income on Heartland's other free standing derivative instruments not designated as hedging instruments for the three- and ~~six-month~~nine-month periods ended ~~June~~September 30, 2017, and ~~June~~September 30, 2016, in thousands:


	Income Statement Category	Gain (Loss) Recognized			Income Statement Category	Gain (Loss) Recognized
Three Months Ended June 30, 2017
Three Months Ended September 30, 2017
Interest rate lock commitments (mortgage)	Gains on sale of loans held for sale	$	(404	)	Net gains on sale of loans held for sale	$	(1,245	)
Forward commitments	Gains on sale of loans held for sale	364			Net gains on sale of loans held for sale	72
Undesignated interest rate swaps	Other noninterest income	(20		)	Other noninterest income	88
Six Months Ended June 30, 2017
Nine Months Ended September 30, 2017
Interest rate lock commitments (mortgage)	Net gains on sale of loans held for sale	$	658		Net gains on sale of loans held for sale	$	(587	)
Forward commitments	Net gains on sale of loans held for sale	(2,375		)	Net gains on sale of loans held for sale	(2,304		)
Undesignated interest rate swaps	Other noninterest income	137			Other noninterest income	203
Three Months Ended June 30, 2016
Three Months Ended September 30, 2016
Interest rate lock commitments (mortgage)	Gains on sale of loans held for sale	$	1,081		Net gains on sale of loans held for sale	$	(1,344	)
Forward commitments	Gains on sale of loans held for sale	(753		)	Net gains on sale of loans held for sale	931
Undesignated interest rate swaps	Other noninterest income	(54		)	Other noninterest income	269
Six Months Ended June 30, 2016
Nine Months Ended September 30, 2016
Interest rate lock commitments (mortgage)	Net gains on sale of loans held for sale	$	5,808		Net gains on sale of loans held for sale	$	4,464
Forward commitments	Net gains on sale of loans held for sale	(2,242		)	Net gains on sale of loans held for sale	(1,311		)
Undesignated interest rate swaps	Other noninterest income	(370		)	Other noninterest income	(101		)

NOTE 8: FAIR VALUE

Heartland utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available for sale, trading securities and derivatives are recorded in the consolidated balance sheets at fair value on a recurring basis. Additionally, from time to time, Heartland may be required to record at fair value other assets on a nonrecurring basis such as loans held for sale, loans held to maturity and certain other assets including, but not limited to, mortgage servicing rights, commercial servicing rights and other real estate owned. These nonrecurring fair value adjustments typically involve application of the 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 all significant assumptions are observable in the market.

Level 3 — Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value on a recurring or non-recurring basis.

Assets

Securities Available for Sale and Held to Maturity

Securities available for sale are recorded at fair value on a recurring basis. Securities held to maturity are generally recorded at cost and are recorded at fair value only to the extent a decline in fair value is determined to be other-than-temporary. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security's credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, as well as U.S. Treasury securities. Level 2 securities include U.S. government and agency securities, mortgage-backed securities and private collateralized mortgage obligations, municipal bonds and corporate debt securities. Level 3 securities ~~consist~~consisted primarily of Z-TRANCHE mortgage-backed securities and corporate debt securities. On a quarterly basis, a secondary independent pricing service is used for ~~a sample of~~the securities portfolio to validate the pricing from Heartland's primary pricing service.

Loans Held for Sale

Loans held for sale are carried at the lower of cost or fair value on an aggregate basis. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, Heartland classifies loans held for sale subjected to nonrecurring fair value adjustments as Level 2.

Loans Held to Maturity

Heartland does not record loans held to maturity at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC 310. The fair value of impaired loans is measured using one of the following impairment methods: 1) the present value of expected future cash flows discounted at the loan's effective interest rate or 2) the observable market price of the loan or 3) the fair value of the collateral if the loan is collateral dependent. In accordance with ASC 820, impaired loans measured at fair value are classified as nonrecurring Level 3 in the fair value hierarchy.

Premises, Furniture and Equipment Held for Sale

Heartland values premises, furniture and equipment held for sale based on third-party appraisals less estimated disposal costs. Heartland considers third party appraisals, as well as independent fair value assessments from Realtors or persons involved in selling bank premises, furniture and equipment, in determining the fair value of particular properties. Accordingly, the valuation of premises, furniture and equipment held for sale is subject to significant external and internal judgment. Heartland periodically reviews premises, furniture and equipment held for sale to determine if the fair value of the property, less disposal costs, has declined below its recorded book value and records any adjustments accordingly. Premises, furniture and equipment held for sale are classified as nonrecurring Level 3 in the fair value hierarchy.

Mortgage Servicing Rights

Mortgage servicing rights assets represent the value associated with servicing residential real estate loans that have been sold to outside investors with servicing retained. Heartland uses the amortization method (i.e., the lower of amortized cost or estimated fair value measured on a nonrecurring basis), not fair value measurement accounting, to determine the carrying value of its mortgage servicing rights. The fair value for servicing assets is determined through discounted cash flow analysis ~~which~~and utilizes discount rates, prepayment speeds and delinquency rate assumptions as ~~inputs, or market indications.~~inputs. All of the assumptions in the discounted cash flow analysis 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 fair value less than the carrying value, mortgage

servicing rights are adjusted to fair value through a valuation allowance. Heartland classifies mortgage servicing rights as nonrecurring with Level 3 measurement inputs.

Commercial Servicing Rights

Commercial servicing rights assets represent the value associated with servicing commercial loans guaranteed by the Small Business Administration and the United States Department of Agriculture that have been sold with servicing retained by Heartland. Heartland uses the amortization method (i.e., the lower of amortized cost or estimated fair value measured on a nonrecurring basis), not fair value measurement accounting, to determine the carrying value of its commercial servicing rights. The fair value for servicing assets is determined through market prices for comparable servicing contracts, when available, or through a valuation model that calculates the present value of estimated future net servicing income. Inputs utilized include discount rates, prepayment speeds and delinquency rate assumptions as inputs. All of these assumptions require a significant degree of management estimation and judgment. Commercial servicing rights are subject to impairment testing, and the carrying values of these rights are reviewed quarterly for impairment based upon the calculation of fair value as performed by an outside third party. If the valuation model reflects a fair value less than the carrying value, commercial servicing rights are adjusted to fair value through a valuation allowance. Heartland classifies commercial servicing rights as nonrecurring with Level 3 measurement inputs.

Derivative Financial Instruments

Heartland's current interest rate risk strategy includes interest rate swaps. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. To comply with the provisions of ASC 820, Heartland incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty's nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, Heartland has considered the impact of netting any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although Heartland has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of ~~June~~September 30, 2017, and December 31, 2016, Heartland has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, Heartland has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Interest rate lock commitments

Heartland uses an internal valuation model that relies on internally developed inputs to estimate the fair value of its interest rate lock commitments which is based on unobservable inputs that reflect management's assumptions and specific information about each borrower. Interest rate lock commitments are classified in Level 3 of the fair value hierarchy.

Forward commitments

The fair value of forward commitments are estimated using an internal valuation model, which includes current trade pricing for similar financial instruments in active markets that Heartland has the ability to access and are classified in Level 2 of the fair value hierarchy.

Other Real Estate Owned

Other real estate owned ("OREO") represents property acquired through foreclosures and settlements of loans. Property acquired is carried at the fair value of the property at the time of acquisition (representing the property's cost basis), plus any acquisition costs, or the estimated fair value of the property, less disposal costs. Heartland considers third party appraisals, as well as independent fair value assessments from realtors or persons involved in selling OREO, in determining the fair value of particular properties. Accordingly, the valuation of OREO is subject to significant external and internal judgment. Heartland periodically reviews OREO to determine if the fair value of the property, less disposal costs, has declined below its recorded book value and records any adjustments accordingly. OREO is classified as nonrecurring Level 3 of the fair value hierarchy.

The table below presents Heartland's assets and liabilities that are measured at fair value on a recurring basis as of ~~June~~September 30, 2017, and December 31, 2016, 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		Total Fair Value		Level 1		Level 2		Level 3
June 30, 2017
September 30, 2017
Assets
Securities available for sale
U.S. government corporations and agencies	$	5,471	$	3,508	$	1,963	$	—	$	7,415	$	3,505	$	3,910	$	—
Mortgage-backed securities	1,262,528		—		1,262,528		—		1,565,400		—		1,565,400		—
Obligations of states and political subdivisions	498,742		—		498,742		—		503,974		—		503,974		—
Corporate debt securities	7,186		—		7,186		—		—		—		—		—
Equity securities	15,514		—		15,514		—		16,596		—		16,596		—
Derivative financial instruments⁽¹⁾	3,364		—		3,364		—		3,386		—		3,386		—
Interest rate lock commitments	3,011		—		—		3,011		2,463		—		��		2,463
Forward commitments	323		—		323		—		237		—		237		—
Total assets at fair value	$	1,796,139	$	3,508	$	1,789,620	$	3,011	$	2,099,471	$	3,505	$	2,093,503	$	2,463
Liabilities
Derivative financial instruments⁽²⁾	$	6,834	$	—	$	6,834	$	—	$	6,309	$	—	$	6,309	$	—
Forward commitments	418		—		418		—		261		—		261		—
Total liabilities at fair value	$	7,252	$	—	$	7,252	$	—	$	6,570	$	—	$	6,570	$	—
December 31, 2016
Assets
Securities available for sale
U.S. government corporations and agencies	$	4,700	$	517	$	4,183	$	—	$	4,700	$	517	$	4,183	$	—
Mortgage-backed securities	1,290,500		—		1,288,276		2,224		1,290,500		—		1,288,276		2,224
Obligations of states and political subdivisions	536,144		—		536,144		—		536,144		—		536,144		—
Equity securities	14,520		—		14,520		—		14,520		—		14,520		—
Derivative financial instruments⁽¹⁾	3,222		—		3,222		—		3,222		—		3,222		—
Interest rate lock commitments	2,790		—		—		2,790		2,790		—		—		2,790
Forward commitments	2,546		—		2,546		—		2,546		—		2,546		—
Total assets at fair value	$	1,854,422	$	517	$	1,848,891	$	5,014	$	1,854,422	$	517	$	1,848,891	$	5,014
Liabilities
Derivative financial instruments⁽²⁾	$	7,027	$	—	$	7,027	$	—	$	7,027	$	—	$	7,027	$	—
Forward commitments	266		—		266		—		266		—		266		—
Total liabilities at fair value	$	7,293	$	—	$	7,293	$	—	$	7,293	$	—	$	7,293	$	—

(1) Includes cash flow hedges, embedded derivatives and back-to-back loan swaps																	(2) Includes cash flow hedges, fair value hedges, back-to-back loan swaps, embedded conversion options and free standing derivative instruments

The tables below present Heartland's assets that are measured at fair value on a nonrecurring basis, in thousands:


	Fair Value Measurements at June 30, 2017											Fair Value Measurements at September 30, 2017
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Year-to- Date (Gains) Losses			Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Year-to- Date (Gains) Losses
Collateral dependent impaired loans:
Commercial	$	3,695	$	—	$	—	$	3,695	$	78		$	3,556	$	—	$	—	$	3,556	$	1,119
Commercial real estate	868		—		—		868		309			8,718		—		—		8,718		2,043
Agricultural and agricultural real estate	1,095		—		—		1,095		—			7,936		—		—		7,936		—
Residential real estate	1,664		—		—		1,664		—			1,365		—		—		1,365		—
Consumer	1,169		—		—		1,169		—			912		—		—		912		—
Total collateral dependent impaired loans	$	8,491	$	—	$	—	$	8,491	$	387		$	22,487	$	—	$	—	$	22,487	$	3,162
Other real estate owned	$	9,269	$	—	$	—	$	9,269	$	392		$	13,226	$	—	$	—	$	13,226	$	594
Premises, furniture and equipment held for sale	$	580	$	—	$	—	$	580	$	112		$	4,428	$	—	$	—	$	4,428	$	404
Commercial servicing rights	$	322	$	—	$	—	$	322	$	(24	)	$	313	$	—	$	—	$	313	$	(29	)


	Fair Value Measurements at December 31, 2016											Fair Value Measurements at December 31, 2016
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Year-to- Date (Gains) Losses		Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Year-to- Date (Gains) Losses
Collateral dependent impaired loans:
Commercial	$	1,683	$	—	$	—		$	1,683	$	41	$	1,683	$	—	$	—		$	1,683	$	41
Commercial real estate	3,026		—		—			3,026		527		3,026		—		—			3,026		527
Agricultural and agricultural real estate	1,955		—		—			1,955		—		1,955		—		—			1,955		—
Residential real estate	3,565		—		—			3,565		85		3,565		—		—			3,565		85
Consumer	1,193		—		—			1,193		—		1,193		—		—			1,193		—
Total collateral dependent impaired loans	$	11,422	$	—	$	—	—	$	11,422	$	653	$	11,422	$	—	$	—	—	$	11,422	$	653
Other real estate owned	$	9,744	$	—	$	—		$	9,744	$	1,341	$	9,744	$	—	$	—		$	9,744	$	1,341
Premises, furniture and equipment held for sale	$	414	$	—	$	—		$	414	$	35	$	414	$	—	$	—		$	414	$	35
Commercial servicing rights	$	326	$	—	$	—		$	326	$	33	$	326	$	—	$	—		$	326	$	33

The following tables present additional quantitative information about assets measured at fair value and for which Heartland has utilized Level 3 inputs to determine fair value, in thousands:

Fair Value at 6/30/17

Valuation Technique

Unobservable Input

Range (Weighted Average)

Fair Value at

9/30/17

Valuation Technique

Unobservable Input

Range (Weighted Average)

Z-TRANCHE Securities

—

Discounted cash flows

Pretax discount rate

—

Discounted cash flows

Pretax discount rate

—

Actual defaults

—

Actual defaults

—

Actual deferrals

—

Actual deferrals

—

Interest rate lock commitments

3,011

Discounted cash flows

Closing ratio

0-99% (88%)⁽¹⁾

2,463

Discounted cash flows

Closing ratio

0-99% (89%)⁽¹⁾

Premises, furniture and equipment held for sale

580

Modified appraised value

Third party appraisal

(2)

4,428

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-8%⁽⁴⁾

Appraisal discount

0-10%⁽⁴⁾

Commercial servicing rights

322

Discounted cash flows

Third party valuation

(3)

313

Discounted cash flows

Third party valuation

(3)

Other real estate owned

9,269

Modified appraised value

Third party appraisal

(2)

13,226

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%

Appraisal discount

0-10%

Collateral dependent impaired loans:

Commercial

3,695

Modified appraised value

Third party appraisal

(2)

3,556

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-15%⁽⁴⁾

Appraisal discount

0-15%⁽⁴⁾

Commercial real estate

868

Modified appraised value

Third party appraisal

(2)

8,718

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-15%⁽⁴⁾

Appraisal discount

0-14%⁽⁴⁾

Agricultural and agricultural real estate

1,095

Modified appraised value

Third party appraisal

(2)

7,936

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-15%⁽⁴⁾

Appraisal discount

0-6%⁽⁴⁾

Residential real estate

1,664

Modified appraised value

Third party appraisal

(2)

1,365

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%⁽⁴⁾

Appraisal discount

0-13%⁽⁴⁾

Consumer

1,169

Modified appraised value

Third party valuation

(2)

912

Modified appraised value

Third party valuation

(2)

Valuation discount

0-18%⁽⁴⁾

Valuation discount

0-11%⁽⁴⁾

(1) The significant unobservable input used in the fair value measurement is the closing ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. The closing ratio calculation takes into consideration historical data and loan-level data.

(2) Third party appraisals are obtained and updated at least annually to establish the value of the underlying asset, but the disclosure of the unobservable inputs used by the appraisers would not be meaningful because the range will vary widely from appraisal to appraisal.

(3) The significant unobservable input used in the fair value measurement are the value indices, which are weighted-average spreads to LIBOR based on maturity groups.

(4) Discounts applied to the appraised values primarily include estimated sales costs, but also consider the age of the appraisal, changes in local market conditions and changes in the current condition of the collateral.

Fair Value at 12/31/16

Valuation Technique

Unobservable Input

Range (Weighted Average)

Fair Value at

12/31/16

Valuation Technique

Unobservable Input

Range (Weighted Average)

Z-TRANCHE Securities

2,224

Discounted cash flows

Pretax discount rate

7.50 - 9.50%

2,224

Discounted cash flows

Pretax discount rate

7.50 - 9.50%

Actual defaults

21.77 - 37.62% (33.11%)

Actual defaults

21.77 - 37.62% (33.11%)

Actual deferrals

10.44 - 26.29% (14.81%)

Actual deferrals

10.44 - 26.29% (14.81%)

Interest rate lock commitments

2,790

Discounted cash flows

��

Closing ratio

0-99% (89%)⁽¹⁾

2,790

Discounted cash flows

Closing ratio

0-99% (89%)⁽¹⁾

Premises, furniture and equipment held for sale

414

Modified appraised value

Third party appraisal

(2)

0-8%⁽⁴⁾

414

Modified appraised value

Third party appraisal

(2)

0-8%⁽⁴⁾

Commercial servicing rights

326

Discounted cash flows

Third party valuation

(3)

326

Discounted cash flows

Third party valuation

(3)

Other real estate owned

9,744

Modified appraised value

Third party appraisal

(2)

9,744

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%

Appraisal discount

0-10%

Collateral dependent impaired loans:

Commercial

1,683

Modified appraised value

Third party appraisal

(2)

1,683

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-8%⁽⁴⁾

Appraisal discount

0-8%⁽⁴⁾

Commercial real estate

3,026

Modified appraised value

Third party appraisal

(2)

3,026

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-7%⁽⁴⁾

Appraisal discount

0-7%⁽⁴⁾

Agricultural and agricultural real estate

1,955

Modified appraised value

Third party appraisal

(2)

1,955

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%⁽⁴⁾

Appraisal discount

0-10%⁽⁴⁾

Residential real estate

3,565

Modified appraised value

Third party appraisal

(2)

3,565

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-8%⁽⁴⁾

Appraisal discount

0-8%⁽⁴⁾

Consumer

1,193

Modified appraised value

Third party valuation

(2)

1,193

Modified appraised value

Third party valuation

(2)

Valuation discount

0-11%⁽⁴⁾

Valuation discount

0-11%⁽⁴⁾

(3) The significant unobservable input used in the fair value measurement are the value indices, which are weighted-average spreads to LIBOR based on maturity groups.

The changes in fair value of the Z-TRANCHE securities, Level 3 assets that are measured on a recurring basis, are summarized in the following table, in thousands:


	For the Six Months Ended June 30, 2017			For the Year Ended December 31, 2016		For the Nine Months Ended September 30, 2017			For the Year Ended December 31, 2016
Balance at January 1,	$	2,224		$	2,039	$	2,224		$	2,039
Total gains (losses):
Included in earnings	2,810			—		2,810			—
Included in other comprehensive income	(2,166		)	185		(2,166		)	185
Purchases, sales and settlements:
Purchases	—			—		—			—
Sales	(2,868		)	—		(2,868		)	—
Settlements	—			—		—			—
Balance at period end	$	—		$	2,224	$	—		$	2,224

The changes in fair value of the interest rate lock commitments, which are Level 3 financial instruments measured on a recurring basis, are summarized in the following table, in thousands:


	For the Six Months Ended June 30, 2017			For the Year Ended December 31, 2016			For the Nine Months Ended September 30, 2017			For the Year Ended December 31, 2016
Balance at January 1,	$	2,790		$	3,168		$	2,790		$	3,168
Total gains (losses) included in earnings	658			(1,564		)	(587		)	(1,564		)
Issuances	726			5,373			1,580			5,373
Settlements	(1,163		)	(4,187		)	(1,320		)	(4,187		)
Balance at period end	$	3,011		$	2,790		$	2,463		$	2,790

Gains included in gains (losses) on sale of loans held for sale attributable to interest rate lock commitments held at ~~June~~September 30, 2017, and December 31, 2016, were ~~$3.0~~$2.5 million and $2.8 million, respectively.

The tables below summarize the estimated fair value of Heartland's financial instruments as defined by ASC 825 as of ~~June~~September 30, 2017, and December 31, 2016, in thousands. The carrying amounts in the following tables 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, such as the value of the mortgage servicing rights, premises, furniture and equipment, premises, furniture and equipment held for sale, goodwill and other intangibles and other liabilities.

Heartland does not believe that the estimated information presented herein is representative of the earnings power or value of Heartland. The following analysis, which is inherently limited in depicting fair value, also does not consider any value associated with either existing customer relationships or the ability of Heartland to create value through loan origination, deposit gathering or fee generating activities. Many of the estimates presented herein 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 June 30, 2017										Fair Value Measurements at September 30, 2017
	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)		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	$	181,776	$	181,776	$	181,776	$	—	$	—	$	251,736	$	251,736	$	251,736	$	—	$	—
Time deposits in other financial institutions	30,241		30,241		30,241		—		—		19,793		19,793		19,793		—		—
Securities:
Available for sale	1,789,441		1,789,441		3,508		1,785,933		—		2,093,385		2,093,385		3,505		2,089,880		—
Held to maturity	259,586		273,394		—		273,394		—		256,355		270,386		—		270,386		—
Other investments	21,094		21,094		—		20,899		195		23,176		23,176		—		22,981		195
Loans held for sale	48,848		48,848		—		48,848		—		35,795		35,795		—		35,795		—
Loans, net:
Commercial	1,327,156		1,317,463		—		1,313,768		3,695		1,596,934		1,601,351		—		1,597,795		3,556
Commercial real estate	2,436,824		2,419,476		—		2,418,608		868		3,143,414		3,117,829		—		3,109,111		8,718
Agricultural and agricultural real estate	492,175		493,369		—		492,274		1,095		506,388		507,974		—		500,038		7,936
Residential real estate	592,778		584,089		—		582,425		1,664		632,306		622,698		—		621,333		1,365
Consumer	422,098		424,708		—		423,539		1,169		441,079		444,384		—		443,472		912
Total Loans, net	5,271,031		5,239,105		—		5,230,614		8,491		6,320,121		6,294,236		—		6,271,749		22,487
Derivative financial instruments⁽¹⁾	3,364		3,364		—		3,364		—		3,386		3,386		—		3,386		—
Interest rate lock commitments	3,011		3,011		—		—		3,011		2,463		2,463		—		—		2,463
Forward commitments	323		323		—		323		—		237		237		—		237		—
Financial liabilities:
Deposits
Demand deposits	2,355,410		2,355,410		—		2,355,410		—		3,009,940		3,009,940		—		3,009,940		—
Savings deposits	3,704,579		3,704,579		—		3,704,579		—		4,227,340		4,227,340		—		4,227,340		—
Time deposits	870,180		870,180		—		870,180		—		994,604		994,604		—		994,604		—
Short term borrowings	139,130		139,130		—		139,130		—		171,871		171,871		—		171,871		—
Other borrowings	281,096		281,348		—		281,348		—		301,473		305,741		—		305,741		—
Derivative financial instruments⁽²⁾	6,834		6,834		—		6,834		—		6,309		6,309		—		6,309		—
Forward commitments	418		418		—		418		—		261		261		—		261		—
																					(1) Includes cash flow hedges, embedded derivatives and back-to-back loan swaps	(2) Includes cash flow hedges, fair value hedges, back-to-back loan swaps, embedded conversion options and free standing derivative instruments


					Fair Value Measurements at December 31, 2016										Fair Value Measurements at December 31, 2016
	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)		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	$	158,724	$	158,724	$	158,724	$	—	$	—	$	158,724	$	158,724	$	158,724	$	—	$	—
Time deposits in other financial institutions	2,105		2,105		2,105		—		—		2,105		2,105		2,105		—		—
Securities:
Available for sale	1,845,864		1,845,864		517		1,843,123		2,224		1,845,864		1,845,864		517		1,843,123		2,224
Held to maturity	263,662		274,799		—		274,799		—		263,662		274,799		—		274,799		—
Other investments	21,560		21,560		—		21,365		195		21,560		21,560		—		21,365		195
Loans held for sale	61,261		61,261		—		61,261		—		61,261		61,261		—		61,261		—
Loans, net:
Commercial	1,272,089		1,258,754		—		1,257,071		1,683		1,272,089		1,258,754		—		1,257,071		1,683
Commercial real estate	2,513,446		2,506,858		—		2,503,832		3,026		2,513,446		2,506,858		—		2,503,832		3,026
Agricultural and agricultural real estate	485,820		487,001		—		485,046		1,955		485,820		487,001		—		485,046		1,955
Residential real estate	614,207		604,233		—		600,668		3,565		614,207		604,233		—		600,668		3,565
Consumer	411,833		414,266		—		413,073		1,193		411,833		414,266		—		413,073		1,193
Total Loans, net	5,297,395		5,271,112		—		5,259,690		11,422		5,297,395		5,271,112		—		5,259,690		11,422
Derivative financial instruments⁽¹⁾	3,222		3,222		—		3,222		—		3,222		3,222		—		3,222		—
Interest rate lock commitments	2,790		2,790		—		—		2,790		2,790		2,790		—		—		2,790
Forward commitments	2,546		2,546		—		2,546		—		2,546		2,546		—		2,546		—
Financial liabilities:
Deposits
Demand deposits	2,202,036		2,202,036		—		2,202,036		—		2,202,036		2,202,036		—		2,202,036		—
Savings deposits	3,788,089		3,788,089		—		3,788,089		—		3,788,089		3,788,089		—		3,788,089		—
Time deposits	857,286		857,286		—		857,286		—		857,286		857,286		—		857,286		—
Short term borrowings	306,459		306,459		—		306,459		—		306,459		306,459		—		306,459		—
Other borrowings	288,534		288,534		—		288,534		—		288,534		288,534		—		288,534		—
Derivative financial instruments⁽²⁾	7,027		7,027		—		7,027		—		7,027		7,027		—		7,027		—
Forward commitments	266		266		—		266		—		266		266		—		266		—
																					(1) Includes cash flow hedges, embedded derivatives and back-to-back loan swaps	(2) Includes cash flow hedges, fair value hedges, back-to-back loan swaps, embedded conversion options 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 fair value due to the short-term nature of these instruments.

Securities — For securities either held to maturity, available for sale or trading, fair value equals quoted market price if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. For Level 3 securities, Heartland utilizes independent pricing provided by third party vendors or brokers.

Other Investments — Fair value measurement of other investments, which consists primarily of FHLB stock, are based on their redeemable value, which is at cost due to the restrictions placed on their transferability. The market for these securities is restricted to the issuer of the stock and subject to impairment evaluation.

Loans — The fair value of loans is estimated using an entrance price concept by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value of 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.

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.

Derivative Financial Instruments — The fair value of all derivatives is estimated based on the amount that Heartland would pay or would be paid to terminate the contract or agreement, using current rates and prices, and, when appropriate, the current creditworthiness of the counter-party.

Deposits — The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. If the fair value of the fixed maturity certificates of deposit is calculated at less than the carrying amount, the carrying value of these deposits is reported as the fair value.

Short-term and Other Borrowings — Rates currently available to Heartland for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.

Commitments to Extend Credit, Unused Lines of Credit and Standby Letters of Credit — Based upon management's analysis of the off balance sheet financial instruments, there are no significant unrealized gains or losses associated with these financial instruments based upon review of the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties.

NOTE 9: SEGMENT REPORTING

Heartland has identified two operating segments for purposes of financial reporting: community and other banking, and retail mortgage banking. These segments were determined based on the products and services provided or the type of customers served and are consistent with the information used by Heartland's key decision makers to make operating decisions and to assess Heartland's performance. The following tables present financial information for Heartland's operating segments for the three- and ~~six-month~~nine-month periods ended ~~June~~September 30, 2017, and ~~June~~September 30, 2016, in thousands:


	Three Months Ended June 30,													Three Months Ended September 30,
	2017							2016						2017							2016
	Community and Other Banking		Retail Mortgage Banking			Total		Community and Other Banking		Retail Mortgage Banking		Total		Community and Other Banking		Retail Mortgage Banking			Total		Community and Other Banking		Retail Mortgage Banking		Total
Net interest income	$	73,445	$	1,135		$	74,580	$	71,895	$	1,223	$	73,118	$	88,778	$	1,066		$	89,844	$	72,694	$	987	$	73,681
Provision for loan losses	889		—			889		2,118		—		2,118		5,705		—			5,705		5,328		—		5,328
Total noninterest income	18,250		7,374			25,624		19,899		11,127		31,026		19,680		5,297			24,977		17,337		11,205		28,542
Total noninterest expense	60,564		8,734			69,298		59,694		11,326		71,020		69,977		8,782			78,759		57,988		10,439		68,427
Income (loss) before taxes	$	30,242	$	(225	)	$	30,017	$	29,982	$	1,024	$	31,006	$	32,776	$	(2,419	)	$	30,357	$	26,715	$	1,753	$	28,468
Average Loans, for the period	$	5,334,723	$	42,103		$	5,376,826	$	5,507,542	$	75,336	$	5,582,878	$	6,245,445	$	40,839		$	6,286,284	$	5,464,304	$	73,784	$	5,538,088
Segment Assets, at period end	$	8,122,172	$	82,549		$	8,204,721	$	8,082,153	$	122,248	$	8,204,401	$	9,693,172	$	62,455		$	9,755,627	$	8,084,810	$	117,405	$	8,202,215


	Six Months Ended June 30,													Nine Months Ended September 30,
	2017							2016						2017							2016
	Community and Other Banking		Retail Mortgage Banking			Total		Community and Other Banking		Retail Mortgage Banking		Total		Community and Other Banking		Retail Mortgage Banking			Total		Community and Other Banking		Retail Mortgage Banking		Total
Net interest income	$	145,628	$	1,980		$	147,608	$	143,478	$	2,347	$	145,825	$	234,406	$	3,046		$	237,452	$	216,172	$	3,334	$	219,506
Provision for loan losses	4,530		—			4,530		4,185		—		4,185		10,235		—			10,235		9,513		—		9,513
Total noninterest income	37,284		14,233			51,517		38,436		22,168		60,604		56,964		19,530			76,494		55,773		33,373		89,146
Total noninterest expense	123,776		17,262			141,038		119,433		21,896		141,329		193,753		26,044			219,797		177,421		32,335		209,756
Income (loss) before taxes	$	54,606	$	(1,049	)	$	53,557	$	58,296	$	2,619	$	60,915	$	87,382	$	(3,468	)	$	83,914	$	85,011	$	4,372	$	89,383
Average Loans, for the period	$	5,334,722	$	36,549		$	5,371,271	$	5,401,867	$	68,623	$	5,470,490	$	5,641,641	$	37,979		$	5,679,620	$	5,422,843	$	70,344	$	5,493,187
Segment Assets, at period end	$	8,122,172	$	82,549		$	8,204,721	$	8,082,153	$	122,248	$	8,204,401	$	9,693,172	$	62,455		$	9,755,627	$	8,084,810	$	117,405	$	8,202,215

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SAFE HARBOR STATEMENT

This document (including any information incorporated herein by reference) contains, and future oral and written statements of Heartland and its management may contain, forward-looking statements within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the business, financial condition, results of operations, plans, objectives and future performance of Heartland. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of Heartland's management and on information currently available to management, are generally identifiable by the use of words such as "believe," "expect," "anticipate," "plan," "intend," "estimate," "may," "will," "would," "could," "should" or other similar expressions. Although Heartland has made these statements based on management's experience and best estimate of future events, there may be events or factors that management has not anticipated, and the accuracy and achievement of such forward-looking statements and estimates are subject to a number of risks, including those identified in our Annual Report on Form 10-K for the year ended December 31, 2016. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and Heartland undertakes no obligation to update any statement in light of new information or future events.

CRITICAL ACCOUNTING POLICIES

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. The estimates and judgments that management believes have the most effect on Heartland's reported financial position and results of operations are described as critical accounting policies in Heartland's Annual Report on Form 10-K for the year ended December 31, 2016. There have been no significant changes in the critical accounting policies or the assumptions and judgments utilized in applying these policies since the year ended December 31, 2016.

OVERVIEW

Heartland's 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 income, brokerage and insurance commissions, securities gains, net gains on sale of loans held for sale, ~~and~~ valuation adjustment on commercial servicing rights and income on bank owned life insurance also affects Heartland's results of operations. Heartland's principal operating expenses, aside from interest expense, consist of the provision for loan losses, salaries and employee benefits, occupancy and equipment costs, professional fees, Federal Deposit Insurance Corporation ("FDIC") insurance premiums, advertising and other real estate and loan collection expenses.

Net income available to common stockholders for the quarter ended ~~June~~September 30, 2017, was ~~$21.9~~$21.6 million, or ~~$0.81~~$0.72 per diluted common share, compared to ~~$20.9~~$20.2 million, or ~~$0.84~~$0.81 per diluted common share, for the quarter ended ~~June~~September 30, 2016. Return on average common equity was ~~11.13%~~8.99% and return on average assets was ~~1.06%~~0.89% for the ~~second~~third quarter of 2017, compared to ~~12.58%~~11.64% and ~~1.03%~~0.98%, respectively, for the same quarter in 2016.

Net income available to common stockholders for the first ~~six~~nine months of 2017 was ~~$39.9~~$61.6 million, or ~~$1.49~~$2.21 per diluted common share, compared to ~~$40.8~~$61.0 million, or ~~$1.66~~$2.48 per diluted common share, for the first ~~six~~nine months of 2016. Return on average common equity was ~~10.44%~~9.88% and return on average assets was ~~0.97%~~0.94% for the first ~~six~~nine months of 2017, compared to ~~12.63%~~12.28% and ~~1.01%~~1.00%, respectively, for the same period in 2016.

For the ~~second~~third quarter of 2017, ~~Heartland experienced a solid~~Heartland's net interest margin ~~of 3.94% (4.14%~~was 4.08% (4.26% on a fully tax-equivalent basis) compared to ~~3.95% (4.12%~~3.97% (4.14% on a fully tax-equivalent basis) for the same quarter in 2016, and the efficiency ratio ~~improved to 65.61% from 67.95%.~~was 64.54% and 63.88% for the third quarter of 2017 and 2016, respectively. For the ~~six-month~~nine-month period ended ~~June~~September 30, 2017, Heartland's net interest margin ~~remained strong at 3.95% (4.15%~~was 4.00% (4.19% on a fully tax-equivalent basis) compared to 3.98% (4.15% on a fully tax-equivalent basis) for the same period in ~~2016, and~~2016. Heartland's efficiency ratio increased to 66.58% for the ~~tangible common equity ratio improved 137 basis points to 7.97% at June~~nine months ended September 30, 2017 ~~from 6.60% at June 30,~~compared to 66.23% for the same period in 2016. The increase in average earning assets of $139.4 million or 2% from the second quarter of 2016, and $182.8 million or 2% from the six-month period ended June 30, 2016, contributed to Heartland's strong financial performance. Weaker residential mortgage loan activity and decreased securities gains, net, partially offset these improvements for both the three- and six-month periods ended June 30, 2017, and 2016.

2017, the aggregate consideration was $31.0 million, with 30% of the consideration paid in cash and 70% by delivery of Heartland common stock. Simultaneous with the closing of the transaction, Founders Community Bank merged into Heartland's Premier Valley Bank subsidiary. As of the close date, Founders Community Bank had, at fair value, total assets of $213.3 million, total loans of $96.4 million and total deposits of $181.5 million. The systems conversion for this transaction occurred two weeks after the closing.

On July 7, 2017, Heartland completed the acquisition of Citywide Banks of Colorado, Inc., parent company of Citywide Banks, headquartered in Aurora, Colorado. Simultaneous with the close, Citywide Banks merged into Heartland's Centennial Bank and Trust subsidiary. The aggregate consideration was approximately $211.2 million, of which $58.6 million was cash, and the remainder was settled by delivery of 3,216,161 shares of Heartland common stock. The combined entity operates as Citywide Banks. As of ~~June 30, 2017,~~the close date, Citywide Banks of Colorado, Inc. had, at fair value, total assets of ~~$1.38~~$1.49 billion, including ~~$1.00 billion~~$985.4 million in net loans outstanding, and ~~$1.20~~$1.21 billion of deposits. The systems conversion for this transaction ~~is scheduled to be completed in the fourth quarter of~~occurred on October 13, 2017.

Total assets of Heartland were ~~$8.20~~$9.76 billion at ~~June~~September 30, 2017, ~~a decrease~~an increase of ~~$42.4 million~~$1.51 billion or 1%18% since year-end 2016. ~~Exclusive of the~~Excluding $213.9 million of assets acquired at fair value in the Founders Bancorp transaction and $1.49 billion of assets acquired at fair value in the Citywide Banks of Colorado, Inc. transaction, total assets decreased ~~$256.3~~$199.1 million or 3%2% since December 31, 2016. Securities represented ~~25%~~24% of total assets at ~~June~~September 30, 2017, and 26% of total assets at December 31, 2016.

Total loans held to maturity were ~~$5.33~~$6.37 billion at ~~June~~September 30, 2017, compared to $5.35 billion at year-end 2016, ~~a decrease~~an increase of ~~$26.6 million.~~$1.02 billion. This change includes $96.4 million of total loans held to maturity acquired at fair value ~~acquired~~ in the Founders Bancorp transaction and $985.4 million of total loans held to maturity acquired at fair value in the Citywide Banks of Colorado, Inc. transaction. Exclusive of ~~this transaction,~~these transactions, total loans held to maturity decreased ~~$123.1~~$60.2 million or 2%1% since December 31, 2016.

Total deposits were ~~$6.93~~$8.23 billion as of ~~June~~September 30, 2017, compared to $6.85 billion at year-end 2016, an increase of ~~$82.8 million~~$1.38 billion or 1%20%. This increase includes $181.5 million of deposits, at fair value, acquired in the Founders Bancorp transaction and $1.21 billion of deposits, at fair value, acquired in the Citywide Banks of Colorado, Inc. transaction. Exclusive of ~~this transaction,~~these transactions, total deposits decreased ~~$98.7~~$7.1 million or less than 1% since December 31, 2016.

Common stockholders' equity was ~~$805.0~~$980.7 million at ~~June~~September 30, 2017, compared to $739.6 million at year-end 2016. Book value per common share was ~~$30.15~~$32.75 at ~~June~~September 30, 2017, compared to $28.31 at year-end 2016. Heartland's unrealized loss on securities available for sale, net of applicable taxes, was ~~$23.3~~$20.1 million at ~~June~~September 30, 2017, compared to an unrealized loss of $30.2 million, net of applicable taxes, at December 31, 2016.

FINANCIAL HIGHLIGHTS


(Dollars in thousands, except per share data)	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016			2017			2016			2017			2016
STATEMENT OF INCOME DATA
Interest income	$	82,061		$	81,331		$	162,612		$	162,015		$	98,978		$	81,687		$	261,590		$	243,702
Interest expense	7,481			8,213			15,004			16,190			9,134			8,006			24,138			24,196
Net interest income	74,580			73,118			147,608			145,825			89,844			73,681			237,452			219,506
Provision for loan losses	889			2,118			4,530			4,185			5,705			5,328			10,235			9,513
Net interest income after provision for loan losses	73,691			71,000			143,078			141,640			84,139			68,353			227,217			209,993
Noninterest income	25,624			31,026			51,517			60,604			24,977			28,542			76,494			89,146
Noninterest expenses	69,298			71,020			141,038			141,329			78,759			68,427			219,797			209,756
Income taxes	8,059			10,036			13,589			19,936			8,725			8,260			22,314			28,196
Net income	21,958			20,970			39,968			40,979			21,632			20,208			61,600			61,187
Preferred dividends	(13		)	(52		)	(32		)	(220		)	(13		)	(53		)	(45		)	(273		)
Interest expense on convertible preferred debt	4			31			9			31			3			17			12			48
Net income available to common stockholders	$	21,949		$	20,949		$	39,945		$	40,790		$	21,622		$	20,172		$	61,567		$	60,962

Key Performance Ratios
Annualized return on average assets	1.06		%	1.03		%	0.97		%	1.01		%	0.89		%	0.98		%	0.94		%	1.00		%
Annualized return on average common equity (GAAP)	11.13		%	12.58		%	10.44		%	12.63		%	8.99		%	11.64		%	9.88		%	12.28		%
Annualized return on average tangible common equity (non-GAAP)⁽¹⁾	14.07		%	16.32		%	13.18		%	16.38		%	12.41		%	14.93		%	12.90		%	15.87		%
Annualized ratio of net charge-offs to average loans	0.14		%	0.01		%	0.18		%	0.04		%	0.31		%	0.17		%	0.23		%	0.09		%


(Dollars in thousands, except per share data)	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016			2017			2016			2017			2016
Annualized net interest margin (GAAP)	3.94		%	3.95		%	3.95		%	3.98		%	4.08		%	3.97		%	4.00		%	3.98		%
Annualized net interest margin, fully tax-equivalent (non-GAAP)⁽²⁾	4.14		%	4.12		%	4.15		%	4.15		%	4.26		%	4.14		%	4.19		%	4.15		%
Efficiency ratio, fully tax-equivalent⁽³⁾	65.61		%	67.95		%	67.75		%	67.43		%	64.54		%	63.88		%	66.58		%	66.23		%

Reconciliation of Return on Average Tangible Common Equity (non-GAAP)⁽⁴⁾
Net income available to common shareholders (GAAP)	$	21,949		$	20,949		$	39,945		$	40,790		$	21,622		$	20,172		$	61,567		$	60,962

Average common stockholders' equity (GAAP)	$	791,039		$	669,930		$	771,464		$	649,612		$	954,511		$	689,637		$	833,150		$	663,050
Less average goodwill	141,461			127,700			136,976			123,727			226,097			127,699			167,009			125,061
Less average other intangibles, net	23,649			25,883			23,438			25,159			36,950			24,563			27,992			24,958
Average tangible common equity (non-GAAP)	$	625,929		$	516,347		$	611,050		$	500,726		$	691,464		$	537,375		$	638,149		$	513,031
Annualized return on average common equity (GAAP)	11.13		%	12.58		%	10.44		%	12.63		%	8.99		%	11.64		%	9.88		%	12.28		%
Annualized return on average tangible common equity (non-GAAP)	14.07		%	16.32		%	13.18		%	16.38		%	12.41		%	14.93		%	12.90		%	15.87		%

Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP)⁽⁵⁾
Net Interest Income (GAAP)	$	74,580		$	73,118		$	147,608		$	145,825		$	89,844		$	73,681		$	237,452		$	219,506
Plus tax-equivalent adjustment⁽⁷⁾	3,796			3,146			7,656			6,187			3,925			3,221			11,581			9,408
Net interest income - tax-equivalent (non-GAAP)	$	78,376		$	76,264		$	155,264		$	152,012		$	93,769		$	76,902		$	249,033		$	228,914

Average earning assets	$	7,586,256		$	7,446,849		$	7,544,609		$	7,361,775		$	8,726,228		$	7,382,860		$	7,942,810		$	7,368,856
Net interest margin (GAAP)	3.94		%	3.95		%	3.95		%	3.98		%	4.08		%	3.97		%	4.00		%	3.98		%
Net interest margin, fully tax-equivalent (non-GAAP)	4.14		%	4.12		%	4.15		%	4.15		%	4.26		%	4.14		%	4.19		%	4.15		%

Reconciliation of Non-GAAP Measure-Efficiency Ratio⁽⁶⁾
Net Interest Income (GAAP)	$	74,580		$	73,118		$	147,608		$	145,825		$	89,844		$	73,681		$	237,452		$	219,506
Plus tax-equivalent adjustment⁽⁷⁾	3,796			3,146			7,656			6,187			3,925			3,221			11,581			9,408
Net interest income - tax-equivalent (non-GAAP)	78,376			76,264			155,264			152,012			93,769			76,902			249,033			228,914
Noninterest income	25,624			31,026			51,517			60,604			24,977			28,542			76,494			89,146
Securities gains, net	(1,392		)	(4,622		)	(3,874		)	(8,148		)	(1,679		)	(1,584		)	(5,553		)	(9,732		)
Adjusted income	$	102,608		$	102,668		$	202,907		$	204,468		$	117,067		$	103,860		$	319,974		$	308,328

Total noninterest expenses	$	69,298		$	71,020		$	141,038		$	141,329		$	78,759		$	68,427		$	219,797		$	209,756
Less:
Core deposit intangibles and customer relationship intangibles amortization	1,218			1,297			2,389			3,192			1,863			1,291			4,252			4,483
Partnership investment in tax credit projects	876			—			876			—			—			—			876			—
(Gain)/loss on sales/valuations of assets, net	(112		)	(43		)	300			270
Loss on sales/valuations of assets, net													1,342			794			1,642			1,064
Adjusted noninterest expenses	$	67,316		$	69,766		$	137,473		$	137,867		$	75,554		$	66,342		$	213,027		$	204,209

Efficiency ratio, fully tax-equivalent (non-GAAP)	65.61		%	67.95		%	67.75		%	67.43		%	64.54		%	63.88		%	66.58		%	66.23		%
(1) Refer to the "Reconciliation of Return on Average Tangible Common Equity (non-GAAP)" table.																									(2) Refer to the "Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP)" table.	(3) Refer to the "Reconciliation of Non-GAAP Measure-Efficiency Ratio" (non-GAAP)" table.	(4) Return on average tangible common equity is net income available to common stockholders divided by average common stockholders' equity less goodwill and core deposit intangibles and customer relationship intangibles, net. This financial measure is included as it is considered to be a critical metric to analyze and evaluate the financial condition and capital strength of Heartland. This measure should not be considered a substitute for operating results determined in accordance with GAAP.	(5) Annualized net interest margin, fully tax-equivalent is a non-GAAP measure, which 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. This measure should not be considered a substitute for operating results determined in accordance with GAAP.	(6) 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 of Heartland as it enhances the comparability of income and expenses arising from taxable and nontaxable sources and excludes specific items, as noted in the table. This measure should not be considered a substitute for operating results determined in accordance with GAAP.	(7) Computed on a tax-equivalent basis using an effective tax rate of 35%.

FINANCIAL HIGHLIGHTS, continued


(Dollars in thousands, except per share data)	As Of and For the Quarter Ended															As Of and For the Quarter Ended
	6/30/2017			3/31/2017			12/31/2016			9/30/2016			6/30/2016			9/30/2017			6/30/2017			3/31/2017			12/31/2016			9/30/2016
BALANCE SHEET DATA
Investments	$	2,070,121		$	2,175,701		$	2,131,086		$	1,943,080		$	1,859,695		$	2,372,916		$	2,070,121		$	2,175,701		$	2,131,086		$	1,943,080
Loans held for sale	48,848			49,009			61,261			78,317			82,538			35,795			48,848			49,009			61,261			78,317
Total loans receivable⁽¹⁾	5,325,082			5,361,604			5,351,719			5,438,715			5,482,258			6,373,415			5,325,082			5,361,604			5,351,719			5,438,715
Allowance for loan losses	54,051			54,999			54,324			54,653			51,756			54,885			54,051			54,999			54,324			54,653
Total assets	8,204,721			8,361,845			8,247,079			8,202,215			8,204,401			9,755,627			8,204,721			8,361,845			8,247,079			8,202,215
Total deposits	6,930,169			7,089,861			6,847,411			6,912,693			6,837,572			8,231,884			6,930,169			7,089,861			6,847,411			6,912,693
Long-term obligations	281,096			282,051			288,534			294,493			296,895			301,473			281,096			282,051			288,534			294,493
Preferred equity	938			938			1,357			1,357			3,777			938			938			938			1,357			1,357
Common stockholders’ equity	805,032			780,374			739,559			703,031			684,186			980,746			805,032			780,374			739,559			703,031

Common Share Data
Book value per common share (GAAP)	$	30.15		$	29.26		$	28.31		$	28.48		$	27.88		$	32.75		$	30.15		$	29.26		$	28.31		$	28.48
Tangible book value per common share (non-GAAP)⁽²⁾	$	24.00		$	23.05		$	22.55		$	22.34		$	21.65		$	23.61		$	24.00		$	23.05		$	22.55		$	22.34
ASC 320 effect on book value per common share	$	(0.87	)	$	(1.06	)	$	(1.15	)	$	0.03		$	0.21		$	(0.67	)	$	(0.87	)	$	(1.06	)	$	(1.15	)	$	0.03
Common shares outstanding, net of treasury stock	26,701,226			26,674,121			26,119,929			24,681,380			24,543,376			29,946,069			26,701,226			26,674,121			26,119,929			24,681,380
Tangible common equity ratio (non-GAAP)⁽³⁾	7.97		%	7.50		%	7.28		%	6.85		%	6.60		%	7.46		%	7.97		%	7.50		%	7.28		%	6.85		%

Reconciliation of Tangible Book Value Per Common Share (non-GAAP)⁽⁴⁾
Common stockholders' equity (GAAP)	$	805,032		$	780,374		$	739,559		$	703,031		$	684,186		$	980,746		$	805,032		$	780,374		$	739,559		$	703,031
Less goodwill	141,461			141,461			127,699			127,699			127,699			236,615			141,461			141,461			127,699			127,699
Less core deposit intangibles and customer relationship intangibles, net	22,850			24,068			22,775			23,922			25,213			37,028			22,850			24,068			22,775			23,922
Tangible common stockholders' equity (non-GAAP)	$	640,721		$	614,845		$	589,085		$	551,410		$	531,274		$	707,103		$	640,721		$	614,845		$	589,085		$	551,410

Common shares outstanding, net of treasury stock	26,701,226			26,674,121			26,119,929			24,681,380			24,543,376			29,946,069			26,701,226			26,674,121			26,119,929			24,681,380
Common stockholders' equity (book value) per share (GAAP)	$	30.15		$	29.26		$	28.31		$	28.48		$	27.88		$	32.75		$	30.15		$	29.26		$	28.31		$	28.48
Tangible book value per common share (non-GAAP)	$	24.00		$	23.05		$	22.55		$	22.34		$	21.65		$	23.61		$	24.00		$	23.05		$	22.55		$	22.34

Reconciliation of Tangible Common Equity Ratio (non-GAAP)⁽⁵⁾
Total assets (GAAP)	$	8,204,721		$	8,361,845		$	8,247,079		$	8,202,215		$	8,204,401		$	9,755,627		$	8,204,721		$	8,361,845		$	8,247,079		$	8,202,215
Less goodwill	141,461			141,461			127,699			127,699			127,699			236,615			141,461			141,461			127,699			127,699
Less core deposit intangibles and customer relationship intangibles, net	22,850			24,068			22,775			23,922			25,213			37,028			22,850			24,068			22,775			23,922
Total tangible assets (non-GAAP)	$	8,040,410		$	8,196,316		$	8,096,605		$	8,050,594		$	8,051,489		$	9,481,984		$	8,040,410		$	8,196,316		$	8,096,605		$	8,050,594
Tangible common equity ratio (non-GAAP)	7.97		%	7.50		%	7.28		%	6.85		%	6.60		%	7.46		%	7.97		%	7.50		%	7.28		%	6.85		%
																															(1) Excludes loans held for sale.	(2) Refer to the "Reconciliation of Tangible Book Value Per Common Share (non-GAAP)" table.	(3) Refer to the "Reconciliation of Tangible Common Equity Ratio (non-GAAP)" table.	(4) Tangible book value per common share is total common stockholders' equity less goodwill and core deposit and customer relationship intangibles, net, divided by common shares outstanding, net of treasury. This amount is a non-GAAP financial measure but has been included as it is considered to be a critical metric with which to analyze and evaluate the financial condition and capital strength of Heartland. This measure should not be considered a substitute for operating results determined in accordance with GAAP.	(5) The tangible common equity ratio is total common stockholders' equity less goodwill and core deposit intangibles, net divided by total assets less goodwill and core deposit intangibles, net. This ratio is a non-GAAP financial measure but has been included as it is considered to be a critical metric with which to analyze and evaluate the financial condition and capital strength of Heartland. This measure should not be considered a substitute for operating results determined in accordance with GAAP.

RESULTS OF OPERATIONS

Net Interest Income

Net interest margin, expressed as a percentage of average earning assets, was ~~3.94%~~4.08% (4.26% on a fully tax-equivalent basis) during the third quarter of 2017, compared to 3.97% (4.14% on a fully tax-equivalent basis) during the ~~second quarter of 2017, compared to 3.95% (4.12% on a fully tax-equivalent basis) during the second~~third quarter of 2016. Heartland's success in maintaining net interest margin ~~at or near the 4.00% level~~ has been the result of improved yield on earning assets and continuous loan and deposit pricing discipline. Also contributing to Heartland's ability to maintain its net interest margin has been the amortization of purchase accounting discounts associated with acquisitions completed by Heartland. See "Analysis of Average Balances, Tax-Equivalent Yields and Rates" for a description of our use of net interest income 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.

Interest income for the ~~second~~third quarter of 2017 was ~~$82.1~~$99.0 million, an increase of ~~$730,000~~$17.3 million or 1%21%, compared to ~~the $81.3~~$81.7 million recorded in the ~~second~~third quarter of 2016. The tax-equivalent adjustments for income taxes saved on the interest earned on nontaxable securities and loans were ~~$3.8~~$3.9 million for the ~~second~~third quarter of 2017 and ~~$3.1~~$3.2 million for the ~~second~~third quarter of 2016. With these adjustments, interest income on a tax-equivalent basis was ~~$85.9~~$102.9 million for the ~~second~~third quarter of 2017, an increase of ~~$1.4~~$18.0 million or 21%, compared to ~~$84.5~~$84.9 million for the ~~second~~third quarter of 2016. The increase in interest income on a fully tax-equivalent basis in the third quarter of 2017, as compared to the third quarter of 2016, was primarily due to the acquisitions completed in 2017. For the third quarter of 2017, average earning assets attributable to the Founders Bancorp transaction totaled $147.6 million, and average earning assets attributable to the Citywide Banks of Colorado, Inc. transaction totaled $1.20 billion. Exclusive of these transactions, average earning assets decreased $7.4 million or less than 1% from the third quarter of 2016. The average interest rate earned on average earning assets increased 10 basis points to 4.68% for the third quarter of 2017 compared to 4.58% for the same quarter in 2016.

For the first ~~six~~nine months of 2017, interest income increased ~~$597,000~~$17.9 million or ~~less than 1%~~7% to ~~$162.6~~$261.6 million from ~~$162.0~~$243.7 million for the first ~~six~~nine months of 2016. The tax-equivalent adjustments for income taxes saved on the interest earned on nontaxable securities and loans were ~~$7.7~~$11.6 million and ~~$6.2~~$9.4 million for the first ~~six~~nine months of 2017 and 2016, respectively. With these adjustments, interest income on a tax-equivalent basis was ~~$170.3~~$273.2 million during the first ~~six~~nine months of 2017 compared to ~~$168.2~~$253.1 million during the first ~~six~~nine months of 2016, an increase of ~~$2.1~~$20.1 million or 1%8%. The increase in interest income on a tax-equivalent basis during 2017 was primarily due to an increase in average earning assets, which totaled $7.59 billion during the second quarter of 2017 compared to $7.45 billion during the second quarter of 2016, a $139.4 million or 2% increase. For the first ~~six~~nine months of 2017, average earning assets were ~~$7.54~~$7.94 billion compared to ~~$7.36~~$7.37 billion during the first ~~six~~nine months of 2016, an increase of ~~$182.8~~$574.0 million or 2%8%. Excluding $521.2 million of average earning assets attributable to the acquisitions completed in 2017, average earning assets increased $52.8 million or 1% for the first nine months of 2017 compared to the same period in 2016.

Interest expense for the ~~second~~third quarter of 2017 was ~~$7.5~~$9.1 million, ~~a decrease~~an increase of ~~$732,000~~$1.1 million or 9%14% from ~~$8.2~~$8.0 million in the ~~second~~third quarter of 2016. ~~Interest expense for the first six months of 2017 was $15.0 million compared to $16.2 million for the first six months of 2016, a decrease of $1.2 million or 7%.~~ For the quarter ended ~~June~~September 30, 2017, average interest bearing liabilities were ~~$5.15~~$5.70 billion, ~~a decrease~~an increase of ~~$217.2~~$473.5 million or 4%9%, from ~~$5.36~~$5.22 billion for the quarter ended ~~June~~September 30, 2016. ~~In addition,~~Average interest bearing deposits increased $520.3 million or 11% to $5.19 billion for the quarter ended September 30, 2017, from $4.67 billion in the same quarter in 2016. Average interest bearing deposits attributable to the Founders Bancorp and the Citywide Banks of Colorado, Inc. transactions totaled $713.3 million for the third quarter of 2017. Exclusive of these transactions, average interest bearing deposits decreased $193.0 million or 4% for the third quarter of 2017 in comparison with the same quarter in 2016. The average interest rate paid on Heartland's interest bearing deposits ~~and borrowings declined 4~~increased 5 basis points to ~~0.58% in~~0.39% for the ~~second~~third quarter of 2017 ~~from 0.62%~~compared to 0.34% for the same quarter in 2016. Average borrowings attributable to the Citywide Banks of Colorado, Inc. transaction totaled $51.8 million, and exclusive of this transaction, average borrowings declined $98.6 million or 18% during the third quarter of 2017 compared to the same quarter in 2016. The average interest rate paid on Heartland's borrowings was 3.16% for the third quarter of 2017 compared to 2.86% in the ~~second~~third quarter of 2016.

Interest expense for the first nine months of 2017 was $24.1 million compared to $24.2 million for the first nine months of 2016, a decrease of $58,000 or less than 1%. Average interest bearing liabilities ~~decreased $149.8~~increased $60.1 million or 3%1% for the first ~~six~~nine months of 2017 compared to the first ~~six~~nine months in ~~2016, while~~2016. Excluding $296.8 million of interest bearing liabilities attributable to the Founders Bancorp and Citywide Banks of Colorado, Inc. transactions, average interest bearing liabilities decreased $236.6 million or 4% during the nine months ended September 30, 2017, compared to the same period in 2016. The average interest rate paid on Heartland's interest bearing ~~deposits and borrowings~~liabilities declined 21 basis ~~points~~point to ~~0.59% in~~0.60% for the first ~~six~~nine months of 2017 from 0.61% infor the first ~~six~~nine months of 2016. The average interest rate paid on savings deposits was 0.26% ~~during~~for the ~~second quarter~~first nine months of 2017 compared to 0.22% for the ~~second quarter of 2016, and the average interest rate paid on time deposits was 0.80% for both the second quarter of 2017 and 2016. For the~~ first ~~six months of 2017, the average interest rate paid on savings deposits was 0.24% compared to 0.22% for the first six~~nine months of 2016, and the average interest rate paid on time deposits was 0.79% for the nine-month period ended September 30, 2017 compared to 0.80% for ~~both six-month periods ending June~~the same period in 2016. The average interest rate paid on Heartland's borrowings increased 37 basis points to 3.06% for the nine months ended September 30, 2017 ~~and~~compared to 2.69% for the nine months ended September 30, 2016.

Net interest income increased ~~$1.5~~$16.2 million or 2%22% to ~~$74.6~~$89.8 million in the ~~second~~third quarter of 2017 from ~~$73.1~~$73.7 million in the ~~second~~third quarter of 2016. After the tax-equivalent adjustment discussed above, net interest income on a tax-equivalent basis totaled ~~$78.4~~$93.8 million during the ~~second~~third quarter of 2017, an increase of ~~$2.1~~$16.9 million or 3%22% from ~~$76.3~~$76.9 million during the ~~second~~third quarter of 2016. For the first ~~six~~nine months of 2017, net interest income increased ~~$1.8~~$17.9 million or 1%8% to ~~$147.6~~$237.5 million from ~~$145.8~~$219.5 million recorded in the first ~~six~~nine months of 2016. After the tax-equivalent adjustment discussed above, net interest income on a tax-equivalent basis totaled ~~$155.3~~$249.0 million during the first ~~six~~nine months of 2017, an increase of ~~$3.3~~$20.1 million or 2%9% from ~~$152.0~~$228.9 million recorded during the first ~~six~~nine months of 2016.

Heartland attempts to manage its balance sheet to minimize the effect that a change in interest rates has on its net interest margin. Heartland plans to continue to work toward improving both its earning assets and funding mix through targeted organic growth strategies, which management believes will result in additional net interest income. Heartland believes its net interest income simulations reflect a well-balanced and manageable interest rate posture. ~~Approximately 39%~~Excluding the loans acquired in the Citywide Banks of Colorado, Inc. transaction, approximately 38% of Heartland's commercial and agricultural loan portfolios consist of floating rate loans that reprice based upon changes in the national prime or LIBOR interest rate, and approximately 9% of these floating rate loans have interest rate floors that are currently in effect. Item 3 of Part I of this Form 10-Q report contains additional information about the results of Heartland's most recent net interest income simulations. Note 7 to the consolidated financial statements included in this Quarterly Report on Form 10-Q contains a detailed discussion of the derivative instruments Heartland has utilized to manage its interest rate risk.

The following table sets forth certain information relating to Heartland's average consolidated balance sheets and reflects the yield on average earning assets and the cost of average interest bearing liabilities for the periods indicated, in thousands. Such yields and costs are calculated by dividing income or expense by the average balance of assets or liabilities. Average balances are derived from daily balances, and nonaccrual loans and loans held for sale are included in each respective loan category. Assets that receive tax favorable treatment are evaluated on a tax-equivalent basis assuming a federal income tax rate of 35%. 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 this amount by the average balance of the tax favorable assets.


ANALYSIS OF AVERAGE BALANCES, TAX-EQUIVALENT YIELDS AND RATES⁽¹⁾ Dollars in thousands
ANALYSIS OF AVERAGE BALANCES, TAX-EQUIVALENT YIELDS AND RATES⁽¹⁾ (Dollars in thousands)																	ANALYSIS OF AVERAGE BALANCES, TAX-EQUIVALENT YIELDS AND RATES⁽¹⁾ (Dollars in thousands)
	For the Quarter Ended																For the Quarter Ended
	June 30, 2017								June 30, 2016								September 30, 2017								September 30, 2016
	Average Balance			Interest			Rate		Average Balance			Interest			Rate		Average Balance			Interest			Rate		Average Balance			Interest			Rate
Earning Assets
Securities:
Taxable	$	1,516,745		$	8,599		2.27	%	$	1,468,896		$	7,903		2.16	%	$	1,667,076		$	10,394		2.47	%	$	1,415,446		$	7,917		2.23	%
Nontaxable⁽¹⁾	624,915			7,723			4.96		430,086			5,486			5.13		643,925			7,825			4.82		473,152			5,719			4.81
Total securities	2,141,660			16,322			3.06		1,898,982			13,389			2.84		2,311,001			18,219			3.13		1,888,598			13,636			2.87
Interest bearing deposits with the Federal Reserve Bank and other banks and other short-term investments	121,778			345			1.14		10,727			52			1.95		164,809			558			1.34		7,026			6			0.34
Federal funds sold	1,262			3			0.95		5,114			1			0.08		18,874			34			0.71		1,409			1			0.28
Loans:⁽²⁾
Commercial and commercial real estate⁽¹⁾	3,824,061			46,912			4.92		3,866,861			46,889			4.88		4,647,414			59,121			5.05		3,908,623			48,334			4.92
Residential mortgage	633,344			6,509			4.12		803,952			8,286			4.15		683,186			7,300			4.24		717,374			7,248			4.02
Agricultural and agricultural real estate⁽¹⁾	488,222			5,807			4.77		481,625			5,504			4.60		504,970			6,175			4.85		486,008			5,719			4.68
Consumer	431,199			8,289			7.71		430,440			8,273			7.73		450,694			9,032			7.95		426,083			8,256			7.71
Fees on loans				1,670			—		—			2,083			—					2,464			—		—			1,708			—
Less: allowance for loan losses	(55,270		)	—			—		(50,852		)	—			—		(54,720		)	—			—		(52,261		)	—			—
Net loans	5,321,556			69,187			5.21		5,532,026			71,035			5.16		6,231,544			84,092			5.35		5,485,827			71,265			5.17
Total earning assets	7,586,256			85,857			4.54	%	7,446,849			84,477			4.56	%	8,726,228			102,903			4.68	%	7,382,860			84,908			4.58	%
Nonearning Assets	747,045								764,477								913,616								789,823
Total Assets	$	8,333,301							$	8,211,326							$	9,639,844							$	8,172,683
Interest Bearing Liabilities
Savings	$	3,881,219		$	2,505		0.26	%	$	3,699,971		$	2,028		0.22	%	$	4,205,946		$	3,162		0.30	%	$	3,697,426		$	2,066		0.22	%
Time, $100,000 and over	350,786			727			0.83		421,151			733			0.70		408,560			787			0.76		399,498			813			0.81
Other time deposits	479,164			931			0.78		586,810			1,260			0.86		573,178			1,124			0.78		570,445			1,122			0.78
Short-term borrowings	153,565			90			0.24		373,768			519			0.56		209,795			271			0.51		258,783			235			0.36
Other borrowings	281,509			3,228			4.60		281,777			3,673			5.24		300,234			3,790			5.01		298,020			3,770			5.03
Total interest bearing liabilities	5,146,243			7,481			0.58	%	5,363,477			8,213			0.62	%	5,697,713			9,134			0.64	%	5,224,172			8,006			0.61	%
Noninterest Bearing Liabilities
Noninterest bearing deposits	2,338,957								2,098,327								2,912,344								2,171,965
Accrued interest and other liabilities	56,124								75,815								74,338								84,142
Total noninterest bearing liabilities	2,395,081								2,174,142								2,986,682								2,256,107
Stockholders' Equity	791,977								673,707								955,449								692,404
Total Liabilities and Stockholders' Equity	$	8,333,301							$	8,211,326							$	9,639,844							$	8,172,683
Net interest income, fully tax-equivalent (non-GAAP)⁽¹⁾				$	78,376							$	76,264							$	93,769							$	76,902
Net interest spread⁽¹⁾							3.96	%							3.94	%							4.04	%							3.97	%
Net interest income, fully tax-equivalent (non-GAAP) to total earning assets⁽³⁾							4.14	%							4.12	%							4.26	%							4.14	%
Interest bearing liabilities to earning assets	67.84		%						72.02		%						65.29		%						70.76		%

Reconciliation of Annualized Net Interest Margin, Fully Taxable Equivalent (non-GAAP)⁽³⁾

Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP)⁽³⁾
Net interest income, fully tax-equivalent (non-GAAP)				$	78,376							$	76,264							$	93,769							$	76,902
Adjustments for tax-equivalent interest⁽¹⁾				(3,796		)						(3,146		)						(3,925		)						(3,221		)
Net interest income (GAAP)				$	74,580							$	73,118							$	89,844							$	73,681

Average Earning Assets	$	7,586,256							$	7,446,849							$	8,726,228							$	7,382,860
Annualized net interest margin (GAAP)							3.94	%							3.95	%							4.08	%							3.97	%
Annualized net interest margin, fully taxable equivalent (non-GAAP)							4.14	%							4.12	%
Annualized net interest margin, fully tax-equivalent (non-GAAP)																							4.26	%							4.14	%

(1)Computed on a tax-equivalent basis using an effective tax rate of 35%	(1)Computed on a tax-equivalent basis using an effective tax rate of 35%																(1)Computed on a tax-equivalent basis using an effective tax rate of 35%
(2) Nonaccrual loans are included in the average loans outstanding.																																	(3) Annualized net interest margin, fully tax-equivalent is a non-GAAP measure, which 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. This measure should not be considered a substitute for operating results determined in accordance with GAAP.


ANALYSIS OF AVERAGE BALANCES, TAX-EQUIVALENT YIELDS AND RATES⁽¹⁾ Dollars in thousands
ANALYSIS OF AVERAGE BALANCES, TAX-EQUIVALENT YIELDS AND RATES⁽¹⁾ (Dollars in thousands)																	ANALYSIS OF AVERAGE BALANCES, TAX-EQUIVALENT YIELDS AND RATES⁽¹⁾ (Dollars in thousands)
	For the Six Months Ended																For the Nine Months Ended
	June 30, 2017								June 30, 2016								September 30, 2017								September 30, 2016
	Average Balance			Interest			Rate		Average Balance			Interest			Rate		Average Balance			Interest			Rate		Average Balance			Interest			Rate
Earning Assets
Securities:
Taxable	$	1,483,087		$	16,852		2.29	%	$	1,488,664		$	16,547		2.24	%	$	1,545,091		$	27,246		2.36	%	$	1,464,080		$	24,604		2.24	%
Nontaxable⁽¹⁾	635,168			15,709			4.99		423,655			10,886			5.17		638,119			23,534			4.93		440,275			16,605			5.04
Total securities	2,118,255			32,561			3.10		1,912,319			27,433			2.88		2,183,210			50,780			3.11		1,904,355			41,209			2.89
Interest bearing deposits with the Federal Reserve Bank and other banks and other short-term investments	109,095			554			1.02		11,180			147			2.64		127,870			1,112			1.16		9,785			13			0.18
Federal funds sold	791			3			0.76		18,120			11			0.12		6,885			37			0.72		12,509			12			0.13
Loans:⁽²⁾
Commercial and commercial real estate⁽¹⁾	3,818,689			92,825			4.90		3,805,401			93,643			4.95		4,097,967			151,946			4.96		3,840,060			141,977			4.94
Residential mortgage	639,902			13,192			4.16		769,043			15,885			4.15		654,488			20,492			4.19		751,694			23,133			4.11
Agricultural and agricultural real estate⁽¹⁾	485,665			11,361			4.72		474,801			11,233			4.76		492,170			17,536			4.76		478,564			16,952			4.73
Consumer	427,015			16,342			7.72		421,245			16,196			7.73		434,995			25,374			7.80		422,869			24,452			7.72
Fees on loans				3,430			—					3,654			—					5,894			—					5,362			—
Less: allowance for loan losses	(54,803		)	—			—		(50,334		)	—			—		(54,775		)	—			—		(50,980		)	—			—
Net loans	5,316,468			137,150			5.20		5,420,156			140,611			5.22		5,624,845			221,242			5.26		5,442,207			211,876			5.20
Total earning assets	7,544,609			170,268			4.55	%	7,361,775			168,202			4.59	%	7,942,810			273,171			4.60	%	7,368,856			253,110			4.59	%
Nonearning Assets	739,072								756,423								797,893								767,636
Total Assets	$	8,283,681							$	8,118,198							$	8,740,703							$	8,136,492
Interest Bearing Liabilities
Savings	$	3,859,730		$	4,610		0.24	%	$	3,628,089		$	3,922		0.22	%	$	3,976,403		$	7,772		0.26	%	$	3,651,370		$	5,988		0.22	%
Time, $100,000 and over	349,789			1,452			0.84		459,885			1,604			0.70		369,595			2,239			0.81		439,609			2,417			0.73
Other time deposits	481,736			1,831			0.77		614,556			2,668			0.87		512,551			2,955			0.77		599,745			3,790			0.84
Short-term borrowings	194,272			227			0.24		342,464			848			0.50		199,503			498			0.33		314,367			1,083			0.46
Other borrowings	282,948			6,884			4.91		273,326			7,148			5.26		288,774			10,674			4.94		281,617			10,918			5.18
Total interest bearing liabilities	5,168,475			15,004			0.59	%	5,318,320			16,190			0.61	%	5,346,826			24,138			0.60	%	5,286,708			24,196			0.61	%
Noninterest Bearing Liabilities
Noninterest bearing deposits	2,282,642								2,040,105								2,494,850								2,084,379
Accrued interest and other liabilities	59,989								75,034								64,824								78,093
Total noninterest bearing liabilities	2,342,631								2,115,139								2,559,674								2,162,472
Stockholders' Equity	772,575								684,739								834,203								687,312
Total Liabilities and Stockholders' Equity	$	8,283,681							$	8,118,198							$	8,740,703							$	8,136,492
Net interest income, fully tax-equivalent (non-GAAP)⁽¹⁾				$	155,264							$	152,012							$	249,033							$	228,914
Net interest spread⁽¹⁾							3.96	%							3.98	%							4.00	%							3.98	%
Net interest income, fully tax-equivalent (non-GAAP) to total earning assets⁽³⁾							4.15	%							4.15	%							4.19	%							4.15	%
Interest bearing liabilities to earning assets	68.51		%						72.24		%						67.32		%						71.74		%

Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP)⁽³⁾

Net interest income, fully tax-equivalent (non-GAAP)				$	155,264							$	152,012							$	249,033							$	228,914
Adjustments for tax-equivalent interest⁽¹⁾				(7,656		)						(6,187		)						(11,581		)						(9,408		)
Net interest income (GAAP)				$	147,608							$	145,825							$	237,452							$	219,506

Average Earning Assets	$	7,544,609							$	7,361,775							$	7,942,810							$	7,368,856
Annualized net interest margin (GAAP)							3.95	%							3.98	%							4.00	%							3.98	%
Annualized net interest margin, fully tax-equivalent (non-GAAP)							4.15	%							4.15	%							4.19	%							4.15	%

(1)Computed on a tax-equivalent basis using an effective tax rate of 35%.	(1)Computed on a tax-equivalent basis using an effective tax rate of 35%.																(1)Computed on a tax-equivalent basis using an effective tax rate of 35%.
(2) Nonaccrual loans are included in the average loans outstanding.																																	(3) Annualized net interest margin, fully tax-equivalent is a non-GAAP measure, which 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. This measure should not be considered a substitute for operating results determined in accordance with GAAP.

Provision For Loan Losses

The allowance for loan losses is established through provision expense to provide, in Heartland management's opinion, an appropriate allowance for loan losses. The provision for loan losses was ~~$889,000~~$5.7 million for the ~~second~~third quarter of 2017 compared to ~~$2.1~~$5.3 million for the ~~second~~third quarter of 2016. For the first ~~six~~nine months of 2017, the provision for loan losses was ~~$4.5~~$10.2 million compared to ~~$4.2~~$9.5 million for the first ~~six~~nine months of 2016. In determining that the allowance for loan losses is appropriate, management uses factors that include the overall composition of the loan portfolio, general economic conditions, types of loans, loan collateral values, past loss experience, loan delinquencies, substandard credits, and doubtful credits. Given the size of Heartland's loan portfolio, the level of organic loan growth, acquired loans that move out of the purchase accounting pool, changes in credit quality and the variability that can occur in the factors considered when determining the appropriateness of the allowance for loan losses, Heartland's quarterly provision for loan losses will vary from quarter to quarter. For additional details on the specific factors considered in establishing the allowance for loan losses, refer to the discussion of critical accounting policies set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Heartland's Annual Report on Form 10-K for the year ended December 31, 2016, and the information under the caption "Allowance For Loan Losses" in Item 2 of this Quarterly Report on Form 10-Q and Note 5 to the consolidated financial statements included herein.

Given the size of Heartland's loan portfolio, the level of organic loan growth, acquired loans that move out of the purchase accounting pool, changes in credit quality and the variability that can occur in the factors considered when determining the appropriateness of the allowance for loan losses, Heartland's quarterly provision for loan losses will vary from quarter to quarter.

During the ~~second quarter~~first nine months of 2017, Heartland’s credit quality ~~was~~remained relatively stable as nonperforming loans increased $1.4 million or 2% to $65.8 million from $64.4 million at December 31, 2016, and delinquent loan levels improved to 0.33% from 0.37% at December 31, 2016. Net charge-offs for the nine months ended September 30, 2017, were ~~largely unchanged, and~~$9.7 million compared to $3.5 million for the ~~charge-offs~~same period in 2016. Included in the ~~quarter~~net charge-offs recorded in 2017 were $3.0 million of charge-offs related to two commercial and industrial loan relationships at Dubuque Bank and Trust and Arizona Bank & Trust and $3.7 million of charge-offs at Heartland's ~~subsidiary banks were primarily attributable to loans with~~consumer finance subsidiary. During the nine months ended September 30, 2016, a ~~specific reserve that had been provided for in previous quarters. As~~recovery of $2.3 million was recorded on a result, the provision expense recorded for both the three- and six-month periods ended June 30, 2017, was primarily due to the movement of acquired loans out of the purchase accounting pool and minor fluctuations in the variables that management uses to determine the allowance.previously charged-off loan.

Heartland believes the allowance for loan losses as of ~~June~~September 30, 2017, was at a level commensurate with the overall risk exposure of the loan portfolio. However, if economic conditions should become more unfavorable, certain borrowers may experience difficulty and the level of nonperforming loans, charge-offs and delinquencies could rise and require further increases in the provision for loan losses.

Noninterest Income

The ~~table~~tables below ~~shows~~show Heartland's noninterest income for the three- and ~~six-month~~nine-month periods ended ~~June~~September 30, 2017 and 2016, in thousands:


	Three Months Ended June 30,										Three Months Ended September 30,
	2017		2016			Change			% Change		2017		2016		Change			% Change
Service charges and fees	$	9,696	$	8,022		$	1,674		21	%	$	10,138	$	8,278	$	1,860		22	%
Loan servicing income	1,351		1,292			59			5		1,161		873		288			33
Trust fees	3,979		3,625			354			10		3,872		3,689		183			5
Brokerage and insurance commissions	976		886			90			10		950		1,006		(56		)	(6	)
Securities gains, net	1,392		4,622			(3,230		)	(70	)	1,679		1,584		95			6
Net gains on sale of loans held for sale	6,817		11,270			(4,453		)	(40	)	4,997		11,459		(6,462		)	(56	)
Valuation adjustment on commercial servicing rights	19		(46		)	65			141		5		5		—			—
Income on bank owned life insurance	656		591			65			11		766		620		146			24
Other noninterest income	738		764			(26		)	(3	)	1,409		1,028		381			37
Total noninterest income	$	25,624	$	31,026		$	(5,402	)	(17	)%	$	24,977	$	28,542	$	(3,565	)	(12	)%

Six Months Ended
June 30,
2017 2016 Change % Change
Service charges and fees $ 19,153
$ 15,184
$ 3,969
26 %
Loan servicing income 3,075
2,560
515
20
Trust fees 7,610
7,438
172
2
Brokerage and insurance commissions 2,012
1,908
104
5
Securities gains, net 3,874
8,148
(4,274 ) (52 )
Net gains on sale of loans held for sale 12,964
22,335
(9,371 ) (42 )
Valuation adjustment on commercial servicing rights 24
(46 ) 70
152
Income on bank owned life insurance 1,273
1,113
160
14
Other noninterest income 1,532
1,964
(432 ) (22 )
Total noninterest income $ 51,517
$ 60,604
$ (9,087 ) (15 )%



	Nine Months Ended September 30,
	2017		2016			Change			% Change
Service charges and fees	$	29,291	$	23,462		$	5,829		25	%
Loan servicing income	4,236		3,433			803			23
Trust fees	11,482		11,127			355			3
Brokerage and insurance commissions	2,962		2,914			48			2
Securities gains, net	5,553		9,732			(4,179		)	(43	)
Net gains on sale of loans held for sale	17,961		33,794			(15,833		)	(47	)
Valuation adjustment on commercial servicing rights	29		(41		)	70			(171	)
Income on bank owned life insurance	2,039		1,733			306			18
Other noninterest income	2,941		2,992			(51		)	(2	)
Total noninterest income	$	76,494	$	89,146		$	(12,652	)	(14	)%

Noninterest income totaled ~~$25.6~~$25.0 million during the ~~second~~third quarter of 2017 compared to ~~$31.0~~$28.5 million during the ~~second~~third quarter of 2016, a decrease of ~~$5.4~~$3.6 million or ~~17%~~12%. For the ~~six-month~~nine-month period ended on ~~June~~September 30, noninterest income totaled ~~$51.5~~$76.5 million during 2017 compared to ~~$60.6~~$89.1 million during 2016, a decrease of ~~$9.1~~$12.7 million or ~~15%~~14%. Decreases in noninterest income for both the quarterly and ~~six-month period comparisons~~nine-month periods under comparison reflected lower net gains on sale of loans held for sale, ~~and securities gains, net,~~ the effect of which was partially offset by increased service charges and fees.

Service Charges and Fees

The following tables summarize the changes in service charges and fees for the three- and nine-month periods ended September 30, 2017 and 2016, in thousands:



	Three Months Ended September 30,
	2017		2016		Change			% Change
Service charges and fees on deposit accounts	$	2,577	$	2,018	$	559		28	%
Overdraft fees	2,479		2,285		194			8
Customer service fees	102		55		47			85
Credit card fee income	1,994		1,290		704			55
Debit card income	2,985		2,629		356			14
Other service charges	1		1		—			—
Total service charges and fees	$	10,138	$	8,278	$	1,860		22	%

	Nine Months Ended September 30,
	2017		2016		Change			% Change
Service charges and fees on deposit accounts	$	7,002	$	5,968	$	1,034		17	%
Overdraft fees	6,950		6,342		608			10
Customer service fees	217		161		56			35
Credit card fee income	6,212		3,431		2,781			81
Debit card income	8,908		7,532		1,376			18
Other service charges	2		27		(25		)	(93	)
Total service charges and fees	$	29,291	$	23,462	$	5,829		25	%

Service charges and fees increased ~~$1.7~~$1.9 million or ~~21%~~22% to ~~$9.7~~$10.1 million during the ~~second~~third quarter of 2017 compared to ~~$8.0~~$8.3 million recorded during the ~~second~~third quarter of 2016 and ~~$4.0~~$5.8 million or ~~26%~~25% to ~~$19.2~~$29.3 million during the first six months of 2017 compared $15.2 million for the first six months of 2016. Service charges on checking and savings accounts recorded during the second quarter of 2017 were $2.3 million compared to $2.1 million during the second quarter of 2016, an increase of $210,000 or 10%. ~~For the six months ended June 30, service charges on checking and savings accounts totaled $4.4 million during 2017 compared to $3.9 million during 2016, an increase of $476,000 or 12%.~~ Overdraft fees were $2.3 million during the second quarter of 2017 compared to $2.1 million during the second quarter of 2016, an increase of $172,000 or 8%. Overdraft fees increased $414,000 or 10% to $4.5 million for the six months ended June 30, 2017 compared to $4.1 million for the same period in 2016. Interchange revenue from activity on bank debit cards, along with surcharges on ATM activity, resulted in service charges and fees of $2.9 million during the second quarter of 2017 compared to $2.6 million during the second quarter of 2016, an increase of $333,000 or 13%. These same fees were $5.9 million during first sixnine months of 2017 compared to ~~$4.9~~$23.5 million ~~during~~for the first ~~six~~nine months of ~~2016, an increase of $1.0 million or 21%.~~2016. Increases in service charges and fees were primarily attributable to a larger demand deposit customer base, a portion of which is attributable to the acquisitions completed ~~during the first quarters of 2016 and~~in 2017. Fees associated with credit card services were ~~$2.2~~$2.0 million during the ~~second~~third quarter of 2017 compared to ~~$1.2~~$1.3 million during the ~~second~~third quarter of 2016, an increase of ~~$1.0 million~~$704,000 or ~~77%~~55%. For the first ~~six~~nine months of 2017, these fees were ~~$4.2~~$6.2 million compared to ~~$2.1~~$3.4 million during the first ~~six~~nine months of 2016, an increase of ~~$2.1~~$2.8 million or ~~97%~~81%. This increase resulted primarily from efforts to increase the level of commercial credit card services provided at Heartland's subsidiary banks, including at the newly acquired banks in California and Colorado. Heartland ~~recently enhanced~~has focused on growing its card payment solutions for businesses, particularly with ~~the rollout of a more robust~~its expense management service that provides business customers the ability to more efficiently manage their card-based spending.

Loan Servicing Income

The following tables show the changes in loan servicing income for the three- and nine-month periods ended September 30, 2017, and 2016, in thousands:



	Three Months Ended September 30,
	2017			2016			Change			% Change
Commercial and agricultural loan servicing fees⁽¹⁾	$	684		$	730		$	(46	)	(6	)%
Residential mortgage servicing fees	2,932			3,111			(179		)	(6	)
Mortgage servicing rights amortization	(2,455		)	(2,968		)	513			(17	)
Total loan servicing income	$	1,161		$	873		$	288		33	%

	Nine Months Ended September 30,
	2017			2016			Change			% Change
Commercial and agricultural loan servicing fees⁽¹⁾	$	2,101		$	2,197		$	(96	)	(4	)%
Residential mortgage servicing fees	9,319			9,031			288			3
Mortgage servicing rights amortization	(7,184		)	(7,795		)	611			(8	)
Total loan servicing income	$	4,236		$	3,433		$	803		23	%

(1) Includes servicing fees for commercial, commercial real estate, agricultural and agricultural real estate loans

Loan servicing income includes the fees collected for the servicing of commercial, agricultural, and mortgage loans, which are dependent upon the aggregate outstanding balances of these loans, rather than quarterly production and sale of these loans. Loan servicing income totaled ~~$1.4~~$1.2 million during the ~~second~~third quarter of 2017 compared to ~~$1.3 million~~$873,000 during the ~~second~~third quarter of 2016, an increase of ~~$59,000~~$288,000 or 5%33%. On a ~~six-month~~nine-month comparative basis, loan servicing income totaled ~~$3.1~~$4.2 million during 2017 compared to ~~$2.6~~$3.4 million during 2016, an increase of ~~$515,000~~$803,000 or ~~20%~~23%. ~~Loan servicing income related to~~

During the ~~servicing of commercial and agricultural loans totaled $604,000 during the second~~third quarter of 2017, ~~compared~~Heartland entered into an agreement to ~~$870,000 during the second quarter~~sell substantially all of ~~2016,~~its GNMA servicing portfolio, which contained loans with an unpaid principal balance of approximately $773.9 million. The transaction qualifies as a ~~decrease of $266,000 or 31%. For the first six months of the year, fees collected for commercial~~sale, and ~~agricultural loan servicing totaled $1.4~~$6.9 million for 2017 compared to $1.5 million in 2016, a decrease of $50,000 or 3%. Fees collected for the servicing of mortgage loans, primarily for government sponsored entities, were $3.2 million during the second quarter of 2017 compared to $3.0 million during the second quarter of 2016, an increase of $226,000 or 8%. For the first six months of the year, fees collected for the servicing of mortgage loans, primarily for government sponsored entities, were $6.4 million during 2017 compared to $5.9 million during 2016, an increase of $468,000 or 8%. Included in and offsetting loan servicing income is the amortization of mortgage servicing rights ~~which~~have been de-recognized on the consolidated balance sheet as of September 30, 2017. Cash of approximately $5.1 million was ~~$2.5 million~~received during the ~~second~~third quarter, and Heartland recorded an estimated loss on the sale of ~~2017 and compared~~this portfolio of approximately $183,000. A receivable of approximately $1.6 million was recorded due to ~~$2.6 million during~~ the ~~second quarter of 2016, a decrease of $99,000 or 4%. For the first six months~~timing of the ~~year,~~servicing transfer per the ~~amortization~~terms of the sale agreement and to address indemnification claims and mortgage servicing rights was $4.7 million during 2017 compared to $4.8 million during 2016, a decrease of $96,000 or 2%. The portfolio of mortgage loans serviced primarily for government sponsored entities by Heartland totaled approximately $4.34 billion at June 30, 2017, compared to $4.20 billion at June 30, 2016.loan documentation deficiencies.

Net Gains on Sale of Loans Held for Sale

The following table ~~summarizes Heartland's residential mortgage loan~~shows the activity related to the net gains on sales of loans held for sale during the ~~most recent five quarters,~~three- and nine-month periods ended September 30, 2017, and 2016, in thousands:

As Of and For the Quarter Ended
6/30/2017 3/31/2017 12/31/2016 9/30/2016 6/30/2016
Mortgage Servicing Fees $ 3,215
$ 3,172
$ 3,116
$ 3,111
$ 2,989
Mortgage Servicing Rights Amortization (2,468 ) (2,261 ) (2,698 ) (2,968 ) (2,567 )
Total Residential Mortgage Loan Servicing Income $ 747
$ 911
$ 418
$ 143
$ 422
Net Gains On Sale of Residential Mortgage Loans $ 6,628
$ 5,947
$ 5,664
$ 11,061
$ 10,707
Total Residential Mortgage Loan Applications $ 308,113
$ 248,614
$ 304,018
$ 445,107
$ 440,907
Residential Mortgage Loans Originated $ 216,637
$ 161,851
$ 278,065
$ 324,337
$ 324,633
Residential Mortgage Loans Sold $ 180,296
$ 172,521
$ 269,333
$ 315,917
$ 302,448
Residential Mortgage Loan Servicing Portfolio $ 4,340,243
$ 4,338,311
$ 4,308,580
$ 4,259,459
$ 4,203,429



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Total residential mortgage loan applications	$	271,476		$	445,107		$	828,203		$	1,293,013
Residential mortgage loans originated	$	198,911		$	324,337		$	577,399		$	887,236
Residential mortgage loans sold	$	188,501		$	315,917		$	541,318		$	838,746
Net gains on sale of residential mortgage loans	$	4,821		$	11,061		$	17,396		$	32,136
Net gains on sale of commercial and agricultural loans⁽¹⁾	$	176		$	398		$	565		$	1,658
Percentage of residential mortgage loans originated for refinancing	31		%	38		%	30		%	37		%

(1) Includes net gains on sale of commercial, commercial real estate and agricultural and agricultural real estate loans

Net gains on sale of loans held for sale totaled ~~$6.8~~$5.0 million during the ~~second~~third quarter of 2017 compared to ~~$11.3~~$11.5 million during the ~~second~~third quarter of 2016, a decrease of ~~$4.5~~$6.5 million or ~~40%~~56%. During the first ~~six~~nine months of 2017, net gains on sale of loans held for sale totaled ~~$13.0~~$18.0 million compared to ~~$22.3~~$33.8 million during the same period in 2016, a decrease of ~~$9.4~~$15.8 million or ~~42%~~47%. 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. Mortgage loan applications were $308.1 million in the second quarter of 2017 compared to $440.9 million in the second quarter of 2016, a decrease of $132.8 million or 30%. During the first six months of 2017, mortgage loan applications were $556.7 million compared to $847.9 million during the same period in 2016, a decrease of $291.2 million or 34%. The volume of mortgage loans sold totaled $180.3 million during the second quarter of 2017, a $122.2 million or 40% decrease from the $302.4 million sold during the second quarter of 2016. During the first six months of 2017, mortgage loans sold totaled $352.8 million compared to $522.8 million during the same period in 2016, a decrease of $170.0 million or 33%. Heartland has experienced weakened demand for mortgage loan refinancings as interest rates have increased. The percentage of residential mortgage loans that represented refinancings was ~~25%~~31% during the ~~second~~third quarter of 2017 compared to ~~33%~~38% in the ~~second~~third quarter of 2016. For the ~~six~~nine months ended ~~June~~September 30, 2017, mortgage loan refinancings were 30% of originations compared to 37% of originations during the first ~~six~~nine months of 2016. Net gains on sale of loans held for sale also includes gains on the sale of commercial and agricultural loans, which totaled ~~$189,000~~$176,000 during the ~~second~~third quarter of 2017 compared to ~~$567,000~~$398,000 during the ~~second~~third quarter of 2016. During the first ~~six~~nine months of 2017, gains on ~~sales~~sale of commercial and agricultural loans totaled ~~$389,000~~$565,000 compared to ~~$1.3~~$1.7 million during the same period in 2016.

Trust fees increased $354,000 or 10% to $4.0 million recorded in the second quarter of 2017 from $3.6 million recorded in the second quarter of 2016. For the six-month period ended June 30, 2017, trust fees increased $172,000 or 2% to $7.6 million for the six months ended June 30, 2017, compared to $7.4 million for the same six-month period in 2016. Heartland derives trust fees from providing personal and corporate trust, employee benefit plan and estate administration. Heartland provides both discretionary and non-discretionary investment management services with respect to trust assets under administration. The market value of trust assets under administration totaled $2.10 billion at June 30, 2017, compared to $1.96 billion at December 31, 2016, and $2.27 billion at June 30, 2016. These values fluctuate throughout the year as market conditions improve or decline.

Securities Gains, Net

Securities gains, net, totaled ~~$1.4~~$1.7 million for the ~~second~~third quarter of 2017 compared to ~~$4.6~~$1.6 million for the ~~second~~third quarter of 2016, which is ~~a decrease~~an increase of ~~$3.2 million~~$95,000 or ~~70%~~6%. For the first ~~six~~nine months of 2017, securities gains, net, totaled ~~$3.9~~$5.6 million compared to ~~$8.1~~$9.7 million during the first ~~six~~nine months of 2016, a decrease of ~~$4.3~~$4.2 million or ~~52%~~43%.

Other Noninterest Income

Other noninterest income ~~was $738,000 during~~totaled $1.4 million for the ~~second~~third quarter of 2017 compared to ~~$764,000 during~~$1.0 million for the ~~second~~third quarter of 2016, ~~a decrease~~an increase of ~~$26,000~~$381,000 or 3%37%. For the ~~first six~~nine months ofended September 30, 2017, other noninterest income ~~totaled $1.5~~decreased $51,000 or 2% to $2.9 million ~~compared to $2.0~~from $3.0 million ~~during the first six months of 2016, a decrease of $432,000 or 22%. The decrease was primarily attributable to the reimbursement received~~recorded in the ~~first~~same period in 2016. During the third quarter of ~~2016 from a customer for loan workout expenses~~2017, $357,000 of other noninterest income was recorded related to recoveries on acquired loans that had been ~~incurred and paid in~~charged off prior ~~years.~~

to the acquisition dates.

Noninterest Expenses

The ~~table~~tables below ~~shows~~show Heartland's noninterest expenses for the three- and ~~six-month~~nine-month periods ended ~~June~~September 30, 2017 and 2016, in thousands:


	Three Months Ended June 30,											Three Months Ended September 30,
	2017			2016			Change			% Change		2017		2016		Change			% Change
Salaries and employee benefits	$	41,126		$	41,985		$	(859	)	(2	)%	$	45,225	$	40,733	$	4,492		11	%
Occupancy	5,056			5,220			(164		)	(3	)	6,223		5,099		1,124			22
Furniture and equipment	2,586			2,442			144			6		2,826		2,746		80			3
Professional fees	7,583			7,486			97			1		8,450		5,985		2,465			41
FDIC insurance assessments	909			1,120			(211		)	(19	)	894		1,180		(286		)	(24	)
Advertising	1,359			1,551			(192		)	(12	)	1,358		1,339		19			1
Core deposit intangibles and customer relationship intangibles amortization	1,218			1,297			(79		)	(6	)	1,863		1,291		572			44
Other real estate and loan collection expenses	365			659			(294		)	(45	)	581		640		(59		)	(9	)
(Gain)/loss on sales/valuations of assets, net	(112		)	(43		)	(69		)	160
Loss on sales/valuations of assets, net												1,342		794		548			69
Other noninterest expenses	9,208			9,303			(95		)	(1	)	9,997		8,620		1,377			16
Total noninterest expenses	$	69,298		$	71,020		$	(1,722	)	(2	)%	$	78,759	$	68,427	$	10,332		15	%


	Six Months Ended June 30,									Nine Months Ended September 30,
	2017		2016		Change			% Change		2017		2016		Change			% Change
Salaries and employee benefits	$	82,893	$	83,699	$	(806	)	(1	)%	$	128,118	$	124,432	$	3,686		3	%
Occupancy	10,129		10,223		(94		)	(1	)	16,352		15,322		1,030			7
Furniture and equipment	5,087		4,555		532			12		7,913		7,301		612			8
Professional fees	15,892		14,496		1,396			10		24,342		20,481		3,861			19
FDIC insurance assessments	1,716		2,288		(572		)	(25	)	2,610		3,468		(858		)	(25	)
Advertising	3,783		2,835		948			33		5,141		4,174		967			23
Core deposit intangibles and customer relationship intangibles amortization	2,389		3,192		(803		)	(25	)	4,252		4,483		(231		)	(5	)
Other real estate and loan collection expenses	1,193		1,231		(38		)	(3	)	1,774		1,871		(97		)	(5	)
(Gain)/loss on sales/valuations of assets, net	300		270		30			11
Loss on sales/valuations of assets, net										1,642		1,064		578			54
Other noninterest expenses	17,656		18,540		(884		)	(5	)	27,653		27,160		493			2
Total noninterest expenses	$	141,038	$	141,329	$	(291	)	—	%	$	219,797	$	209,756	$	10,041		5	%

For the ~~second~~third quarter of 2017, noninterest expenses totaled ~~$69.3~~$78.8 million compared to ~~$71.0~~$68.4 million during the ~~second~~third quarter of 2016, ~~a decrease~~an increase of ~~$1.7~~$10.3 million or 2%15%. For the first ~~six~~nine months of 2017, noninterest expenses totaled ~~$141.0~~$219.8 million compared to ~~$141.3~~$209.8 million during the first ~~six~~nine months of 2016, ~~a decrease~~an increase of ~~$291,000~~$10.0 million or ~~less than 1%~~5%.

Salaries and Employee Benefits

The largest component of noninterest expenses, salaries and employee benefits, ~~decreased $859,000~~increased $4.5 million or 2%11% during the ~~second~~third quarter of 2017 as compared to the same quarter in 2016. The increase is primarily attributable to the acquisition of Citywide Banks of Colorado, Inc. on July 7, 2017. When comparing the first ~~six~~nine months of 2017 to the first ~~six~~nine months of 2016, salaries and employee benefits ~~decreased $806,000~~increased $3.7 million or 1%3%. Heartland had total full-time equivalent employees of 2,024 on September 30, 2017, compared to 1,862 on June 30, 2017, ~~compared to 1,888~~and 1,846 on ~~June~~September 30, 2016.

Occupancy

Occupancy expense totaled $6.2 million for the third quarter of 2017 compared to $5.1 million for the third quarter of 2016, an increase of $1.1 million or 22%. For the nine-month period ending September 30, 2017, occupancy expense was $16.4 million, an increase of $1.0 million or 7% from the same period in 2016. The increase for both the three- and nine-month periods is primarily attributable to the additional locations acquired in the Citywide Banks of Colorado, Inc. transaction.

Professional Fees

Professional fees increased ~~$97,000~~$2.5 million or 1%41% during the ~~second~~third quarter of 2017 compared to the ~~second~~third quarter of 2016 and ~~$1.4~~$3.9 million or ~~10%~~19% during the first ~~six~~nine months of 2017 compared to the first ~~six~~nine months of 2016, primarily as a result of a higher level of services provided to Heartland by third-party advisors, including services performed in connection with mergers and acquisitions and cloud-based applications.

FDIC Insurance Assessments

FDIC insurance assessments decreased ~~$211,000~~$286,000 or ~~19%~~24% to ~~$909,000~~$894,000 during the ~~second~~third quarter of 2017 from ~~$1.1~~$1.2 million during the same quarter in 2016. For the ~~six-month~~nine-month periods ended ~~June~~September 30, 2017, and 2016, the FDIC insurance assessments were ~~$1.7~~$2.6 million and ~~$2.3~~$3.5 million respectively, ~~which is~~ a decrease of ~~$572,000~~$858,000 or 25%. Changes made to the assessment rate calculation

by the FDIC went into effect on December 30, 2016, and those changes have resulted in decreased assessments for Heartland's subsidiary banks.

Advertising Expenses

Advertising expenses were $1.4 million during the ~~second~~third quarter of 2017 compared to ~~$1.6~~$1.3 million during the ~~second~~third quarter of 2016, ~~a decrease~~an increase of ~~$192,000~~$19,000 or ~~12%~~1%. Advertising expenses increased ~~$948,000~~$967,000 or ~~33%~~23% during the first ~~six~~nine months of 2017 compared to the first ~~six~~nine months of 2016. ~~The~~This increase is primarily due to the costs of a deposit campaign promotion inrecorded during the first quarter of 2017.

Core Deposit Intangibles and Customer Relationship Intangibles Amortization

Core deposit intangibles and customer relationship intangibles amortization ~~decreased $79,000~~increased $572,000 or 6%44% during the ~~second~~third quarter of 2017 compared to the ~~second~~third quarter of 2016 and ~~$803,000~~decreased $231,000 or ~~25%~~5% during the first ~~six~~nine months of 2017 compared to the first ~~six~~nine months of 2016. Heartland recorded $18.5 million of core deposit intangibles and customer relationship intangibles in conjunction with the acquisitions of Founders Bancorp and Citywide Banks of Colorado, Inc. in 2017. During the first quarter of 2016, a $700,000 adjustment to the core deposit intangibles was recorded at Premier Valley Bank due to the loss of a significant deposit account ~~relationship at Premier Valley Bank.~~relationship.

Loss on Sales/Valuations of Assets, Net

For the ~~second~~third quarter of 2017, ~~other noninterest expenses decreased $95,000~~loss on sales/valuations of assets, net totaled $1.3 million compared to $794,000 for the same quarter in 2016, which is an increase of $548,000 or ~~1% to $9.2 million during~~69%. For the ~~second quarter~~first nine months of 2017, ~~from $9.3~~loss on sales/valuations of assets, net, increased $578,000 or 54% to $1.6 million ~~recorded during the second quarter of 2016. For the six-month period ended June 30, 2017, other noninterest expenses decreased $884,000 or 5%~~compared to ~~$17.7 million from $18.6~~$1.1 million recorded in the same period in 2016. ~~Heartland has replaced certain existing software applications~~The increase for both the three- and nine-month periods is primarily attributable to write-downs on fixed assets associated ~~maintenance costs~~ with ~~cloud-based applications.~~the Citywide Banks of Colorado, Inc. transaction.

Other Noninterest Expenses

Other noninterest expenses increased $1.4 million or 16% to $10.0 million during the third quarter of 2017 compared to $8.6 million for the same quarter in 2016. Other noninterest expenses increased $493,000 or 2% to $27.7 million for the nine months ended September 30, 2017, from $27.2 million for the nine months ended September 30, 2016. The increase for the quarterly comparison is primarily related to the Citywide Banks of Colorado, Inc. transaction.

Efficiency Ratio

One of Heartland's top priorities is to improve its efficiency ratio, on a fully tax-equivalent basis, by reducing it to 65% or less. During the ~~second~~third quarter of 2017, Heartland's efficiency ratio, on a fully tax-equivalent basis, ~~decreased to 65.61%~~was 64.54% in comparison with ~~67.95%~~63.88% during the ~~second~~third quarter of 2016. For the ~~six-month~~nine-month period ended ~~June~~September 30, 2017, the efficiency ratio on a fully tax-equivalent basis increased by 3235 basis points to ~~67.75%~~66.58% when compared to the same ~~six-month~~nine-month period in 2016. Heartland's efficiency ratio will show variability from quarter to quarter as a result of acquisition activities and also from the seasonality and related revenue and expense timing differences that are inherent in the residential mortgage business.

Income Taxes

Heartland's effective tax rate was ~~26.85%~~28.74% for the ~~second~~third quarter of 2017 compared to ~~32.37%~~29.02% for the ~~second~~third quarter of 2016. Federal low-income housing tax credits totaling ~~$310,000 and solar energy tax credits totaling $270,000~~$307,000 reduced Heartland's income taxes during the ~~second~~third quarter of 2017. For the ~~second~~third quarter of 2016, Heartland's income taxes were reduced by federal low-income housing tax credits totaling $304,000. ~~Also included in the second quarter of 2017 tax computation was a state tax credit of $830,000 related to a partnership investment in a historic rehabilitation tax credit project.~~ Heartland's effective tax rate was also affected by the level of tax-exempt interest income which, as a percentage of pre-tax income, was ~~23.49%~~24.01% during the ~~second~~third quarter of 2017 compared to ~~18.86%~~21.01% during the ~~second~~third quarter of 2016.

Heartland's effective tax rate was ~~25.37%~~26.59% for the first ~~six~~nine months of 2017 compared to ~~32.73%~~31.55% for the first ~~six~~nine months of 2016. Federal low-income housing tax credits totaling ~~$614,000~~$921,000 and solar energy tax credits totaling $270,000 were included in the

determination of Heartland's income taxes during the first ~~six~~nine months of 2017 compared to federal low-income housing tax credits of ~~$608,000~~$912,000 during the first ~~six~~nine months of 2016. Heartland's effective tax rate for the ~~six~~nine months ended ~~June~~September 30, 2017, was impacted by ~~the~~a state tax credit ~~referenced above.~~of $830,000 related to a partnership investment in a historic rehabilitation tax credit project. The level of tax-exempt interest income, as a percentage of pre-tax income, was ~~26.55%~~25.63% during the first ~~six~~nine months of 2017 compared to ~~18.86%~~19.55% during the first ~~six~~nine months of 2016.

As a result of the adoption of ASU 2016-09, "Compensation-Stock Compensation (Topic 718)" on January 1, 2017, Heartland's income taxes for the first ~~six~~nine months of 2017 included a tax benefit of ~~$989,000~~$1.1 million resulting from the vesting of outstanding restricted stock unit ~~awards.~~awards and the exercise of stock options. The majority of this tax benefit was recorded in the first quarter of 2017. Exclusive of this tax benefit, Heartland's effective tax rate for the first ~~six~~nine months of 2017 was ~~27.22%~~27.93%.

Segment Reporting

Heartland has two reportable segments: community and other banking and retail mortgage banking. Revenues from community and other banking operations consist primarily of interest earned on loans and investment securities, fees from deposit and ancillary services and net security gains. Retail mortgage banking operating revenues consist of interest earned on mortgage loans held for sale, gains on sale of mortgage loans into the secondary market, the servicing of mortgage loans for others and loan origination fee income. See Note 9 to the consolidated financial statements included in this Quarterly Report on Form 10-Q for further information regarding Heartland's segment reporting.

Community and Other Banking Segment

Income before taxes for the community and other banking segment for the ~~second~~third quarter of 2017 was ~~$30.2~~$32.8 million compared to ~~$30.0~~$26.7 million for the ~~second~~third quarter of 2016, a ~~$260,000~~$6.1 million or 1%23% increase. For the first ~~six~~nine months of 2017, income before taxes

for the community and other banking segment was ~~$54.6~~$87.4 million compared to ~~$58.3~~$85.0 million for the first ~~six~~nine months of 2016, a ~~$3.7~~$2.4 million or ~~6% decrease.~~3% increase.

Net interest income from the community and other banking segment was ~~$73.4~~$88.8 million during the ~~second~~third quarter of 2017 compared to ~~$71.9~~$72.7 million during the ~~second~~third quarter of 2016, an increase of ~~$1.6~~$16.1 million or 2%22%. For the ~~six-month~~nine-month period ended ~~June~~September 30, 2017, net interest income from the community and other banking segment increased ~~$2.2~~$18.2 million or 1%8% to $234.4 million compared to $216.2 million for the first ~~six~~nine months of 2016. This increase was primarily ~~the result of~~attributable to additional earning ~~assets.~~assets acquired in the Founders Bancorp and Citywide Banks of Colorado, Inc. transactions.

Provision for loan losses allocable to the community and other banking segment was ~~$889,000~~$5.7 million for the ~~second~~third quarter of 2017 compared to ~~$2.1~~$5.3 million during the ~~second~~third quarter of 2016. For the first ~~six~~nine months of 2017, the provision for loan losses was ~~$4.5~~$10.2 million compared to ~~$4.2~~$9.5 million for the first ~~six~~nine months of 2016. Given the size of Heartland's loan portfolio, the movement of acquired loans out of the purchase accounting pool and the variability that can occur in the factors considered when determining the appropriateness of the allowance for loan losses, Heartland's quarterly provision for loan losses will vary from quarter to quarter. During the ~~second quarter~~first nine months of 2017, Heartland’s credit quality ~~was~~remained relatively stable as nonperforming loans increased $1.4 million or 2% to $65.8 million from $64.4 million at December 31, 2016, and delinquent loan levels improved to 0.33% from 0.37% at December 31, 2016. Net charge-offs for the nine months ended September 30, 2017, were ~~largely unchanged, and~~$9.7 million compared to $3.5 million for the ~~charge-offs~~same period in 2016. Included in the ~~quarter~~net charge-offs recorded in 2017 were ~~primarily attributable~~$3.0 million of charge-offs related to ~~loans with~~two commercial and industrial loan relationships at Dubuque Bank and Trust and Arizona Bank & Trust and $3.7 million of charge-offs at Heartland's consumer finance subsidiary. During the nine months ended September 30, 2016, a ~~specific reserve that had been provided for in previous quarters. As~~recovery of $2.3 million was recorded on a result, the provision expense recorded for both the three- and six-month periods ended June 30, 2017, was primarily due to the movement of acquired loans out of the purchase accounting pool and minor fluctuations in the variables that management uses to determine the allowance.previously charged-off loan.

Noninterest income allocable to the community and other banking segment totaled ~~$18.3~~$19.7 million during the ~~second~~third quarter of 2017 compared to ~~$19.9~~$17.3 million during the ~~second~~third quarter of 2016, ~~a decrease~~an increase of ~~$1.6~~$2.3 million or 8%14%. For the first ~~six~~nine months of 2017, noninterest income allocable to the community and other banking segment totaled ~~$37.3~~$57.0 million compared to ~~$38.4~~$55.8 million during 2016, ~~a decrease~~an increase of $1.2 million or 3%2%. Increased service charges and fees income ~~offset by decreases in securities gains, net,~~ contributed to the majority of the change in noninterest income for both the ~~three~~three- and ~~six-month~~nine-month periods ended ~~June~~September 30, 2017, compared to the same periods in 2016.

Noninterest expenses allocable to the community and other banking segment totaled ~~$60.6~~$70.0 million during the ~~second~~third quarter of 2017 compared to ~~$59.7~~$58.0 million during the ~~second~~third quarter of 2016, an increase of ~~$870,000~~$12.0 million or 1%21%. For the ~~six-month~~nine-month period ended ~~June~~September 30, 2017, noninterest expenses allocable to the community and other banking segment increased by ~~$4.3~~$16.3 million or 4%9% to ~~$123.8~~$193.8 million compared to ~~$119.4~~$177.4 million recorded during the first ~~six~~nine months of 2016. The categories of noninterest expenses with the most significant increases were salaries and employee benefits and professional fees. Professional fees increased primarily as a result of additional services provided to Heartland by third-party advisors, including services performed in connection with mergers and acquisitions and the replacement of software applications with cloud-based applications.

Retail Mortgage Banking Segment

The retail mortgage banking segment recorded a loss before taxes of ~~$225,000~~$2.4 million for the ~~second~~third quarter of 2017 compared to income before taxes of ~~$1.0~~$1.8 million for the ~~second~~third quarter of 2016, a decrease of ~~$1.2~~$4.2 million or ~~122%~~238%. For the first ~~six~~nine months of 2017,

the retail mortgage banking segment recorded a loss before income taxes of ~~$1.0~~$3.5 million compared to income before taxes of ~~$2.6~~$4.4 million during the first ~~six~~nine months of 2016, a decrease of ~~$3.7~~$7.8 million or ~~140%~~179%.

Noninterest income from the retail mortgage banking segment totaled ~~$7.4~~$5.3 million during the ~~second~~third quarter of 2017 compared to ~~$11.1~~$11.2 million during the ~~second~~third quarter of 2016, a ~~$3.8~~$5.9 million or ~~34%~~53% decrease. Noninterest income from the retail mortgage banking segment totaled ~~$14.2~~$19.5 million for the first ~~six~~nine months of 2017 compared to ~~$22.2~~$33.4 million for the first ~~six~~nine months of 2016, ~~which is~~ a decrease of ~~$7.9~~$13.8 million or ~~36%~~41%. Retail mortgage banking income results primarily from net gains on sale of mortgage loans into the secondary market, related fees and fair value marks on the associated derivatives. Mortgage loan applications were ~~$308.1~~$271.5 million in the ~~second~~third quarter of 2017 compared to ~~$440.9~~$445.1 million in the ~~second~~third quarter of 2016, a decrease of ~~$132.8~~$173.6 million or ~~30%~~39%. For the first ~~six~~nine months of 2017, mortgage loan applications were ~~$556.7~~$828.2 million compared to ~~$847.9 million~~$1.29 billion during the first ~~six~~nine months of 2016, a decrease of ~~$291.2~~$464.8 million or ~~34%~~36%.The volume of mortgage loans sold totaled ~~$180.3~~$188.5 million during the ~~second~~third quarter of 2017, a ~~$122.2~~$127.4 million or 40% decrease from the ~~$302.4~~$315.9 million of mortgage loans sold during the ~~second~~third quarter of 2016. For the first ~~six~~nine months of 2017, the volume of mortgage loans sold totaled ~~$352.8~~$541.3 million compared to ~~$522.8~~$838.7 million during the first ~~six~~nine months of 2016, a ~~$170.0~~$297.4 million or ~~31%~~35% decrease. Decreases in the volume of mortgage loans sold was attributable to the higher mortgage interest rates during the first ~~six~~nine months of 2017, which significantly reduced mortgage loan refinancing activity.

Noninterest expenses allocable to the retail mortgage banking segment were ~~$8.7~~$8.8 million during the ~~second~~third quarter of 2017 compared to ~~$11.3~~$10.4 million during the ~~second~~third quarter of 2016, a decrease of ~~$2.6~~$1.7 million or ~~23%~~16%. For the first ~~six~~nine months of 2017, noninterest expenses allocable to the retail mortgage banking segment were ~~$17.3~~$26.0 million compared to ~~$21.9~~$32.3 million during the first ~~six~~nine months of 2016, a decrease of ~~$4.6~~$6.3 million or ~~21%~~19%. Lower expenses during the ~~second~~third quarter and first ~~six~~nine months of 2017 in comparison with the ~~second~~third quarter and first ~~six~~nine months of 2016 were partially attributable to reduced transaction-based compensation paid to mortgage banking personnel as a result of the lower volume of residential mortgage loans underwritten

during 2017. Additionally, in reaction to the lower volume of mortgage loan originations, a series of workforce reductions were implemented during the first six months of 2017.

FINANCIAL CONDITION

Lending Activities

Total ~~net~~ loans held to maturity were ~~$5.33~~$6.37 billion at ~~June~~September 30, 2017, compared to $5.35 billion at year-end 2016, ~~a decrease~~an increase of ~~$26.6 million~~$1.02 billion or ~~less than 1%~~19%. This change includes $96.4 million of total loans held to maturity, at fair value, acquired in the Founders Bancorp transaction and $985.4 million of total loans held to maturity acquired at fair value in the Citywide Banks of Colorado, Inc. transaction. Exclusive of ~~this~~these transactions, total loans held to maturity decreased $60.2 million or 1% since year-end 2016. Excluding the loans acquired in the Citywide Banks of Colorado, Inc. transaction, total loans held to maturity ~~decreased $123.1~~increased $62.9 million ~~or 2%. Five~~during the third quarter of 2017, and six of the Heartland bank subsidiaries experienced a net ~~increase in~~organic loan ~~balances~~growth during the ~~second quarter of 2017.~~quarter. Price competition for quality loans remains intense, and Heartland remains committed to its pricing strategy, disciplined credit approach and emphasis on the client relationship.

The table below presents the composition of the loan portfolio as of ~~June~~September 30, 2017, and December 31, 2016, in thousands:

LOAN PORTFOLIO June 30, 2017 December 31, 2016
Amount Percent Amount Percent
Loans receivable held to maturity:
Commercial $ 1,344,323
25.24 % $ 1,287,265
24.04 %
Commercial real estate 2,458,688
46.17
2,538,582
47.42 %
Agricultural and agricultural real estate 495,243
9.30
489,318
9.14
Residential mortgage 596,385
11.20
617,924
11.54
Consumer 431,052
8.09
420,613
7.86
Gross loans receivable held to maturity 5,325,691
100.00 % 5,353,702
100.00 %
Unearned discount (639 ) (699 )
Deferred loan fees 30
(1,284 )
Total net loans receivable held to maturity 5,325,082
5,351,719

Allowance for loan losses (54,051 ) (54,324 )
Loans receivable, net $ 5,271,031
$ 5,297,395



LOAN PORTFOLIO	September 30, 2017					December 31, 2016
	Amount			Percent		Amount			Percent
Loans receivable held to maturity:
Commercial	$	1,613,903		25.31	%	$	1,287,265		24.04	%
Commercial real estate	3,163,953			49.63		2,538,582			47.42
Agricultural and agricultural real estate	511,764			8.03		489,318			9.14
Residential mortgage	635,611			9.97		617,924			11.54
Consumer	450,088			7.06		420,613			7.86
Gross loans receivable held to maturity	6,375,319			100.00	%	5,353,702			100.00	%
Unearned discount	(605		)			(699		)
Deferred loan fees	(1,299		)			(1,284		)
Total net loans receivable held to maturity	6,373,415					5,351,719
Allowance for loan losses	(54,885		)			(54,324		)
Loans receivable, net	$	6,318,530				$	5,297,395

Loans secured by real estate, either fully or partially, totaled ~~$3.48~~$4.25 billion or ~~65%~~67% of gross loans at ~~June~~September 30, 2017. ~~Excluding~~Exclusive of purchase accounting valuations and the loans acquired in the third quarter of 2017, 52% of the properties securing non-farm, nonresidential real estate loans are owner occupied. The largest categories of Heartland's real estate secured loans at ~~June~~September 30, 2017, and December 31, 2016, are listed below, in thousands:

													LOANS SECURED BY REAL ESTATE
	June 30, 2017			December 31, 2016			September 30, 2017			December 31, 2016
Residential real estate, excluding residential construction and residential lot loans	$	1,010,455		$	1,030,190		$	989,112		$	1,030,190
Industrial, manufacturing, business and commercial	467,975			474,632			461,281			474,632
Agriculture	249,018			255,046			254,315			255,046
Retail	341,063			332,009			350,888			332,009
Office	333,950			347,334			335,057			347,334
Land development and lots	126,494			127,700			132,625			127,700
Hotel, resort and hospitality	164,948			151,571			163,076			151,571
Multi-family	180,443			185,559			185,634			185,559
Food and beverage	101,928			102,225			107,846			102,225
Warehousing	119,762			120,471			125,231			120,471
Health services	131,851			147,412			132,785			147,412
Residential construction	105,679			143,962			93,968			143,962
All other	162,402			172,617			169,912			172,617
Loans acquired in the quarter							775,587			—
Purchase accounting valuations	(16,306		)	(17,559		)	(30,806		)	(17,559		)
Total loans secured by real estate	$	3,479,662		$	3,573,169		$	4,246,511		$	3,573,169

Allowance For Loan Losses

The process utilized by Heartland to determine the appropriateness of the allowance for loan and losses is considered a critical accounting practice for Heartland and has remained consistent over the past several years. The allowance for loan losses represents management's estimate of identified and unidentified probable losses in the existing loan portfolio. For additional details on the specific factors considered in determining the allowance for loan losses, refer to the critical accounting policies section of our Annual Report on Form 10-K for the year ended December 31, 2016.

Nonperforming loans were ~~$66.1~~$65.8 million or ~~1.24%~~1.03% of total loans at ~~June~~September 30, 2017, compared to $64.4 million or 1.20% of total loans at December 31, 2016. At ~~June~~September 30, 2017, approximately ~~$30.1~~$29.6 million or ~~46%~~45% of Heartland's nonperforming loans had individual loan balances exceeding $1.0 million and represented loans to ~~six~~eight borrowers. The portion of Heartland's

nonperforming loans covered by government guarantees was ~~$21.9~~$23.2 million at ~~June~~September 30, 2017, and $17.3 million at December 31, 2016, which includes ~~$16.3~~$16.2 million and $14.3 million, respectively, of repurchased residential real estate loans. ~~Effective July 1,~~

During the third quarter of 2017, Heartland ~~has elected~~sold substantially all of its GNMA loan servicing portfolio, which contained loans with an unpaid principal balance of approximately $773.9 million. The sale effectively eliminates Heartland's obligation, as a GNMA loan servicer, to ~~sell GNMA originated~~repurchase any additional non-performing government guaranteed residential real estate loans ~~on a~~from the GNMA loan pools. In addition, any GNMA government guaranteed residential real estate loans originated after July 1, 2017, by Heartland's subsidiary banks are sold into the secondary market with servicing ~~released basis to mitigate the future repurchase obligation associated with these loans.~~released.

The allowance for loan losses was ~~1.02%~~0.86% of loans at ~~both June~~September 30, 2017, ~~and~~compared to 1.02% at December 31, 2016, and ~~81.78%~~83.41% and 84.37% of nonperforming loans at ~~June~~September 30, 2017, and December 31, 2016, respectively. Excluding ~~those~~the acquired loans covered by the ~~purchase accounting adjustments,~~valuation reserves, the ratio of the allowance for loan losses to outstanding loans was ~~1.20%~~1.17% at ~~June~~September 30, 2017, and 1.22% at December 31, 2016. At ~~June~~September 30, 2017, valuation reserves totaled ~~$22.8~~$42.8 million and covered ~~$853.0 million~~$1.75 billion of acquired loans. At December 31, 2016, valuation reserves totaled $25.3 million and covered $956.0 million of acquired loans.

Loans delinquent 30 to 89 days as a percent of total loans was ~~0.38%~~0.33% at ~~June~~September 30, 2017, in comparison with 0.37% at December 31, 2016.

The table below presents the changes in the allowance for loan losses during the three- and ~~six-month~~nine-month periods ended ~~June~~September 30, 2017 and 2016, in thousands:


ANALYSIS OF ALLOWANCE FOR LOAN LOSSES	Three Months Ended June 30,						Three Months Ended September 30,
	2017			2016			2017			2016
Balance at beginning of period	$	54,999		$	49,738		$	54,051		$	51,756
Provision for loan losses	889			2,118			5,705			5,328
Recoveries on loans previously charged off	929			2,851			888			852
Charge-offs on loans not covered by loss share agreements	(2,766		)	(2,951		)
Charge-offs on loans							(5,759		)	(3,283		)
Balance at end of period	$	54,051		$	51,756		$	54,885		$	54,653
Annualized ratio of net charge offs to average loans	0.14		%	0.01		%	0.31		%	0.17		%

	Six Months Ended June 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Balance at beginning of period	$	54,324		$	48,685		$	54,324		$	48,685
Provision for loan losses	4,530			4,185			10,235			9,513
Recoveries on loans previously charged off	1,681			3,442			2,569			4,294
Charge-offs on loans	(6,484		)	(4,556		)	(12,243		)	(7,839		)
Balance at end of period	$	54,051		$	51,756		$	54,885		$	54,653
Annualized ratio of net charge offs to average loans	0.18		%	0.04		%	0.23		%	0.09		%

The table below presents the amounts of nonperforming loans and other nonperforming assets on the dates indicated, in thousands:

NONPERFORMING ASSETS June 30, December 31,
2017 2016 2016 2015
Nonaccrual loans $ 65,393
$ 57,053
$ 64,299
$ 39,655
Loans contractually past due 90 days or more 698
—
86
—
Total nonperforming loans 66,091
57,053
64,385
39,655
Other real estate 9,269
11,003
9,744
11,524
Other repossessed assets 675
564
663
485
Total nonperforming assets $ 76,035
$ 68,620
$ 74,792
$ 51,664
Performing troubled debt restructured loans⁽¹⁾
$ 11,157
$ 9,923
$ 10,380
$ 11,075
Nonperforming loans to total loans 1.24 % 1.04 % 1.20 % 0.79 %
Nonperforming assets to total loans plus repossessed property 1.43 % 1.25 % 1.39 % 1.03 %
Nonperforming assets to total assets 0.93 % 0.84 % 0.91 % 0.67 %

(1) Represents accruing troubled debt restructured loans performing according to their restructured terms.



NONPERFORMING ASSETS	September 30,						December 31,
	2017			2016			2016			2015
Nonaccrual loans	$	63,456		$	57,799		$	64,299		$	39,655
Loans contractually past due 90 days or more	2,348			105			86			—
Total nonperforming loans	65,804			57,904			64,385			39,655
Other real estate	13,226			10,740			9,744			11,524
Other repossessed assets	773			821			663			485
Total nonperforming assets	$	79,803		$	69,465		$	74,792		$	51,664
Performing troubled debt restructured loans⁽¹⁾	$	10,040		$	10,281		$	10,380		$	11,075
Nonperforming loans to total loans	1.03		%	1.06		%	1.20		%	0.79		%
Nonperforming assets to total loans plus repossessed property	1.25		%	1.27		%	1.39		%	1.03		%
Nonperforming assets to total assets	0.82		%	0.85		%	0.91		%	0.67		%

(1) Represents accruing troubled debt restructured loans performing according to their restructured terms.

The schedules below summarize the changes in Heartland's nonperforming assets during the ~~second~~third quarter of 2017 and the first ~~six~~nine months of 2017, in thousands:



	Nonperforming Loans			Other Real Estate Owned			Other Repossessed Assets			Total Nonperforming Assets
June 30, 2017	$	66,091		$	9,269		$	675		$	76,035
Loan foreclosures	(425		)	408			17			—
Net loan charge-offs	(4,871		)	—			—			(4,871		)
Acquired nonperforming assets	1,075			6,916			—			7,991
New nonperforming loans	9,117			—			—			9,117
Reduction of nonperforming loans⁽¹⁾	(5,183		)	—			—			(5,183		)
OREO/Repossessed assets sales proceeds	—			(3,315		)	(13		)	(3,328		)
OREO/Repossessed assets writedowns, net	—			(52		)	(4		)	(56		)
Net activity at Citizens Finance Co.	—			—			98			98
September 30, 2017	$	65,804		$	13,226		$	773		$	79,803

(1) Includes principal reductions and transfers to performing status.



	Nonperforming Loans			Other Real Estate Owned			Other Repossessed Assets			Total Nonperforming Assets
December 31, 2016	$	64,385		$	9,744		$	663		$	74,792
Loan foreclosures	(4,955		)	4,710			245			—
Net loan charge-offs	(9,674		)	—			—			(9,674		)
Acquired nonperforming assets	1,075			6,916			—			7,991
New nonperforming loans	37,636			—			—			37,636
Reduction of nonperforming loans⁽¹⁾	(22,663		)	—			—			(22,663		)
OREO/Repossessed assets sales proceeds	—			(7,560		)	(217		)	(7,777		)
OREO/Repossessed assets writedowns, net	—			(584		)	(10		)	(594		)
Net activity at Citizens Finance Co.	—			—			92			92
September 30, 2017	$	65,804		$	13,226		$	773		$	79,803

(1) Includes principal reductions and transfers to performing status.

Nonperforming
Loans

Other
Real Estate
Owned

Other
Repossessed
Assets

Total
Nonperforming
Assets
March 31, 2017 $ 63,740
$ 11,188
$ 739
$ 75,667
Loan foreclosures (2,069 ) 2,039
30
—
Net loan charge-offs (1,837 ) —
—
(1,837 )
Acquired nonperforming assets —
—
—
—
New nonperforming loans 13,700
—
—
13,700
Reduction of nonperforming loans⁽¹⁾
(7,443 ) —
—
(7,443 )
OREO/Repossessed assets sales proceeds —
(3,700 ) (34 ) (3,734 )
OREO/Repossessed assets writedowns, net —
(258 ) (1 ) (259 )
Net activity at Citizens Finance Co. —
—
(59 ) (59 )
June 30, 2017 $ 66,091
$ 9,269
$ 675
$ 76,035

(1) Includes principal reductions and transfers to performing status.

Nonperforming
Loans

Other
Real Estate
Owned

Other
Repossessed
Assets

Total
Nonperforming
Assets
December 31, 2016 $ 64,385
$ 9,744
$ 663
$ 74,792
Loan foreclosures (4,530 ) 4,302
228
—
Net loan charge-offs (4,803 ) —
—
(4,803 )
Acquired nonperforming assets —
—
—
—
New nonperforming loans 28,519
—
—
28,519
Reduction of nonperforming loans⁽¹⁾
(17,480 ) —
—
(17,480 )
OREO/Repossessed assets sales proceeds —
(4,245 ) (204 ) (4,449 )
OREO/Repossessed assets writedowns, net —
(532 ) (6 ) (538 )
Net activity at Citizens Finance Co. —
—
(6 ) (6 )
June 30, 2017 $ 66,091
$ 9,269
$ 675
$ 76,035

(1) Includes principal reductions and transfers to performing status.

Securities

The composition of Heartland's securities portfolio is managed to maximize the return on the portfolio while considering the impact it has on Heartland's asset/liability position and liquidity needs. Securities represented ~~25%~~24% and 26% of total assets at ~~June~~September 30, 2017, and December 31, 2016, respectively. Total available for sale securities as of ~~June~~September 30, 2017, were ~~$1.79~~$2.09 billion, ~~a decrease~~an increase of ~~$56.4~~$247.5 million or 3%13% from $1.85 billion at December 31, 2016. The increase is primarily attributable to the Citywide Banks of Colorado, Inc. transaction completed in the third quarter of 2017.

The table below presents the composition of the securities portfolio, including available for sale, held to maturity securities and other, by major category, as of ~~June~~September 30, 2017, and December 31, 2016, in thousands:

SECURITIES PORTFOLIO COMPOSITION June 30, 2017 December 31, 2016
Amount Percent Amount Percent
U.S. government corporations and agencies $ 5,471
0.26 % $ 4,700
0.22 %
Mortgage-backed securities 1,262,528
60.99
1,290,500
60.56
Obligation of states and political subdivisions 758,328
36.63
799,806
37.53
Corporate debt securities 7,186
0.35
—
—
Equity securities 15,514
0.75
14,520
0.68
Other securities 21,094
1.02
21,560
1.01
Total securities $ 2,070,121
100.00 % $ 2,131,086
100.00 %



SECURITIES PORTFOLIO COMPOSITION	September 30, 2017				December 31, 2016
	Amount		Percent		Amount		Percent
U.S. government corporations and agencies	$	7,415	0.31	%	$	4,700	0.22	%
Mortgage-backed securities	1,565,400		65.97		1,290,500		60.56
Obligation of states and political subdivisions	760,329		32.04		799,806		37.53
Equity securities	16,596		0.70		14,520		0.68
Other securities	23,176		0.98		21,560		1.01
Total securities	$	2,372,916	100.00	%	$	2,131,086	100.00	%

The percentage of Heartland's securities portfolio comprised of mortgage-backed securities was ~~61%~~66% at ~~both June~~September 30, 2017, ~~and~~compared to 61% at December 31, 2016. Approximately ~~80%~~74% of Heartland's mortgage-backed securities were issued by government-sponsored enterprises at ~~June~~September 30, 2017. Heartland's securities portfolio had an expected modified duration of ~~4.60~~4.83 years as of ~~June~~September 30, 2017, compared to 4.34 years at year-end 2016.

The Volcker Rule, which went into effect July 21, 2017, prohibits insured depository institutions and their holding companies from engaging in proprietary trading of securities, derivatives and certain other financial instruments for the entity's own account, and prohibits certain interests in, or relationships with, a hedge fund or private equity fund. Heartland did not engage in any significant amount of proprietary trading, as defined in the Volcker Rule, and the impact of the Volcker Rule on Heartland's business activities and investment portfolio was minimal. Heartland has reviewed its investment portfolio to determine if any investments meet the Volcker Rule's definition of covered funds. Based on the review, Heartland 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.

At ~~June~~September 30, 2017, Heartland had ~~$21.1~~$23.2 million of other securities, including capital stock in each Federal Home Loan Bank ("FHLB") of which each of its bank subsidiaries is a member. All of these securities were classified as other securities held at cost.

Deposits

Total deposits were ~~$6.93~~$8.23 billion as of ~~June~~September 30, 2017, compared to $6.85 billion at year-end 2016, an increase of ~~$82.8 million~~$1.38 billion or 1%20%. This increase included $181.5 million of deposits, at fair value, acquired in the Founders Bancorp transaction and $1.21 billion of deposits, at fair value, acquired in the Citywide Banks of Colorado, Inc. transaction. Exclusive of ~~this transaction,~~these transactions, total deposits decreased ~~$98.7~~$7.1 million or less than 1% since December 31, ~~2017.~~2016.

The table below presents, in thousands, the composition of Heartland's deposits by category as of ~~June~~September 30, 2017, and December 31, 2016:


DEPOSITS	June 30, 2017				December 31, 2016				September 30, 2017				December 31, 2016
	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
Demand	$	2,355,410	33.99	%	$	2,202,036	32.16	%	$	3,009,940	36.56	%	$	2,202,036	32.16	%
Savings	3,704,579		53.45		3,788,089		55.32		4,227,340		51.36		3,788,089		55.32
Time	870,180		12.56		857,286		12.52		994,604		12.08		857,286		12.52
Total	$	6,930,169	100.00	%	$	6,847,411	100.00	%	$	8,231,884	100.00	%	$	6,847,411	100.00	%

Demand deposits totaled ~~$2.36~~$3.01 billion at ~~June~~September 30, 2017, an increase of ~~$153.4~~$807.9 million or 7%37% since year-end 2016, with ~~$94.4~~$626.7 million of the increase attributable to the Founders Bancorp ~~transaction.~~and Citywide Banks of Colorado, Inc. transactions. Excluding demand deposits acquired in ~~this transaction,~~these transactions, demand deposits increased ~~$59.0~~$181.2 million or ~~3%. Deposit composition continued~~8% since year-end 2016. Savings

deposits increased $439.3 million or 12% to ~~reflect a favorable mix with demand deposits~~$4.23 billion at ~~34%, savings deposits at 53% and time deposits at 13% of total deposits at June~~September 30, 2017 ~~compared to demand deposits at 32%, savings deposits at 55% and time deposits at 13% of total deposits~~from $3.79 billion at December 31, 2016. ~~Savings~~Excluding savings deposits ~~totaled $3.70 billion at June 30, 2017, a decrease~~ of ~~$83.5~~$619.0 million ~~or 2% since year-end 2016, with $63.3 million of the change attributable to savings deposits~~ acquired in the Founders Bancorp ~~transaction. Excluding savings deposits acquired in this transaction,~~and Citywide Banks of Colorado, Inc. transactions, savings deposits decreased ~~$146.8~~$179.7 million or 4%. The primary reason for the decrease in the savings deposits balance is due to significant reductions in the balances of two deposit customers at two of Heartland's subsidiary banks, which represent $136.0 million of the decrease since December 31, 2016. Time deposits increased $12.9 million or 2% since year end. Time deposits include brokered CDs, which increased $20.2 million5% since year-end 2016. Time deposits increased $137.3 million or 16% since December 31, 2016, and exclusive of $145.9 million of time deposits acquired ~~with the Founders Bancorp transaction totaled $23.8 million. Excluding the effect of these items,~~in 2017, time deposits decreased ~~$31.2~~$8.6 million or 1% since ~~December 31,~~year-end 2016. This trend of reduced time deposits is partially a result of management's focus on building its demand and savings deposit customer base. Heartland does not plan to offer highly competitive interest rates on time deposits, except to customers with which it has other banking relationships. The increase in brokered deposits during the second quarter of 2017 was to provide liquidity at one subsidiary bank that experienced a decline in savings deposits as mentioned previously.

Short-Term Borrowings

Short-term borrowings, which Heartland defines as borrowings with an original maturity of one year or less, were as follows as of ~~June~~September 30, 2017, and December 31, 2016, in thousands:


	June 30, 2017		December 31, 2016		September 30, 2017		December 31, 2016
Securities sold under agreement to repurchase	$	105,568	$	229,555	$	133,985	$	229,555
Federal funds purchased	2,700		40,200		2,400		40,200
Advances from the FHLB	25,000		30,367		25,000		30,367
Notes payable to unaffiliated banks					5,000		—
Other short-term borrowings	5,862		6,337		5,486		6,337
Total	$	139,130	$	306,459	$	171,871	$	306,459

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 Heartland's bank subsidiaries 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. The amount of short-term borrowings of Heartland was ~~$139.1~~$171.9 million at ~~June~~September 30, 2017, compared to $306.5 million at year-end 2016, a decrease of ~~$167.3~~$134.6 million or ~~55%~~44%.

All of the Heartland bank subsidiaries 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 ~~$105.6~~$134.0 million at ~~June~~September 30, 2017, compared to $229.6 million at December 31, 2016, a decrease of ~~$124.0~~$95.6 million or ~~54%~~42%. In addition to seasonal fluctuations, these balances declined as a result of Heartland's focus on reducing the volume of retail repurchase agreement activity so that the securities pledged under these repurchase agreements would be unencumbered. The treasury management teams at the Heartland bank subsidiaries introduced other value-added cash management tools and loss prevention services to these customers to further enhance their cash management alternatives.

~~Short-term FHLB advances of $25.0 million were included in short-term borrowings at June 30, 2017, in comparison with $30.4 million at December 31, 2016.~~

Also included in short-term borrowings is a $25.0 million revolving credit line agreement Heartland has with an unaffiliated bank, primarily to provide liquidity to Heartland. The borrowing capacity on this revolving credit line was increased from $20.0 million to $25.0 million on June 14, 2017. ~~No balance was outstanding~~During the third quarter of 2017, Heartland had advances of $20.0 million and repayments of $15.0 million on this ~~line~~line. The outstanding balance at ~~both June~~September 30, 2017, ~~and~~was $5.0 million compared to $0 at December 31, 2016.

Other Borrowings

The outstanding balances of other borrowings, which Heartland defines as borrowings with an original maturity date of more than one year, are shown in the table below, net of discount and issuance costs amortization, in thousands, as of ~~June~~September 30, 2017, and December 31, 2016:

June 30, 2017 December 31, 2016
Advances from the FHLB $ 6,840
$ 6,975
Wholesale repurchase agreements 30,000
30,000
Trust preferred securities 115,410
115,232
Senior notes 11,000
16,000
Note payable to unaffiliated bank 35,667
37,667
Contracts payable for purchase of real estate and other assets 1,969
2,339
Subordinated notes 73,929
73,857
Other borrowings 6,281
6,464
Total $ 281,096

$ 288,534



	September 30, 2017		December 31, 2016
Advances from the FHLB	$	6,771	$	6,975
Wholesale repurchase agreements	30,000		30,000
Trust preferred securities	137,222		115,232
Senior notes	11,000		16,000
Note payable to unaffiliated bank	34,667		37,667
Contracts payable for purchase of real estate and other assets	1,965		2,339
Subordinated notes	73,964		73,857
Other borrowings	5,884		6,464
Total	$	301,473	$	288,534

Other borrowings include all debt arrangements Heartland and its subsidiaries have entered into with original maturities that extend beyond one year, including long-term FHLB borrowings, borrowings under term notes, subordinated notes and senior notes, convertible debt, and obligations under trust preferred capital securities. As of ~~June~~September 30, 2017, the amount of other borrowings was ~~$281.1~~$301.5 million, ~~a decrease~~an increase of ~~$7.4~~$12.9 million or 3%4% since year-end 2016.

~~Long-term FHLB borrowings with an original term of more than one year totaled $6.8 million at June~~At September 30, 2017, $137.2 million of trust preferred securities were outstanding compared to ~~$7.0 million at December 31, 2016. Total long-term FHLB borrowings at June 30, 2017, had an average rate of 3.27% and an average maturity of 43 months.~~

~~Heartland's structured wholesale repurchase agreements totaled $30.0 million at both June 30, 2017, and December 31, 2016. These wholesale repurchase agreements mature in 2018.~~

~~Heartland had senior notes totaling $11.0 million outstanding at June 30, 2017, and $16.0~~$115.2 million outstanding at December 31, ~~2016.~~2016, which is an increase of $22.0 million or 19%. Heartland acquired $21.6 million of trust preferred securities at fair value in the Citywide Banks of Colorado, Inc. transaction.

Heartland has a non-revolving credit facility with an unaffiliated bank, which provides a borrowing capacity of up to $75.0 million. At ~~June~~September 30, 2017, ~~$35.7~~$34.7 million was outstanding on this non-revolving credit line compared to $37.7 million outstanding at December 31, 2016. The balance of the ~~$35.7~~$34.7 million note is due in April 2021. At ~~June~~September 30, 2017, Heartland had $39.3 million available on this non-revolving credit facility, of which no balance was drawn. Any balance on this non-revolving credit facility is due in June 2018.

Subordinated notes totaling $74.0 million and $73.9 million were outstanding at ~~both June~~September 30, 2017, and December 31, ~~2016.~~2016, respectively. During the first quarter of 2017, $167,000 of ~~the~~ subordinated convertible notes were converted into 6,128 shares of Heartland common ~~stock.~~stock, and the remaining balance of the subordinated convertible notes totaling $391,100 was converted into 14,353 shares of Heartland common stock during the third quarter of 2017.

A schedule of Heartland's trust preferred securities outstanding excluding deferred issuance costs, as of ~~June~~September 30, 2017, is as follows, in thousands:

Amount

Issued

Issuance

Date

Interest

Rate

Interest

Rate as of

6/30/17⁽¹⁾

Maturity

Date

Callable

Date

Amount

Issued

Issuance

Date

Interest

Rate

Interest

Rate as of

9/30/17⁽¹⁾

Maturity

Date

Callable

Date

Heartland Financial Statutory Trust IV

25,774

03/17/2004

2.75% over LIBOR

4.02%⁽²⁾

03/17/2034

09/17/2017

25,774

03/17/2004

2.75% over LIBOR

4.07%⁽²⁾

03/17/2034

12/17/2017

Heartland Financial Statutory Trust V

20,619

01/27/2006

1.33% over LIBOR

2.49%⁽³⁾

04/07/2036

10/07/2017

20,619

01/27/2006

1.33% over LIBOR

2.63%⁽³⁾

04/07/2036

01/07/2018

Heartland Financial Statutory Trust VI

20,619

06/21/2007

1.48% over LIBOR

2.73%⁽⁴⁾

09/15/2037

09/15/2017

20,619

06/21/2007

1.48% over LIBOR

2.80%⁽⁴⁾

09/15/2037

12/15/2017

Heartland Financial Statutory Trust VII

20,619

06/26/2007

1.48% over LIBOR

2.68%⁽⁵⁾

09/01/2037

09/01/2017

20,619

06/26/2007

1.48% over LIBOR

2.80%⁽⁵⁾

09/01/2037

12/01/2017

Morrill Statutory Trust I

8,853

12/19/2002

3.25% over LIBOR

4.55%⁽⁶⁾

12/26/2032

09/26/2017

8,876

12/19/2002

3.25% over LIBOR

4.58%⁽⁶⁾

12/26/2032

12/26/2017

Morrill Statutory Trust II

8,475

12/17/2003

2.85% over LIBOR

4.12%⁽⁷⁾

12/17/2033

09/17/2017

8,503

12/17/2003

2.85% over LIBOR

4.17%⁽⁷⁾

12/17/2033

12/17/2017

Sheboygan Statutory Trust I

6,309

9/17/2003

2.95% over LIBOR

4.22%

09/17/2033

09/17/2017

6,331

09/17/2003

2.95% over LIBOR

4.27%

09/17/2033

12/17/2017

CBNM Capital Trust I

4,284

9/10/2004

3.25% over LIBOR

4.50%

12/15/2034

09/15/2017

4,297

09/10/2004

3.25% over LIBOR

4.57%

12/15/2034

12/15/2017

Citywide Capital Trust III

6,313

12/19/2003

2.80% over LIBOR

4.11%

12/19/2033

01/23/2018

Citywide Capital Trust IV

4,166

09/30/2004

2.20% over LIBOR

3.51%

09/30/2034

02/23/2018

Citywide Capital Trust V

11,241

05/31/2006

1.54% over LIBOR

2.86%

07/25/2036

12/15/2017

115,552

137,358

(1) Effective weighted average interest rate as of June 30, 2017, was 4.34% due to interest rate swap transactions on the variable rate securities as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(2) Effective interest rate as of June 30, 2017, was 5.01% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(3) Effective interest rate as of June 30, 2017, was 4.69% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(4) Effective interest rate as of June 30, 2017, was 3.87% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(5) Effective interest rate as of June 30, 2017, was 3.83% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(6) Effective interest rate as of June 30, 2017, was 4.92% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(7) Effective interest rate as of June 30, 2017, was 4.51% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(1) Effective weighted average interest rate as of September 30, 2017, was 5.08% due to interest rate swap transactions on the variable rate securities as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(2) Effective interest rate as of September 30, 2017, was 5.01% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(3) Effective interest rate as of September 30, 2017, was 4.69% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(4) Effective interest rate as of September 30, 2017, was 3.87% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(5) Effective interest rate as of September 30, 2017, was 3.83% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(6) Effective interest rate as of September 30, 2017, was 4.92% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(7) Effective interest rate as of September 30, 2017, was 4.51% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

During 2015, Heartland entered into two additional forward starting interest rate swaps. The first forward starting interest rate swap transaction relates to Heartland's $20.0 million Statutory Trust VI, which converted from a fixed interest rate subordinated debenture to a variable interest rate subordinated debenture on June 15, 2017. Heartland Statutory Trust VI will effectively remain at a fixed interest rate until the swap expires on June 15, 2024. The second forward starting interest rate swap was effective on March 1, 2017, and replaced the current interest rate swap related to Heartland Statutory Trust VII that expired on March 1, 2017.

CAPITAL REQUIREMENTS

The Federal Reserve has adopted capital adequacy guidelines that are used to assess the adequacy of capital in supervising a bank holding company. The federal banking agencies implemented final rules to establish a new comprehensive regulatory capital framework with a phase-in period beginning on January 1, 2015, and ending on January 1, 2019. The Final Rules implemented the third installment of the Basel Accords ("Basel III") regulatory capital reforms and changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") and substantially amended the regulatory risk-based capital rules applicable to Heartland. Under Basel III, Heartland must hold a conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer for 2017 is 1.25%.

The most recent notification from the FDIC categorized Heartland and each of its bank subsidiaries 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.

Heartland's capital ratios are calculated in accordance with Federal Reserve Board instructions and are required regulatory financial measures. The following table illustrates Heartland's capital ratios and the Federal Reserve's current capital adequacy guidelines for the dates indicated, in thousands:

CAPITAL RATIOS June 30, 2017 December 31, 2016
Amount Ratio Amount Ratio
Risk-Based Capital Ratio
Tier 1 capital $ 797,920
12.73 % $ 756,056
11.93 %
Tier 1 capital minimum requirement 376,068
6.00 % 380,148
6.00 %
Excess $ 421,852
6.73 % $ 375,908
5.93 %

Common Equity Tier 1 capital $ 681,571
10.87 % $ 639,467
10.09 %
Common Equity Tier 1 minimum requirement 282,051
4.50 % 285,111
4.50 %
Excess $ 399,520
6.37 % $ 354,356
5.59 %

Total capital $ 927,355
14.80 % $ 887,607
14.01 %
Total capital minimum requirement 501,424
8.00 % 506,865
8.00 %
Excess $ 425,931
6.80 % $ 380,742
6.01 %
Total risk-weighted assets $ 6,267,795
$ 6,335,807

Leverage Ratio

Tier 1 capital $ 797,920
9.75 % $ 756,056
9.28 %
Tier 1 capital minimum requirement 327,336
4.00 % 325,894
4.00 %
Excess $ 470,584
5.75 % $ 430,162
5.28 %
Average adjusted assets (less goodwill and other intangible assets) $ 8,183,396
$ 8,147,357



	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)
September 30, 2017	13.58		%	11.84		%	10.01		%	9.48		%
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	$	7,517,635		$	7,517,635		$	7,517,635		N/A
Average Assets	N/A			N/A			N/A			$	9,387,922

December 31, 2016	14.01		%	11.93		%	10.09		%	9.28		%
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	$	6,335,807		$	6,335,807		$	6,335,807		N/A
Average Assets	N/A			N/A			N/A			$	8,147,357

Retained earnings that could be available for the payment of dividends to Heartland totaled approximately $244.6 million and $182.1 million at September 30, 2017, and December 31, 2016, respectively under the capital requirements to remain well capitalized. At September 30, 2017, and December 31, 2016, retained earnings that could be available for the payment of dividends under the most restrictive minimum capital requirements totaled $394.9 million and $308.9 million, respectively.

On July 29, 2016, Heartland filed a universal shelf registration statement with the SEC to register debt or equity securities. This shelf registration statement, which was effective immediately, provides Heartland with the ability to raise capital, subject to market conditions and SEC rules and limitations, if Heartland's board of directors decides to do so. This registration statement will permit Heartland, 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 be offered is not specified in the registration statement, and the terms of any future offerings will be established at the time of the offering. In November 2016, Heartland offered and sold 1,379,690 shares of its common stock pursuant to this registration statement.

On February 28, 2017, Heartland completed the acquisition of Founders Bancorp, parent company of Founders Community Bank, based in San Luis Obispo, California. Based on Heartland's closing common stock price of $49.55 per share on February 28, 2017, the aggregate consideration was approximately $31.0 million, which was paid by delivery of 455,877 shares of Heartland common stock and cash of $8.4 million.

During the first quarter of 2017, 333 shares of the Heartland Series D convertible preferred stock issued in the CIC Bancshares, Inc. acquisition were converted into 13,283 shares of Heartland common stock, and $167,000 of the subordinated convertible notes assumed in the acquisition were converted into 6,128 shares of Heartland common stock. The remaining subordinated convertible debt balance of $391,100 related to the CIC Bancshares, Inc., acquisition were converted to 14,353 shares of common stock during the third quarter of 2017.

Common stockholders' equity was ~~$805.0~~$980.7 million at ~~June~~September 30, 2017, compared to $739.6 million at December 31, 2016. Book value per common share was ~~$30.15~~$32.75 at ~~June~~September 30, 2017, compared to $28.31 at year-end 2016. Changes in common stockholders' equity and book value per common share are the result of earnings, dividends paid, stock transactions and mark-to-market adjustment for unrealized gains and losses on securities available for sale and derivative instruments. Heartland had

unrealized losses on securities available for sale, net of applicable taxes, of ~~$23.3~~$20.1 million at ~~June~~September 30, 2017, compared to unrealized losses of $30.2 million at December 31, 2016.

COMMITMENTS AND CONTRACTUAL OBLIGATIONS

Commitments and Contractual Obligations

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Heartland's bank subsidiaries evaluate the creditworthiness of customers to which they extend a credit commitment on a case-by-case basis and may require collateral to secure any credit extended. The amount of collateral obtained is based upon management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties. Standby letters of credit and financial guarantees are conditional commitments issued by Heartland's bank subsidiaries to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. At ~~June~~September 30, 2017, and December 31, 2016, commitments to extend credit aggregated ~~$1.64~~$2.03 billion and $1.57 billion, respectively. Standby letters of credit aggregated ~~$46.2~~$52.3 million at ~~June~~September 30, 2017, and $46.1 million at December 31, 2016.

Contractual obligations and other commitments were disclosed in Heartland's Annual Report on Form 10-K for the year ended December 31, ~~2016. Except for the commitments with respect to the Citywide Banks of Colorado, Inc. acquisition described below,~~2016, and there have been no material changes in Heartland's contractual obligations and other commitments since that report was filed.

On July 7, 2017, Heartland acquired Citywide Banks of Colorado, Inc., parent company of Citywide Banks, headquartered in Aurora, Colorado. Simultaneous with the close, Citywide Banks merged into Heartland's Centennial Bank and Trust subsidiary. The combined entity operates as Citywide Banks. The aggregate consideration was approximately $211.2 million, of which $58.6 million was cash, and the remainder was settled by delivery of 3,216,161 shares of Heartland common stock. The combined entity operates as Citywide Banks. As of June 30, 2017, Citywide Banks had total assets of $1.38 billion, including $1.00 billion in net loans outstanding, and $1.20 billion of deposits. The systems conversion for this transaction is scheduled to be completed in the fourth quarter of 2017.

On a consolidated basis, Heartland maintains a large balance of short-term securities that, when combined with cash from operations, Heartland 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. On June 14, 2017, Heartland's revolving credit agreement with an unaffiliated bank was increased to $25.0 million from $20.0 million of maximum borrowing capacity. At ~~June~~September 30, 2017, ~~no balance~~$5.0 million was outstanding. Heartland also has a non-revolving credit line with the same unaffiliated bank. At ~~June~~September 30, 2017, $39.3 million was available on this non-revolving credit line. These credit agreements contain specific financial covenants, all of which Heartland was in compliance with as of ~~June~~September 30, 2017.

The ability of Heartland to pay dividends to its stockholders is dependent upon dividends paid by its subsidiaries. The bank subsidiaries are subject to statutory and regulatory restrictions on the amount they may pay in dividends. To maintain acceptable

capital ratios in Heartland's bank subsidiaries, certain portions of their retained earnings are not available for the payment of dividends.

Heartland continues to explore opportunities to expand its footprint of independent community banks. In the current banking industry environment, Heartland seeks these opportunities for growth through acquisitions. Heartland is primarily focused on possible acquisitions in the markets it currently serves, in which there would be an opportunity to increase market share, achieve efficiencies and provide greater convenience for current customers. Future expenditures relating to expansion efforts, in addition to those identified above, cannot be estimated at this time.

Derivative Financial Instruments

Heartland enters 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 these loans and on the residential mortgage loans held as available for sale. See Note 7 to the consolidated financial statements include in this Quarterly Report on Form 10-Q for additional information on our derivative financial instruments.

LIQUIDITY

Liquidity refers to Heartland's ability to maintain 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 Heartland

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.

Operating activities provided cash of ~~$71.9~~$129.9 million during the first ~~six~~nine months of 2017 compared to cash provided of ~~$51.5~~$96.7 million during the first ~~six~~nine months of 2016. The largest factor in this change was the activity in loans originated for sale and the proceeds on sales of loans held for sale, which provided cash of ~~$12.4~~$25.5 million during the first ~~six~~nine months of 2017 compared to ~~the use of $7.8~~using $3.5 million in cash during the first ~~six~~nine months of 2016.

Investing activities provided cash of ~~$230.4~~$156.6 million during the first ~~six~~nine months of 2017 compared to providing cash of ~~$223.9~~$168.7 million during the first ~~six~~nine months of 2016. The proceeds from sales, paydowns and maturities of securities available for sale and held to maturity were ~~$730.2 million~~$1.30 billion during the first ~~six~~nine months of 2017 compared to ~~$712.9~~$912.0 million during the first ~~six~~nine months of 2016. Cash used for the purchase of securities available for sale totaled ~~$666.6 million~~$1.30 billion during the first ~~six~~nine months of 2017 compared to ~~$594.1~~$888.9 million during the first ~~six~~nine months of 2016. ~~A net change~~Net decreases in loans provided cash of ~~$113.4~~$45.1 million and $138.7 million during the first ~~six~~nine months of 2017 ~~compared to providing cash of $98.2 million during the first six months of 2016.~~and 2016, respectively. Also contributing to cash provided by investing activities was net cash and cash equivalents received in acquisitions, which totaled ~~$33.7~~$71.1 million during the first ~~six~~nine months of 2017 compared to $8.1 million during the first ~~six~~nine months of 2016.

Financing activities used cash of ~~$279.2~~$193.5 million during the first ~~six~~nine months of 2017 compared to using cash of ~~$304.2~~$322.1 million during the first ~~six~~nine months of 2016. A net increase in demand deposits provided cash of ~~$59.0~~$181.2 million during the first ~~six~~nine months of 2017 compared to providing cash of ~~$71.5~~$160.3 million during the first ~~six~~nine months of 2016. The net decrease in savings deposits used cash of ~~$146.8 million and $10.0~~$179.7 million for the ~~six~~first nine months ~~ended June 30,~~of 2017 ~~and 2016, respectively.~~compared to providing cash of $51.5 million during the first nine months of 2016. A net decrease in time deposits used cash of ~~$10.9~~$8.6 million during the first ~~six~~nine months of 2017 compared to using cash of ~~$277.9~~$353.1 million during the first ~~six~~nine months of 2016. Short-term borrowings activity, including short-term FHLB activity and revolving credit line agreement activity, used cash of ~~$167.3~~$169.0 million during the first ~~six~~nine months of 2017 compared to using cash of ~~$26.0~~$115.6 million during the first ~~six~~nine months of 2016. Other borrowing activity used cash of ~~$7.5~~$8.6 million during the first ~~six~~nine months of 2017 compared to providing cash of ~~$25.5~~$24.4 million during the first ~~six~~nine months of 2016. Included in the use of cash during the first ~~six~~nine months of 2016 was cash of $81.7 million used for the redemption of Heartland's Series C Preferred Stock issued to the U.S. Treasury under the Small Business Lending Fund program.

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 increases in net interest cash flows.

Heartland's short-term borrowing balances are dependent on commercial cash management and smaller correspondent bank relationships, and, as a result, short-term borrowing balances will normally fluctuate. Management believes these balances, on average, to be stable sources of funds; however, management intends to rely more heavily on deposit growth and additional FHLB borrowings in the future.

In the event of short-term liquidity needs, Heartland's bank subsidiaries may purchase federal funds from each other or from correspondent banks, and may also borrow from the Federal Reserve Bank. Additionally, the bank subsidiaries’ FHLB memberships give them the ability to borrow funds for short- and long-term purposes under a variety of programs.

Heartland's revolving credit line agreement with an unaffiliated bank provides a maximum borrowing capacity of $25.0 million. During the third quarter of 2017, Heartland had advances of $20.0 million and repayments of ~~which no balance had been drawn at June~~$15.0 million on this line. At September 30, ~~2017.~~2017, $5.0 million was outstanding on this agreement. Heartland also has a non-revolving credit line with the same unaffiliated bank, which had $39.3 million of borrowing capacity at ~~June~~September 30, 2017, of which no balance had been drawn.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss arising from adverse changes in market prices and rates. Heartland's market risk is comprised primarily of interest rate risk resulting from its core banking activities of lending and accepting deposits. Interest rate risk measures the impact on earnings from changes in interest rates and the effect on the current fair market values of Heartland's assets, liabilities and off-balance sheet contracts. Heartland's objective is to measure this risk and manage its 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 Heartland's bank subsidiaries and, on a consolidated basis, by Heartland's executive management and board of directors. Darling Consulting Group, Inc. has been engaged to provide asset/liability management position assessment and strategy formulation services to Heartland and its bank subsidiaries. At least quarterly, a detailed review of the balance sheet risk profile is performed for Heartland 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 Heartland's interest rate risk profile and net interest income. Heartland believes its primary market risk exposures did not change significantly in the first ~~six~~nine months of 2017.

The core interest rate risk analysis utilized by Heartland 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 Heartland's net interest income. Starting balances in the model reflect actual balances on the “as of” date, adjusted for material 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 ~~June~~September 30, 2017, and ~~June~~September 30, 2016, provided the following results, in thousands:


	2017				2016				2017				2016
	Net Interest Margin		% Change From Base		Net Interest Margin		% Change From Base		Net Interest Margin		% Change From Base		Net Interest Margin		% Change From Base
Year 1
Down 100 Basis Points	$	289,377	(3.28	)%	$	281,651	(2.76	)%	$	343,033	(2.69	)%	$	278,279	(2.74	)%
Base	$	299,196			$	289,650			$	352,502			$	286,122
Up 200 Basis Points	$	300,077	0.29	%	$	286,207	(1.19	)%	$	351,265	(0.35	)%	$	286,325	0.07	%
Year 2
Down 100 Basis Points	$	274,065	(8.40	)%	$	268,616	(7.26	)%	$	326,965	(7.24	)%	$	264,054	(7.71	)%
Base	$	300,821	0.54	%	$	290,353	0.24	%	$	354,238	0.49	%	$	286,429	0.11	%
Up 200 Basis Points	$	318,483	6.45	%	$	296,350	2.31	%	$	369,712	4.88	%	$	298,565	4.35	%

Heartland uses derivative financial instruments to manage the impact of changes in interest rates on its future interest income or interest expense. Heartland is exposed to credit-related losses in the event of nonperformance by the counterparties to these derivative instruments, but believes it has 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 7 to the consolidated financial statements included in this Quarterly Report on Form 10-Q.

Heartland enters into financial instruments with off balance sheet risk in the normal course of business to meet the financing needs of its 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 funds 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 Heartland to guarantee the performance of a customer to a third party up to a stated amount and subject to 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 or credit is issued.

Heartland periodically holds a securities trading portfolio that would also be subject to elements of market risk. These securities are carried on the balance sheet at fair value. At both ~~June~~September 30, 2017, and December 31, 2016, Heartland held no securities in its securities trading portfolio.

ITEM 4. CONTROLS AND PROCEDURES

Based on an evaluation, as of the end of the period covered by this quarterly report on Form 10-Q, under the supervision and with the participation of Heartland's management, including its Chief Executive Officer and Chief Financial Officer, the Chief Executive Officer and Chief Financial Officer have concluded that Heartland's disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) were effective. During the quarter ended ~~June~~September 30, 2017, there have been no changes in Heartland's internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) that have materially affected, or are reasonably likely to materially affect, Heartland's internal control over financial reporting.

PART II

ITEM 1. LEGAL PROCEEDINGS

There are no material pending legal proceedings to which Heartland or its subsidiaries are a party other than ordinary routine litigation incidental to their respective businesses. While the ultimate outcome of current legal proceedings cannot be predicted with certainty, it is the opinion of management that the resolution of these legal actions should not have a material effect on Heartland's consolidated financial position or results of operations.

ITEM 1A. RISK FACTORS

There have been no material changes in the risk factors applicable to Heartland from those disclosed in Part I, Item 1A. “Risk Factors” in Heartland's 2016 Annual Report on Form 10-K. Please refer to that section of Heartland's Form 10-K report for disclosures regarding the risks and uncertainties related to Heartland's business.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Heartland's board of directors has authorized management to acquire and hold up to 500,000 shares of common stock as treasury shares at any one time. Heartland and its affiliated purchasers made no purchases of its common stock during the ~~six~~nine months ended ~~June~~September 30, 2017.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

Exhibits



~~10.1~~31.1	⁽¹⁾⁽²⁾	~~Form of Director Restricted Stock Unit Award Agreement under the Heartland Financial USA, Inc. 2012 Long-Term Incentive Plan~~
~~10.2~~	⁽²⁾	~~Revolving Credit Line Promissory Note dated June 14, 2017, between Heartland Financial USA, Inc. and Bankers Trust Company~~
~~10.3~~	⁽²⁾	~~Promissory Note dated June 14, 2017 between Heartland Financial USA, Inc. and Bankers Trust Company~~
~~31.1~~	⁽²⁾	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.
31.2	⁽²⁾⁽¹⁾	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.
32.1	⁽²⁾⁽¹⁾	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	⁽²⁾⁽¹⁾	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101		Financial statement formatted in Extensible Business Reporting Language: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Changes in Equity, and (vi) the Notes to Consolidated Financial Statements.

______________

(1) ~~Management contracts or compensatory plans or arrangements.~~

~~(2)~~ Filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned there unto duly authorized.

HEARTLAND FINANCIAL USA, INC.

(Registrant)

/s/ Lynn B. Fuller

By: Lynn B. Fuller

Chairman and Chief Executive Officer

(Principal Executive Officer and Duly Authorized Officer)

/s/ Bryan R. McKeag

By: Bryan R. McKeag

Executive Vice President and Chief Financial Officer

(Principal Financial Officer and Duly Authorized Officer)

/s/ Janet M. Quick

By: Janet M. Quick

Executive Vice President and Deputy Chief Financial Officer

(Principal Accounting Officer and Duly Authorized Officer)

Dated: ~~August 4,~~November 8, 2017



NONPERFORMING ASSETS	June 30,						December 31,
	2017			2016			2016			2015
Nonaccrual loans	$	65,393		$	57,053		$	64,299		$	39,655
Loans contractually past due 90 days or more	698			—			86			—
Total nonperforming loans	66,091			57,053			64,385			39,655
Other real estate	9,269			11,003			9,744			11,524
Other repossessed assets	675			564			663			485
Total nonperforming assets	$	76,035		$	68,620		$	74,792		$	51,664
Performing troubled debt restructured loans⁽¹⁾	$	11,157		$	9,923		$	10,380		$	11,075
Nonperforming loans to total loans	1.24		%	1.04		%	1.20		%	0.79		%
Nonperforming assets to total loans plus repossessed property	1.43		%	1.25		%	1.39		%	1.03		%
Nonperforming assets to total assets	0.93		%	0.84		%	0.91		%	0.67		%

(1) Represents accruing troubled debt restructured loans performing according to their restructured terms.



CAPITAL RATIOS	June 30, 2017				December 31, 2016
	Amount		Ratio		Amount		Ratio
Risk-Based Capital Ratio
Tier 1 capital	$	797,920	12.73	%	$	756,056	11.93	%
Tier 1 capital minimum requirement	376,068		6.00	%	380,148		6.00	%
Excess	$	421,852	6.73	%	$	375,908	5.93	%

Common Equity Tier 1 capital	$	681,571	10.87	%	$	639,467	10.09	%
Common Equity Tier 1 minimum requirement	282,051		4.50	%	285,111		4.50	%
Excess	$	399,520	6.37	%	$	354,356	5.59	%

Total capital	$	927,355	14.80	%	$	887,607	14.01	%
Total capital minimum requirement	501,424		8.00	%	506,865		8.00	%
Excess	$	425,931	6.80	%	$	380,742	6.01	%
Total risk-weighted assets	$	6,267,795			$	6,335,807

Leverage Ratio
Tier 1 capital	$	797,920	9.75	%	$	756,056	9.28	%
Tier 1 capital minimum requirement	327,336		4.00	%	325,894		4.00	%
Excess	$	470,584	5.75	%	$	430,162	5.28	%
Average adjusted assets (less goodwill and other intangible assets)	$	8,183,396			$	8,147,357