0000920112 us-gaap:EstimateOfFairValueFairValueDisclosureMember us-gaap:ForwardContractsMember 2019-06-30

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 ~~September~~June 30, ~~2017~~

2019



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

For transition period from __________ 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, Iowa52001

(Address of principal executive offices)(Zip Code)

~~(563) 589-2000~~(563) 589-2100

(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~~"large accelerated ~~filer”~~filer", ~~“smaller~~"accelerated filer", "smaller reporting ~~company”~~company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.



	Large accelerated filerx	☒		Accelerated Filer¨	☐
Non-accelerated filer	☐
	~~Non-accelerated filer~~ ¨	~~(Do not check if a smaller reporting company)~~
	Smaller reporting company¨	☐
Emerging growth 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)~~Act). Yes o☐No x☒

Securities registered pursuant to Section 12(b) of the Exchange Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $1.00 per share	HTLF	Nasdaq Stock Market

Indicate the number of shares outstanding of each of the classes of Registrant's common stock as of the latest practicable date: As of ~~November~~August 6, ~~2017,~~2019, the Registrant had outstanding ~~29,949,070~~36,690,358 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
	~~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)
	September 30, 2017 (Unaudited)			December 31, 2016			June 30, 2019 (Unaudited)			December 31, 2018
ASSETS
Cash and due from banks	$	180,751		$	151,290		$	198,664		$	223,135
Interest bearing deposits with the Federal Reserve Bank and other banks and other short-term investments	70,985			7,434
Interest bearing deposits with other banks and other short-term investments							443,475			50,495
Cash and cash equivalents	251,736			158,724			642,139			273,630
Time deposits in other financial institutions	19,793			2,105			4,430			4,672
Securities:
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
Carried at fair value (cost of $2,552,214 at June 30, 2019, and $2,492,620 at December 31, 2018)							2,561,887			2,450,709
Held to maturity, at cost (fair value of $96,619 at June 30, 2019, and $245,341 at December 31, 2018)							88,166			236,283
Other investments, at cost	23,176			21,560			31,366			28,396
Loans held for sale	35,795			61,261			34,575			119,801
Loans receivable:
Held to maturity	6,373,415			5,351,719			7,853,051			7,407,697
Allowance for loan losses	(54,885		)	(54,324		)
Allowance for loan and lease losses							(63,850		)	(61,963		)
Loans receivable, net	6,318,530			5,297,395			7,789,201			7,345,734
Premises, furniture and equipment, net	174,533			163,614			194,628			187,418
Premises, furniture and equipment held for sale	4,428			414			3,701			7,258
Other real estate, net	13,226			9,744			6,646			6,153
Goodwill	236,615			127,699			427,097			391,668
Core deposit intangibles and customer relationship intangibles, net	37,028			22,775			52,718			47,479
Servicing rights, net	26,599			35,778			7,180			31,072
Cash surrender value on life insurance	142,073			112,615			170,421			162,892
Other assets	122,355			123,869			146,135			114,841
TOTAL ASSETS	$	9,755,627		$	8,247,079		$	12,160,290		$	11,408,006
LIABILITIES AND EQUITY
LIABILITIES:
Deposits:
Demand	$	3,009,940		$	2,202,036		$	3,426,758		$	3,264,737
Savings	4,227,340			3,788,089			5,533,503			5,107,962
Time	994,604			857,286			1,148,296			1,023,730
Total deposits	8,231,884			6,847,411			10,108,557			9,396,429
Deposits held for sale							—			106,409
Short-term borrowings	171,871			306,459			107,260			227,010
Other borrowings	301,473			288,534			282,863			274,905
Accrued expenses and other liabilities	68,715			63,759			139,823			78,078
TOTAL LIABILITIES	8,773,943			7,506,163			10,638,503			10,082,831
STOCKHOLDERS' EQUITY:
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
Preferred stock (par value $1 per share; authorized 17,604 shares; none issued or outstanding at both June 30, 2019, and December 31, 2018)							—			—
Series A Junior Participating preferred stock (par value $1 per share; authorized 16,000 shares; none issued or outstanding at both June 30, 2019, and December 31, 2018)							—			—
Series C Senior Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares authorized at both June 30, 2019, and December 31, 2018, none issued or outstanding at both June 30, 2019, and December 31, 2018)							—			—
Series D Senior Non-Cumulative Perpetual Convertible Preferred Stock (par value $1 per share; 3,000 shares authorized at both June 30, 2019, and December 31, 2018; none issued or outstanding at both June 30, 2019, and December 31, 2018)							—			—
Common stock (par value $1 per share; 60,000,000 shares authorized at June 30, 2019, and 40,000,000 shares authorized at December 31, 2018; issued 36,690,061 shares at June 30, 2019, and 34,477,499 shares at December 31, 2018)							36,690			34,477
Capital surplus	503,262			328,376			837,150			743,095
Retained earnings	468,556			416,109			642,808			579,252
Accumulated other comprehensive loss	(21,018		)	(31,046		)
Treasury stock at cost (0 shares at both September 30, 2017, and December 31, 2016)	—			—
Accumulated other comprehensive income/(loss)							5,139			(31,649		)
TOTAL STOCKHOLDERS' EQUITY	981,684			740,916			1,521,787			1,325,175
TOTAL LIABILITIES AND EQUITY	$	9,755,627		$	8,247,079		$	12,160,290		$	11,408,006

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 September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2019			2018			2019			2018
INTEREST INCOME:
Interest and fees on loans	$	82,906		$	70,046		$	217,898		$	208,280		$	106,027		$	96,787		$	206,483		$	182,438
Interest on securities:
Taxable	10,394			7,917			27,246			24,604			16,123			12,270			31,999			23,847
Nontaxable	5,086			3,717			15,297			10,793			2,554			3,584			5,647			7,163
Interest on federal funds sold	34			1			37			12			—			—			4			—
Interest on interest bearing deposits in other financial institutions	558			6			1,112			13			2,299			768			3,591			1,175
TOTAL INTEREST INCOME	98,978			81,687			261,590			243,702			127,003			113,409			247,724			214,623
INTEREST EXPENSE:
Interest on deposits	5,073			4,001			12,966			12,195			16,138			7,983			29,351			13,749
Interest on short-term borrowings	271			235			498			1,083			338			547			1,227			815
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
Interest on other borrowings (includes $100 and $30 of interest expense related to derivatives reclassified from accumulated other comprehensive income for the three months ended June 30, 2019 and 2018, respectively, and $265 and $227 of interest expense related to derivatives reclassified from accumulated other comprehensive income for the six months ended June 30, 2019 and 2018, respectively)													3,819			3,470			7,483			7,066
TOTAL INTEREST EXPENSE	9,134			8,006			24,138			24,196			20,295			12,000			38,061			21,630
NET INTEREST INCOME	89,844			73,681			237,452			219,506			106,708			101,409			209,663			192,993
Provision for loan losses	5,705			5,328			10,235			9,513			4,918			4,831			6,553			9,094
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	84,139			68,353			227,217			209,993			101,790			96,578			203,110			183,899
NONINTEREST INCOME:
Service charges and fees	10,138			8,278			29,291			23,462			14,629			12,072			27,423			22,151
Loan servicing income	1,161			873			4,236			3,433			1,338			1,807			3,067			3,561
Trust fees	3,872			3,689			11,482			11,127			4,825			4,615			9,299			9,295
Brokerage and insurance commissions	950			1,006			2,962			2,914			1,028			877			1,762			1,784
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
Securities gains/(losses), net (includes $3,580 of net security gains and $259 of net security losses reclassified from accumulated other comprehensive income for the three months ended June 30, 2019 and 2018, respectively and $5,155 and $1,182 of net security gains reclassified from accumulated other comprehensive income for the six months ended June 30, 2019 and 2018, respectively)													3,580			(259		)	5,155			1,182
Unrealized gain on equity securities, net													112			71			370			43
Net gains on sale of loans held for sale	4,997			11,459			17,961			33,794			4,343			6,800			7,519			10,851
Valuation allowance on commercial servicing rights	5			5			29			(41		)
Valuation allowance on servicing rights													(364		)	(216		)	(953		)	(218		)
Income on bank owned life insurance	766			620			2,039			1,733			888			700			1,787			1,314
Other noninterest income	1,409			1,028			2,941			2,992			1,682			1,167			3,349			2,387
TOTAL NONINTEREST INCOME	24,977			28,542			76,494			89,146			32,061			27,634			58,778			52,350
NONINTEREST EXPENSES:
Salaries and employee benefits	45,225			40,733			128,118			124,432			49,995			50,758			100,280			99,468
Occupancy	6,223			5,099			16,352			15,322			6,436			6,315			13,043			12,358
Furniture and equipment	2,826			2,746			7,913			7,301			3,220			3,184			5,912			5,933
Professional fees	8,450			5,985			24,342			20,481			14,968			10,632			26,347			20,080
FDIC insurance assessments	894			1,180			2,610			3,468
Advertising	1,358			1,339			5,141			4,174			2,661			2,145			4,986			4,085
Core deposit intangibles and customer relationship intangibles amortization	1,863			1,291			4,252			4,483			3,313			2,274			6,155			4,137
Other real estate and loan collection expenses	581			640			1,774			1,871			162			948			863			1,680
Loss on sales/valuations of assets, net	1,342			794			1,642			1,064
(Gain)/loss on sales/valuations of assets, net													(18,286		)	1,528			(21,290		)	1,331
Restructuring expenses													—			—			3,227			2,564
Other noninterest expenses	9,997			8,620			27,653			27,160			12,629			11,098			23,805			20,892
TOTAL NONINTEREST EXPENSES	78,759			68,427			219,797			209,756			75,098			88,882			163,328			172,528
INCOME BEFORE INCOME TAXES	30,357			28,468			83,914			89,383			58,753			35,330			98,560			63,721
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
Income taxes (includes $880 and $(61) of income tax expense/(benefit) reclassified from accumulated other comprehensive income for the three months ended June 30, 2019 and 2018, respectively and $1,238 and $201 of income tax expense reclassified from accumulated other comprehensive income for the six months ended June 30, 2019 and 2018, respectively)													13,584			7,451			21,894			12,574
NET INCOME	21,632			20,208			61,600			61,187			45,169			27,879			76,666			51,147
Preferred dividends	(13		)	(53		)	(45		)	(273		)	—			(13		)	—			(26		)
Interest expense on convertible preferred debt	3			17			12			48
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS	$	21,622		$	20,172		$	61,567		$	60,962		$	45,169		$	27,866		$	76,666		$	51,121
EARNINGS PER COMMON SHARE - BASIC	$	0.73		$	0.82		$	2.23		$	2.51		$	1.26		$	0.85		$	2.18		$	1.62
EARNINGS PER COMMON SHARE - DILUTED	$	0.72		$	0.81		$	2.21		$	2.48		$	1.26		$	0.85		$	2.17		$	1.61
CASH DIVIDENDS DECLARED PER COMMON SHARE	$	0.11		$	0.10		$	0.33		$	0.30		$	0.16		$	0.13		$	0.32		$	0.26

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 September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2019			2018			2019			2018
NET INCOME	$	21,632		$	20,208		$	61,600		$	61,187		$	45,169		$	27,879		$	76,666		$	51,147
OTHER COMPREHENSIVE INCOME
OTHER COMPREHENSIVE INCOME/(LOSS)
Securities:
Net change in unrealized gain on securities	6,940			(5,696		)	22,002			18,274
Reclassification adjustment for net gains realized in net income	(1,679		)	(1,586		)	(5,553		)	(9,964		)
Net change in non-credit related other than temporary impairment	—			—			—			7
Net change in unrealized gain/(loss) on securities													28,422			(8,501		)	58,387			(28,335		)
Reclassification adjustment for net (gains)/losses realized in net income													(3,580		)	259			(5,155		)	(1,182		)
Income taxes	(2,084		)	2,871			(6,433		)	(3,364		)	(6,383		)	2,117			(13,664		)	7,508
Other comprehensive income (loss) on securities	3,177			(4,411		)	10,016			4,953
Other comprehensive income/(loss) on securities													18,459			(6,125		)	39,568			(22,009		)
Derivatives used in cash flow hedging relationships:
Net change in unrealized loss on derivatives	17			844			(656		)	(4,623		)
Net change in unrealized gain/(loss) on derivatives													(2,263		)	897			(3,768		)	2,596
Reclassification adjustment for net losses on derivatives realized in net income	308			492			1,005			1,463			94			30			252			227
Income taxes	(123		)	(517		)	(337		)	1,155			453			105			736			(603		)
Other comprehensive income (loss) on cash flow hedges	202			819			12			(2,005		)
Other comprehensive income (loss)	3,379			(3,592		)	10,028			2,948
Other comprehensive income/(loss) on cash flow hedges													(1,716		)	1,032			(2,780		)	2,220
Other comprehensive income/(loss)													16,743			(5,093		)	36,788			(19,789		)
TOTAL COMPREHENSIVE INCOME	$	25,011		$	16,616		$	71,628		$	64,135		$	61,912		$	22,786		$	113,454		$	31,358

See accompanying notes to consolidated financial statements.


HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands)
	Nine Months Ended September 30,						Six Months Ended June 30,
	2017			2016			2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	61,600		$	61,187		$	76,666		$	51,147
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	22,738			22,975			16,315			14,273
Provision for loan losses	10,235			9,513			6,553			9,094
Net amortization of premium on securities	20,186			24,093			10,927			12,587
Securities gains, net	(5,553		)	(9,732		)	(5,155		)	(1,182		)
Unrealized gain on equity securities, net							(370		)	(43		)
Stock based compensation	3,588			3,073			3,602			2,770
Loans originated for sale	(548,768		)	(863,354		)	(165,249		)	(317,979		)
Proceeds on sales of loans held for sale	586,202			883,758			161,625			346,083
Net gains on sale of loans held for sale	(11,968		)	(23,938		)	(7,177		)	(8,178		)
Decrease in accrued interest receivable	(1,449		)	(1,054		)
(Increase) decrease in prepaid expenses	838			(128		)
Increase in accrued interest payable	1,104			332
(Increase) decrease in accrued interest receivable							2,421			(35		)
Decrease in prepaid expenses							229			2,263
Increase (decrease) in accrued interest payable							1,021			(25		)
Capitalization of servicing rights	(5,993		)	(9,856		)	(415		)	(2,694		)
Valuation allowance on commercial servicing rights	(29		)	41
Write downs and losses on sales of assets, net	1,642			1,064
Valuation allowance on servicing rights							953			218
(Gain)/loss on sales/valuations of assets, net							(10,735		)	1,331
Net excess tax benefit from stock based compensation	1,121			1,121			272			660
Other, net	(5,637		)	(2,419		)	(29,184		)	(16,605		)
NET CASH PROVIDED BY OPERATING ACTIVITIES	129,857			96,676			62,299			93,685
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of time deposits in other financial institutions							(248		)	(1,000		)
Proceeds from the sale of securities available for sale	1,127,091			768,617			1,194,897			635,735
Proceeds from the sale of securities held to maturity	—			4,557
Proceeds from the sale of other investments	—			4,722
Proceeds from the redemption of time deposits in other financial institutions	12,171			—			—			8,767
Proceeds from the maturity of and principal paydowns on securities available for sale	161,827			130,549			178,930			112,166
Proceeds from the maturity of and principal paydowns on securities held to maturity	6,645			8,271			2,406			8,897
Proceeds from the maturity of and principal paydowns on time deposits in other financial institutions	24,931			250			490			4,862
Proceeds from the maturity of and principal paydowns on other investments	2,574			—
Proceeds from the sale, maturity of and principal paydowns on other investments							7,992			1,400
Purchase of securities available for sale	(1,299,492		)	(888,903		)	(1,148,238		)	(733,030		)
Purchase of other investments	(1,012		)	(1,875		)	(4,899		)	(1,842		)
Net decrease in loans	45,139			138,725
Net (increase) decrease in loans							77,147			(86,466		)
Purchase of bank owned life insurance policies	(2,000		)	—			(16		)	—
Proceeds from bank owned life insurance policies	—			111			421			—
Proceeds from sale of mortgage servicing rights	5,137			—			33,823			—
Capital expenditures	(6,876		)	(8,318		)	(3,909		)	(9,788		)
Net cash and cash equivalents received in acquisitions	71,089			8,084			38,650			212,197
Proceeds from the sale of equipment	1,845			686			829			622
Net cash expended in divestitures							(49,264		)	—
Proceeds on sale of OREO and other repossessed assets	7,578			3,266			3,825			2,091
NET CASH PROVIDED BY INVESTING ACTIVITIES	$	156,647		$	168,742		$	332,836		$	154,611


HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (Unaudited) (Dollars in thousands)
	Nine Months Ended September 30,						Six Months Ended June 30,
	2017			2016			2019			2018
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits	$	181,206		$	160,313		$	4,675		$	117,456
Net increase (decrease) in savings deposits	(179,721		)	51,530
Net decrease in time deposit accounts	(8,582		)	(353,084		)
Net increase in savings deposits							110,498			5,408
Net increase (decrease) in time deposit accounts							29,924			(31,789		)
Proceeds on short-term revolving credit line	20,000			—			—			25,000
Repayments on short-term revolving credit line	(15,000		)	—
Net decrease in short-term borrowings	(168,667		)	(101,409		)	(44,326		)	(155,403		)
Proceeds from short term FHLB advances	186,039			243,100			430,888			302,102
Repayments of short term FHLB advances	(191,405		)	(257,250		)	(531,725		)	(266,500		)
Proceeds from other borrowings	—			40,000			50			—
Repayments of other borrowings	(8,573		)	(15,562		)	(15,621		)	(44,654		)
Redemption of preferred stock	—			(81,698		)
Purchase of treasury stock	(440		)	(2,293		)	—			(97		)
Proceeds from issuance of common stock	804			1,863			408			156
Dividends paid	(9,153		)	(7,638		)	(11,397		)	(7,972		)
NET CASH USED BY FINANCING ACTIVITIES	(193,492		)	(322,128		)	(26,626		)	(56,293		)
Net increase (decrease) in cash and cash equivalents	93,012			(56,710		)
Net increase in cash and cash equivalents							368,509			192,003
Cash and cash equivalents at beginning of year	158,724			258,799			273,630			196,003
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	251,736		$	202,089		$	642,139		$	388,006
Supplemental disclosures:
Cash paid for income/franchise taxes	$	10,775		$	16,550		$	19,495		$	8,254
Cash paid for interest	$	23,034		$	23,864		$	37,099		$	21,655
Loans transferred to OREO	$	4,955		$	1,359		$	4,655		$	2,264
Transfer of premises from premises, furniture and equipment, net, to premises, furniture and equipment held for sale							$	2,568		$	2,501
Transfer of premises from premises, furniture and equipment held for sale to premises, furniture and equipment, net,							$	1,564		$	—
Deposits transferred to held for sale							$	76,968		$	—
Loans transferred to held for sale							$	32,111		$	—
Securities transferred from held to maturity to available for sale							$	148,030		$	—
Purchases of securities available for sale, accrued, not settled	$	2,063		$	—		$	37,373		$	—
Sales of securities available for sale, accrued, not settled	$	125		$	250
Conversion of convertible debt to common stock	$	558		$	—
Conversion of Series D preferred stock to common stock	$	419		$	—
Stock consideration granted for acquisitions	$	175,196		$	57,433		$	92,258		$	238,075

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. Stockholders' 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
Comprehensive income

61,187
2,948

64,135
Cash dividends declared:

Series C Preferred, $2.50 per share

(168 )

(168 )
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 )
Issuance of Series D Preferred Stock 3,777
3,777
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

3,073

3,073
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
Comprehensive income 61,600
10,028

71,628
Cash dividends declared:

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 )
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
3,588

3,588
Balance at September 30, 2017 $ 938
$ 29,946
$ 503,262
$ 468,556
$ (21,018 ) $ —
$ 981,684

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. Stockholders' Equity
	Preferred Stock		Common Stock		Capital Surplus		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Equity
Balance at March 31, 2018	$	938	$	31,068	$	557,990	$	500,959		$	(39,450	)	$	—		$	1,051,505
Comprehensive income							27,879			(5,093		)				22,786
Cash dividends declared:
Series D Preferred, $17.50 per share							(13		)							(13		)
Common, $0.13 per share							(4,039		)							(4,039		)
Issuance of 3,370,206 shares of common stock			3,370		181,226											184,596
Stock based compensation					912											912
Balance at June 30, 2018	$	938	$	34,438	$	740,128	$	524,786		$	(44,543	)	$	—		$	1,255,747
Balance at January 1, 2018	$	938	$	29,953	$	503,709	$	481,331		$	(24,474	)	$	—		$	991,457
Comprehensive income							51,147			(19,789		)				31,358
Reclassification of unrealized net gain on equity securities							280			(280		)				—
Cash dividends declared:
Series D Preferred, $35.00 per share							(26		)							(26		)
Common, $0.26 per share							(7,946		)							(7,946		)
Purchase of 1,761 shares of common stock													(97		)	(97		)
Issuance of 4,486,850 shares of common stock			4,485		233,649								97			238,231
Stock based compensation					2,770											2,770
Balance at June 30, 2018	$	938	$	34,438	$	740,128	$	524,786		$	(44,543	)	$	—		$	1,255,747
Balance at March 31, 2019	$	—	$	34,604	$	745,596	$	603,506		$	(11,604	)	$	—		$	1,372,102
Comprehensive income							$	45,169		$	16,743					61,912
Cash dividends declared:
Common, $0.16 per share							$	(5,867	)							(5,867		)
Issuance of 2,086,450 shares of common stock			$	2,086	$	90,327										92,413
Stock based compensation					$	1,227										1,227
Balance at June 30, 2019	$	—	$	36,690	$	837,150	$	642,808		$	5,139		$	—		$	1,521,787
Balance at January 1, 2019	$	—	$	34,477	$	743,095	$	579,252		$	(31,649	)	$	—		$	1,325,175
Comprehensive income							76,666			36,788						113,454
Retained earnings adjustment for adoption of leasing standard							(1,713		)							(1,713		)
Cash dividends declared:
Common, $0.32 per share							(11,397		)							(11,397		)
Issuance of 2,212,562 shares of common stock			2,213		90,453											92,666
Stock based compensation					3,602											3,602
Balance at June 30, 2019	$	—	$	36,690	$	837,150	$	642,808		$	5,139		$	—		$	1,521,787

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,~~2018, included in the Form 10-K of Heartland Financial USA, Inc. ("Heartland") filed with the Securities and Exchange Commission ("SEC") on ~~March 1, 2017~~February 27, 2019. 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 ~~September~~June 30, ~~2017,~~2019, are not necessarily indicative of the results expected for the year ending December 31, ~~2017.~~2019.

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 ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2017~~2019, and ~~2016,~~2018, are shown in the table below:



	Three Months Ended June 30,
(Dollars and number of shares in thousands, except per share data)	2019		2018
Net income	$	45,169	$	27,879
Preferred dividends	—		(13		)
Net income available to common stockholders	$	45,169	$	27,866
Weighted average common shares outstanding for basic earnings per share	35,744		32,621
Assumed incremental common shares issued upon vesting of outstanding restricted stock units	135		210
Weighted average common shares for diluted earnings per share	35,879		32,831
Earnings per common share — basic	$	1.26	$	0.85
Earnings per common share — diluted	$	1.26	$	0.85
Number of antidilutive common stock equivalents excluded from diluted earnings per share computation	7		—

	Six Months Ended June 30,
(Dollars and number of shares in thousands, except per share data)	2019		2018
Net income	$	76,666	$	51,147
Preferred dividends	—		(26		)
Net income available to common stockholders	$	76,666	$	51,121
Weighted average common shares outstanding for basic earnings per share	35,157		31,537
Assumed incremental common shares issued upon vesting of outstanding restricted stock units	138		209
Weighted average common shares for diluted earnings per share	35,295		31,746
Earnings per common share — basic	$	2.18	$	1.62
Earnings per common share — diluted	$	2.17	$	1.61
Number of antidilutive common stock equivalents excluded from diluted earnings per share computation	7		—

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

Nine Months Ended
September 30,
(Dollars and number of shares in thousands, except per share data) 2017 2016
Net income $ 61,600
$ 61,187
Preferred dividends (45 ) (273 )
Interest expense on convertible preferred debt 12
48
Net income available to common stockholders $ 61,567
$ 60,962
Weighted average common shares outstanding for basic earnings per share 27,569
24,262
Assumed incremental common shares issued upon exercise of stock options and non-vested restricted stock units 265
319
Weighted average common shares for diluted earnings per share 27,834
24,581
Earnings per common share — basic $ 2.23
$ 2.51
Earnings per common share — diluted $ 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 September 30, 2017, 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 $1.1 million during the nine months ended 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 nine months ended 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 on a specified future date in three equal installments starting in the year following the 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 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 on a specified date in the third calendar year following the year of the 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 nine months ended September 30, 2017, and September 30, 2016, 16,804 and 24,153 time-based RSUs, respectively, were granted to directors and new employees.

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

2017 2016
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
Granted 109,071
47.21
143,721
29.75
Vested (136,428 ) 26.66
(117,898 ) 23.44
Forfeited (12,923 ) 31.57
(11,547 ) 27.12
Outstanding at September 30 306,537
$ 34.72
367,471
$ 27.60

Total compensation costs recorded for RSUs were $3.6 million and $3.1 million for the nine-month periods ended September 30, 2017 and 2016. As of September 30, 2017, there were $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 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 September 30, 2017 and 2016, and changes during the nine months ended September 30, 2017 and 2016, follows:

2017 2016
Shares
Weighted-Average
Exercise Price
Shares
Weighted-Average
Exercise Price
Outstanding at January 1 26,400
$ 18.60
125,950
$ 24.08
Granted —
—
—
—
Exercised (13,650 ) 18.60
(55,250 ) 24.82
Forfeited (500 ) 18.60
(1,500 ) 21.10
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 September 30, 2017, the vested options totale~~d 12,250 shares with a weighted average exercise price of $18.60 per share and a weighted average remaining contractual life of 0.32 years. The intrinsic value (the difference between the market price and the aggregate exercise price) for the vested options as of September 30, 2017, was $377,000. The intrinsic value for the total of all options exercised during the nine months ended September 30, 2017, was $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 $254,000 for the nine months ended September 30, 2017, and $1.4 million for the nine months ended September 30, 2016.

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

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 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~~on-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~~pattern and classification 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~~is applied on a modified retrospective basis. Heartland leases certain properties and equipment under operating leases that ~~will result~~resulted in recognition of lease assets and lease liabilities on the consolidated balance sheets under ~~this~~the ASU; however the majority of Heartland's properties and equipment are owned, ~~and~~ not leased. ~~Heartland intends~~The modified retrospective approach includes a number of optional practical expedients that entities may elect to ~~adopt~~apply. These practical expedients relate to the ~~accounting standard~~identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in ~~2019~~evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. Early adoption is permitted. In January 2018, the FASB issued an amendment to provide entities with the optional practical expedient to not evaluate existing or expired land easements that were previously not accounted for as ~~required.~~

leases under Topic 840. In ~~March 2016,~~July 2018, the FASB issued ASU ~~2016-09,~~ 2018-11, "~~Compensation-Stock Compensation (Topic 718).~~Leases - Targeted Improvements" ~~The amendments in this ASU simplify several~~to provide entities with relief from the costs of implementing certain aspects of the ~~accounting for share-based payments, including income tax consequences, classification of awards as either equity or liabilities~~new leasing standard, Specifically, under the amendments in ASU 2018-11, entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and ~~classification on the statement of cash flows.~~lessors may elect not to separate lease and non-lease components when certain conditions are met. The amendments ~~in this~~have the same effective date as 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.2016-02. Heartland adopted ~~this ASU~~the accounting standard on January 1, ~~2017,~~2019, on a modified retrospective basis, as required, ~~using a prospective transition method.~~and has not restated comparative periods. Heartland adopted the practical expedients, which allow for existing leases to be accounted for under previous guidance with the exception of balance sheet recognition for lessees. The ~~requirement to report~~adoption of the ~~excess tax benefit or shortfall related to settlements~~new standard resulted in the recording of ~~share-based payment awards in earnings~~ROU assets and lease liabilities of approximately $25.9 million and $27.6 million, respectively, on January 1, 2019. The difference between the lease assets and lease liabilities, which was $1.7 million, was recorded as an ~~increase~~adjustment to retained earnings. The adoption of the standard did not impact Heartland's results of operations or ~~decrease to tax expense has been applied to settlements occurring~~liquidity. See Note 11, "Leases", for more information on ~~or after January 1, 2017, and the impact of applying the guidance reduced reported income tax expense by $1.1 million.~~Heartland's leases.

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 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 nine months ended 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~~amendment is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. ~~Early adoption is permitted for~~An entity may adopt the amendments earlier as of the 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~~In April 2019, the FASB also issued ASU 2019-04, "Codification Improvements to ~~review the standard, understand the potential impact of~~Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments." As it relates to current expected credit losses, this guidance ~~on its results~~amends certain provisions contained in ASU 2016-13, particularly with regards to the inclusion of ~~operations, financial position~~accrued interest in the definition of amortized cost, as well as clarifying the extension and ~~liquidity, and oversee~~renewal options that are not unconditionally cancelable by the ~~implementation~~entity that are included in the original or modified contract should be considered in the entity's determination of ~~the standard.~~

~~In August 2016, the FASB issued~~expected credit losses. Upon adoption of 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 must2016-13, a cumulative-effect adjustment to retained earnings will be ~~reflected~~recorded as of the beginning of the ~~fiscal year~~first reporting period in which the guidance is effective. Heartland has formed an internal committee to assess and implement the standard. Heartland entered into an agreement with a third party vendor and is in the final stages of implementing a technology solution. Management expects that ~~includes~~ the ~~interim period. An entity that elects early adoption must adopt all~~preliminary model will be ready for detailed review and testing during the third quarter of 2019. Based on the results of Heartland's parallel runs, management expects to have an estimate of the ~~amendments~~impact that this new guidance will have on the consolidated financial statements 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,~~fourth quarter of 2019. Management expects that testing, control design and ~~is currently evaluating~~model validation will continue through the ~~potential impact on its results~~remainder of ~~operations, financial position, and liquidity.~~2019.

~~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 and Heartland intends to apply these amendments 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~~adopted this ASU inon January 1, 2019, as required, and ~~is currently evaluating~~ the ~~potential~~adoption did not have a material 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. For a closed portfolio of prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments, this ASU permits an entity to designate an amount that is not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows (the "last-of-layer" method). Under this designation, prepayment risk is not incorporated into the measurement of the hedged item. 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 inon the ~~statement of financial position~~balance sheet as of the date of adoption. Heartland ~~currently~~adopted this ASU on January 1, 2019, as required, and as a result of the adoption, $148.0 million of held to maturity securities were reclassified to available for sale debt securities carried at fair value. See Note 3, "Securities," for further details. There was no impact to Heartland's results of operations, or liquidity as a result of the adoption of this amendment.

In August 2018, the FASB issued ASU 2018-13, "Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. Heartland intends to adopt this ASU in ~~2019,~~2020, as required, and ~~does~~because the ASU only revises disclosure requirements, the adoption of this ASU is not ~~believe there will be~~expected to have a material impact on results of operations, financial position and liquidity.

In August 2018, the FASB issued ASU 2018-15, "Intangible-Goodwill and Other-Internal Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract." The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments in this update require an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The amendments also require the entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The amendment is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, and the amendment can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption was permitted. Heartland early adopted this ASU using the prospective approach in the second quarter of 2019, and the adoption did not have a material impact on its results of operations, financial position and liquidity.

In October 2018, the FASB issued ASU 2018-16, "Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting." In the United States, eligible benchmark interest rates under Topic 815 are interest rates on direct Treasury obligations of the U.S. government ("UST"), the London Interbank Offered Rate ("LIBOR") swap rate, and the Overnight Index Swap ("OIS") Rate based on the Fed Funds Effective Rate. When the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, in August 2017, it introduced the Securities Industry and Financial Markets Association ("SIFMA") Municipal Swap Rate as the fourth permissible U.S. benchmark rate. The new ASU adds the OIS rate based on the

Secured Overnight Financing Rate ("SOFR") as a U.S. benchmark interest rate to facilitate the LIBOR to SOFR transition and provide sufficient lead time for entities to prepare for changes to interest rate risk hedging strategies for both risk management and hedge accounting purposes. The amendments in this update became effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years and the financial statement impact immediately upon adoption was immaterial. The future financial statement impact will depend on any new contracts entered into using new benchmark rates, as well as any existing contracts that get migrated from LIBOR to new benchmark interest rates. Heartland is currently evaluating the impact of the transition from LIBOR as an interest rate benchmark to other potential alternative reference rates, including but not limited to the SOFR. Currently, Heartland has adjustable rate loans, several debt obligations and derivative instruments in place that reference LIBOR-based rates. The transition from LIBOR is estimated to take place at the end of 2021, and management will continue to actively assess the related opportunities and risks involved in this transition.

NOTE 2: ACQUISITIONS

~~Citywide Banks of Colorado, Inc.~~Blue Valley Ban Corp.

On ~~July 7, 2017,~~May 10, 2019, Heartland acquired Citywide Banks of Colorado, Inc., parent company of Citywide Banks, headquartered in Aurora, Colorado. The transaction 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. Simultaneous with the close, Citywide Banks merged into Heartland's Centennial Bank and Trust subsidiary, and the combined entity operates as Citywide Banks. The transaction included, at fair value, total assets of $1.49 billion, including $985.4 million of net loans outstanding, and $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 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~~completed the acquisition of ~~Citywide Banks~~Blue Valley Ban Corp. ("BVBC") and its wholly-owned subsidiary, Bank of ~~Colorado, Inc., which is calculated as~~Blue Valley, headquartered in Overland Park, Kansas. Based on Heartland's closing common stock price of $44.78 per share on May 10, 2019, the ~~excess of both the~~aggregate consideration ~~exchanged and the liabilities assumed as compared~~paid 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, 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~~BVBC common shareholders 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~~$92.3 million, which was paid by delivery of ~~455,877~~2,060,258 shares of Heartland common ~~stock~~stock. On the closing date, in addition to this merger consideration, Heartland provided BVBC the funds necessary to repay outstanding debt of $6.9 million, and ~~cash~~Heartland assumed $16.1 million of ~~$8.4 million. The~~trust preferred securities at fair value. Immediately following the closing of the transaction, ~~included,~~Bank of Blue Valley was merged with and into Heartland's wholly-owned Kansas subsidiary, Morrill & Janes Bank and Trust Company, and the combined entity operates under the Bank of Blue Valley brand. As of the closing date, BVBC had, 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$766.2 million, total loans held to maturity of ~~$581.5~~$542.0 million, and total deposits of ~~$648.1~~$617.1 million. The transaction was a tax-free reorganization with respect to the stock consideration received by the stockholders of ~~CIC~~BVBC.

First Bank Lubbock Bancshares, Inc.

On May 18, 2018, Heartland completed the acquisition of Lubbock, Texas based First Bank Lubbock Bancshares, Inc. ("FBLB"), parent company of First Bank & Trust, and PrimeWest Mortgage Corporation, which is a wholly-owned subsidiary of First Bank & Trust. Under the terms of the definitive merger agreement, Heartland acquired FBLB in a transaction valued at approximately $189.9 million, of which $5.5 million was cash, and the remainder was settled by delivery of 3,350,664 shares of Heartland common stock. On the closing date, in addition to this merger consideration, Heartland provided FBLB the funds necessary to repay outstanding debt of $3.9 million, and Heartland assumed $8.2 million of trust preferred securities at fair value. Immediately after the close of the transaction, Heartland paid $13.3 million to the holders of FBLB's stock appreciation rights. The transaction included, at fair value, total assets of $1.12 billion, including $681.1 million of gross loans held to maturity, and deposits of $893.8 million. Upon closing of the transaction, First Bank & Trust became a wholly-owned subsidiary of Heartland and continues to operate under its current name and management team as Heartland's eleventh state-chartered bank. The transaction was a tax-free reorganization with respect to the stock consideration received by the stockholders of FBLB.

Signature Bancshares, Inc.

On February 23, 2018, Heartland completed the acquisition of Signature Bancshares, Inc., parent company of Signature Bank, headquartered in Minnetonka, Minnesota. Under the terms of the definitive merger agreement, Heartland acquired Signature Bancshares, Inc. in a transaction valued at approximately $61.4 million, of which $7.8 million was cash, and the remainder was settled by delivery of 1,000,843 shares of Heartland common stock. Simultaneous with the close, Signature Bank merged into Heartland's wholly-owned Minnesota Bank & Trust subsidiary, and the combined entity operates under the Minnesota Bank & Trust brand name. The transaction included, at fair value, total assets of $427.1 million, including $324.5 million of gross loans held to maturity, and deposits of $357.3 million. On the closing date, Heartland provided Signature Bancshares, Inc. the funds necessary to repay outstanding subordinated debt of $5.9 million. The transaction was a tax-free reorganization with respect to the stock consideration received by the stockholders of Signature Bancshares, Inc.

NOTE 3: SECURITIES

The amortized cost, gross unrealized gains and losses, and estimated fair values of debt securities available for sale and equity securities with a readily determinable fair value that are carried at fair value as of ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016,~~2018, are summarized in the table below, in thousands:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
June 30, 2019
U.S. government corporations and agencies	$	18,660	$	48	$	(87	)	$	18,621
Mortgage and asset-backed securities	2,191,327		17,472		(15,473		)	2,193,326
Obligations of states and political subdivisions	324,070		8,097		(384		)	331,783
Total debt securities	2,534,057		25,617		(15,944		)	2,543,730
Equity securities with a readily determinable fair value	18,157		—		—			18,157
Total	$	2,552,214	$	25,617	$	(15,944	)	$	2,561,887
December 31, 2018
U.S. government corporations and agencies	$	32,075	$	3	$	(127	)	$	31,951
Mortgage and asset-backed securities	2,061,358		3,740		(38,400		)	2,026,698
Obligations of states and political subdivisions	382,101		919		(8,046		)	374,974
Total debt securities	2,475,534		4,662		(46,573		)	2,433,623
Equity securities with a readily determinable fair value	17,086		—		—			17,086
Total	$	2,492,620	$	4,662	$	(46,573	)	$	2,450,709

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair
Value
September 30, 2017
U.S. government corporations and agencies $ 7,435
$ 14
$ (34 ) $ 7,415
Mortgage-backed securities 1,593,677
4,656
(32,933 ) 1,565,400
Obligations of states and political subdivisions 506,867
4,307
(7,200 ) 503,974
Total debt securities 2,107,979
8,977
(40,167 ) 2,076,789
Equity securities 16,253
343
—
16,596
Total $ 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
Mortgage-backed securities 1,321,760
7,026
(38,286 ) 1,290,500
Obligations of states and political subdivisions 553,020
2,436
(19,312 ) 536,144
Total debt securities 1,879,496

9,478

(57,630 )
1,831,344
Equity securities 14,451
69
—
14,520
Total $ 1,893,947
$ 9,547
$ (57,630 ) $ 1,845,864

On January 1, 2019, Heartland adopted ASU 2017-12, and as a result of the adoption, $148.0 million of held to maturity debt securities were transferred to debt securities available for sale. The securities were transferred at book value on the date of the transfer.

The amortized cost, gross unrealized gains and losses and estimated fair values of held to maturity securities as of ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016,~~2018, are summarized in the table below, in thousands:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
June 30, 2019
Obligations of states and political subdivisions	$	88,166	$	8,453	$	—		$	96,619
Total	$	88,166	$	8,453	$	—		$	96,619
December 31, 2018
Obligations of states and political subdivisions	$	236,283	$	9,554	$	(496	)	$	245,341
Total	$	236,283	$	9,554	$	(496	)	$	245,341

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair
Value
September 30, 2017
Obligations of states and political subdivisions $ 256,355
$ 14,722
$ (691 ) $ 270,386
Total $ 256,355
$ 14,722
$ (691 ) $ 270,386
December 31, 2016
Obligations of states and political subdivisions $ 263,662
$ 12,282
$ (1,145 ) $ 274,799
Total $ 263,662
$ 12,282
$ (1,145 ) $ 274,799

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

The amortized cost and estimated fair value of ~~debt~~investment securities ~~available for sale~~carried at ~~September~~fair value at June 30, ~~2017,~~2019, 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.


	September 30, 2017				June 30, 2019
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in 1 year or less	$	185	$	186	$	24,891	$	24,889
Due in 1 to 5 years	40,716		41,077		45,463		45,685
Due in 5 to 10 years	93,240		91,514		72,708		74,659
Due after 10 years	380,161		378,612		199,668		205,171
Total debt securities	514,302		511,389		342,730		350,404
Mortgage-backed securities	1,593,677		1,565,400
Equity securities	16,253		16,596
Mortgage and asset-backed securities					2,191,327		2,193,326
Equity securities with a readily determinable fair value					18,157		18,157
Total investment securities	$	2,124,232	$	2,093,385	$	2,552,214	$	2,561,887

The amortized cost and estimated fair value of debt securities held to maturity at ~~September~~June 30, ~~2017,~~2019, 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, 2019
	Amortized Cost		Estimated Fair Value
Due in 1 year or less	$	1,531	$	1,567
Due in 1 to 5 years	11,634		11,863
Due in 5 to 10 years	58,200		61,679
Due after 10 years	16,801		21,510
Total investment securities	$	88,166	$	96,619

September 30, 2017
Amortized Cost Estimated Fair Value
Due in 1 year or less $ 1,510
$ 1,533
Due in 1 to 5 years 21,157
22,090
Due in 5 to 10 years 105,030
109,119
Due after 10 years 128,658
137,644
Total investment securities $ 256,355
$ 270,386

As of ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016,~~2018, securities with a fair value of ~~$758.1~~$569.7 million and ~~$810.6~~$524.8 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~~carried at fair value for the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, are summarized as follows, in thousands:



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Proceeds from sales	$	760,743	$	243,489	$	1,194,897	$	635,735
Gross security gains	5,522		457		7,930		3,470
Gross security losses	1,942		716		2,775		2,288

Three Months Ended
September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
Proceeds from sales $ 503,083
$ 146,242
$ 1,127,091
$ 768,617
Gross security gains 2,088
1,763
8,585
11,416
Gross security losses 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 ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016.~~2018. 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 ~~September~~June 30, ~~2016,~~2018, and December 31, ~~2015,~~2017, 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

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses
September 30, 2017
U.S. government corporations and agencies $ 6,901
$ (34 ) $ —
$ —
$ 6,901
$ (34 )
Mortgage-backed securities 761,235
(11,558 ) 431,669
(21,375 ) 1,192,904
(32,933 )
Obligations of states and political subdivisions 149,931
(1,820 ) 153,068
(5,380 ) 302,999
(7,200 )
Total debt securities 918,067
(13,412 ) 584,737
(26,755 ) 1,502,804
(40,167 )
Equity securities —
—
—
—
—
—
Total temporarily impaired securities $ 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 )
Mortgage-backed securities 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 )
Total debt securities 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 )


Securities held to maturity	Less than 12 months					12 months or longer					Total
Debt securities available for sale																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
September 30, 2017
June 30, 2019
U.S. government corporations and agencies																$	4,631	$	(87	)	$	—	$	—		$	4,631	$	(87	)
Mortgage and asset-backed securities																544,795		(5,265		)	448,159		(10,208		)	992,954		(15,473		)
Obligations of states and political subdivisions	$	6,278	$	(43	)	$	8,894	$	(648	)	$	15,172	$	(691	)	10,975		(11		)	48,748		(373		)	59,723		(384		)
Total temporarily impaired securities	$	6,278	$	(43	)	$	8,894	$	(648	)	$	15,172	$	(691	)	$	560,401	$	(5,363	)	$	496,907	$	(10,581	)	$	1,057,308	$	(15,944	)
December 31, 2016
December 31, 2018																December 31, 2018
U.S. government corporations and agencies																$	24,902	$	(83	)	$	4,577	$	(44	)	$	29,479	$	(127	)
Mortgage and asset-backed securities																733,826		(9,060		)	805,089		(29,340		)	1,538,915		(38,400		)
Obligations of states and political subdivisions	$	31,479	$	(884	)	$	2,017	$	(261	)	$	33,496	$	(1,145	)	34,990		(390		)	258,143		(7,656		)	293,133		(8,046		)
Total temporarily impaired securities	$	31,479	$	(884	)	$	2,017	$	(261	)	$	33,496	$	(1,145	)	$	793,718	$	(9,533	)	$	1,067,809	$	(37,040	)	$	1,861,527	$	(46,573	)



Securities held to maturity	Less than 12 months					12 months or longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
June 30, 2019
Obligations of states and political subdivisions	$	—	$	—		$	—	$	—		$	—	$	—
Total temporarily impaired securities	$	—	$	—		$	—	$	—		$	—	$	—
December 31, 2018
Obligations of states and political subdivisions	$	10,802	$	(17	)	$	19,508	$	(479	)	$	30,310	$	(496	)
Total temporarily impaired securities	$	10,802	$	(17	)	$	19,508	$	(479	)	$	30,310	$	(496	)

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~~mortgage and asset-backed securities are the result of changes in market interest rates or widening of market spreads subsequent to the initial purchase of the securities. The losses are not related to concerns regarding the underlying credit of the issuers or the underlying collateral. It is expected that the securities will not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates or widening market spreads and not credit quality, and because 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 nine-month period ended September 30, 2017.~~

There were no gross realized gains ~~and $85,000 of gross realized~~or losses on the sale of ~~available for sale~~ securities ~~with OTTI writedowns for the nine-month period ended September 30, 2016. Additionally, there were no gross realized gains and $439,000 of gross realized losses on the sale of~~carried at fair value or held to maturity securities with OTTI write-downs for the ~~nine-month period~~six-month periods ended ~~September~~June 30, ~~2016.~~2019, and June 30, 2018, respectively.

~~The following table shows the detail of OTTI write-downs on debt~~Other investments, at cost, include equity securities ~~included in earnings~~without a readily determinable fair value. Equity securities without a readily determinable fair value totaled $18.2 million and ~~the related changes in other accumulated comprehensive income ("AOCI") for the same securities, in thousands:~~

Three Months Ended
September 30, Nine Months Ended
September 30,
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 )
  Accretion of non-credit related impairment —
—
—
(7 )
Total changes to AOCI for non-credit related impairment —
—
—
(127 )
Total OTTI losses (accretion) recorded on debt securities, net $ —
$ —
$ —
$ (127 )

~~Included in other securities~~$17.1 million at ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016, were~~2018, respectively. At June 30, 2019, and December 31, 2018, other investments at cost included 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~~$14.9 million and ~~$14.4~~$16.6 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 ~~September~~June 30, ~~2017,~~2019, did not consider the investments to be other than temporarily impaired.

NOTE 4: LOANS

Loans as of ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016,~~2018, were as follows, in thousands:



	June 30, 2019			December 31, 2018
Loans receivable held to maturity:
Commercial	$	2,238,453		$	2,020,231
Commercial real estate	3,991,919			3,711,481
Agricultural and agricultural real estate	549,404			565,408
Residential real estate	613,707			673,603
Consumer	461,802			440,158
Gross loans receivable held to maturity	7,855,285			7,410,881
Unearned discount	(942		)	(1,624		)
Deferred loan fees	(1,292		)	(1,560		)
Total net loans receivable held to maturity	7,853,051			7,407,697
Allowance for loan losses	(63,850		)	(61,963		)
Loans receivable, net	$	7,789,201		$	7,345,734

September 30, 2017 December 31, 2016
Loans receivable held to maturity:
Commercial $ 1,613,903
$ 1,287,265
Commercial real estate 3,163,953
2,538,582
Agricultural and agricultural real estate 511,764
489,318
Residential real estate 635,611
617,924
Consumer 450,088
420,613
Gross loans receivable held to maturity 6,375,319
5,353,702
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

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 and 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~~Heartland originates commercial and commercial real estate ~~loan portfolio includes~~loans for a wide ~~range~~variety of business ~~loans,~~purposes, including lines of credit for ~~working~~ capital and ~~operational~~operating 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.

equipment purchases. Agricultural loans ~~many of which are secured by crops, machinery and real estate, are provided to finance~~provide financing for capital improvements and farm operations, as well as ~~acquisitions of~~ livestock and ~~machinery. Agricultural~~machinery purchases. Residential mortgage 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~~originated for the construction, purchase or refinancing of a single family residential ~~property. These~~properties. Consumer 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~~include 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 September 30, 2017, Heartland had $4.8 million of loans secured by residential real estate property that were in the process of foreclosure.

~~Consumer lending includes~~for motor ~~vehicle,~~vehicles, home improvement, home equity and ~~small~~ personal ~~credit lines. Consumer loans typically have shorter terms, lower balances, higher yields and higher risks~~lines 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 17% of Heartland's total consumer loan portfolio.credit.

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. 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 ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016,~~2018, 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.~~the quarter ended March 31, 2019.



	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
June 30, 2019
Commercial	$	5,685	$	18,397	$	24,082	$	26,881	$	2,211,572	$	2,238,453
Commercial real estate	377		26,923		27,300		22,141		3,969,778		3,991,919
Agricultural and agricultural real estate	1,557		4,492		6,049		21,729		527,675		549,404
Residential real estate	197		1,375		1,572		18,556		595,151		613,707
Consumer	546		4,301		4,847		5,411		456,391		461,802
Total	$	8,362	$	55,488	$	63,850	$	94,718	$	7,760,567	$	7,855,285
December 31, 2018
Commercial	$	5,733	$	18,772	$	24,505	$	24,202	$	1,996,029	$	2,020,231
Commercial real estate	218		25,320		25,538		14,388		3,697,093		3,711,481
Agricultural and agricultural real estate	686		4,267		4,953		15,951		549,457		565,408
Residential real estate	168		1,617		1,785		20,251		653,352		673,603
Consumer	749		4,433		5,182		7,004		433,154		440,158
Total	$	7,554	$	54,409	$	61,963	$	81,796	$	7,329,085	$	7,410,881

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
September 30, 2017
Commercial $ 2,166
$ 14,804
$ 16,970
$ 6,957
$ 1,606,946
$ 1,613,903
Commercial real estate 864
19,676
20,540
27,943
3,136,010
3,163,953
Agricultural and agricultural real estate 2,353
3,774
6,127
12,792
498,972
511,764
Residential real estate 393
1,873
2,266
29,833
605,778
635,611
Consumer 1,267
7,715
8,982
6,524
443,564
450,088
Total $ 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
Commercial real estate 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
Residential real estate 497
1,766
2,263
25,726
592,198
617,924
Consumer 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

The following table presents nonaccrual loans, accruing loans past due 90 days or more and performing troubled debt restructured loans at ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016,~~2018, in thousands:



	June 30, 2019		December 31, 2018
Nonaccrual loans	$	74,963	$	67,833
Nonaccrual troubled debt restructured loans	4,656		4,110
Total nonaccrual loans	$	79,619	$	71,943
Accruing loans past due 90 days or more	$	285	$	726
Performing troubled debt restructured loans	$	3,539	$	4,026

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

The following tables provide information on troubled debt restructured loans that were modified during the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2017,~~2019, and ~~September~~June 30, ~~2016,~~2018, dollars in thousands:


	Three Months Ended September 30,										Three Months Ended June 30,
	2017					2016					2019					2018
	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	—	$	—	$	—	—	$	—	$	—	—	$	—	$	—	—	$	—	$	—
Commercial real estate	—	—		—		—	—		—		—	—		—		—	—		—
Total commercial and commercial real estate	—	—		—		—	—		—		—	—		—		—	—		—
Agricultural and agricultural real estate	—	—		—		—	—		—		—	—		—		—	—		—
Residential real estate	8	1,174		1,174		5	651		651		3	240		246		6	1,292		1,125
Consumer	—	—		—		—	—		—		—	—		—		—	—		—
Total	8	$	1,174	$	1,174	5	$	651	$	651	3	$	240	$	246	6	$	1,292	$	1,125



	Six Months Ended June 30,
	2019					2018
	Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment
Commercial	—	$	—	$	—	—	$	—	$	—
Commercial real estate	—	—		—		—	—		—
Total commercial and commercial real estate	—	—		—		—	—		—
Agricultural and agricultural real estate	—	—		—		—	—		—
Residential real estate	4	276		288		11	2,169		1,877
Consumer	—	—		—		—	—		—
Total	4	$	276	$	288	11	$	2,169	$	1,877

Nine Months Ended
September 30,
2017 2016

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 22
2,977
2,977
5
651
651
Consumer —
—
—
—
—
—
Total 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 difference between the pre-modification investment and post-modification ~~recorded~~ investment amounts ~~are~~on Heartland's residential real estate troubled debt restructured loans for the ~~same.~~three- and six-months ended June 30, 2019, is due to principal deferment collected from government guarantees and capitalized interest and escrow. At ~~September~~June 30, ~~2017,~~2019, there were no commitments to extend credit to any of the borrowers with an existing troubled debt ~~restructuring.~~restructured loan.

The following table shows troubled debt restructured loans for which there was a payment default during the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2017,~~2019, and ~~September~~June 30, ~~2016,~~2018, that had been modified during the twelve-month period prior to default, in thousands:

With Payment Defaults During the Following Periods
Three Months Ended
September 30,
2017 2016
Number of Loans Recorded Investment Number of Loans Recorded Investment
Commercial —
$ —
—

$ —
Commercial real estate —
—
—

—
Total commercial and commercial real estate —
—
—
—
Agricultural and agricultural real estate —
—
—

—
Residential real estate 5
1,221
—

—
Consumer —
—
—

—
Total 5
$ 1,221
—

$ —

With Payment Defaults During the Following Periods
Nine Months Ended
September 30,
2017 2016
Number of Loans Recorded Investment Number of Loans Recorded Investment
Commercial —
$ —

1

$ 95
Commercial real estate —
—

—

—
Total commercial and commercial real estate —
—
1
95
Agricultural and agricultural real estate —
—

—

—
Residential real estate 8
1,480

—

—
Consumer —
—

—

—
Total 8
$ 1,480
1
$ 95



	With Payment Defaults During the Three Months Ended June 30,
	2019			2018
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
Commercial	—	$	—	—	$	—
Commercial real estate	—	—		—	—
Total commercial and commercial real estate	—	—		—	—
Agricultural and agricultural real estate	—	—		—	—
Residential real estate	1	61		3	667
Consumer	—	—		—	—
Total	1	$	61	3	$	667



	With Payment Defaults During the Six Months Ended June 30,
	2019			2018
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
Commercial	—	$	—	—	$	—
Commercial real estate	—	—		—	—
Total commercial and commercial real estate	—	—		—	—
Agricultural and agricultural real estate	—	—		—	—
Residential real estate	3	253		6	1,184
Consumer	—	—		—	—
Total	3	$	253	6	$	1,184

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 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 loss or doubtful as of ~~September~~June 30, ~~2017.~~2019. 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 ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016,~~2018, in thousands:



	Pass		Nonpass		Total
June 30, 2019
Commercial	$	2,095,930	$	142,523	$	2,238,453
Commercial real estate	3,755,285		236,634		3,991,919
Total commercial and commercial real estate	5,851,215		379,157		6,230,372
Agricultural and agricultural real estate	441,598		107,806		549,404
Residential real estate	586,121		27,586		613,707
Consumer	446,569		15,233		461,802
Total gross loans receivable held to maturity	$	7,325,503	$	529,782	$	7,855,285
December 31, 2018
Commercial	$	1,880,579	$	139,652	$	2,020,231
Commercial real estate	3,524,344		187,137		3,711,481
Total commercial and commercial real estate	5,404,923		326,789		5,731,712
Agricultural and agricultural real estate	471,642		93,766		565,408
Residential real estate	645,478		28,125		673,603
Consumer	425,451		14,707		440,158
Total gross loans receivable held to maturity	$	6,947,494	$	463,387	$	7,410,881

Pass Nonpass Total
September 30, 2017
Commercial $ 1,523,080
$ 90,823
$ 1,613,903
Commercial real estate 2,992,663
171,290
3,163,953
  Total commercial and commercial real estate 4,515,743
262,113
4,777,856
Agricultural and agricultural real estate 445,554
66,210
511,764
Residential real estate 597,987
37,624
635,611
Consumer 437,831
12,257
450,088
  Total gross loans receivable held to maturity $ 5,997,115
$ 378,204
$ 6,375,319
December 31, 2016
Commercial $ 1,187,557
$ 99,708
$ 1,287,265
Commercial real estate 2,379,632
158,950
2,538,582
  Total commercial and commercial real estate 3,567,189
258,658
3,825,847
Agricultural and agricultural real estate 424,311
65,007
489,318
Residential real estate 584,626
33,298
617,924
Consumer 409,474
11,139
420,613
  Total gross loans receivable held to maturity $ 4,985,600
$ 368,102
$ 5,353,702

The nonpass category in the table above is comprised of approximately ~~48%~~57% special mention loans and ~~52%~~43% substandard loans as of ~~September~~June 30, ~~2017.~~2019. The percent of nonpass loans on nonaccrual status as of ~~September~~June 30, ~~2017,~~2019, was ~~17%~~15%. As of December 31, ~~2016,~~2018, the nonpass category in the table above was comprised of approximately ~~47%~~52% special mention loans and ~~53%~~48% substandard loans. The percent of nonpass loans on nonaccrual status as of December 31, ~~2016,~~2018, was ~~17%~~16%. Loans delinquent 30 to 89 days as a percent of total loans were ~~0.33%~~0.31% at ~~September~~June 30, ~~2017,~~2019, compared to ~~0.37%~~0.21% at December 31, ~~2016.~~2018. Changes in credit risk are monitored on a ~~regular~~continuous basis and changes in risk ratings are made when identified. All impaired loans are reviewed at least annually.

As of June 30, 2019, Heartland had $3.1 million of loans secured by residential real estate property that were in the process of foreclosure.

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. A loan can be restored to accrual status if the borrower has resumed paying the full amount of the scheduled contractual interest and principal payments on the loan, and (1) all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within a reasonable period of time, and (2) that there is a sustained period of repayment performance (generally a minimum of six months) by the borrower in accordance with the scheduled contractual terms.

The following table sets forth information regarding Heartland's accruing and nonaccrual loans at ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016,~~2018, in thousands:



	Accruing Loans
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Nonaccrual		Total Loans
June 30, 2019
Commercial	$	6,030	$	1,281	$	—	$	7,311	$	2,205,913	$	25,229	$	2,238,453
Commercial real estate	4,931		1,006		—		5,937		3,969,426		16,556		3,991,919
Total commercial and commercial real estate	10,961		2,287		—		13,248		6,175,339		41,785		6,230,372
Agricultural and agricultural real estate	2,664		386		285		3,335		524,655		21,414		549,404
Residential real estate	2,744		653		—		3,397		598,120		12,190		613,707
Consumer	3,850		578		—		4,428		453,144		4,230		461,802
Total gross loans receivable held to maturity	$	20,219	$	3,904	$	285	$	24,408	$	7,751,258	$	79,619	$	7,855,285
December 31, 2018
Commercial	$	2,574	$	205	$	—	$	2,779	$	1,991,525	$	25,927	$	2,020,231
Commercial real estate	4,819		—		726		5,545		3,694,259		11,677		3,711,481
Total commercial and commercial real estate	7,393		205		726		8,324		5,685,784		37,604		5,731,712
Agricultural and agricultural real estate	99		—		—		99		549,376		15,933		565,408
Residential real estate	5,147		49		—		5,196		655,329		13,078		673,603
Consumer	2,724		307		—		3,031		431,799		5,328		440,158
Total gross loans receivable held to maturity	$	15,363	$	561	$	726	$	16,650	$	7,322,288	$	71,943	$	7,410,881

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
September 30, 2017
Commercial $ 2,591
$ 133
$ 215
$ 2,939
$ 1,603,397
$ 7,567
$ 1,613,903
Commercial real estate 6,140
465
—
6,605
3,140,672
16,676
3,163,953
Total commercial and commercial real estate 8,731
598
215
9,544
4,744,069
24,243
4,777,856
Agricultural and agricultural real estate 315
782
1,282
2,379
496,593
12,792
511,764
Residential real estate 5,033
449
—
5,482
607,165
22,964
635,611
Consumer 3,001
1,813
851
5,665
440,966
3,457
450,088
Total gross loans receivable held to maturity $ 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
Commercial real estate 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
Agricultural and agricultural real estate 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
Consumer 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

The majority of Heartland's impaired loans are onthose that are nonaccrual, are past due 90 days or more and still accruing 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~~principal balance that was contractually due at ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016;~~2018, the outstanding loan ~~balances~~balance recorded on the consolidated balance sheets at ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016;~~2018, any related allowance recorded for those loans as of ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016;~~2018, the average outstanding loan balances recorded on the consolidated balance sheets during the three- and ~~nine-months~~six- months ended ~~September~~June 30, ~~2017,~~2019, and year ended December 31, ~~2016;~~2018, and the interest income recognized on the impaired loans during the three- and ~~nine-month periods~~six-month period ended ~~September~~June 30, ~~2017,~~2019, and year ended December 31, ~~2016,~~2018, 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 Principal 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
September 30, 2017
June 30, 2019
Impaired loans with a related allowance:
Commercial	$	3,190	$	3,190	$	2,166	$	4,885	$	—	$	3,829	$	1	$	11,152	$	11,142	$	5,685	$	11,442	$	9	$	11,747	$	16
Commercial real estate	11,272		9,416		864		10,637		—		12,106		7		1,541		1,541		377		1,357		5		1,280		11
Total commercial and commercial real estate	14,462		12,606		3,030		15,522		—		15,935		8		12,693		12,683		6,062		12,799		14		13,027		27
Agricultural and agricultural real estate	10,289		10,289		2,353		3,532		—		2,140		—		3,916		3,916		1,557		3,314		—		2,772		—
Residential real estate	1,640		1,640		393		1,633		—		2,197		10		1,273		1,273		197		1,378		—		1,194		—
Consumer	2,179		2,179		1,267		2,155		10		2,343		32		1,175		1,173		546		1,200		1		1,237		7
Total impaired loans with a related allowance	$	28,570	$	26,714	$	7,043	$	22,842	$	10	$	22,615	$	50
Total loans held to maturity															$	19,057	$	19,045	$	8,362	$	18,691	$	15	$	18,230	$	34
Impaired loans without a related allowance:
Commercial	$	4,887	$	3,767	$	—	$	2,727	$	—	$	2,017	$	112	$	20,542	$	15,739	$	—	$	13,519	$	111	$	12,726	$	441
Commercial real estate	19,132		18,527		—		18,237		201		21,750		536		20,680		20,600		—		17,785		73		15,900		127
Total commercial and commercial real estate	24,019		22,294		—		20,964		201		23,767		648		41,222		36,339		—		31,304		184		28,626		568
Agricultural and agricultural real estate	2,503		2,503		—		8,343		—		10,858		—		20,220		17,813		—		17,739		17		16,056		33
Residential real estate	28,197		28,193		—		27,556		112		26,006		230		17,283		17,283		—		17,198		121		17,566		151
Consumer	4,345		4,345		—		4,222		19		3,849		61		4,238		4,238		—		4,222		18		4,522		43
Total impaired loans without a related allowance	$	59,064	$	57,335	$	—	$	61,085	$	332	$	64,480	$	939
Total loans held to maturity															$	82,963	$	75,673	$	—	$	70,463	$	340	$	66,770	$	795
Total impaired loans held to maturity:
Commercial	$	8,077	$	6,957	$	2,166	$	7,612	$	—	$	5,846	$	113	$	31,694	$	26,881	$	5,685	$	24,961	$	120	$	24,473	$	457
Commercial real estate	30,404		27,943		864		28,874		201		33,856		543		22,221		22,141		377		19,142		78		17,180		138
Total commercial and commercial real estate	38,481		34,900		3,030		36,486		201		39,702		656		53,915		49,022		6,062		44,103		198		41,653		595
Agricultural and agricultural real estate	12,792		12,792		2,353		11,875		—		12,998		—		24,136		21,729		1,557		21,053		17		18,828		33
Residential real estate	29,837		29,833		393		29,189		112		28,203		240		18,556		18,556		197		18,576		121		18,760		151
Consumer	6,524		6,524		1,267		6,377		29		6,192		93		5,413		5,411		546		5,422		19		5,759		50
Total impaired loans held to maturity	$	87,634	$	84,049	$	7,043	$	83,927	$	342	$	87,095	$	989	$	102,020	$	94,718	$	8,362	$	89,154	$	355	$	85,000	$	829



	Unpaid Principal Balance		Loan Balance		Related Allowance Recorded		Year-to- Date Avg. Loan Balance		Year-to- Date Interest Income Recognized
December 31, 2018
Impaired loans with a related allowance:
Commercial	$	12,376	$	12,366	$	5,733	$	4,741	$	33
Commercial real estate	891		891		218		4,421		25
Total commercial and commercial real estate	13,267		13,257		5,951		9,162		58
Agricultural and agricultural real estate	1,718		1,718		686		2,165		2
Residential real estate	647		647		168		1,138		12
Consumer	1,373		1,373		749		2,934		29
Total loans held to maturity	$	17,005	$	16,995	$	7,554	$	15,399	$	101
Impaired loans without a related allowance:
Commercial	$	13,616	$	11,836	$	—	$	10,052	$	299
Commercial real estate	13,578		13,497		—		13,000		249
Total commercial and commercial real estate	27,194		25,333		—		23,052		548
Agricultural and agricultural real estate	16,836		14,233		—		14,781		5
Residential real estate	19,604		19,604		—		23,950		308
Consumer	5,631		5,631		—		5,117		97
Total loans held to maturity	$	69,265	$	64,801	$	—	$	66,900	$	958
Total impaired loans held to maturity:
Commercial	$	25,992	$	24,202	$	5,733	$	14,793	$	332
Commercial real estate	14,469		14,388		218		17,421		274
Total commercial and commercial real estate	40,461		38,590		5,951		32,214		606
Agricultural and agricultural real estate	18,554		15,951		686		16,946		7
Residential real estate	20,251		20,251		168		25,088		320
Consumer	7,004		7,004		749		8,051		126
Total impaired loans held to maturity	$	86,270	$	81,796	$	7,554	$	82,299	$	1,059

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,~~May 10, 2019, Heartland ~~acquired Citywide Banks~~completed the acquisition of ~~Colorado, Inc.~~Blue Valley Ban Corp., parent company of ~~Citywide Banks, based~~Bank of Blue Valley, headquartered in ~~Denver, Colorado.~~Overland Park, Kansas. As of ~~July 7, 2017, Citywide Banks~~May 10, 2019, Blue Valley Ban Corp. 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$558.4 million, and the estimated fair value of the loans acquired was ~~$96.4~~$542.3 million.

On ~~February 5, 2016,~~May 18, 2018, Heartland ~~acquired CIC~~completed the acquisition of First Bank Lubbock Bancshares, Inc., parent company of ~~Centennial~~First Bank & Trust, headquartered in ~~Denver, Colorado.~~Lubbock, Texas. As of ~~February 5, 2016, Centennial~~May 18, 2018, First Bank Lubbock Bancshares, Inc. had gross loans of ~~$594.9~~$696.9 million, and the estimated fair value of the loans acquired was ~~$581.5~~$681.1 million.

On February 23, 2018, Heartland acquired Signature Bancshares, Inc., parent company of Signature Bank, based in Minnetonka, Minnesota. As of February 23, 2018, Signature Bancshares, Inc. had gross loans of $335.1 million and the estimated fair value of the loans acquired was $324.5 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 ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016,~~2018, the carrying amount of loans acquired since 2015 consist of purchased impaired and nonimpaired purchased loans as summarized in the following table, in thousands:



	June 30, 2019						December 31, 2018
	Impaired Purchased Loans		Non Impaired Purchased Loans		Total Purchased Loans		Impaired Purchased Loans		Non Impaired Purchased Loans		Total Purchased Loans
Commercial	$	7,109	$	336,256	$	343,365	$	3,801	$	243,693	$	247,494
Commercial real estate	3,337		1,169,970		1,173,307		158		1,098,171		1,098,329
Agricultural and agricultural real estate	—		10,054		10,054		—		27,115		27,115
Residential real estate	—		171,327		171,327		231		184,389		184,620
Consumer loans	—		97,824		97,824		—		75,773		75,773
Total covered loans	$	10,446	$	1,785,431	$	1,795,877	$	4,190	$	1,629,141	$	1,633,331

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
Commercial $ 968
$ 270,241
$ 271,209
$ 2,198
$ 99,082
$ 101,280
Commercial real estate 2,509
1,181,333
1,183,842
2,079
622,117
624,196
Agricultural and agricultural real estate —
1,251
1,251
—
181
181
Residential real estate 211
184,167
184,378
186
157,468
157,654
Consumer loans —
62,491
62,491
—
47,368
47,368
Total loans $ 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 ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2017,~~2019, and ~~September~~June 30, ~~2016,~~2018, were as follows, in thousands:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2019			2018			2019			2018
Balance at beginning of period	$	101		$	168		$	182		$	557		$	188		$	—		$	227		$	57
Original yield discount, net, at date of acquisitions	—			—			—			19
Original yield discount, net, at date of acquisition													27			564			27			508
Accretion	(700		)	(379		)	(1,074		)	(845		)	(851		)	(651		)	(1,108		)	(850		)
Reclassification from nonaccretable difference⁽¹⁾	654			331			947			389			452			550			670			748
Balance at period end	$	55		$	120		$	55		$	120		$	(184	)	$	463		$	(184	)	$	463

(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 ~~$22.2~~$44.6 million, and the estimated fair value of these loans was ~~$13.1~~$28.2 million. At ~~September~~June 30, ~~2017,~~2019, 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 ~~September~~June 30, ~~2017,~~2019, there was $0 of allowance recorded and $57,000 of allowance recorded at December 31, ~~2016, there was an allowance for loan losses of $132,000 and $588,000, respectively,~~2018, related to these ASC 310-30 loans. Provision benefit of $64,000 and provision expense of ~~$4,000 and $126,000~~$672,000 was recorded for the ~~three-month~~six-month periods ended ~~September~~June 30, ~~2017,~~2019, and ~~2016, respectively. Provision expense of $5,000 and $517,000 was recorded for the nine-month periods ended September 30, 2017, and 2016,~~2018, 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 ~~$2.66~~$4.22 billion, and the estimated fair value of the loans was ~~$2.59~~$4.12 billion.

NOTE 5: ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses for the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2017,~~2019, and ~~September~~June 30, ~~2016,~~2018, were as follows, in thousands:


	Commercial			Commercial Real Estate			Agricultural			Residential Real Estate			Consumer			Total			Commercial			Commercial Real Estate			Agricultural and Agricultural Real Estate			Residential Real Estate			Consumer				Total
Balance at June 30, 2017	$	17,168		$	21,861		$	3,832		$	2,263		$	8,927		$	54,051
Balance at March 31, 2019																			$	23,821		$	26,787		$	5,598		$	1,605		$	4,828			$	62,639
Charge-offs	(1,954		)	(1,913		)	—			(142		)	(1,750		)	(5,759		)	(3,687		)	(121		)	(49		)	(150		)	(773		)		(4,780		)
Recoveries	347			46			14			63			418			888			194			26			5			34			814				1,073
Provision	1,409			546			2,281			82			1,387			5,705			3,754			608			495			83			(22		)		4,918
Balance at September 30, 2017	$	16,970		$	20,540		$	6,127		$	2,266		$	8,982		$	54,885
Balance at June 30, 2019																			$	24,082		$	27,300		$	6,049		$	1,572		$	4,847			$	63,850
																																		��
	Commercial			Commercial Real Estate			Agricultural			Residential Real Estate			Consumer			Total			Commercial			Commercial Real Estate			Agricultural and Agricultural Real Estate			Residential Real Estate			Consumer				Total
Balance at December 31, 2016	$	14,765		$	24,319		$	4,210		$	2,263		$	8,767		$	54,324
Balance at December 31, 2018																			$	24,505		$	25,538		$	4,953		$	1,785		$	5,182			$	61,963
Charge-offs	(3,310		)	(2,522		)	(888		)	(541		)	(4,982		)	(12,243		)	(4,331		)	(160		)	(428		)	(313		)	(1,498		)		(6,730		)
Recoveries	635			860			17			70			987			2,569			369			177			335			47			1,136				2,064
Provision	4,880			(2,117		)	2,788			474			4,210			10,235			3,539			1,745			1,189			53			27				6,553
Balance at September 30, 2017	$	16,970		$	20,540		$	6,127		$	2,266		$	8,982		$	54,885
Balance at June 30, 2019																			$	24,082		$	27,300		$	6,049		$	1,572		$	4,847			$	63,850



	Commercial			Commercial Real Estate			Agricultural and Agricultural Real Estate			Residential Real Estate			Consumer			Total
Balance at March 31, 2018	$	19,395		$	23,469		$	4,716		$	2,141		$	8,935		$	58,656
Charge-offs	(978		)	(437		)	(212		)	(195		)	(1,342		)	(3,164		)
Recoveries	300			323			—			1			377			1,001
Provision	1,992			372			1,205			(90		)	1,352			4,831
Balance at June 30, 2018	$	20,709		$	23,727		$	5,709		$	1,857		$	9,322		$	61,324

	Commercial			Commercial Real Estate			Agricultural and Agricultural Real Estate			Residential Real Estate			Consumer			Total
Balance at December 31, 2017	$	18,098		$	21,950		$	4,258		$	2,224		$	9,156		$	55,686
Charge-offs	(1,772		)	(562		)	(212		)	(211		)	(2,631		)	(5,388		)
Recoveries	404			771			14			76			667			1,932
Provision	3,979			1,568			1,649			(232		)	2,130			9,094
Balance at June 30, 2018	$	20,709		$	23,727		$	5,709		$	1,857		$	9,322		$	61,324

Commercial
Commercial
Real Estate
Agricultural
Residential
Real Estate
Consumer Total
Balance at June 30, 2016 $ 15,525
$ 22,968
$ 4,100
$ 2,065
$ 7,098
$ 51,756
Charge-offs (240 ) (814 ) —
(106 ) (2,123 ) (3,283 )
Recoveries 119
467
2
1
263
852
Provision 1,487
1,060
904
22
1,855
5,328
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
Balance at December 31, 2015 $ 16,095
$ 19,532
$ 3,887
$ 1,934
$ 7,237
$ 48,685
Charge-offs (587 ) (2,229 ) —
(248 ) (4,775 ) (7,839 )
Recoveries 438
3,056
9
25
766
4,294
Provision 945
3,322
1,110
271
3,865
9,513
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 ~~$236.6~~$427.1 million at ~~September~~June 30, ~~2017,~~2019, and ~~$127.7~~$391.7 million at December 31, ~~2016.~~2018. 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~~$35.4 million of goodwill and ~~$16.0~~$11.4 million of core deposit intangibles in connection with the acquisition of ~~Citywide Banks of Colorado, Inc.~~Blue Valley Ban Corp., parent company of ~~Citywide Banks,~~Bank of Blue Valley, headquartered in ~~Aurora, Colorado~~Overland Park, Kansas on ~~July 7, 2017.~~May 10, 2019.

Heartland recorded ~~$13.8~~$121.4 million of goodwill and ~~$2.5~~$13.9 million of core deposit intangibles in connection with the acquisition of ~~Founders Bancorp,~~First Bank Lubbock Bancshares, Inc., parent company of ~~Founders Community~~First Bank ~~based~~& Trust Company, headquartered in ~~San Luis Obispo, California~~Lubbock, Texas on ~~February 28, 2017.~~May 18, 2018.

Heartland recorded ~~$29.8~~$33.7 million of goodwill and $7.7 million of core deposit intangibles in connection with the acquisition of ~~CIC~~Signature Bancshares, Inc., parent company of ~~Centennial~~Signature Bank, ~~based~~headquartered in ~~Denver, Colorado~~Minnetonka, Minnesota 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.~~23, 2018.

The core deposit intangibles recorded with the ~~Citywide Banks of Colorado,~~First Bank Lubbock Bancshares, Inc.~~, Founders Bancorp,~~ and ~~CIC~~Signature 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.

The core deposit intangibles recorded with the Blue Valley Ban Corp. acquisition are not deductible for tax purposes and are expected to be amortized over a period of 9 years on an accelerated basis.

Goodwill related to the ~~Citywide Banks of Colorado,~~Blue Valley Ban Corp., First Bank Lubbock Bancshares, Inc., ~~Founders Bancorp,~~ and ~~CIC~~Signature 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 ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016,~~2018, are presented in the table below, in thousands:



	June 30, 2019						December 31, 2018
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Amortizing intangible assets:
Core deposit intangibles	$	95,033	$	42,539	$	52,494	$	83,640	$	36,403	$	47,237
Customer relationship intangibles	1,177		953		224		1,177		935		242
Mortgage servicing rights	7,112		1,311		5,801		42,228		12,865		29,363
Commercial servicing rights	6,907		5,528		1,379		6,834		5,125		1,709
Total	$	110,229	$	50,331	$	59,898	$	133,879	$	55,328	$	78,551

September 30, 2017 December 31, 2016

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount
Amortizing intangible assets:
Core deposit intangibles $ 62,008
$ 25,271
$ 36,737
$ 43,504
$ 21,049
$ 22,455
Customer relationship intangibles 1,177
886
291
1,177
857
320
Mortgage servicing rights 41,903
18,161
23,742
50,467
18,379
32,088
Commercial servicing rights 6,719
3,862
2,857
6,504
2,814
3,690
Total $ 111,807
$ 48,180
$ 63,627
$ 101,652
$ 43,099
$ 58,553

On April 30, 2019, Dubuque Bank and Trust Company closed on the sale of substantially all its servicing rights portfolio, which contained loans with an unpaid principal balance of $3.31 billion to PNC Bank, N.A. The transaction qualified as a sale, and $20.6 million of mortgage servicing rights were de-recognized on the consolidated balance sheet as of June 30, 2019. Cash of approximately $34.8 million was received during the second quarter, and Heartland recorded an estimated gain on the sale of this portfolio of approximately $13.3 million. A payable of approximately $334,000 was recorded as of June 30, 2019, due to the timing of the servicing transfer per the terms of the sale agreement. In the agreement, which includes customary terms and conditions, Dubuque Bank and Trust Company provided interim servicing of the loans until the transfer date, which was August 1, 2019.

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
Six months ending December 31, 2019	$	5,869	$	19	$	876	$	195	$	6,959
Year ending December 31,
2020	10,238		36		1,231		329		11,834
2021	8,520		35		1,055		293		9,903
2022	6,947		35		879		246		8,107
2023	6,061		34		704		159		6,958
2024	4,981		33		528		86		5,628
Thereafter	9,878		32		528		71		10,509
Total	$	52,494	$	224	$	5,801	$	1,379	$	59,898

Core
Deposit
Intangibles

Customer
Relationship
Intangibles

Mortgage
Servicing
Rights

Commercial
Servicing
Rights

Total
Three months ending December 31, 2017 $ 1,815
$ 10
$ 2,463
$ 184
$ 4,472
Year ending December 31,
2018 6,712
39
5,319
701
12,771
2019 5,915
38
4,560
566
11,079
2020 5,191
37
3,800
442
9,470
2021 4,425
35
3,040
380
7,880
2022 3,391
34
2,280
307
6,012
Thereafter 9,288
98
2,280
277
11,943
Total $ 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 ~~September~~June 30, ~~2017.~~2019. Heartland's actual experience may be significantly different depending upon changes in mortgage interest rates and market conditions. Mortgage loans serviced for others at First Bank & Trust were approximately ~~$3.56 billion and $4.31 billion as of September~~$630.7 million at June 30, ~~2017, and~~2019 compared to $648.9 million at December 31, ~~2016, respectively.~~2018. Custodial escrow balances maintained in connection with the mortgage loan servicing portfolio at First Bank & Trust were approximately ~~$24.3~~$12.5 million at June 30, 2019 and ~~$21.4 million as of September 30, 2017, and December 31, 2016, respectively. The fair value of Heartland's mortgage servicing rights was estimated at~~ ~~$35.0 million~~ ~~at September 30, 2017, and $45.2~~$5.9 million at December 31, ~~2016.~~2018.

~~Heartland's~~Custodial escrow balances maintained at Dubuque Bank and Trust Company in connection with the interim servicing of the mortgage loan servicing portfolio sold to PNC Bank, N.A. totaled $19.8 million at June 30, 2019. Heartland transferred custodial escrow balances totaling $22.9 million to PNC Bank, N.A. in conjunction with the transfer of the mortgage servicing rights portfolio ~~is comprised of loans serviced for~~on August 1, 2019. Custodial escrow balances maintained in connection with the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). Prior to the third quarter of 2017, Heartland also serviced loans for the Government National Mortgage 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~~mortgage loan servicing portfolio ~~which contained loans with an unpaid principal balance~~at Dubuque Bank and Trust Company totaled $17.7 million at December 31, 2018.

At June 30, 2019, the fair value of ~~approximately $773.9 million. The transaction qualifies as a sale, and $6.9 million of~~the mortgage servicing rights ~~have been de-recognized on the consolidated balance sheet as of September 30, 2017. Cash of approximately $5.1~~at First Bank & Trust was estimated at $5.8 million ~~was received during the third quarter, and Heartland recorded an estimated loss on the sale~~compared to $7.1 million at December 31, 2018.

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.~~analysis. Cash flow assumptions, including prepayment speeds, servicing costs and escrow earnings of First Bank & Trust's mortgage servicing rights are considered in the calculation. The average constant prepayment rate was ~~10.93%~~ ~~and 9.63%~~14.10% for the ~~September~~June 30, ~~2017, and~~2019 valuation compared to 10.30% for the December 31, ~~2016, valuations, respectively.~~2018 valuation. The discount rate was ~~9.06%~~ ~~and~~ ~~9.26%~~9.03% for ~~the September~~both June 30, ~~2017,~~2019 and December 31, ~~2016, valuations, respectively.~~2018 valuations. The average capitalization rate for the first~~ninemonths~~ six months of ~~2017~~2019 ranged from 91 81 to ~~150 basis~~98 basis points compared to ~~the~~a range of 8893 to ~~135~~117 basis points for ~~2016.~~2018 since acquisition on May 18, 2018. Fees collected for the servicing of mortgage loans for others were ~~$2.9 million~~$427,000 and ~~$3.1 million~~$174,000 for the quarters ended ~~September~~June 30, ~~2017,~~2019 and ~~September~~June 30, ~~2016,~~2018, respectively, and ~~$9.3 million~~$854,000 and ~~$9.0 million~~$174,000 for the ~~nine months~~six-months ended ~~September~~June 30, ~~2017,~~2019 and ~~September~~June 30, ~~2016, respectively.~~2018.

The following table summarizes, in thousands, the changes in capitalized mortgage servicing rights for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, and ~~September~~June 30, ~~2016:~~2018:



	2019			2018
Balance at January 1,	$	29,363		$	23,248
Originations	342			2,673
Amortization	(2,395		)	(2,752		)
Valuation allowance on mortgage servicing rights	—			(209		)
Sale of mortgage servicing rights	(20,556		)	—
Acquired mortgage servicing rights	—			6,995
Valuation adjustment	(953		)	—
Balance at period end	$	5,801		$	29,955
Mortgage servicing rights, net to servicing portfolio	0.92		%	0.72		%

2017 2016
Balance at January 1, $ 32,088
$ 30,314
Originations 5,778
9,323
Amortization (7,184 ) (7,795 )
Sale of mortgage servicing rights (6,940 ) —
Balance at period end $ 23,742
$ 31,842
Fair value of mortgage servicing rights $ 35,002
$ 38,127
Mortgage servicing rights, net to servicing portfolio 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 ~~$144.4~~$90.9 million at ~~September~~June 30, ~~2017~~2019 and ~~$164.6~~$107.4 million at December 31, ~~2016.~~2018. 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 ~~$394,000~~$230,000 and ~~$230,000~~$425,000 for the quarter ended ~~September~~June 30, ~~2017,~~2019 and ~~September~~June 30, ~~2016,~~2018, respectively, and ~~$1.2 million~~$610,000 and ~~$685,000~~$845,000 for the ~~nine months~~six-months ended ~~September~~June 30, ~~2017,~~2019, and ~~September~~June 30, ~~2016,~~2018, 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 ~~6.66%~~11.26% to ~~7.99%~~15.50% as of ~~September~~June 30, ~~2017,~~2019, compared to ~~6.96%~~11.01% to ~~7.88%~~13.50% as of December 31, ~~2016.~~2018. The discount rate range was ~~12.52%~~12.25% to ~~14.65%~~14.66% for the ~~September~~June 30, ~~2017,~~2019, valuations compared to ~~12.44%~~13.44% to ~~13.88%~~16.96% for the December 31, ~~2016,~~2018, valuations. The capitalization rate for ~~2017~~both 2019 and 2018 ranged from 310 to 445 basis ~~points compared to 310 to 445 basis points for 2016.~~points. The total fair value of Heartland's commercial servicing rights was estimated at ~~$3.5~~$1.9 million as of ~~September~~June 30, ~~2017,~~2019, and ~~$4.1~~$2.1 million as of December 31, ~~2016.~~2018.

The following table summarizes, in thousands, the changes in capitalized commercial servicing rights for the ~~nine months~~six-months ended ~~September~~June 30, ~~2017,~~2019, and ~~September~~June 30, ~~2016:~~2018:



	2019			2018
Balance at January 1,	$	1,709		$	2,609
Originations	73			21
Amortization	(403		)	(580		)
Valuation allowance on commercial servicing rights	—			(9		)
Balance at period end	$	1,379		$	2,041
Fair value of commercial servicing rights	$	1,851		$	2,502
Commercial servicing rights, net to servicing portfolio	1.52		%	1.75		%

2017 2016
Balance at January 1, $ 3,690
$ 4,611
Purchased commercial servicing rights —
190
Originations 215
533
Amortization (1,077 ) (1,229 )
Valuation allowance on commercial servicing rights 29
(41 )
Balance at period end $ 2,857
$ 4,064
Fair value of commercial servicing rights $ 3,458
$ 4,397
Commercial servicing rights, net to servicing portfolio 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 ~~September~~June 30, ~~2017,~~2019, a $1.0 million valuation allowance was required on mortgage servicing rights and at December 31, 2018, a $58,000 valuation allowance was required on mortgage servicing rights. At June 30, 2019, no valuation allowance was required on commercial servicing rights with a term less than 20 years and ~~a $4,000~~no valuation allowance was required on commercial servicing rights with a term greater than 20 years. At December 31, ~~2016,~~2018, no valuation allowance was required on commercial servicing rights with a term less than 20 years and ~~a $33,000~~no 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 mortgage servicing rights and any recorded valuation allowance at each respective subsidiary at June 30, 2019, and December 31, 2018:



June 30, 2019	Book Value 15-Year Tranche		Fair Value 15-Year Tranche		Impairment 15-Year Tranche		Book Value 30-Year Tranche		Fair Value 30-Year Tranche		Impairment 30-Year Tranche
Dubuque Bank and Trust Company	$	—	$	—	$	—	$	—	$	—	$	—
First Bank & Trust	1,541		1,389		152		5,271		4,412		859
Total	$	1,541	$	1,389	$	152	$	5,271	$	4,412	$	859
December 31, 2018
Dubuque Bank and Trust Company	$	2,195	$	4,636	$	—	$	20,025	$	36,901	$	—
First Bank & Trust	1,685		1,665		20		5,516		5,478		38
Total	$	3,880	$	6,301	$	20	$	25,541	$	42,379	$	38

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 ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016:~~2018:



June 30, 2019	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	$	—	$	—	$	—	$	—	$	—	$	—
Premier Valley Bank	33		62		—		159		176		—
Wisconsin Bank & Trust	178		346		—		1,009		1,267		—
Total	$	211	$	408	$	—	$	1,168	$	1,443	$	—
December 31, 2018
Citywide Banks	$	1	$	6	$	—	$	18	$	20	$	—
Premier Valley Bank	45		74		—		178		184		—
Wisconsin Bank & Trust	249		411		—		1,218		1,439		—
Total	$	295	$	491	$	—	$	1,414	$	1,643	$	—

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 95
124
—
317
313
4
Wisconsin Bank & Trust 515
688
—
1,868
2,257
—
Total $ 622
$ 827
$ —
$ 2,239
$ 2,631
$ 4
December 31, 2016
Citywide Banks $ 19
$ 23
$ —
$ 107
$ 114
$ —
Premier Valley Bank 156
180
—
359
326
33
Wisconsin Bank & Trust 833
997
—
2,249
2,487
—
Total $ 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 ~~$2.2~~$1.8 million of cash as collateral at ~~both September~~June 30, ~~2017, and~~2019 compared to no collateral at December 31, ~~2016. No~~2018. At June 30, 2019, no collateral was required to be pledged by Heartland's counterparties, compared to $770,000 collateral at ~~both September 30, 2017, and~~ December 31, ~~2016.~~2018.

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 ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, the change in net unrealized losses on cash flow hedges reflects changes in the fair value of the swaps and reclassification from accumulated other comprehensive income to interest expense totaling ~~$1.0 million.~~$265,000. For the next twelve months, Heartland estimates that cash ~~payments~~receipts and reclassification from accumulated other comprehensive income to reduce interest expense will total ~~$1.2 million.~~$402,000.

Heartland entered into ~~five~~six forward starting interest rate swap transactions to effectively convert Heartland Financial Statutory Trust IV, V, VI, and VII, which total ~~$65.0~~$85.0 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~~six 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~~$105.0 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 replaced2019, the interest rate swap transactions associated with Morrill Statutory Trust I and II, totaling $20.0 million, matured and the fixed rate debt has been converted to variable rate subordinated debentures.

On May 18, 2018, Heartland acquired cash flow hedges related to ~~Heartland~~OCGI Statutory Trust ~~VII upon its expiration~~III and OCGI Capital Trust IV with notional amounts of $3.0 million and $6.0 million, respectively, in the First Bank Lubbock Bancshares, Inc. transaction. The cash flow hedges effectively convert OCGI Statutory Trust III and OGCI Capital Trust IV from variable rate subordinated debentures to fixed rate debt. These swaps are designated as cash flow hedges of the changes in LIBOR, the benchmark interest rate being hedged, associated with the interest payments made on ~~March 1, 2017.~~$9.0 million of Heartland's subordinated debentures that reset quarterly on a specified reset date.

The table below identifies the balance sheet category and fair values of Heartland's derivative instruments designated as cash flow hedges at ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016,~~2018, in thousands:



	Notional Amount		Fair Value			Balance Sheet Category	Receive Rate		Weighted Average Pay Rate		Maturity
June 30, 2019
Interest rate swap	$	25,000	$	(184	)	Other liabilities	2.410	%	2.255	%	03/17/2021
Interest rate swap	20,000		(162		)	Other liabilities	2.589		3.355		01/07/2020
Interest rate swap	27,667		251			Other assets	4.912		3.674		05/10/2021
Interest rate swap	27,250		(1,452		)	Other liabilities	4.904		5.425		07/24/2028
Interest rate swap	20,000		(623		)	Other liabilities	2.410		2.390		06/15/2024
Interest rate swap	20,000		(563		)	Other liabilities	2.520		2.352		03/01/2024
Interest rate swap	6,000		(8		)	Other liabilities	2.410		1.866		06/15/2021
Interest rate swap	3,000		(2		)	Other liabilities	2.597		1.878		06/30/2021
December 31, 2018
Interest rate swap	$	25,000	$	191		Other assets	2.788	%	2.255	%	03/17/2021
Interest rate swap	20,000		(177		)	Other liabilities	2.408		3.355		01/07/2020
Interest rate swap	10,000		29			Other assets	2.822		1.674		03/26/2019
Interest rate swap	10,000		28			Other assets	2.788		1.658		03/18/2019
Interest rate swap	29,667		763			Other assets	4.887		3.674		05/10/2021
Interest rate swap	28,750		(572		)	Other liabilities	5.004		5.425		07/24/2028
Interest rate swap	20,000		157			Other assets	2.788		2.390		06/15/2024
Interest rate swap	20,000		185			Other assets	2.738		2.352		03/01/2024
Interest rate swap	6,000		105			Other Assets	2.788		1.866		06/15/2021
Interest rate swap	3,000		51			Other assets	2.787		1.878		06/30/2021

Notional
Amount

Fair
Value

Balance
Sheet
Category

Receive
Rate

Weighted
Average
Pay Rate
Maturity
September 30, 2017
Interest rate swap $ 25,000
$ (346 ) Other liabilities 1.321 % 2.255 % 03/17/2021
Interest rate swap —
—
Other liabilities — % 3.220 % 03/01/2017
Interest rate swap 20,000
(828 ) Other liabilities 1.303 % 3.355 % 01/07/2020
Interest rate swap 10,000
(6 ) Other liabilities 1.329 % 1.674 % 03/26/2019
Interest rate swap 10,000
(5 ) Other liabilities 1.321 % 1.658 % 03/18/2019
Interest rate swap 35,667
557
Other assets 3.735 % 3.674 % 05/10/2021
Interest rate swap 20,000
(393 ) Other liabilities 1.320 % 2.390 % 06/15/2024
Interest rate swap 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
Interest rate swap 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
Interest rate swap 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
Interest rate swap 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
Interest rate swap⁽²⁾
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 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 ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2017,~~2019, and ~~September~~June 30, ~~2016,~~2018, in thousands:



	Effective Portion							Ineffective Portion
	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)
Three Months Ended June 30, 2019
Interest rate swaps	$	(2,163	)	Interest expense	$	(100	)	Other income	$	—
Six Months Ended June 30, 2019
Interest rate swaps	$	(3,503	)	Interest expense	$	(265	)	Other income	$	—
Three Months Ended June 30, 2018
Interest rate swaps	$	927		Interest expense	$	(30	)	Other income	$	—
Six Months Ended June 30, 2018
Interest rate swaps	$	2,823		Interest expense	$	(227	)	Other income	$	—

Effective Portion Ineffective Portion
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)
Three Months Ended September 30, 2017
Interest rate swaps $ 325
Interest expense $ (308 ) Other income $ —
Nine Months Ended September 30, 2017
Interest rate swaps $ 349
Interest expense $ (1,005 ) Other income $ —
Three Months Ended September 30, 2016
Interest rate swaps $ 1,336
Interest expense $ (492 ) Other income $ —
Nine Months Ended September 30, 2016
Interest rate swaps $ (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 ~~$4.5~~$3.2 million and ~~$5.0~~$2.5 million of cash as collateral for these fair value hedges at ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016,~~2018, respectively.

The table below identifies the notional amount, fair value and balance sheet category of Heartland's fair value hedges at ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016,~~2018, in thousands:



	Notional Amount		Fair Value			Balance Sheet Category
June 30, 2019
Fair value hedges	$	—	$	—		Other assets
Fair value hedges	29,262		(1,555		)	Other liabilities
December 31, 2018
Fair value hedges	$	19,820	$	74		Other assets
Fair value hedges	15,064		$	(339	)	Other liabilities

Notional Amount Fair Value Balance Sheet Category
September 30, 2017
Fair value hedges $ 35,813
$ (1,537 ) Other liabilities
December 31, 2016
Fair value hedges $ 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 ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2017,~~2019, and ~~September~~June 30, ~~2016,~~2018, in thousands:



	Amount of Gain (Loss)			Income Statement Category
Three Months Ended June 30, 2019
Fair value hedges	$	(660	)	Interest income
Six Months Ended June 30, 2019
Fair value hedges	$	(1,290	)	Interest income
Three Months Ended June 30, 2018
Fair value hedges	$	350		Interest income
Six Months Ended June 30, 2018
Fair value hedges	$	1,244		Interest income

Amount of Gain (Loss) Income Statement Category
Three Months Ended September 30, 2017
Fair value hedges $ (63 ) Interest income
Nine Months Ended September 30, 2017
Fair value hedges $ 89
Interest income
Three Months Ended September 30, 2016
Fair value hedges $ (225 ) Interest income
Nine Months Ended September 30, 2016
Fair value hedges $ (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 ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016,~~2018, in thousands:



	Notional Amount		Fair Value			Balance Sheet Category
June 30, 2019
Embedded derivatives	$	—	$	—		Other assets
Embedded derivatives	11,874		(672		)	Other liabilities
December 31, 2018
Embedded derivatives	$	11,266	$	453		Other assets
Embedded derivatives	2,231		(54		)	Other liabilities

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

The table below identifies the gains and losses recognized on Heartland's embedded derivatives for the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2017,~~2019, and ~~September~~June 30, ~~2016,~~2018, in thousands:


	Amount of Gain (Loss)			Income Statement Category	Amount of Gain (Loss)		Income Statement Category
Three Months Ended September 30, 2017
Three Months Ended June 30, 2019
Embedded derivatives	$	(296	)	Other noninterest income	$	182	Other noninterest income
Nine Months Ended September 30, 2017
Six Months Ended June 30, 2019
Embedded derivatives	$	(181	)	Other noninterest income	$	1,071	Other noninterest income
Three Months Ended September 30, 2016
Three Months Ended June 30, 2018
Embedded derivatives	$	(173	)	Other noninterest income	$	138	Other noninterest income
Nine Months Ended September 30, 2016
Six Months Ended June 30, 2018
Embedded derivatives	$	243		Other noninterest income	$	415	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 December 31, 2016, the remaining shares to be issued upon conversion totaled 20,481. During 2017, all of the remaining convertible subordinated debt was converted to common stock, resulting in the issuance of 20,481 shares of common stock. The embedded conversion option was 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 September 30, 2017, and December 31, 2016:

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

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

Amount of Gain (Loss) Income Statement Category
Three Months Ended September 30, 2017
Embedded conversion option $ 285
Other noninterest income
Nine Months Ended September 30, 2017
Embedded conversion option $ 422
Other noninterest income
Three Months Ended September 30, 2016
Embedded conversion option $ 435
Other noninterest income
Nine Months Ended September 30, 2016
Embedded conversion option $ 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 $13.5 million and $2.0 million ~~and $1.8 million at both September~~as of June 30, ~~2017,~~2019, and December 31, ~~2016,~~2018, respectively, as collateral related to these back-to-back swaps. Heartland's counterparties were required to pledge ~~$190,000~~$0 at ~~September~~June 30, ~~2017,~~2019, and ~~$768,000~~$680,000 at December 31, ~~2016.~~2018. Any gains and losses on these back-to-back swaps are recorded in noninterest income on the consolidated statements of income, and for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~September~~June 30, ~~2016,~~2018, 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 ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016,~~2018, in thousands:



	Notional Amount		Fair Value			Balance Sheet Category	Weighted Average Receive Rate		Weighted Average Pay Rate
June 30, 2019
Customer interest rate swaps	$	228,934	$	14,162		Other assets	5.16	%	4.77	%
Customer interest rate swaps	228,934		(14,162		)	Other liabilities	4.77		5.16
December 31, 2018
Customer interest rate swaps	$	211,246	$	4,449		Other assets	5.10	%	4.96	%
Customer interest rate swaps	211,246		(4,449		)	Other liabilities	4.96		5.10

Notional
Amount

Fair
Value

Balance Sheet
Category

Weighted
Average
Receive
Rate

Weighted
Average
Pay
Rate
September 30, 2017
Customer interest rate swaps $ 90,370
$ 1,906
Other assets 4.75 % 3.91 %
Customer interest rate swaps 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 %
Customer interest rate swaps 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 ~~$353,000~~$0 at ~~September~~June 30, ~~2017,~~2019, and $0$35,000 at December 31, ~~2016.~~2018. Heartland's counterparties were required to pledge ~~$29,000 and $2.9 million~~no collateral at ~~September~~both June 30, ~~2017,~~2019 and December 31, ~~2016, respectively,~~2018, 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 ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016,~~2018, in thousands:


	Balance Sheet Category	Notional Amount		Fair Value			Balance Sheet Category	Notional Amount		Fair Value
September 30, 2017
June 30, 2019
Interest rate lock commitments (mortgage)	Other assets	$	77,910	$	2,463		Other assets	$	32,016	$	1,072
Forward commitments	Other assets	75,192		237			Other assets	5,000		2
Forward commitments	Other liabilities	91,865		(261		)	Other liabilities	65,000		(430		)
Undesignated interest rate swaps	Other liabilities	14,175		(923		)	Other liabilities	11,874		(672		)
December 31, 2016
Undesignated interest rate swaps							Other assets	—		—
December 31, 2018
Interest rate lock commitments (mortgage)	Other assets	$	80,465	$	2,790		Other assets	$	22,451	$	725
Forward commitments	Other assets	142,750		2,546			Other assets	—		—
Forward commitments	Other liabilities	59,276		(266		)	Other liabilities	51,500		(399		)
Undesignated interest rate swaps	Other liabilities	15,564		(1,126		)	Other liabilities	11,266		(453		)
Undesignated interest rate swaps							Other assets	2,231		54

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 ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2017,~~2019, and ~~September~~June 30, ~~2016,~~2018, in thousands:



	Income Statement Category	Gain (Loss) Recognized
Three Months Ended June 30, 2019
Interest rate lock commitments (mortgage)	Net gains on sale of loans held for sale	$	552
Forward commitments	Net gains on sale of loans held for sale	(145		)
Undesignated interest rate swaps	Other noninterest income	182
Six Months Ended June 30, 2019
Interest rate lock commitments (mortgage)	Net gains on sale of loans held for sale	$	816
Forward commitments	Net gains on sale of loans held for sale	(28		)
Undesignated interest rate swaps	Other noninterest income	1,071
Three Months Ended June 30, 2018
Interest rate lock commitments (mortgage)	Net gains on sale of loans held for sale	$	2,604
Forward commitments	Net gains on sale of loans held for sale	(407		)
Undesignated interest rate swaps	Other noninterest income	138
Six Months Ended June 30, 2018
Interest rate lock commitments (mortgage)	Net gains on sale of loans held for sale	$	2,621
Forward commitments	Net gains on sale of loans held for sale	(292		)
Undesignated interest rate swaps	Other noninterest income	415

Income Statement Category Gain (Loss) Recognized
Three Months Ended September 30, 2017
Interest rate lock commitments (mortgage) Net gains on sale of loans held for sale $ (1,245 )
Forward commitments Net gains on sale of loans held for sale 72
Undesignated interest rate swaps Other noninterest income 88
Nine Months Ended September 30, 2017
Interest rate lock commitments (mortgage) Net gains on sale of loans held for sale $ (587 )
Forward commitments Net gains on sale of loans held for sale (2,304 )
Undesignated interest rate swaps Other noninterest income 203
Three Months Ended September 30, 2016
Interest rate lock commitments (mortgage) Net gains on sale of loans held for sale $ (1,344 )
Forward commitments Net gains on sale of loans held for sale 931
Undesignated interest rate swaps Other noninterest income 269
Nine Months Ended September 30, 2016
Interest rate lock commitments (mortgage) Net gains on sale of loans held for sale $ 4,464
Forward commitments Net gains on sale of loans held for sale (1,311 )
Undesignated interest rate swaps 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 carried at fair value, which include available for sale, trading securities and equity securities with a readily determinable fair value, and derivatives are recorded in the consolidated balance sheets at fair value on a recurring basis. Additionally, from time to time, 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~~mortgage and asset-backed securities and private collateralized mortgage obligations, municipal bonds ~~and corporate debt securities. Level 3 securities consisted primarily of Z-TRANCHE mortgage-backed securities~~ and corporate debt securities. On a quarterly basis, a secondary independent pricing service is used for the securities portfolio to validate the pricing from Heartland's primary pricing service.

Equity Securities with a Readily Determinable Fair Value

Equity securities with a readily determinable fair value generally include Community Reinvestment Act mutual funds and are classified as Level 2 due to the infrequent trading of these securities. The fair value is based on the price per share.

Loans Held for Sale

Loans held for sale are carried at the lower of cost or fair value on an aggregate basis. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, 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 and utilizes discount rates, prepayment speeds and delinquency rate assumptions as 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 ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016,~~2018, 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 ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016,~~2018, 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
June 30, 2019
Assets
Securities available for sale
U.S. government corporations and agencies	$	18,621	$	12,480	$	6,141	$	—
Mortgage and asset-backed securities	2,193,326		—		2,193,326		—
Obligations of states and political subdivisions	331,783		—		331,783		—
Equity securities with a readily determinable fair value	18,157		—		18,157		—
Derivative financial instruments⁽¹⁾	14,413		—		14,413		—
Interest rate lock commitments	1,072		—		—		1,072
Forward commitments	2		—		2		—
Total assets at fair value	$	2,577,374	$	12,480	$	2,563,822	$	1,072
Liabilities
Derivative financial instruments⁽²⁾	$	19,383	$	—	$	19,383	$	—
Forward commitments	430		—		430		—
Total liabilities at fair value	$	19,813	$	—	$	19,813	$	—
December 31, 2018
Assets
Securities available for sale
U.S. government corporations and agencies	$	31,951	$	25,414	$	6,537	$	—
Mortgage and asset-backed securities	2,026,698		—		2,026,698		—
Obligations of states and political subdivisions	374,974		—		374,974		—
Equity securities	17,086		—		17,086		—
Derivative financial instruments⁽¹⁾	6,539		—		6,539		—
Interest rate lock commitments	725		—		—		725
Total assets at fair value	$	2,457,973	$	25,414	$	2,431,834	$	725
Liabilities
Derivative financial instruments⁽²⁾	$	6,044	$	—	$	6,044	$	—
Forward commitments	399		—		399		—
Total liabilities at fair value	$	6,443	$	—	$	6,443	$	—

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

Total Fair Value Level 1 Level 2 Level 3
September 30, 2017
Assets
Securities available for sale
U.S. government corporations and agencies $ 7,415
$ 3,505
$ 3,910
$ —
Mortgage-backed securities 1,565,400
—
1,565,400
—
Obligations of states and political subdivisions 503,974
—
503,974
—
Corporate debt securities —
—
—
—
Equity securities 16,596
—
16,596
—
Derivative financial instruments⁽¹⁾
3,386
—
3,386
—
Interest rate lock commitments 2,463
—
��
2,463
Forward commitments 237
—
237
—
Total assets at fair value $ 2,099,471
$ 3,505
$ 2,093,503
$ 2,463
Liabilities
Derivative financial instruments⁽²⁾
$ 6,309
$ —
$ 6,309
$ —
Forward commitments 261
—
261
—
Total liabilities at fair value $ 6,570
$ —
$ 6,570
$ —
December 31, 2016
Assets
Securities available for sale
U.S. government corporations and agencies $ 4,700
$ 517
$ 4,183
$ —
Mortgage-backed securities 1,290,500
—
1,288,276
2,224
Obligations of states and political subdivisions 536,144
—
536,144
—
Equity securities 14,520
—
14,520
—
Derivative financial instruments⁽¹⁾
3,222
—
3,222
—
Interest rate lock commitments 2,790
—
—
2,790
Forward commitments 2,546
—
2,546
—
Total assets at fair value $ 1,854,422
$ 517
$ 1,848,891
$ 5,014
Liabilities
Derivative financial instruments⁽²⁾
$ 7,027
$ —
$ 7,027
$ —
Forward commitments 266
—
266
—
Total liabilities at fair value $ 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 September 30, 2017											Fair Value Measurements at June 30, 2019
	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	$	3,556	$	—	$	—	$	3,556	$	1,119		$	13,337	$	—	$	—	$	13,337	$	3,070
Commercial real estate	8,718		—		—		8,718		2,043			808		—		—		808		72
Agricultural and agricultural real estate	7,936		—		—		7,936		—			9,032		—		—		9,032		379
Residential real estate	1,365		—		—		1,365		—			1,076		—		—		1,076		—
Consumer	912		—		—		912		—			627		—		—		627		2
Total collateral dependent impaired loans	$	22,487	$	—	$	—	$	22,487	$	3,162		$	24,880	$	—	$	—	$	24,880	$	3,523
Loans held for sale												$	34,575	$	—	$	34,575	$	—	$	(1,386	)
Other real estate owned	$	13,226	$	—	$	—	$	13,226	$	594		$	6,646	$	—	$	—	$	6,646	$	936
Premises, furniture and equipment held for sale	$	4,428	$	—	$	—	$	4,428	$	404		$	3,701	$	—	$	—	$	3,701	$	954
Commercial servicing rights	$	313	$	—	$	—	$	313	$	(29	)
Mortgage servicing rights												$	5,801	$	—	$	—	$	5,801	$	953



	Fair Value Measurements at December 31, 2018
	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	$	12,932	$	—	$	—	$	12,932	$	660
Commercial real estate	405		—		—		405		72
Agricultural and agricultural real estate	11,070		—		—		11,070		575
Residential real estate	478		—		—		478		—
Consumer	624		—		—		624		—
Total collateral dependent impaired loans	$	25,509	$	—	$	—	$	25,509	$	1,307
Loans held for sale	$	119,801	$	—	$	52,577	$	67,224	$	(1,870	)
Other real estate owned	$	6,153	$	—	$	—	$	6,153	$	2,647
Premises, furniture and equipment held for sale	$	7,258	$	—	$	—	$	7,258	$	59
Mortgage servicing rights	$	7,143	$	—	$	—	$	7,143	$	58

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
Collateral dependent impaired loans:
Commercial $ 1,683
$ —
$ —
$ 1,683
$ 41
Commercial real estate 3,026
—
—
3,026
527
Agricultural and agricultural real estate 1,955
—
—
1,955
—
Residential real estate 3,565
—
—
3,565
85
Consumer 1,193
—
—
1,193
—
Total collateral dependent impaired loans $ 11,422
$ —
$ —
—
$ 11,422
$ 653
Other real estate owned $ 9,744
$ —
$ —
$ 9,744
$ 1,341
Premises, furniture and equipment held for sale $ 414
$ —
$ —
$ 414
$ 35
Commercial servicing rights $ 326
$ —
$ —
$ 326
$ 33

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

Fair Value at

9/30/17

Valuation Technique

Unobservable Input

Range (Weighted Average)

Fair Value at

6/30/2019

Valuation
Technique

Unobservable
Input

Range
(Weighted Average)

Z-TRANCHE Securities

—

Discounted cash flows

Pretax discount rate

—

Actual defaults

—

Actual deferrals

—

Interest rate lock commitments

2,463

Discounted cash flows

Closing ratio

0-99% (89%)⁽¹⁾

1,072

Discounted cash flows

Closing ratio

0-99% (90%)⁽¹⁾

Other real estate owned

6,646

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%⁽³⁾

Mortgage servicing rights

5,801

Discounted cash flows

Third party valuation

(4)

Premises, furniture and equipment held for sale

4,428

Modified appraised value

Third party appraisal

(2)

3,701

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%⁽⁴⁾

Commercial servicing rights

313

Discounted cash flows

Third party valuation

(3)

Other real estate owned

13,226

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%

Premises, furniture and equipment held for sale

Appraisal discount

0-10%⁽³⁾

Commercial

3,556

Modified appraised value

Third party appraisal

(2)

13,337

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-15%⁽⁴⁾

Commercial

Appraisal discount

0-20%⁽³⁾

8,718

Modified appraised value

Third party appraisal

(2)

808

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-14%⁽⁴⁾

Commercial real estate

Appraisal discount

0-20%⁽³⁾

7,936

Modified appraised value

Third party appraisal

(2)

9,032

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-6%⁽⁴⁾

Agricultural and agricultural real estate

Appraisal discount

0-15%⁽³⁾

1,365

Modified appraised value

Third party appraisal

(2)

1,076

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-13%⁽⁴⁾

Residential real estate

Appraisal discount

0-12%⁽³⁾

627

Modified appraised value

Third party valuation

(2)

Consumer

912

Modified appraised value

Third party valuation

(2)

Valuation discount

0-12%⁽³⁾

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.

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

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



	Fair Value at 12/31/2018		Valuation Technique	Unobservable Input	Range (Weighted Average)
Loans held for sale	$	67,224	Discounted cash flows	Sales contract	⁽¹⁾
Interest rate lock commitments	725		Discounted cash flows	Closing ratio	0-99% (91%)⁽²⁾
Other real estate owned	6,153		Modified appraised value	Third party appraisal	(3)
Other real estate owned				Appraisal discount	0-10%⁽⁴⁾
Servicing rights	7,143		Discounted cash flows	Third party valuation	⁽⁵⁾
Premises, furniture and equipment held for sale	7,258		Modified appraised value	Third party appraisal	(3)
Premises, furniture and equipment held for sale				Appraisal discount	0-10%⁽⁴⁾
Other real estate owned	6,153		Modified appraised value	Third party appraisal	(3)
Other real estate owned				Appraisal discount	0-10%⁽⁴⁾
Collateral dependent impaired loans:
Commercial	12,932		Modified appraised value	Third party appraisal	(3)
				Appraisal discount	0-8%⁽⁴⁾
Commercial real estate	405		Modified appraised value	Third party appraisal	(3)
				Appraisal discount	0-19%⁽⁴⁾
Agricultural and agricultural real estate	11,070		Modified appraised value	Third party appraisal	(3)
Agricultural and agricultural real estate				Appraisal discount	0-24%⁽⁴⁾
Residential real estate	478		Modified appraised value	Third party appraisal	(3)
Residential real estate				Appraisal discount	0-24%⁽⁴⁾
Consumer	624		Modified appraised value	Third party valuation	(3)
Consumer				Valuation discount	0-14%⁽⁴⁾

(1) The significant unobservable input related to the loans held for sale was the third party sales contract Heartland entered into prior to December 31, 2018. The sale of these consumer loans closed on January 11, 2019.
(2) 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.
(3) 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.
(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.
(5) 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.

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%
Actual defaults 21.77 - 37.62% (33.11%)
Actual deferrals 10.44 - 26.29% (14.81%)
Interest rate lock commitments 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⁾
Commercial servicing rights 326
Discounted cash flows Third party valuation (3)
Other real estate owned 9,744
Modified appraised value Third party appraisal (2)
Appraisal discount 0-10%
Collateral dependent impaired loans:
Commercial 1,683
Modified appraised value Third party appraisal (2)
Appraisal discount
0-8%⁽⁴⁾
Commercial real estate 3,026
Modified appraised value Third party appraisal (2)
Appraisal discount
0-7%⁽⁴⁾
Agricultural and agricultural real estate 1,955
Modified appraised value Third party appraisal (2)
Appraisal discount
0-10%⁽⁴⁾
Residential real estate 3,565
Modified appraised value Third party appraisal (2)
Appraisal discount
0-8%⁽⁴⁾
Consumer 1,193
Modified appraised value Third party valuation (2)
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.

~~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 Nine Months Ended
September 30, 2017
For the Year Ended
December 31, 2016
Balance at January 1, $ 2,224
$ 2,039
Total gains (losses):

  Included in earnings 2,810
—
  Included in other comprehensive income (2,166 ) 185
Purchases, sales and settlements:
  Purchases —
—
  Sales (2,868 ) —
  Settlements —
—
Balance at period end $ —
$ 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, 2019			For the Year Ended December 31, 2018
Balance at January 1,	$	725		$	1,738
Acquired interest rate lock commitments	—			1,383
Total gains (losses) included in earnings	816			(3,269		)
Issuances	4,661			2,962
Settlements	(5,130		)	(2,089		)
Balance at period end	$	1,072		$	725

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

Gains included in gains (losses) on sale of loans held for sale attributable to interest rate lock commitments held at ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016,~~2018, were ~~$2.5~~$1.1 million and ~~$2.8 million,~~$725,000, respectively.

The ~~tables~~table below ~~summarize~~is a summary of the estimated fair value of Heartland's financial instruments as(as defined by ASC ~~825~~825) as of ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016,~~2018, 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~~including the value of the commercial and mortgage servicing rights, premises, furniture and equipment, premises, furniture and equipment held for sale, OREO, 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 September 30, 2017										Fair Value Measurements at June 30, 2019
	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	$	251,736	$	251,736	$	251,736	$	—	$	—	$	642,139	$	642,139	$	642,139	$	—	$	—
Time deposits in other financial institutions	19,793		19,793		19,793		—		—		4,430		4,430		4,430		—		—
Securities:
Available for sale	2,093,385		2,093,385		3,505		2,089,880		—
Carried at fair value											2,561,887		2,561,887		12,480		2,549,407		—
Held to maturity	256,355		270,386		—		270,386		—		88,166		96,619		—		96,619		—
Other investments	23,176		23,176		—		22,981		195		31,366		31,366		—		31,366		—
Loans held for sale	35,795		35,795		—		35,795		—		34,575		34,575		—		34,575		—
Loans, net:
Commercial	1,596,934		1,601,351		—		1,597,795		3,556		2,213,691		2,185,030		—		2,171,693		13,337
Commercial real estate	3,143,414		3,117,829		—		3,109,111		8,718		3,963,406		3,948,274		—		3,947,466		808
Agricultural and agricultural real estate	506,388		507,974		—		500,038		7,936		544,109		535,926		—		526,894		9,032
Residential real estate	632,306		622,698		—		621,333		1,365		611,025		597,534		—		596,458		1,076
Consumer	441,079		444,384		—		443,472		912		456,970		455,559		—		454,932		627
Total Loans, net	6,320,121		6,294,236		—		6,271,749		22,487		7,789,201		7,722,323		—		7,697,443		24,880
Cash surrender value on life insurance											170,421		170,421		—		170,421		—
Derivative financial instruments⁽¹⁾	3,386		3,386		—		3,386		—		14,413		14,413		—		14,413		—
Interest rate lock commitments	2,463		2,463		—		—		2,463		1,072		1,072		—		—		1,072
Forward commitments	237		237		—		237		—		2		2		—		2		—
Financial liabilities:
Deposits
Demand deposits	3,009,940		3,009,940		—		3,009,940		—		3,426,758		3,426,758		—		3,426,758		—
Savings deposits	4,227,340		4,227,340		—		4,227,340		—		5,533,503		5,533,503		—		5,533,503		—
Time deposits	994,604		994,604		—		994,604		—		1,148,296		1,148,296		—		1,148,296		—
Deposits held for sale											—		—		—		—		—
Short term borrowings	171,871		171,871		—		171,871		—		107,260		107,260		—		107,260		—
Other borrowings	301,473		305,741		—		305,741		—		282,863		283,695		—		283,695		—
Derivative financial instruments⁽²⁾	6,309		6,309		—		6,309		—		19,383		19,383		—		19,383		—
Forward commitments	261		261		—		261		—		430		430		—		430		—

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



					Fair Value Measurements at December 31, 2018
	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	$	273,630	$	273,630	$	273,630	$	—	$	—
Time deposits in other financial institutions	4,672		4,672		4,672		—		—
Securities:
Carried at fair value	2,450,709		2,450,709		25,414		2,425,295		—
Held to maturity	236,283		245,341		—		245,341		—
Other investments	28,396		28,396		—		28,396		—
Loans held for sale	119,801		119,801		—		52,577		67,224
Loans, net:
Commercial	1,994,785		1,955,607		—		1,942,675		12,932
Commercial real estate	3,684,213		3,667,138		—		3,666,733		405
Agricultural and agricultural real estate	561,265		553,112		—		542,042		11,070
Residential real estate	670,473		654,596		—		654,118		478
Consumer	434,998		432,016		—		431,392		624
Total Loans, net	7,345,734		7,262,469		—		7,236,960		25,509
Cash surrender value on life insurance	162,892		162,892		—		162,892		—
Derivative financial instruments⁽¹⁾	6,539		6,539		—		6,539		—
Interest rate lock commitments	725		725		—		—		725
Financial liabilities:
Deposits
Demand deposits	3,264,737		3,264,737		—		3,264,737		—
Savings deposits	5,107,962		5,107,962		—		5,107,962		—
Time deposits	1,023,730		1,023,730		—		1,023,730		—
Deposits held for sale	106,409		100,241		—		—		100,241
Short term borrowings	227,010		227,010		—		227,010		—
Other borrowings	274,905		276,966		—		276,966		—
Derivative financial instruments⁽²⁾	6,044		6,044		—		6,044		—
Forward commitments	399		399		—		399		—

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

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)
Financial assets:
Cash and cash equivalents $ 158,724
$ 158,724
$ 158,724
$ —
$ —
Time deposits in other financial institutions 2,105
2,105
2,105
—
—
Securities:
Available for sale 1,845,864
1,845,864
517
1,843,123
2,224
Held to maturity 263,662
274,799
—
274,799
—
Other investments 21,560
21,560
—
21,365
195
Loans held for sale 61,261
61,261
—
61,261
—
Loans, net:
Commercial 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
Agricultural and agricultural real estate 485,820
487,001
—
485,046
1,955
Residential real estate 614,207
604,233
—
600,668
3,565
Consumer 411,833
414,266
—
413,073
1,193
Total Loans, net 5,297,395
5,271,112
—
5,259,690
11,422
Derivative financial instruments⁽¹⁾
3,222
3,222
—
3,222
—
Interest rate lock commitments 2,790
2,790
—
—
2,790
Forward commitments 2,546
2,546
—
2,546
—
Financial liabilities:
Deposits
Demand deposits 2,202,036
2,202,036
—
2,202,036
—
Savings deposits 3,788,089
3,788,089
—
3,788,089
—
Time deposits 857,286
857,286
—
857,286
—
Short term borrowings 306,459
306,459
—
306,459
—
Other borrowings 288,534
288,534
—
288,534
—
Derivative financial instruments⁽²⁾
7,027
7,027
—
7,027
—
Forward commitments 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 equity securities with a readily determinable fair value and debt securities either held to maturity, available for sale or trading, fair value equals quoted market price if available. If a quoted market price is not available, fair value is estimated

using quoted market prices for similar securities. For Level 3 securities, 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~~determined using an ~~entrance~~exit price ~~concept~~methodology as prescribed by ~~discounting~~ASU 2016-01, which was effective on January 1, 2018. The exit price estimation of fair value is based on the ~~future~~present value of the expected cash flows. The projected cash flows ~~using~~are based on the ~~current rates at which similar~~contractual terms of the loans, ~~would be made to borrowers with similar~~adjusted for prepayments and a discount rate based on the relative risk of the cash flows. Other considerations include the loan type, remaining life of the loan and credit ~~ratings and for the same remaining maturities.~~ risk.

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.

Cash surrender value on life insurance — Life insurance policies are held on certain officers. The carrying value of these policies approximates fair value as it is based on the cash surrender value adjusted for other charges or amounts due that are probable at settlement. As such, Heartland classifies the estimated fair value of the cash surrender value on life insurance as Level 2.

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.

Interest Rate Lock Commitments— The fair value of interest rate lock commitments is estimated using an internal valuation model, which includes grouping the interest rate lock commitments by interest rate and terms, applying an estimated closing ratio based on historical experience, and then multiplying by quoted investor prices determined to be reasonably applicable to the loan commitment groups based on interest rate, terms, and rate lock expiration dates of the loan commitment group.

Forward Commitments— The fair value of these instruments is estimated using an internal valuation model, which includes current trade pricing for similar financial instruments.

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

Deposits Held for Sale — As of June 30, 2019, Heartland had $0 of deposits held for sale. Prior to December 31, 2018, Heartland entered into agreements with third parties to sell the deposits of five branch locations, which totaled $106.4 million as of December 31, 2018. The estimated fair value in the table above was based on the carrying value of the deposits less the premium Heartland expected to receive in accordance with the sales contract when the transactions were completed in the first six months of 2019.

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: REVENUE

On January 1, 2018, Heartland adopted ASU 2014-09, "Revenue from Contracts with Customers" (Topic 606), and all subsequent ASUs that modified Topic 606.

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with loan servicing income, bank owned life insurance, derivatives and certain credit card fees are also not in scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as service charges and fees, trust fees, and brokerage and insurance commissions. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of Heartland's revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.

Service Charges and Fees

Service charges and fees consist of revenue generated from deposit account related service charges and fees, overdraft fees, customer service fees, credit card fee income, debit card income and other service charges and fees.

Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders and other deposit account related fees. Heartland's performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees, including overdraft fees, are largely transactional based, and therefore, the performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.

Customer service fees and other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. Heartland's performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.

Credit card fee income and debit card income are comprised of interchange fees, ATM fees, and merchant services income. Credit card fee income and debit card income are earned whenever the banks' debit and credit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a bank cardholder uses an ATM that is not owned by one of Heartland's banks or a non-bank cardholder uses Heartland-owned ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees.

Trust Fees

Trust fees are primarily comprised of fees earned from the management and administration of trusts and other customer assets. Heartland's performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the average daily market value or month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days before or after month end through a direct charge to customers’ accounts. Heartland does not earn performance-based incentives. Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. Heartland's performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered.

Brokerage and Insurance Commissions

Brokerage commission primarily consist of commissions related to broker-dealer contracts. The contracts are between the customer and the broker-dealer, and Heartland satisfies its performance obligation and earns commission when the transactions are completed. The recognition of revenue is based on a defined fee schedule and does not require significant judgment. Payment is received shortly after services are rendered. Insurance commissions are related to commissions received directly from the insurance carrier. Heartland acts as an insurance agent between the customer and the insurance carrier. Heartland's performance obligations and associated fee and commission income are defined with each insurance product with the insurance company. When insurance payments are received from customers, a portion of the payment is recognized as commission revenue.

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three- and six-months ended June 30, 2019, and 2018, in thousands:



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
In-scope of Topic 606
Service charges and fees
Service charges and fees on deposit accounts	$	3,186		$	2,794		$	6,163		$	5,412
Overdraft fees	2,876			2,518			5,619			4,726
Customer service and other service fees	84			88			166			166
Credit card fee income	4,270			3,114			7,619			5,381
Debit card income	4,213			3,558			7,856			6,466
Total service charges and fees	$	14,629		$	12,072		$	27,423		$	22,151
Trust fees	4,825			4,615			9,299			9,295
Brokerage and insurance commissions	1,028			877			1,762			1,784
Total noninterest income in-scope of Topic 606	$	20,482		$	17,564		$	38,484		$	33,230

Out-of-scope of Topic 606
Loan servicing income	$	1,338		$	1,807		$	3,067		$	3,561
Securities gains/(losses), net	3,580			(259		)	5,155			1,182
Unrealized gain on equity securities, net	112			71			370			43
Net gains on sale of loans held for sale	4,343			6,800			7,519			10,851
Valuation adjustment on servicing rights	(364		)	(216		)	(953		)	(218		)
Income on bank owned life insurance	888			700			1,787			1,314
Other noninterest income	1,682			1,167			3,349			2,387
Total noninterest income out-of-scope of Topic 606	11,579			10,070			20,294			19,120
Total noninterest income	$	32,061		$	27,634		$	58,778		$	52,350

Contract Balances

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. Heartland's noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after Heartland satisfies its performance obligation and revenue is recognized. Heartland does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of June 30, 2019, and December 31, 2018, Heartland did not have any significant contract balances.

Contract Acquisition Costs

In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). Heartland utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, Heartland did not capitalize any contract acquisition costs.

NOTE ~~9: SEGMENT REPORTING~~10: STOCK COMPENSATION

Heartland ~~has identified two operating segments~~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 ~~purposes~~issuance and make certain other changes to the Plan. As of ~~financial reporting: community~~June 30, 2019, 341,552 shares of common stock were available for issuance under future awards that may be granted under the Plan to employees and ~~other banking,~~directors of, and ~~retail mortgage banking. These segments were determined~~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 ~~products~~fair value of the underlying shares of common stock on the date of grant. Forfeitures are accounted for as they occur.

The amount of tax benefit related to the exercise, vesting and ~~services provided~~forfeiture of equity-based awards reflected as a tax benefit in Heartland's income tax expense was $272,000 and $660,000 during the six months ended June 30, 2019 and 2018, respectively.

Restricted Stock Units

The Plan permits the Compensation Committee to grant restricted stock units ("RSUs"). In the first quarter of 2019, the Compensation Committee granted time-based RSUs with respect to 90,073 shares of common stock, and in the first quarter of 2018, the Compensation Committee granted time-based RSUs with respect to 52,153 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 on a specified date in the future. The time-based RSUs granted in 2019 and 2018 vest over three years in equal installments on March 6 of each of the three years following the year of the grant. 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 ~~type~~RSU agreement). The retiree is required to sign a non-solicitation agreement as a condition to vesting.

The Compensation Committee also granted three-year performance-based RSUs with respect to 34,848 shares and 16,108 shares of ~~customers served~~common stock in the first quarter of 2019 and 2018, respectively. These performance-based RSUs will be earned based on satisfaction of performance targets for the three-year performance period ended December 31, 2021, and December 31, 2020, respectively. These performance-based RSUs or a portion thereof may vest in 2022 and 2021, respectively, after measurement of performance in relation to the performance targets.

The three-year performance-based RSUs vest to the extent that they are earned upon death or disability or upon a "qualified retirement." Upon a change in control, performance-based RSUs shall become vested at 100% of target if the RSU obligations are not assumed by the successor company. If the successor company does assume the RSU obligations, the 2019 and 2018 performance-based RSUs will vest at 100% of target upon a "Termination of Service" within the period beginning six months prior to a change in control and ending twenty-four months after a change in control.

All of Heartland's RSUs will be settled in common stock upon vesting and are ~~consistent with~~not entitled to dividends until vested.

The Compensation Committee may grant RSUs under the ~~information used by Heartland's key decision makers~~Plan to ~~make operating decisions~~directors as part of their compensation, to new management level employees at commencement of employment, and to ~~assess Heartland's performance. The following tables present financial information~~other employees and service providers as incentives. During the six months ended June 30, 2019, and June 30, 2018, 32,662 and 26,489 time-based RSUs, respectively, were granted to directors and new employees.

A summary of the RSUs outstanding as of June 30, 2019, and 2018, and changes during the six months ended June 30, 2019 and 2018, follows:



	2019				2018
	Shares		Weighted-Average Grant Date Fair Value		Shares		Weighted-Average Grant Date Fair Value
Outstanding at January 1,	266,995		$	43.89	301,578		$	34.74
Granted	157,583		45.00		113,738		55.16
Vested	(139,623	)	38.82		(124,764	)	32.64
Forfeited	(18,015	)	49.31		(25,011	)	45.50
Outstanding at June 30,	266,940		$	46.97	265,541		$	43.49

Total compensation costs recorded for ~~Heartland's operating segments~~RSUs were $3.6 million and $2.8 million for the ~~three- and nine-month~~six-month periods ended ~~September~~June 30, ~~2017,~~2019 and ~~September~~2018. As of June 30, ~~2016,~~2019, there were $7.4 million of total unrecognized compensation costs related to the Plan for RSUs that are expected to be recognized through 2022.

NOTE 11: LEASES

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, Heartland adopted ASU 2016-02 "Leases" (Topic 842) and all subsequent ASUs that modified Topic 842. For Heartland, Topic 842 primarily affected the accounting treatment for operating lease agreements in which Heartland is the lessee.

Lessee Accounting

Substantially all of the leases in which Heartland is the lessee are comprised of real estate property for branches, ATM locations, and office space with terms extending through 2031. All of Heartland's leases are classified as operating leases, and therefore, were previously not recognized on the consolidated balance sheet. With the adoption of Topic 842, operating lease agreements are required to be recognized on the consolidated balance sheet as a right-of-use ("ROU") asset and a corresponding lease liability.

Heartland elected not to include short-term leases (i.e., leases with initial terms of twelve months or less), or equipment leases (deemed immaterial) on the consolidated balance sheet. The table below presents Heartland's ROU assets and lease liabilities as of June 30, 2019, (in thousands):



Assets	Classification	June 30, 2019
Operating lease assets	Other assets	$	21,076
Total lease right-of-use assets		$	21,076

Liabilities
Operating lease liabilities	Accrued expenses and other liabilities	$	22,673
Total lease liabilities		$	22,673

The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. Heartland’s lease agreements often include one or more options to renew at Heartland’s discretion. If at lease inception, Heartland considers the exercising of a renewal option to be reasonably certain, Heartland will include the extended term in the calculation of the ROU asset and lease liability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, Heartland utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used. The variable lease cost primarily represents variable payments such as common area maintenance and utilities. The table below presents the lease costs and supplemental information as of June 30, 2019, in thousands:



	Income Statement Category	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
Lease Cost
Operating lease cost	Occupancy expense	$	1,462	$	2,867
Variable lease cost	Occupancy expense	32		67
Total lease cost		$	1,494	$	2,934
Supplemental Information
Noncash reduction of ROU assets arising from lease modifications	Occupancy expense	$	2,464	$	2,464
Noncash reduction lease liabilities arising from lease modifications	Occupancy expense	2,487		2,487

Supplemental balance sheet information		As of June 30, 2019
Weighted-average remaining operating lease term (in years)		5.92

Weighted-average discount rate for operating leases		3.00				%

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities as of June 30, 2019 is as follows:



Six months ending December 31, 2019	$	2,976
Year ending December 31,
2020	5,793
2021	5,312
2022	3,343
2023	1,883
Thereafter	5,502
Total lease payments	$	24,809
Less interest	(2,136		)
Present value of lease liabilities	$	22,673

As defined by Topic 840, Heartland's minimum future rental commitments at December 31, 2018, for all non-cancelable leases were as follows, in thousands:



2019	$	5,776
2020	5,493
2021	5,102
2022	3,241
2023	2,297
Thereafter	12,419
	$	34,328

Three Months Ended
September 30,
2017 2016

Community
and Other
Banking

Retail
Mortgage
Banking
Total
Community
and Other
Banking

Retail
Mortgage
Banking
Total
Net interest income $ 88,778
$ 1,066
$ 89,844
$ 72,694
$ 987
$ 73,681
Provision for loan losses 5,705
—
5,705
5,328
—
5,328
Total noninterest income 19,680
5,297
24,977
17,337
11,205
28,542
Total noninterest expense 69,977
8,782
78,759
57,988
10,439
68,427
Income (loss) before taxes $ 32,776
$ (2,419 ) $ 30,357
$ 26,715
$ 1,753
$ 28,468
Average Loans, for the period $ 6,245,445
$ 40,839
$ 6,286,284
$ 5,464,304
$ 73,784
$ 5,538,088
Segment Assets, at period end $ 9,693,172
$ 62,455
$ 9,755,627
$ 8,084,810
$ 117,405
$ 8,202,215

Nine Months Ended
September 30,
2017 2016
Community
and Other
Banking Retail
Mortgage
Banking Total Community
and Other
Banking Retail
Mortgage
Banking Total
Net interest income $ 234,406
$ 3,046
$ 237,452
$ 216,172
$ 3,334
$ 219,506
Provision for loan losses 10,235
—
10,235
9,513
—
9,513
Total noninterest income 56,964
19,530
76,494
55,773
33,373
89,146
Total noninterest expense 193,753
26,044
219,797
177,421
32,335
209,756
Income (loss) before taxes $ 87,382
$ (3,468 ) $ 83,914
$ 85,011
$ 4,372
$ 89,383
Average Loans, for the period $ 5,641,641
$ 37,979
$ 5,679,620
$ 5,422,843
$ 70,344
$ 5,493,187
Segment Assets, at period end $ 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~~Quarterly Report on Form 10-Q (including any information incorporated herein by reference) contains, and future oral and written statements of Heartland Financial USA, Inc. ("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.~~2018. 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.~~2018. 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.~~2018.

OVERVIEW

Heartland is a multi-bank holding company providing banking, mortgage, wealth management, investments and insurance services to individuals and businesses. As of the date of this Quarterly Report on Form 10-Q, Heartland has eleven banking subsidiaries with 116 locations in Iowa, Illinois, Wisconsin, New Mexico, Arizona, Montana, Colorado, Minnesota, Kansas, Missouri, Texas and California. Heartland's primary objectives are to increase profitability and diversify its market area and asset base by expanding through acquisitions and to grow organically by increasing its customer base in the markets it serves.

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, ~~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, core deposit and customer relationship intangibles amortization and other real estate and loan collection expenses.

Net income available to common stockholders for the quarter ended ~~September~~June 30, ~~2017,~~2019, was ~~$21.6~~$45.2 million, or ~~$0.72~~$1.26 per diluted common share, compared to ~~$20.2~~$27.9 million, or ~~$0.81~~$0.85 per diluted common share, for the quarter ended ~~September~~June 30, ~~2016.~~2018. Return on average common equity was ~~8.99%~~12.56% and return on average assets was ~~0.89%~~1.55% for the ~~third~~second quarter of ~~2017,~~2019, compared to ~~11.64%~~9.81% and ~~0.98%~~1.05%, respectively, for the same quarter in ~~2016.~~2018.

Net income available to common stockholders for the ~~first nine~~six months ~~of 2017~~ended June 30, 2019, was ~~$61.6~~$76.7 million or ~~$2.21~~$2.17 per diluted common share, compared to ~~$61.0~~$51.1 million or ~~$2.48~~$1.61 per diluted common share for the ~~first nine~~six months ~~of 2016.~~ended June 30, 2018. Return on average common equity was ~~9.88%~~11.13% and return on average assets was ~~0.94%~~1.35% for the first ~~nine~~six months of ~~2017,~~2019, compared to ~~12.28%~~9.58% and ~~1.00%, respectively,~~1.01% for the same period in ~~2016.~~2018.

For the ~~third~~second quarter of ~~2017,~~2019, Heartland's net interest margin was ~~4.08% (4.26%~~4.06% (4.10% on a fully tax-equivalent basis) compared to ~~3.97% (4.14%~~4.23% (4.30% on a fully tax-equivalent basis) for the same quarter in ~~2016,~~2018, and the efficiency ratio was ~~64.54%~~64.81% and ~~63.88%~~64.94% for the ~~third~~second quarter of ~~2017~~2019 and ~~2016,~~2018, respectively. For the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2017,~~2019, Heartland's net interest margin

was ~~4.00% (4.19%~~4.09% (4.14% on a fully tax-equivalent basis) compared to ~~3.98% (4.15%~~4.21% (4.28% on a fully tax-equivalent basis) for the same period in ~~2016. Heartland's~~2018. The efficiency ratio ~~increased to 66.58%~~ for the ~~nine~~first six months ~~ended September 30, 2017~~of 2019 was 65.01% compared to ~~66.23%~~66.48% for the same period in ~~2016.~~2018.

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 as of February 28,

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 the close date, Citywide Banks of Colorado, Inc. had, at fair value, total assets of $1.49 billion, including $985.4 million in net loans outstanding, and $1.21 billion of deposits. The systems conversion for this transaction occurred on October 13, 2017.

Total assets of Heartland were ~~$9.76~~$12.16 billion at ~~September~~June 30, ~~2017,~~2019, an increase of ~~$1.51 billion~~$752.3 million or ~~18%~~7% since year-end 2016. 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 $199.1 million or 2% since December 31, 2016.2018. Securities represented ~~24%~~22% of total assets at ~~September~~June 30, ~~2017,~~2019, and ~~26%~~24% of total assets at December 31, ~~2016.~~2018.

Total loans held to maturity were ~~$6.37~~$7.85 billion at ~~September~~June 30, ~~2017,~~2019, compared to ~~$5.35~~$7.41 billion at year-end ~~2016,~~2018, an increase of ~~$1.02 billion.~~$445.4 million or 6%. This change includes ~~$96.4~~$542.0 million of total loans held to maturity acquired at fair value in the ~~Founders Bancorp transaction and $985.4~~Blue Valley Ban Corp. ("BVBC") transaction. During the first quarter of 2019, Heartland classified $32.1 million of loans as held for sale in conjunction with the branch sales described below in "Recent Developments". Excluding the reclassification of loans to held for sale and the BVBC transaction, total loans held to maturity decreased $64.6 million or 1% since December 31, 2018.

Total deposits were $10.11 billion as of June 30, 2019, compared to $9.40 billion at year-end 2018, an increase of $712.1 million or 8%. This increase includes $617.1 million of deposits acquired at fair value in the ~~Citywide Banks~~BVBC transaction. During the first quarter of ~~Colorado, Inc. transaction.~~2019, Heartland classified $77.0 million of deposits as held for sale in conjunction with the branch sales. Exclusive of ~~these transactions,~~the reclassification of deposits to held for sale and the deposits acquired at fair value in the BVBC transaction, total ~~loans held to maturity decreased $60.2~~deposits increased $172.0 million or 1%2% since December 31, ~~2016.~~2018.

Total ~~deposits were $8.23~~equity was $1.52 billion ~~as of September~~at June 30, ~~2017,~~2019, compared to ~~$6.85~~$1.33 billion at year-end 2016, an increase of $1.38 billion or 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 these transactions, total deposits decreased $7.1 million or less than 1% since December 31, 2016.

~~Common stockholders' equity was $980.7 million at September 30, 2017, compared to $739.6 million at year-end 2016.~~2018. Book value per common share was ~~$32.75~~$41.48 at ~~September~~June 30, ~~2017,~~2019, compared to ~~$28.31~~$38.44 at year-end ~~2016.~~2018. Heartland's unrealized ~~loss~~gain on securities available for sale, net of applicable taxes, was ~~$20.1~~$7.1 million at ~~September~~June 30, ~~2017,~~2019, compared to an unrealized loss of ~~$30.2~~$32.5 million, net of applicable taxes, at December 31, ~~2016.~~2018.

~~FINANCIAL HIGHLIGHTS~~

RECENT DEVELOPMENTS

Regulatory Developments

Enactment of the Economic Growth, Regulatory Relief, and Consumer Protection Act in May 2018 significantly altered several provisions of the Dodd-Frank Act, including how stress tests are run. Bank holding companies with assets of less than $100 billion, such as Heartland, are no longer subject to company-run stress testing requirements in accordance with the Dodd-Frank Act, which included publishing a summary of results. In response to the initial provisions of the Dodd-Frank Act, Heartland has added staff, enhanced risk management processes and invested in upgraded information systems and technology. In addition, management continues to run internal stress tests as a component of the comprehensive risk management and capital planning process.

Other provisions of the Dodd-Frank Act, such as the Durbin Amendment, which restricts interchange fees, remain in place. The Durbin Amendment, which was effective for Heartland on July 1, 2019, restricts interchange fees to those which are "reasonable and proportionate" for certain debit card issuers and limits the ability of networks and issuers to restrict debit card transaction routing. In the final rules, interchange fees for debit card transactions were capped at $0.21 plus five basis points in order to be eligible for a safe harbor such that the fee is conclusively determined to be reasonable and proportionate. Based on calculations using 2018 debit card volume, the negative impact of the Durbin Amendment will be approximately $6.0 million annually to Heartland's noninterest income.

In keeping with its focus on core businesses and execution of strategic priorities, Heartland has completed the following transactions since January 1, 2019:

Blue Valley Ban Corp. Acquisition

On May 10, 2019, Heartland completed the acquisition of BVBC and its wholly-owned subsidiary, Bank of Blue Valley, headquartered in Overland Park, Kansas. Based on Heartland's closing common stock price of $44.78 per share on May 10, 2019, the aggregate consideration paid to BVBC common shareholders was $92.3 million, which was paid by delivery of 2,060,258 shares of Heartland common stock. On the closing date, in addition to this merger consideration, Heartland provided BVBC the funds necessary to repay outstanding debt of $6.9 million, and Heartland assumed $16.1 million of trust preferred securities at fair value. Immediately following the closing of the transaction, Bank of Blue Valley was merged with and into Heartland's wholly-owned Kansas subsidiary, Morrill & Janes Bank and Trust Company, and the combined entity operates under the Bank of Blue Valley brand. As of the closing date, BVBC had, at fair value, total assets of $766.2 million, total loans held to maturity of $542.0 million, and total deposits of $617.1 million. The transaction was a tax-free reorganization with respect to the stock consideration received by the stockholders of BVBC.

The financial impact of the BVBC acquisition is included in the results of operations for the period ended June 30, 2019, but not in the results of operations for the same period ended June 30, 2018.

Branch Sales and Other Divestitures

On January 11, 2019, Heartland completed the sale of the loan portfolios of its consumer finance subsidiaries, Citizens Finance Co. and Citizens Finance of Illinois Co. (collectively, "Citizens"). The loan portfolios had a fair value of $67.2 million.

On February 22, 2019, Heartland completed the sale of two branch locations of Wisconsin Bank & Trust. The sale included loans of $11.7 million and deposits of $48.6 million. Heartland recorded a net gain of $3.2 million in the first quarter of 2019, which consisted of a gain of $3.5 million and write-off $329,000 of core deposit intangibles.

On April 30, 2019, Dubuque Bank and Trust Company closed on the sale of substantially all its mortgage servicing rights portfolio, which contained loans with an unpaid principal balance of approximately $3.31 billion to PNC Bank, N.A. The transaction qualified as a sale, and $20.6 million of mortgage servicing rights were de-recognized on the consolidated balance sheet as of June 30, 2019. Cash of approximately $34.8 million was received during the second quarter, and Heartland recorded an estimated gain on the sale of this portfolio of approximately $13.3 million. A payable of approximately $334,000 was recorded as of June 30, 2019, due to the timing of the servicing transfer per the terms of the sale agreement. In the agreement, which includes customary terms and conditions, Dubuque Bank and Trust Company provided interim servicing of the loans until the transfer date, which was August 1, 2019.

On May 3, 2019, Heartland completed the sale of two branches of Illinois Bank & Trust. The sale included loans of $1.2 million and deposits of $11.4 million. Heartland recorded a net gain of $340,000 in the second quarter of 2019, which consisted of a gain of $519,000 and write-off of $179,000 of core deposit intangibles.

On May 17, 2019, Heartland completed the sale of one branch of Citywide Banks. The sale included loans of $8.4 million and deposits of $24.4 million. Heartland recorded a net gain of $1.6 million in the second quarter of 2019, which consisted of a gain of $1.8 million and write-off of $174,000 of core deposit intangibles.

On May 31, 2019, Heartland completed the sale of two branch locations of Dubuque Bank and Trust Company, which operated as First Community Bank, in Keokuk, Iowa. The sale included loans of $17.5 million and deposits of $72.0 million. Heartland recorded a gain of $4.2 million in the second quarter of 2019.

Heartland has been working on company-wide strategic initiatives since the end of 2018. Management expects approximately $8 million to $10 million of the net gains on the sale of the branches and mortgage servicing rights previously discussed will be invested in talent, process improvement, and technology upgrades that management believes are necessary to support future organic and acquired growth, improve efficiency and ultimately provide a superior customer experience and enhance profitability.

Three of the most significant investments in technology and process improvement are:

a project called Operation Customer Compass, which is focused on streamlining and automating processes. This project is intended to create back-office capacity for growth and enhance the customer experience. Expense reductions of over $10 million annually are expected to be realized once the project is completed, which is anticipated to be the end of 2019;

an upgrade to the existing customer relationship management system to the Salesforce Platform, which is an industry leader for relationship management, and,

the implementation of nCino, a premiere commercial loan origination system.

The upgrade to Salesforce and the implementation of nCino is expected to significantly improve the sales management process and improve the effectiveness of the commercial sales teams. The integration between nCino and Salesforce is expected to improve back office efficiencies and shorten the sales cycle. These two projects are currently underway and will be ongoing into mid-2020.

(Dollars in thousands, except per share data) Three Months Ended
September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
STATEMENT OF INCOME DATA
Interest income $ 98,978
$ 81,687
$ 261,590
$ 243,702
Interest expense 9,134
8,006
24,138
24,196
Net interest income 89,844
73,681
237,452
219,506
Provision for loan losses 5,705
5,328
10,235
9,513
Net interest income after provision for loan losses 84,139
68,353
227,217
209,993
Noninterest income 24,977
28,542
76,494
89,146
Noninterest expenses 78,759
68,427
219,797
209,756
Income taxes 8,725
8,260
22,314
28,196
Net income 21,632
20,208
61,600
61,187
Preferred dividends (13 ) (53 ) (45 ) (273 )
Interest expense on convertible preferred debt 3
17
12
48
Net income available to common stockholders $ 21,622
$ 20,172
$ 61,567
$ 60,962

Key Performance Ratios
Annualized return on average assets 0.89 % 0.98 % 0.94 % 1.00 %
Annualized return on average common equity (GAAP) 8.99 % 11.64 % 9.88 % 12.28 %
Annualized return on average tangible common equity (non-GAAP)⁽¹⁾
12.41 % 14.93 % 12.90 % 15.87 %
Annualized ratio of net charge-offs to average loans 0.31 % 0.17 % 0.23 % 0.09 %



FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share data)	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
STATEMENT OF INCOME DATA
Interest income	$	127,003	$	113,409	$	247,724	$	214,623
Interest expense	20,295		12,000		38,061		21,630
Net interest income	106,708		101,409		209,663		192,993
Provision for loan losses	4,918		4,831		6,553		9,094
Net interest income after provision for loan losses	101,790		96,578		203,110		183,899

(Dollars in thousands, except per share data) Three Months Ended
September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
Annualized net interest margin (GAAP) 4.08 % 3.97 % 4.00 % 3.98 %
Annualized net interest margin, fully tax-equivalent (non-GAAP)⁽²⁾
4.26 % 4.14 % 4.19 % 4.15 %
Efficiency ratio, fully tax-equivalent⁽³⁾
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) $ 21,622
$ 20,172
$ 61,567
$ 60,962

Average common stockholders' equity (GAAP) $ 954,511
$ 689,637
$ 833,150
$ 663,050
    Less average goodwill 226,097
127,699
167,009
125,061
    Less average other intangibles, net 36,950
24,563
27,992
24,958
Average tangible common equity (non-GAAP) $ 691,464
$ 537,375
$ 638,149
$ 513,031
Annualized return on average common equity (GAAP) 8.99 % 11.64 % 9.88 % 12.28 %
Annualized return on average tangible common equity (non-GAAP) 12.41 % 14.93 % 12.90 % 15.87 %

Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP)⁽⁵⁾

Net Interest Income (GAAP) $ 89,844
$ 73,681
$ 237,452
$ 219,506
    Plus tax-equivalent adjustment⁽⁷⁾
3,925
3,221
11,581
9,408
Net interest income - tax-equivalent (non-GAAP)
$ 93,769
$ 76,902
$ 249,033
$ 228,914

Average earning assets $ 8,726,228
$ 7,382,860
$ 7,942,810
$ 7,368,856
Net interest margin (GAAP) 4.08 % 3.97 % 4.00 % 3.98 %
Net interest margin, fully tax-equivalent (non-GAAP) 4.26 % 4.14 % 4.19 % 4.15 %

Reconciliation of Non-GAAP Measure-Efficiency Ratio⁽⁶⁾

Net Interest Income (GAAP) $ 89,844
$ 73,681
$ 237,452
$ 219,506
    Plus tax-equivalent adjustment⁽⁷⁾
3,925
3,221
11,581
9,408
Net interest income - tax-equivalent (non-GAAP)
93,769
76,902
249,033
228,914
Noninterest income 24,977
28,542
76,494
89,146
Securities gains, net (1,679 ) (1,584 ) (5,553 ) (9,732 )
Adjusted income $ 117,067
$ 103,860
$ 319,974
$ 308,328

Total noninterest expenses $ 78,759
$ 68,427
$ 219,797
$ 209,756
Less:
Core deposit intangibles and customer relationship intangibles amortization 1,863
1,291
4,252
4,483
Partnership investment in tax credit projects —
—
876
—
Loss on sales/valuations of assets, net 1,342
794
1,642
1,064
Adjusted noninterest expenses $ 75,554
$ 66,342
$ 213,027
$ 204,209

Efficiency ratio, fully tax-equivalent (non-GAAP) 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
(Dollars in thousands, except per share data)	Three Months Ended June 30,						Six Months Ended June 30,
Noninterest income	32,061			27,634			58,778			52,350
Noninterest expenses	75,098			88,882			163,328			172,528
Income taxes	13,584			7,451			21,894			12,574
Net income	45,169			27,879			76,666			51,147
Preferred dividends	—			(13		)	—			(26		)
Net income available to common stockholders	$	45,169		$	27,866		$	76,666		$	51,121

Key Performance Ratios
Annualized return on average assets	1.55		%	1.05		%	1.35		%	1.01		%
Annualized return on average common equity (GAAP)	12.56		%	9.81		%	11.13		%	9.58		%
Annualized return on average tangible common equity (non-GAAP)⁽¹⁾	19.52		%	15.50		%	17.49		%	14.70		%
Annualized ratio of net charge-offs to average loans	0.19		%	0.12		%	0.12		%	0.10		%
Annualized net interest margin (GAAP)	4.06		%	4.23		%	4.09		%	4.21		%
Annualized net interest margin, fully tax-equivalent (non-GAAP)⁽¹⁾	4.10		%	4.30		%	4.14		%	4.28		%
Efficiency ratio, fully tax-equivalent (non-GAAP)⁽¹⁾	64.81		%	64.94		%	65.01		%	66.48		%

Reconciliation of Annualized Return on Average Tangible Common Equity (non-GAAP)
Net income available to common shareholders (GAAP)	$	45,169		$	27,866		$	76,666		$	51,121
Plus core deposit and customer relationship intangibles amortization, net of tax⁽²⁾	2,617			1,796			4,862			3,268
Adjusted net income available to common shareholders (non-GAAP)	$	47,786		$	29,662		$	81,528		$	54,389

Average common stockholders' equity (GAAP)	$	1,442,388		$	1,139,876		$	1,389,612		$	1,076,083
Less average goodwill	410,642			325,781			401,207			288,185
Less average other intangibles, net	49,868			46,363			48,188			41,961
Average tangible common equity (non-GAAP)	$	981,878		$	767,732		$	940,217		$	745,937
Annualized return on average common equity (GAAP)	12.56		%	9.81		%	11.13		%	9.58		%
Annualized return on average tangible common equity (non-GAAP)	19.52		%	15.50		%	17.49		%	14.70		%
Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP)
Net Interest Income (GAAP)	$	106,708		$	101,409		$	209,663		$	192,993
Plus tax-equivalent adjustment⁽²⁾	1,268			1,575			2,680			3,119
Net interest income - tax-equivalent (non-GAAP)	$	107,976		$	102,984		$	212,343		$	196,112

Average earning assets	$	10,552,166		$	9,614,800		$	10,342,229		$	9,238,391
Net interest margin (GAAP)	4.06		%	4.23		%	4.09		%	4.21		%
Net interest margin, fully tax-equivalent (non-GAAP)	4.10		%	4.30		%	4.14		%	4.28		%



FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share data)	Three Months Ended June 30,						Six Months Ended June 30,
Reconciliation of Efficiency Ratio (non-GAAP)
Net interest income (GAAP)	$	106,708		$	101,409		$	209,663		$	192,993
Plus tax-equivalent adjustment⁽²⁾	1,268			1,575			2,680			3,119
Fully tax-equivalent net interest income	107,976			102,984			212,343			196,112
Noninterest income	32,061			27,634			58,778			52,350
Securities (gains)/losses, net	(3,580		)	259			(5,155		)	(1,182		)
Unrealized gain on equity securities, net	(112		)	(71		)	(370		)	(43		)
Valuation adjustment on servicing rights	364			216			953			218
Adjusted income (non-GAAP)	$	136,709		$	131,022		$	266,549		$	247,455

Total noninterest expenses (GAAP)	$	75,098		$	88,882		$	163,328		$	172,528
Less:
Core deposit and customer relationship intangibles amortization	3,313			2,274			6,155			4,137
Partnership investment in tax credit projects	1,465			—			1,940			—
(Gain)/loss on sales/valuations of assets, net	(18,286		)	1,528			(21,290		)	1,331
Restructuring expenses	—			—			3,227			2,564
Adjusted noninterest expenses (non-GAAP)	$	88,606		$	85,080		$	173,296		$	164,496

Efficiency ratio, fully tax-equivalent (non-GAAP)	64.81		%	64.94		%	65.01		%	66.48		%

(1) Refer to the "Non-GAAP Financial Measures" section after these financial tables for additional information on the usage and presentation of these non-GAAP measures, and refer to these financial tables for the reconciliations to the most directly comparable GAAP measures.
(2) Computed on a tax-equivalent basis using an effective tax rate of 21%.

FINANCIAL HIGHLIGHTS, continued


(Dollars in thousands, except per share data)	As Of and For the Quarter Ended															As Of and For the Quarter Ended
	9/30/2017			6/30/2017			3/31/2017			12/31/2016			9/30/2016			6/30/2019			3/31/2019			12/31/2018			9/30/2018			6/30/2018
BALANCE SHEET DATA
Investments	$	2,372,916		$	2,070,121		$	2,175,701		$	2,131,086		$	1,943,080		$	2,681,419		$	2,516,055		$	2,715,388		$	2,540,779		$	2,468,113
Loans held for sale	35,795			48,848			49,009			61,261			78,317			34,575			69,716			119,801			77,727			55,684
Total loans receivable⁽¹⁾	6,373,415			5,325,082			5,361,604			5,351,719			5,438,715			7,853,051			7,331,544			7,407,697			7,365,493			7,477,697
Allowance for loan losses	54,885			54,051			54,999			54,324			54,653			63,850			62,639			61,963			61,221			61,324
Total assets	9,755,627			8,204,721			8,361,845			8,247,079			8,202,215			12,160,290			11,312,495			11,408,006			11,335,132			11,301,920
Total deposits(2)	8,231,884			6,930,169			7,089,861			6,847,411			6,912,693			10,108,557			9,352,942			9,396,429			9,512,163			9,489,144
Long-term obligations	301,473			281,096			282,051			288,534			294,493			282,863			268,312			274,905			277,563			258,708
Preferred equity	938			938			938			1,357			1,357			—			—			—			—			938
Common stockholders’ equity	980,746			805,032			780,374			739,559			703,031			1,521,787			1,372,102			1,325,175			1,280,393			1,254,809

Common Share Data
Book value per common share (GAAP)	$	32.75		$	30.15		$	29.26		$	28.31		$	28.48		$	41.48		$	39.65		$	38.44		$	37.14		$	36.44
Tangible book value per common share (non-GAAP)⁽²⁾⁽³⁾	$	23.61		$	24.00		$	23.05		$	22.55		$	22.34		$	28.40		$	27.04		$	25.70		$	24.33		$	23.53
ASC 320 effect on book value per common share	$	(0.67	)	$	(0.87	)	$	(1.06	)	$	(1.15	)	$	0.03
Common shares outstanding, net of treasury stock	29,946,069			26,701,226			26,674,121			26,119,929			24,681,380			36,690,061			34,603,611			34,477,499			34,473,029			34,438,445
Tangible common equity ratio (non-GAAP)⁽³⁾	7.46		%	7.97		%	7.50		%	7.28		%	6.85		%	8.92		%	8.60		%	8.08		%	7.70		%	7.46		%

Reconciliation of Tangible Book Value Per Common Share (non-GAAP)⁽⁴⁾
Reconciliation of Tangible Book Value Per Common Share (non-GAAP)
Common stockholders' equity (GAAP)	$	980,746		$	805,032		$	780,374		$	739,559		$	703,031		$	1,521,787		$	1,372,102		$	1,325,175		$	1,280,393		$	1,254,809
Less goodwill	236,615			141,461			141,461			127,699			127,699			427,097			391,668			391,668			391,668			391,668
Less core deposit intangibles and customer relationship intangibles, net	37,028			22,850			24,068			22,775			23,922
Less core deposit and customer relationship intangibles, net																52,718			44,637			47,479			50,071			52,698
Tangible common stockholders' equity (non-GAAP)	$	707,103		$	640,721		$	614,845		$	589,085		$	551,410		$	1,041,972		$	935,797		$	886,028		$	838,654		$	810,443

Common shares outstanding, net of treasury stock	29,946,069			26,701,226			26,674,121			26,119,929			24,681,380			36,690,061			34,603,611			34,477,499			34,473,029			34,438,445
Common stockholders' equity (book value) per share (GAAP)	$	32.75		$	30.15		$	29.26		$	28.31		$	28.48		$	41.48		$	39.65		$	38.44		$	37.14		$	36.44
Tangible book value per common share (non-GAAP)	$	23.61		$	24.00		$	23.05		$	22.55		$	22.34		$	28.40		$	27.04		$	25.70		$	24.33		$	23.53

Reconciliation of Tangible Common Equity Ratio (non-GAAP)⁽⁵⁾
Reconciliation of Tangible Common Equity Ratio (non-GAAP)
Tangible common stockholders' equity (non-GAAP)																$	1,041,972		$	935,797		$	886,028		$	838,654		$	810,443

Total assets (GAAP)	$	9,755,627		$	8,204,721		$	8,361,845		$	8,247,079		$	8,202,215		$	12,160,290		$	11,312,495		$	11,408,006		$	11,335,132		$	11,301,920
Less goodwill	236,615			141,461			141,461			127,699			127,699			427,097			391,668			391,668			391,668			391,668
Less core deposit intangibles and customer relationship intangibles, net	37,028			22,850			24,068			22,775			23,922
Less core deposit and customer relationship intangibles, net																52,718			44,637			47,479			50,071			52,698
Total tangible assets (non-GAAP)	$	9,481,984		$	8,040,410		$	8,196,316		$	8,096,605		$	8,050,594		$	11,680,475		$	10,876,190		$	10,968,859		$	10,893,393		$	10,857,554
Tangible common equity ratio (non-GAAP)	7.46		%	7.97		%	7.50		%	7.28		%	6.85		%	8.92		%	8.60		%	8.08		%	7.70		%	7.46		%
																															(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.
(2) Excludes deposits held for sale.																(2) Excludes deposits held for sale.
(3) Refer to the "Non-GAAP Financial Measures" section after these financial tables for additional information on the usage and presentation of these non-GAAP measures, and refer to these financial tables for the reconciliations to the most directly comparable GAAP measures.																(3) Refer to the "Non-GAAP Financial Measures" section after these financial tables for additional information on the usage and presentation of these non-GAAP measures, and refer to these financial tables for the reconciliations to the most directly comparable GAAP measures.

Non-GAAP Financial Measures

This Quarterly Report on Form 10-Q contains references to financial measures which are not defined by generally accepted accounting principles ("GAAP"). Management believes the non-GAAP measures are helpful for investors to analyze and evaluate Heartland's financial condition and operating results. However, these non-GAAP measures have inherent limitations and should not be considered a substitute for operating results determined in accordance with GAAP. Additionally, because non-GAAP measures are not standardized, it may not be possible to compare the non-GAAP measures presented in this section with other companies' non-GAAP measures. Reconciliations of each non-GAAP measure to the most directly comparable GAAP measure may be found in the financial tables above.

The non-GAAP measures presented in this Quarterly Report on Form 10-Q, management's reason for including each measure and the method of calculating each measure are presented below:

Annualized return on average tangible common equity is net income available to common stockholders plus core deposit and customer relationship intangibles amortization, net of tax, divided by average common stockholders' equity less goodwill and core deposit and customer relationship intangibles, net. This measure is included as it is considered to be a critical metric to analyze and evaluate financial condition and capital strength.

Annualized net interest margin, fully tax-equivalent, adjusts net interest income for the tax-favored status of certain loans and securities. Management believes this measure enhances the comparability of net interest income arising from taxable and tax-exempt sources.

Efficiency ratio, fully tax equivalent, expresses noninterest expenses as a percentage of fully tax-equivalent net interest income and noninterest income. This efficiency ratio is presented on a tax-equivalent basis which adjusts net interest income and noninterest expenses for the tax favored status of certain loans, securities, and tax credit projects. Management believes the presentation of this non-GAAP measure provides supplemental useful information for proper understanding of the financial results as it enhances the comparability of income and expenses arising from taxable and nontaxable sources and excludes specific items as noted in reconciliation contained in this Quarterly Report on Form 10-Q.

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 measure is included as it is considered to be a critical metric to analyze and evaluate use of equity, financial condition and capital strength.

Tangible common equity ratio is total common stockholders' equity less goodwill and core deposit and customer relationship intangibles, net, divided by total assets less goodwill and core deposit and customer relationship intangibles, net. This measure is included as it is considered to be a critical metric to analyze and evaluate use of equity, financial condition and capital strength.

RESULTS OF OPERATIONS

Net Interest Margin and Net Interest Income

Net interest margin, expressed as a percentage of average earning assets, was 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 third quarter of 2016. Heartland's success in maintaining competitive net interest margin has been the result of ~~improved yield on~~an increase in average earning assets and ~~continuous loan~~a favorable deposit mix for the quarters ended June 30, 2019 and ~~deposit pricing discipline.~~2018 and the six-month periods ended June 30, 2019 and 2018. 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. Growth in interest income on a tax-equivalent basis was primarily due to recent increases in market interest rates and the increase in average earning assets primarily from recent acquisitions. Increases in total interest expense were primarily due to recent increases in market interest rates and deposit growth from recent acquisitions. See "Analysis of Average Balances, Tax-Equivalent Yields and Rates" for ~~a description of our use of~~information relating to Heartland's net interest income on a fully tax-equivalent basis, which is not defined by ~~GAAP, and~~GAAP. Refer to the financial highlights above for a reconciliation of annualized net interest margin on a fully tax-equivalent basis to GAAP.

~~Interest~~For the Quarters ended June 30, 2019 and 2018

Net interest margin, expressed as a percentage of average earning assets, was 4.06% (4.10% on a fully tax-equivalent basis) during the second quarter of 2019, compared to 4.23% (4.30% on a fully tax-equivalent basis) during the second quarter of 2018. For the second quarter of 2019, Heartland's net interest margin included 18 basis points of purchase accounting discount amortization compared to 17 basis points in the same quarter of 2018.

Total interest income for the ~~third~~second quarter of ~~2017~~2019 was ~~$99.0~~$127.0 million, an increase of ~~$17.3~~$13.6 million or ~~21%~~12%, compared to ~~$81.7~~$113.4 million recorded in the ~~third~~second quarter of ~~2016.~~2018. The tax-equivalent adjustments for income taxes saved on the interest earned on nontaxable securities and loans were ~~$3.9~~$1.3 million for the ~~third~~second quarter of ~~2017~~2019 and ~~$3.2~~$1.6 million for the ~~third~~second quarter of ~~2016.~~2018. With these adjustments, total interest income on a tax-equivalent basis was ~~$102.9~~$128.3 million for the ~~third~~second quarter of ~~2017,~~2019, an increase of ~~$18.0~~$13.3 million or ~~21%~~12%, compared to ~~$84.9~~$115.0 million for the ~~third~~second quarter of ~~2016. The increase in interest income on a fully tax-equivalent basis in~~2018.

Average earning assets increased $937.4 million or 10% to $10.55 billion from $9.61 billion the ~~third~~second 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 2016.2018. The average interest rate ~~earned~~ on ~~average~~ earning assets increased 108 basis points to ~~4.68%~~4.88% for the ~~third~~second quarter of ~~2017~~2019 compared to ~~4.58%~~4.80% for the same quarter in ~~2016.~~2018.

Total interest expense for the second quarter of 2019 was $20.3 million, an increase of $8.3 million or 69% from $12.0 million in the second quarter of 2018. The average interest rate paid on savings deposits was 0.89% during the second quarter of 2019 compared to 0.47% for the second quarter of 2018, and the average interest rate paid on time deposits was 1.49% for the second quarter of 2019 compared to 0.94% for the second quarter of 2018. The average interest rate paid on Heartland's borrowings was 4.52% for the second quarter of 2019 compared to 3.88% in the second quarter of 2018.

For the ~~first nine months~~quarter ended June 30, 2019, average interest bearing liabilities were $6.87 billion, an increase of ~~2017,~~$667.3 million or 11%, from $6.21 billion for the quarter ended June 30, 2018. Average interest bearing deposits increased $713.3 million or 12% to $6.50 billion for the quarter ended June 30, 2019, from $5.79 billion in the same quarter in 2018. Average borrowings decreased $46.0 million or 11% to $369.3 million during the second quarter of 2019 from $415.3 million during the same quarter in 2018. The increase in Heartland's average interest bearing liabilities is primarily attributable to recent acquisitions.

Net interest income increased ~~$17.9~~$5.3 million or 7%5% to ~~$261.6~~$106.7 million in the second quarter of 2019 from ~~$243.7~~$101.4 million in the second quarter of 2018. After the tax-equivalent adjustment discussed above, net interest income on a tax-equivalent basis totaled $108.0 million during the second quarter of 2019, an increase of $5.0 million or 5% from $103.0 million during the second quarter of 2018.

For the Six Months Ended June 30, 2019 and 2018

Net interest margin, expressed as a percentage of average earning assets, was 4.09% (4.14% on a fully tax-equivalent basis) during the six-month period ended June 30, 2019, compared to 4.21% (4.28% on a fully tax-equivalent basis) during the same period of 2018. For the six months ended June 30, 2019, Heartland's net interest margin included 17 basis points of purchase accounting discount amortization compared to 19 basis points for the same period of 2018.

Total interest income for the first ~~nine~~six months of ~~2016.~~2019 was $247.7 million, an increase of $33.1 million or 15%, compared to $214.6 million recorded in the first six months of 2018. The tax-equivalent adjustments for income taxes saved on the interest earned on nontaxable securities and loans were ~~$11.6 million and $9.4~~$2.7 million for the first ~~nine~~six months of ~~2017~~2019 and ~~2016, respectively.~~$3.1 million for the same period of 2018. With these adjustments, total interest income on a tax-equivalent basis was ~~$273.2~~$250.4 million ~~during~~for the first ~~nine~~six months of ~~2017 compared to $253.1 million during the first nine months of 2016,~~2019, an increase of ~~$20.1~~$32.7 million or ~~8%. For~~15%, compared to $217.7 million for the first ~~nine~~six months of 2017, average earning assets were $7.94 billion compared to $7.37 billion during the first nine months of 2016, an increase of $574.0 million or 8%. Excluding $521.2 million of average earning assets attributable to the acquisitions completed in 2017, average2018.

Average earning assets increased ~~$52.8 million~~$1.10 billion or 1%12% to $10.34 billion for the first ~~nine~~six months of ~~2017~~2019 from $9.24 billion for the first six months of 2018. The average interest rate on earning assets increased 13 basis points to 4.88% for the first six months quarter 2019 compared to 4.75% for the same period in ~~2016.~~2018.

~~Interest~~Total interest expense for the ~~third quarter of 2017~~six-month period ended June 30, 2019 was ~~$9.1~~$38.1 million, an increase of ~~$1.1~~$16.4 million or ~~14%~~76% from ~~$8.0~~$21.6 million in the ~~third quarter of 2016. For the quarter~~six-month period ended ~~September~~June 30, 2017, average interest bearing liabilities were $5.70 billion, an increase of $473.5 million or 9%, from $5.22 billion for the quarter ended September 30, 2016. 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 increased 5 basis points to 0.39% for the third quarter of 2017 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 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 increased $60.1 million or 1% for the first nine months of 2017 compared to the first nine months in 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 liabilities declined 1 basis point to 0.60% for the first nine months of 2017 from 0.61% for the first nine months of 2016.2018. The average interest rate paid on savings deposits was ~~0.26% for the first nine months of 2017 compared to 0.22% for the first nine months of 2016,~~0.85%, and the average interest rate paid on time deposits was ~~0.79%~~1.37% during the first six months of 2019 compared to 0.41% and 0.91%, respectively, for the ~~nine-month period ended September 30, 2017 compared to 0.80% for the same period in 2016.~~first six months of 2018. The average interest rate paid on Heartland's borrowings ~~increased 37 basis points to 3.06%~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2017 compared to 2.69%~~2019 and 2018, was 4.21% and 3.77%, respectively.

For the first six months of 2019, average interest bearing liabilities were $6.75 billion, an increase of $796.8 million or 13%, from $5.95 billion for the ~~nine~~same period of 2018. Average interest bearing deposits increased $800.9 million or 14% to $6.33 billion for the six months ended ~~September~~June 30, ~~2016.~~2019, from $5.53 billion in the first six months of 2018. Average borrowings decreased $4.1 million or 1% to $417.5 million during the first six months of 2019 from $421.6 million during the same period in 2018.

Net interest income increased ~~$16.2~~$16.7 million or ~~22%~~9% to ~~$89.8~~$209.7 million in the ~~third quarter~~first six months of ~~2017~~2019 from ~~$73.7~~$193.0 million recorded in the ~~third quarter~~first six months of ~~2016.~~2018. After the tax-equivalent adjustment discussed above, net interest income on a tax-equivalent basis totaled $93.8 million during the third quarter of 2017, an increase of $16.9 million or 22% from $76.9 million during the third quarter of 2016. For the first nine months of 2017, net interest income increased $17.9 million or 8% to $237.5 million from $219.5 million recorded in the first nine months of 2016. After the tax-equivalent adjustment discussed above, net interest income on a tax-equivalent basis totaled $249.0$212.3 million during the first ~~nine~~six months of ~~2017,~~2019, an increase of ~~$20.1~~$16.2 million or 9%8% from ~~$228.9~~$196.1 million ~~recorded~~ during the ~~first nine months~~same period of ~~2016.~~2018.

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~~produces and reviews simulations of various interest rate scenarios to assist in monitoring its ~~net~~exposure to interest ~~income~~rate risk. Based on these simulations, ~~reflect~~it is management's opinion that Heartland maintains a well-balanced and manageable interest rate posture. 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 Quarterly Report on 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~~tables set forth certain information relating to Heartland's average consolidated balance sheets and ~~reflects~~reflect 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 favorable tax ~~favorable~~ treatment are evaluated on a tax-equivalent basis assuming a federal income tax rate of ~~35%~~21%. ~~Tax favorable~~Tax-favored 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~~favored 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)

	For the Quarter Ended
	June 30, 2019							March 31, 2019							June 30, 2018
	Average Balance			Interest		Rate		Average Balance			Interest		Rate		Average Balance			Interest		Rate
Earning Assets
Securities:
Taxable	$	2,217,863		$	16,123	2.92	%	$	2,169,016		$	15,876	2.97	%	$	1,890,468		$	12,270	2.60	%
Nontaxable⁽¹⁾	324,164			3,233		4.00		391,724			3,915		4.05		448,844			4,537		4.05
Total securities	2,542,027			19,356		3.05		2,560,740			19,791		3.13		2,339,312			16,807		2.88
Interest on deposits with other banks and other short-term investments	424,262			2,299		2.17		218,445			1,292		2.40		211,414			768		1.46
Federal funds sold	—			—		—		560			4		2.90		—			—		—
Loans:⁽²⁾
Commercial and commercial real estate⁽¹⁾	5,968,424			82,328		5.53		5,745,180			78,083		5.51		5,403,447			71,301		5.29
Residential mortgage	676,465			8,238		4.88		673,682			7,179		4.32		685,005			7,562		4.43
Agricultural and agricultural real estate⁽¹⁾	558,128			7,581		5.45		554,506			7,301		5.34		542,249			6,850		5.07
Consumer	445,545			6,517		5.87		439,487			6,479		5.98		492,481			9,192		7.49
Fees on loans				1,952		—					2,004		—					2,504		—
Less: allowance for loan losses	(62,685		)	—		—		(62,643		)	—		—		(59,108		)	—		—
Net loans	7,585,877			106,616		5.64		7,350,212			101,046		5.58		7,064,074			97,409		5.53
Total earning assets	10,552,166			128,271		4.88	%	10,129,957			122,133		4.89	%	9,614,800			114,984		4.80	%
Nonearning Assets	1,156,372							1,137,257							1,028,506
Total Assets	$	11,708,538						$	11,267,214						$	10,643,306
Interest Bearing Liabilities⁽³⁾
Savings	$	5,360,355		$	11,895	0.89	%	$	5,121,179		$	10,083	0.80	%	$	4,748,306		$	5,535	0.47	%
Time deposits	1,142,842			4,243		1.49		1,034,744			3,130		1.23		1,041,590			2,448		0.94
Short-term borrowings	92,977			338		1.46		195,390			889		1.85		152,576			547		1.44
Other borrowings	276,275			3,819		5.54		270,836			3,664		5.49		262,715			3,470		5.30
Total interest bearing liabilities	6,872,449			20,295		1.18	%	6,622,149			17,766		1.09	%	6,205,187			12,000		0.78	%
Noninterest Bearing Liabilities⁽³⁾
Noninterest bearing deposits	3,287,559							3,200,281							3,229,049
Accrued interest and other liabilities	106,142							108,534							68,256
Total noninterest bearing liabilities	3,393,701							3,308,815							3,297,305
Stockholders' Equity	1,442,388							1,336,250							1,140,814
Total Liabilities and Stockholders' Equity	$	11,708,538						$	11,267,214						$	10,643,306
Net interest income, fully tax-equivalent (non-GAAP)⁽¹⁾				$	107,976						$	104,367						$	102,984
Net interest spread⁽¹⁾						3.70	%						3.80	%						4.02	%
Net interest income, fully tax-equivalent (non-GAAP) to total earning assets						4.10	%						4.18	%						4.30	%

(1) Computed on a tax-equivalent basis using an effective tax rate of 21%.
(2) Nonaccrual loans and loans held for sale are included in the average loans outstanding.
(3) Includes deposits held for sale.


ANALYSIS OF AVERAGE BALANCES, TAX-EQUIVALENT YIELDS AND RATES⁽¹⁾ (Dollars in thousands)
ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES ⁽¹⁾																	ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES ⁽¹⁾
DOLLARS IN THOUSANDS																	DOLLARS IN THOUSANDS

	For the Quarter Ended																For the Six Months Ended
	September 30, 2017								September 30, 2016								June 30, 2019							June 30, 2018
	Average Balance			Interest			Rate		Average Balance			Interest			Rate		Average Balance			Interest		Rate		Average Balance			Interest		Rate
Earning Assets
Securities:
Taxable	$	1,667,076		$	10,394		2.47	%	$	1,415,446		$	7,917		2.23	%	$	2,193,576		$	31,999	2.94	%	$	1,847,858		$	23,847	2.60	%
Nontaxable⁽¹⁾	643,925			7,825			4.82		473,152			5,719			4.81		357,757			7,148		4.03		448,743			9,067		4.07
Total securities	2,311,001			18,219			3.13		1,888,598			13,636			2.87		2,551,333			39,147		3.09		2,296,601			32,914		2.89
Interest bearing deposits with the Federal Reserve Bank and other banks and other short-term investments	164,809			558			1.34		7,026			6			0.34
Interest bearing deposits with other banks and other short-term investments																	321,922			3,591		2.25		173,349			1,175		1.37
Federal funds sold	18,874			34			0.71		1,409			1			0.28		278			4		2.90		—			—		—
Loans:⁽²⁾
Commercial and commercial real estate⁽¹⁾	4,647,414			59,121			5.05		3,908,623			48,334			4.92		5,857,419			160,411		5.52		5,158,483			134,114		5.24
Residential mortgage	683,186			7,300			4.24		717,374			7,248			4.02		675,081			15,417		4.61		663,711			14,413		4.38
Agricultural and agricultural real estate⁽¹⁾	504,970			6,175			4.85		486,008			5,719			4.68		556,327			14,882		5.39		528,093			12,854		4.91
Consumer	450,694			9,032			7.95		426,083			8,256			7.71		442,533			12,996		5.92		475,731			17,852		7.57
Fees on loans				2,464			—		—			1,708			—					3,956		—					4,420		—
Less: allowance for loan losses	(54,720		)	—			—		(52,261		)	—			—		(62,664		)	—		—		(57,577		)	—		—
Net loans	6,231,544			84,092			5.35		5,485,827			71,265			5.17		7,468,696			207,662		5.61		6,768,441			183,653		5.47
Total earning assets	8,726,228			102,903			4.68	%	7,382,860			84,908			4.58	%	10,342,229			250,404		4.88	%	9,238,391			217,742		4.75	%
Nonearning Assets	913,616								789,823								1,146,866							965,670
Total Assets	$	9,639,844							$	8,172,683							$	11,489,095						$	10,204,061
Interest Bearing Liabilities
Interest Bearing Liabilities⁽³⁾
Savings	$	4,205,946		$	3,162		0.30	%	$	3,697,426		$	2,066		0.22	%	$	5,241,428		$	21,978	0.85	%	$	4,554,484		$	9,326	0.41	%
Time, $100,000 and over	408,560			787			0.76		399,498			813			0.81
Other time deposits	573,178			1,124			0.78		570,445			1,122			0.78
Time deposits																	1,089,091			7,373		1.37		975,129			4,423		0.91
Short-term borrowings	209,795			271			0.51		258,783			235			0.36		143,901			1,227		1.72		150,171			815		1.09
Other borrowings	300,234			3,790			5.01		298,020			3,770			5.03		273,570			7,483		5.52		271,391			7,066		5.25
Total interest bearing liabilities	5,697,713			9,134			0.64	%	5,224,172			8,006			0.61	%	6,747,990			38,061		1.14	%	5,951,175			21,630		0.73	%
Noninterest Bearing Liabilities
Noninterest Bearing Liabilities⁽³⁾
Noninterest bearing deposits	2,912,344								2,171,965								3,244,161							3,107,552
Accrued interest and other liabilities	74,338								84,142								107,332							68,313
Total noninterest bearing liabilities	2,986,682								2,256,107								3,351,493							3,175,865
Stockholders' Equity	955,449								692,404								1,389,612							1,077,021
Total Liabilities and Stockholders' Equity	$	9,639,844							$	8,172,683							$	11,489,095						$	10,204,061
Net interest income, fully tax-equivalent (non-GAAP)⁽¹⁾				$	93,769							$	76,902							$	212,343						$	196,112
Net interest spread⁽¹⁾							4.04	%							3.97	%						3.74	%						4.02	%
Net interest income, fully tax-equivalent (non-GAAP) to total earning assets⁽³⁾							4.26	%							4.14	%
Interest bearing liabilities to earning assets	65.29		%						70.76		%
Net interest income, fully tax-equivalent (non-GAAP) to total earning assets																						4.14	%						4.28	%

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

Average Earning Assets	$	8,726,228							$	7,382,860
Annualized net interest margin (GAAP)							4.08	%							3.97	%
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%
(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.
(1) Computed on a tax-equivalent basis using an effective tax rate of 21%.																	(1) Computed on a tax-equivalent basis using an effective tax rate of 21%.
(2) Nonaccrual loans and loans held for sale are included in the average loans outstanding.																	(2) Nonaccrual loans and loans held for sale are included in the average loans outstanding.
(3) Includes deposits held for sale.																	(3) Includes deposits held for sale.

ANALYSIS OF AVERAGE BALANCES, TAX-EQUIVALENT YIELDS AND RATES⁽¹⁾
(Dollars in thousands)
For the Nine Months Ended
September 30, 2017 September 30, 2016
Average
Balance Interest Rate Average
Balance Interest Rate
Earning Assets
Securities:
Taxable $ 1,545,091
$ 27,246
2.36 % $ 1,464,080
$ 24,604
2.24 %
Nontaxable⁽¹⁾
638,119
23,534
4.93
440,275
16,605
5.04
Total securities 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 127,870
1,112
1.16
9,785
13
0.18
Federal funds sold 6,885
37
0.72
12,509
12
0.13
Loans:⁽²⁾

Commercial and commercial real estate⁽¹⁾
4,097,967
151,946
4.96
3,840,060
141,977
4.94
Residential mortgage 654,488
20,492
4.19
751,694
23,133
4.11
Agricultural and agricultural real estate⁽¹⁾
492,170
17,536
4.76
478,564
16,952
4.73
Consumer 434,995
25,374
7.80
422,869
24,452
7.72
Fees on loans 5,894
—
5,362
—
Less: allowance for loan losses (54,775 ) —
—
(50,980 ) —
—
Net loans 5,624,845
221,242
5.26
5,442,207
211,876
5.20
Total earning assets 7,942,810
273,171
4.60 % 7,368,856
253,110
4.59 %
Nonearning Assets 797,893
767,636

Total Assets $ 8,740,703
$ 8,136,492

Interest Bearing Liabilities
Savings $ 3,976,403
$ 7,772
0.26 % $ 3,651,370
$ 5,988
0.22 %
Time, $100,000 and over 369,595
2,239
0.81
439,609
2,417
0.73
Other time deposits 512,551
2,955
0.77
599,745
3,790
0.84
Short-term borrowings 199,503
498
0.33
314,367
1,083
0.46
Other borrowings 288,774
10,674
4.94
281,617
10,918
5.18
Total interest bearing liabilities 5,346,826
24,138
0.60 % 5,286,708
24,196
0.61 %
Noninterest Bearing Liabilities
Noninterest bearing deposits 2,494,850
2,084,379

Accrued interest and other liabilities 64,824
78,093

Total noninterest bearing liabilities 2,559,674
2,162,472

Stockholders' Equity 834,203
687,312

Total Liabilities and Stockholders' Equity $ 8,740,703
$ 8,136,492

Net interest income, fully tax-equivalent (non-GAAP)⁽¹⁾
$ 249,033
$ 228,914

Net interest spread⁽¹⁾
4.00 % 3.98 %
Net interest income, fully tax-equivalent (non-GAAP) to total earning assets⁽³⁾
4.19 % 4.15 %
Interest bearing liabilities to earning assets 67.32 % 71.74 %

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

Net interest income, fully tax-equivalent (non-GAAP) $ 249,033
$ 228,914

Adjustments for tax-equivalent interest⁽¹⁾
(11,581 ) (9,408 )
Net interest income (GAAP) $ 237,452
$ 219,506

Average Earning Assets $ 7,942,810
$ 7,368,856

Annualized net interest margin (GAAP) 4.00 % 3.98 %
Annualized net interest margin, fully tax-equivalent (non-GAAP) 4.19 % 4.15 %

(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 $5.7~~increased $87,000 to $4.9 million for the ~~third~~second quarter of ~~2017~~2019 compared to ~~$5.3~~$4.8 million for the ~~third~~second quarter of ~~2016.~~2018. For the ~~first nine~~six months ~~of 2017, the~~ended June 30, 2019, provision ~~for loan losses was $10.2~~expense totaled $6.6 million compared to ~~$9.5~~$9.1 million for the same period of 2018.

The impact of the Citizen's Finance loan portfolios resulted in net recoveries of $535,000 in the second quarter of 2019 and $628,000 of net recoveries for the first six months of 2019, compared to net charge-offs of $769,000 in the second quarter of 2018

and $1.5 million for the first ~~nine~~six months of ~~2016. In determining that the allowance for loan losses is appropriate, management uses factors that include the overall composition~~2018. As a result of the sale of the Citizen's Finance loan ~~portfolio, general economic conditions, types~~portfolios, Heartland recorded negative provision expense of ~~loans,~~$535,000 and $628,000 for the second quarter of 2019 and first six months of 2019, respectively, Provision expense related to the Citizen's Finance loan ~~collateral values, past loss experience,~~portfolios of $738,000 and $1.5 million, respectively, was recorded for the same periods of 2018. This was a change to provision expense of $1.3 million and $2.2 million for the three- and six-months ended June 30, 2019, respectively, for the Citizen's Finance loan ~~delinquencies, substandard credits, and doubtful credits.~~ portfolios.

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,~~2018, 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.

During the first nine months of 2017, Heartland’s credit quality 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 $9.7 million compared to $3.5 million for the same period in 2016. Included in the 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 consumer finance subsidiary. During the nine months ended September 30, 2016, a recovery of $2.3 million was recorded on a previously charged-off loan.

Heartland believes the allowance for loan losses as of ~~September~~June 30, ~~2017,~~2019, was at a level commensurate with the overall risk exposure of the loan portfolio. However, if economic conditions should ~~become more unfavorable,~~deteriorate, 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 tables below show Heartland's noninterest income for the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2017~~2019, and ~~2016,~~2018, in thousands:


	Three Months Ended September 30,									Three Months Ended June 30,
	2017		2016		Change			% Change		2019			2018			Change			% Change
Service charges and fees	$	10,138	$	8,278	$	1,860		22	%	$	14,629		$	12,072		$	2,557		21	%
Loan servicing income	1,161		873		288			33		1,338			1,807			(469		)	(26	)
Trust fees	3,872		3,689		183			5		4,825			4,615			210			5
Brokerage and insurance commissions	950		1,006		(56		)	(6	)	1,028			877			151			17
Securities gains, net	1,679		1,584		95			6
Securities gains/(losses), net										3,580			(259		)	3,839			1,482
Unrealized gain on equity securities, net										112			71			41			58
Net gains on sale of loans held for sale	4,997		11,459		(6,462		)	(56	)	4,343			6,800			(2,457		)	(36	)
Valuation adjustment on commercial servicing rights	5		5		—			—
Valuation adjustment on servicing rights										(364		)	(216		)	(148		)	69
Income on bank owned life insurance	766		620		146			24		888			700			188			27
Other noninterest income	1,409		1,028		381			37		1,682			1,167			515			44
Total noninterest income	$	24,977	$	28,542	$	(3,565	)	(12	)%	$	32,061		$	27,634		$	4,427		16	%


	Nine Months Ended September 30,										Six Months Ended June 30,
	2017		2016			Change			% Change		2019			2018			Change			% Change
Service charges and fees	$	29,291	$	23,462		$	5,829		25	%	$	27,423		$	22,151		$	5,272		24	%
Loan servicing income	4,236		3,433			803			23		3,067			3,561			(494		)	(14	)
Trust fees	11,482		11,127			355			3		9,299			9,295			4			—
Brokerage and insurance commissions	2,962		2,914			48			2		1,762			1,784			(22		)	(1	)
Securities gains, net	5,553		9,732			(4,179		)	(43	)	5,155			1,182			3,973			336
Unrealized gain on equity securities, net											370			43			327			760
Net gains on sale of loans held for sale	17,961		33,794			(15,833		)	(47	)	7,519			10,851			(3,332		)	(31	)
Valuation adjustment on commercial servicing rights	29		(41		)	70			(171	)
Valuation adjustment on servicing rights											(953		)	(218		)	(735		)	(337	)
Income on bank owned life insurance	2,039		1,733			306			18		1,787			1,314			473			36
Other noninterest income	2,941		2,992			(51		)	(2	)	3,349			2,387			962			40
Total noninterest income	$	76,494	$	89,146		$	(12,652	)	(14	)%	$	58,778		$	52,350		$	6,428		12	%

~~Noninterest~~

Total noninterest income totaled ~~$25.0~~$32.1 million during the ~~third~~second quarter of ~~2017~~2019 compared to ~~$28.5~~$27.6 million during the ~~third~~second quarter of ~~2016, a decrease~~2018, an increase of ~~$3.6~~$4.4 million or 16%. For the six months ended June 30, 2019, total noninterest income totaled $58.8 million compared to $52.4 million for the first six months of 2018, which was an increase of $6.4 million or 12%. ~~For the nine-month period ended on September 30,~~These increases reflected higher service charges and fees, net securities gains and other noninterest income, totaled $76.5 million during 2017 compared to $89.1 million during 2016, a decrease of $12.7 million or 14%. Decreases in noninterest income for both the quarterly and nine-month periods under comparison reflected lowerwhich were partially offset by decreased net gains on sale of loans held for sale ~~the effect of which was partially offset by~~and an increased ~~service charges and fees.~~valuation adjustment on servicing rights.

Service Charges and Fees

The following tables summarize the changes in service charges and fees for the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2017~~2019, and ~~2016,~~2018, in thousands:


	Three Months Ended September 30,									Three Months Ended June 30,
	2017		2016		Change			% Change		2019		2018		Change			% Change
Service charges and fees on deposit accounts	$	2,577	$	2,018	$	559		28	%	$	3,186	$	2,794	$	392		14	%
Overdraft fees	2,479		2,285		194			8		2,876		2,518		358			14
Customer service fees	102		55		47			85
Customer service and other service fees										84		88		(4		)	(5	)
Credit card fee income	1,994		1,290		704			55		4,270		3,114		1,156			37
Debit card income	2,985		2,629		356			14		4,213		3,558		655			18
Other service charges	1		1		—			—
Total service charges and fees	$	10,138	$	8,278	$	1,860		22	%	$	14,629	$	12,072	$	2,557		21	%

	Nine Months Ended September 30,									Six Months Ended June 30,
	2017		2016		Change			% Change		2019		2018		Change			% Change
Service charges and fees on deposit accounts	$	7,002	$	5,968	$	1,034		17	%	$	6,163	$	5,412	$	751		14	%
Overdraft fees	6,950		6,342		608			10		5,619		4,726		893			19
Customer service fees	217		161		56			35
Customer service and other service fees										166		166		—			—
Credit card fee income	6,212		3,431		2,781			81		7,619		5,381		2,238			42
Debit card income	8,908		7,532		1,376			18		7,856		6,466		1,390			21
Other service charges	2		27		(25		)	(93	)
Total service charges and fees	$	29,291	$	23,462	$	5,829		25	%	$	27,423	$	22,151	$	5,272		24	%

Total service charges and fees increased $2.6 million or 21% to $14.6 million during the second quarter of 2019 compared to $12.1 million during the second quarter of 2018. Total service charges and fees increased $5.3 million or 24% to $27.4 million during the first six months of 2019 compared to $22.2 million for the same period of 2018. Service charges and fees on deposit accounts increased ~~$1.9~~$392,000 or 14% to $3.2 million ~~or 22% to $10.1 million during~~for the ~~third~~second quarter of ~~2017~~2019 compared to ~~$8.3~~$2.8 million ~~recorded during~~for the ~~third~~second quarter of ~~2016 and $5.8 million or 25% to $29.3 million during~~2018. For the first ~~nine~~six months of ~~2017~~2019, service charges and fees on deposit accounts totaled $6.2 million compared to ~~$23.5~~$5.4 million for the first ~~nine~~six months of ~~2016. Increases in service charges~~2018, which was an increase of $751,000 or 14%. Overdraft fees increased $358,000 or 14% to $2.9 million for the second quarter of 2019 compared to $2.5 million for the second quarter of 2018, and overdraft fees increased $893,000 or 19% during the first six months of 2019 to $5.6 million compared to $4.7 million for the first six months of 2018. These increases were primarily attributable to a larger demand deposit customer base, a portion of which is attributable to the acquisitions completed in ~~2017.~~ 2018 and the first half of 2019.

Fees associated with credit card services were ~~$2.0~~$4.3 million during the ~~third~~second quarter of ~~2017~~2019 compared to ~~$1.3~~$3.1 million during the ~~third~~second quarter of ~~2016,~~2018, an increase of ~~$704,000~~$1.2 million or ~~55%~~37%. For the ~~first nine~~six months ~~of 2017, these fees were $6.2~~ended June 30, 2019, credit card fee income totaled $7.6 million, ~~compared to $3.4 million during the first nine months of 2016,~~which was an increase of ~~$2.8~~$2.2 million or ~~81%. This increase~~42% from $5.4 million recorded in the same period of 2018. These increases resulted primarily from efforts to increase the level of commercial credit card services provided at Heartland's subsidiary banks, including at the ~~newly~~recently acquired ~~banks in California and Colorado.~~banks. Heartland has focused on ~~growing~~expanding its card payment solutions for ~~businesses, particularly with its~~businesses. In particular, Heartland has introduced an expense management service that provides business customers the ability to more efficiently manage their card-based spending.

Debit card income increased $655,000 or 18% to $4.2 million for the second quarter of 2019 compared to $3.6 million for the second quarter of 2018. For the six months ended June 30, 2019, debit card income increased $1.4 million or 21% to $7.9 million from $6.5 million for the six months ended June 30, 2018. These increases are primarily attributable to a larger demand deposit customer base, a portion of which is attributable to recent acquisitions. Based on estimated calculations using 2018 debit card

income, Heartland estimates the impact of the Durbin Amendment, which Heartland was subject to effective July 1, 2019, will reduce debit card income by approximately $6.0 million on an annualized basis.

Loan Servicing Income

The following tables show the changes in loan servicing income for the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2017,~~2019, and ~~2016,~~2018, in thousands:


	Three Months Ended September 30,											Three Months Ended June 30,
	2017			2016			Change			% Change		2019			2018			Change			% Change
Commercial and agricultural loan servicing fees⁽¹⁾	$	684		$	730		$	(46	)	(6	)%	$	735		$	924		$	(189	)	(20	)%
Residential mortgage servicing fees	2,932			3,111			(179		)	(6	)	1,355			2,390			(1,035		)	(43	)
Mortgage servicing rights amortization	(2,455		)	(2,968		)	513			(17	)	(752		)	(1,507		)	755			50
Total loan servicing income	$	1,161		$	873		$	288		33	%	$	1,338		$	1,807		$	(469	)	(26	)%

	Nine Months Ended September 30,											Six Months Ended June 30,
	2017			2016			Change			% Change		2019			2018			Change			% Change
Commercial and agricultural loan servicing fees⁽¹⁾	$	2,101		$	2,197		$	(96	)	(4	)%	$	1,496		$	1,673		$	(177	)	(11	)%
Residential mortgage servicing fees	9,319			9,031			288			3		3,965			4,640			(675		)	(15	)
Mortgage servicing rights amortization	(7,184		)	(7,795		)	611			(8	)	(2,394		)	(2,752		)	358			13
Total loan servicing income	$	4,236		$	3,433		$	803		23	%	$	3,067		$	3,561		$	(494	)	(14	)%

(1) Includes servicing fees for commercial, commercial real estate, agricultural and agricultural real estate loans
(1) Includes servicing fees for commercial, commercial real estate, agricultural and agricultural real estate loans.												(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 ~~$1.2~~$1.3 million during the ~~third~~second quarter of ~~2017~~2019 compared to ~~$873,000~~$1.8 million during the ~~third~~second quarter of ~~2016, an increase~~2018, a decrease of ~~$288,000~~$469,000 or ~~33%~~26%. ~~On a nine-month comparative basis,~~For the six months ended June 30, 2019, loan servicing income totaled ~~$4.2~~$3.1 million, ~~during 2017~~which was a decrease of $494,000 or 14% from $3.6 million recorded in the same period of 2018. Due to the sale of the mortgage servicing rights portfolio of Dubuque Bank and Trust Company, which occurred on April 30, 2019, net loan servicing income related to residential mortgage loans is expected to decrease by approximately $100,000 per quarter in future quarters. This transaction does not impact the residential mortgage servicing portfolio of Heartland's PrimeWest Mortgage Corporation subsidiary.

Securities Gains, Net

Securities gains, net, totaled $3.6 million for the second quarter of 2019 compared to ~~$3.4 million during 2016,~~net securities losses of $259,000 for the second quarter of 2018, which was an increase of ~~$803,000 or 23%.~~$3.8 million. Securities gains, net, totaled $5.2 million and $1.2 million for the six months ended June 30, 2019 and 2018, respectively, which was an increase of $4.0 million. Heartland's net unrealized gain on securities available for sale totaled $9.7 million at June 30, 2019, compared to net unrealized losses of $60.9 million at June 30, 2018.

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.

Net Gains on Sale of Loans Held for Sale

~~The following table shows~~During the ~~activity related to the net gains on sales of loans held for sale during the three- and nine-month periods ended September 30, 2017, and 2016, in thousands:~~

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 $5.0 million during the third~~second quarter of ~~2017 compared to $11.5 million during the third quarter of 2016, a decrease of $6.5 million or 56%. During the first nine months of 2017,~~2019, net gains on sale of loans held for sale totaled ~~$18.0~~$4.3 million compared to ~~$33.8~~$6.8 million during the same period in ~~2016,~~2018, a decrease of ~~$15.8~~$2.5 million or ~~47%~~36%. ~~These~~

~~gains result primarily from~~For the ~~gain or loss~~six months ended June 30, 2019, net gains on sales of mortgage loans into the secondary market, related fees and fair value marks on the associated derivatives. Heartland has experienced weakened demand for mortgage loan refinancings as interest rates have increased. The percentage of residential mortgage loans that represented refinancings was 31% during the third quarter of 2017 compared to 38% in the third quarter of 2016. For the nine months ended September 30, 2017, mortgage loan refinancings were 30% of originations compared to 37% of originations during the first 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 ~~$176,000 during the third quarter of 2017~~$7.5 million compared to $398,000 during the third quarter of 2016. During the first nine months of 2017, gains on sale of commercial and agricultural loans totaled $565,000 compared to $1.7 million during the same period in 2016.

~~Securities Gains, Net~~

~~Securities gains, net, totaled $1.7~~$10.9 million for the ~~third quarter of 2017 compared to $1.6 million for the third quarter of 2016,~~six months ended June 30, 2018, which ~~is an increase of $95,000 or 6%. For the first nine months of 2017, securities gains, net, totaled $5.6 million compared to $9.7 million during the first nine months of 2016,~~was a decrease of ~~$4.2~~$3.3 million or ~~43%~~31%. These decreases were primarily due to the outsourcing of Heartland's legacy residential mortgage lending operations in the fourth quarter of 2018.

Other Noninterest Income

Other noninterest income totaled ~~$1.4~~$1.7 million and $1.2 million for the ~~third quarter of 2017 compared to $1.0 million for the third quarter of 2016, an~~quarters ended June 30, 2019 and 2018, respectively. The increase of ~~$381,000~~$515,000 or ~~37%. For the nine months ended September 30, 2017, other noninterest income decreased $51,000 or 2%~~44% was primarily attributable to ~~$2.9 million from $3.0 million recorded in the same period in 2016. During the third quarter~~a recovery of ~~2017, $357,000 of other noninterest income~~$266,000 on an acquired loan that was ~~recorded related to recoveries on acquired loans that had been~~ charged off prior to acquisition, reimbursement of $97,000 on loan collection expenses incurred in a prior period, and a write-up of $102,000 on a property transferred to other real estate at its appraised value. For the ~~acquisition dates.~~six months ended June 30, 2019, other noninterest income totaled $3.3 million compared to $2.4 million for the same period of 2018. This increase of $962,000 or 40% was primarily attributable to $368,000 from a death benefit on bank owned life insurance in the first quarter of 2019, as well as the items impacting the second quarter of 2019.

Noninterest ~~Expenses~~Expense

The tables below show Heartland's noninterest expenses for the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2017~~2019, and ~~2016,~~2018, in thousands:

Three Months Ended
September 30,
2017 2016 Change % Change
Salaries and employee benefits $ 45,225
$ 40,733
$ 4,492
11 %
Occupancy 6,223
5,099
1,124
22
Furniture and equipment 2,826
2,746
80
3
Professional fees 8,450
5,985
2,465
41
FDIC insurance assessments 894
1,180
(286 ) (24 )
Advertising 1,358
1,339
19
1
Core deposit intangibles and customer relationship intangibles amortization 1,863
1,291
572
44
Other real estate and loan collection expenses 581
640
(59 ) (9 )
Loss on sales/valuations of assets, net 1,342
794
548
69
Other noninterest expenses 9,997
8,620
1,377
16
Total noninterest expenses $ 78,759
$ 68,427
$ 10,332
15 %

Nine Months Ended
September 30,
2017 2016 Change % Change
Salaries and employee benefits $ 128,118
$ 124,432
$ 3,686
3 %
Occupancy 16,352
15,322
1,030
7
Furniture and equipment 7,913
7,301
612
8
Professional fees 24,342
20,481
3,861
19
FDIC insurance assessments 2,610
3,468
(858 ) (25 )
Advertising 5,141
4,174
967
23
Core deposit intangibles and customer relationship intangibles amortization 4,252
4,483
(231 ) (5 )
Other real estate and loan collection expenses 1,774
1,871
(97 ) (5 )
Loss on sales/valuations of assets, net 1,642
1,064
578
54
Other noninterest expenses 27,653
27,160
493
2
Total noninterest expenses $ 219,797
$ 209,756
$ 10,041
5 %



	Three Months Ended June 30,
	2019			2018		Change			% Change
Salaries and employee benefits	$	49,995		$	50,758	$	(763	)	(2	)%
Occupancy	6,436			6,315		121			2
Furniture and equipment	3,220			3,184		36			1
Professional fees	14,968			10,632		4,336			41
Advertising	2,661			2,145		516			24
Core deposit and customer relationship intangibles amortization	3,313			2,274		1,039			46
Other real estate and loan collection expenses	162			948		(786		)	(83	)
(Gain)/loss on sales/valuations of assets, net	(18,286		)	1,528		(19,814		)	(1,297	)
Restructuring expenses	—			—		—			—
Other noninterest expenses	12,629			11,098		1,531			14
Total noninterest expenses	$	75,098		$	88,882	$	(13,784	)	(16	)%



	Six Months Ended June 30,
	2019			2018		Change			% Change
Salaries and employee benefits	$	100,280		$	99,468	$	812		1	%
Occupancy	13,043			12,358		685			6
Furniture and equipment	5,912			5,933		(21		)	—
Professional fees	26,347			20,080		6,267			31
Advertising	4,986			4,085		901			22
Core deposit and customer relationship intangibles amortization	6,155			4,137		2,018			49
Other real estate and loan collection expenses	863			1,680		(817		)	(49	)
Gain/(loss) on sales/valuations of assets, net	(21,290		)	1,331		(22,621		)	(1,700	)
Restructuring expenses	3,227			2,564		663			26
Other noninterest expenses	23,805			20,892		2,913			14
Total noninterest expenses	$	163,328		$	172,528	$	(9,200	)	(5	)%

For the ~~third~~second quarter of ~~2017,~~2019, noninterest expenses totaled ~~$78.8~~$75.1 million compared to ~~$68.4~~$88.9 million during the ~~third~~second quarter of ~~2016, an increase~~2018, a decrease of ~~$10.3~~$13.8 million or ~~15%~~16%. For the ~~first nine~~six months ~~of 2017,~~ended June 30, 2019, total noninterest expenses ~~totaled $219.8~~were $163.3 million compared to ~~$209.8~~$172.5 million ~~during~~for the ~~first nine months~~same period of ~~2016, an increase~~2018, which was a decrease of ~~$10.0~~$9.2 million or 5%.

~~Salaries~~ The most significant increases were related to professional fees, core deposit and ~~Employee Benefits~~

customer relationship intangibles amortization, which were offset by net gain on sales/valuations of assets. The ~~largest component of noninterest expenses, salaries~~increases in occupancy expense and ~~employee benefits, increased $4.5 million or 11% during~~advertising for the ~~third quarter of 2017 as compared to the same quarter in 2016. The increase is~~three- and six-month periods were primarily attributable to the acquisition of Citywide Banks of Colorado, Inc. on July 7, 2017. When comparing the first nine months of 2017 to the first nine months of 2016, salaries and employee benefits increased $3.7 million or 3%. Heartland had total full-time equivalent employees of 2,024 on September 30, 2017, compared to 1,862 on June 30, 2017, and 1,846 on September 30, 2016.recent acquisitions.

~~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 $2.5~~for the second quarter of 2019 totaled $15.0 million compared to $10.6 million for the same quarter of 2018, which was an increase of $4.3 million or 41% ~~during~~. For the ~~third quarter of 2017~~six months ended June 30, 2019, professional fees totaled $26.3 million compared to $20.1 million for the ~~third quarter~~six months ended June 30, 2018, which was an increase of ~~2016 and $3.9~~$6.3 million or ~~19% during~~31%. The increase for the ~~first nine~~three- and six-month periods was primarily attributable to professional fees incurred with the strategic initiative projects previously discussed. Professional fees related to these projects totaled $2.9 million for the second quarter and $3.0 million for the six months ended June 30, 2019. The remainder of ~~2017 compared~~the increase for both the quarterly and year-to-date comparisons was primarily attributable to professional fees incurred at recently acquired entities, model validation expenses, and increased advisory services associated with the ~~first nine months of 2016, primarily as a result of a~~ higher level of ~~services provided to~~regulation resulting from Heartland ~~by third-party advisors, including services performed in connection with mergers and acquisitions and cloud-based applications.~~having assets over $10 billion.

~~FDIC Insurance Assessments~~

FDIC insurance assessments decreased $286,000 or 24% to $894,000 during the third quarter of 2017 from $1.2 million during the same quarter in 2016. For the nine-month periods ended September 30, 2017, and 2016, the FDIC insurance assessments were $2.6 million and $3.5 million respectively, a decrease of $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 third quarter of 2017 compared to $1.3 million during the third quarter of 2016, an increase of $19,000 or 1%. Advertising expenses increased $967,000 or 23% during the first nine months of 2017 compared to the first nine months of 2016. This increase is primarily due to the costs of a deposit campaign promotion recorded during the first quarter of 2017.

Core Deposit ~~Intangibles~~ and Customer Relationship Intangibles Amortization

Core deposit ~~intangibles~~ and customer relationship intangibles amortization ~~increased $572,000 or 44% during~~was $3.3 million for the ~~third~~second quarter of ~~2017~~2019 compared to $2.3 million for the ~~third~~same quarter of ~~2016~~2018, which was an increase of $1.0 million or 46%. For the six months ended June 30, 2019, core deposit and ~~decreased $231,000~~customer relationship intangibles amortization was $6.2 million compared to $4.1 million for the same period of 2018, which was an increase of $2.0 million or ~~5% during~~49%. Included in the increase for the second quarter of 2019 were core deposit intangible write-offs totaling $353,000 related to the branch sales at Illinois Bank & Trust and Citywide Banks. For the first ~~nine~~six months of ~~2017 compared~~2019, in addition to the ~~first nine months of 2016. Heartland recorded $18.5 million~~write-offs of core deposit intangibles ~~and customer relationship intangibles~~ in ~~conjunction with~~ the ~~acquisitions~~second quarter, a write-off of ~~Founders Bancorp and Citywide Banks~~$329,000 of ~~Colorado, Inc. in 2017. During the first quarter of 2016, a $700,000 adjustment to the~~ core deposit intangibles was recorded related to the branch sales at ~~Premier Valley~~Wisconsin Bank & Trust during the first quarter of 2019. The remainder of the increase was due to ~~the loss of a significant deposit account relationship.~~recent acquisitions.

Gain/Loss on Sales/Valuations of Assets, Net

Net gain on sales/valuations of assets totaled $18.3 million during the second quarter of 2019 compared to net losses on sales/valuations of assets of $1.5 million for the second quarter of 2018, which was change of $19.8 million. For the ~~third quarter~~six months ended June 30, 2019, net gains on sales/valuations of ~~2017, loss~~assets totaled $21.3 million compared to net losses on sales/valuations of assets, net, ~~totaled~~of $1.3 million, ~~compared~~which was a change of $22.6 million. In the second quarter of 2019, gains of $19.8 million were recorded in conjunction with the branch sales at Illinois Bank & Trust, Citywide Banks, and Dubuque Bank and Trust Company, and the sale of Dubuque Bank and Trust Company's mortgage servicing rights portfolio. Additionally, a gain of $3.5 million was recorded related to ~~$794,000 for~~ the ~~same quarter~~sale of two branches at Wisconsin Bank & Trust in ~~2016, which is an increase of $548,000 or 69%. For~~ the first ~~nine months~~quarter of 2017, loss on sales/valuations of assets, net, increased $578,000 or 54% to $1.6 million compared to $1.1 million recorded in the same period in 2016. The increase for both the three- and nine-month periods is primarily attributable to write-downs on fixed assets associated with the Citywide Banks of Colorado, Inc. transaction.2019.

Other ~~Noninterest Expenses~~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~~totaled $12.6 million for the ~~same~~second quarter ~~in 2016. Other noninterest expenses increased $493,000 or 2%~~of 2019 compared to ~~$27.7~~$11.1 million for the ~~nine~~second quarter of 2018, which was an increase of $1.5 million or 14%. For the six months ended ~~September~~June 30, ~~2017, from $27.2~~2019 and 2018, other noninterest expenses totaled $23.8 million and $20.9 million, respectively, which was an increase of $2.9 million or 14%. Write-downs on partnership investments which qualified for tax credits totaled $1.5 million and $1.9 million for the ~~nine~~quarter and the six months ended ~~September~~June 30, ~~2016. The increase~~2019, respectively. There were no partnership investments in tax credit projects for the ~~quarterly comparison is primarily related to the Citywide Banks~~same periods of ~~Colorado, Inc. transaction.~~2018.

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.~~the 55-60% range over the next twelve to eighteen months. During the ~~third~~second quarter of ~~2017,~~2019, Heartland's efficiency ratio on a fully tax-equivalent basis ~~was 64.54%~~decreased by 13 basis points to 64.81% in comparison with ~~63.88% during~~64.94% for the ~~third~~ quarter ~~of 2016.~~ended June 30, 2018. For the ~~nine-month period~~six months ended ~~September~~June 30, ~~2017, the~~2019, Heartland's efficiency ratio ~~on a fully tax-equivalent basis increased by 35~~was 65.01%, which was an improvement of 147 basis points ~~to 66.58% when compared to~~from 66.48% for the same ~~nine-month~~ period of 2018.

Management has taken actions to improve its efficiency ratio, including restructuring its mortgage lending operations, optimizing bank branch locations, and strategic initiative projects. Operation Customer Compass is anticipated to be complete by the end of 2019, and this project is focused on streamlining and automating processes. Expense reductions of over $10 million annually are expected to be realized once the Operation Customer Compass project is completed. Other process improvement projects will continue into mid-2020. Additionally, systems conversions of newly acquired entities are completed as soon as possible after the closing of the transaction in ~~2016.~~order to optimize cost savings. Heartland's efficiency ratio will ~~show variability~~also vary from quarter to quarter as a result of merger and acquisition ~~activities and also from the seasonality and related revenue and expense timing differences that are inherent in the residential mortgage business.~~activities.

Income Taxes

Heartland's effective tax rate was ~~28.74%~~23.12% for the ~~third~~second quarter of ~~2017~~2019 compared to ~~29.02%~~21.09% for the ~~third~~second quarter of ~~2016.~~2018. Included in Heartland's second quarter 2019 tax calculation were solar energy credits of $911,000. Federal low-income housing tax credits totaling $307,000 reduced Heartland's income taxes during the third quarter of 2017. For the third quarter of 2016, Heartland's income taxes were reduced by federal low-income housing tax credits totaling $304,000. 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 24.01% during the third quarter of 2017 compared to 21.01% during the third quarter of 2016.

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

determination of Heartland's income taxes ~~during~~totaled $281,000 for the ~~first nine months~~second quarter of ~~2017~~2019 compared to ~~federal low-income housing tax credits of $912,000 during the first nine months of 2016. Heartland's effective tax rate~~$307,000 for the ~~nine months ended September 30, 2017, was impacted by a state tax credit~~second quarter of ~~$830,000 related to a partnership investment in a historic rehabilitation tax credit project.~~2018. The ~~level of~~ tax-exempt interest income as a percentage of pre-tax income declined to 8.09% during the second quarter of 2019 from 16.77% during the second quarter of 2018.

Heartland's effective tax rate was ~~25.63%~~22.21% and 19.73% for the six months ended June 30, 2019 and 2018, respectively. Included in Heartland's tax calculation for the first six months of 2019 were solar energy credits of $1.2 million. Federal low-income housing tax credits include in the determination of Heartland's income taxes were $562,000 and $614,000 for the six months ended June 30, 2019 and 2018, respectively. The tax-exempt interest income as a percentage of pre-tax income declined to 10.23% during the first ~~nine~~six months of ~~2017 compared to 19.55%~~2019 from 18.41% during the first ~~nine~~six months of ~~2016.~~2018.

~~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 nine months of 2017~~ included a tax benefit of ~~$1.1 million~~$272,000 and $660,000 for the six-month periods ended June 30, 2019, and 2018, respectively, resulting from the vesting of outstanding restricted stock unit awards and ~~the exercise of stock~~ options. The majority of ~~this tax benefit was recorded~~Heartland's restricted stock unit awards vest in the first quarter of ~~2017. Exclusive of this tax benefit, Heartland's effective tax rate for the first nine months of 2017 was 27.93%.~~each year.

~~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 third quarter of 2017 was $32.8 million compared to $26.7 million for the third quarter of 2016, a $6.1 million or 23% increase. For the first nine months of 2017, income before taxes for the community and other banking segment was $87.4 million compared to $85.0 million for the first nine months of 2016, a $2.4 million or 3% increase.

Net interest income from the community and other banking segment was $88.8 million during the third quarter of 2017 compared to $72.7 million during the third quarter of 2016, an increase of $16.1 million or 22%. For the nine-month period ended September 30, 2017, net interest income from the community and other banking segment increased $18.2 million or 8% to $234.4 million compared to $216.2 million for the first nine months of 2016. This increase was primarily attributable to additional earning 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 $5.7 million for the third quarter of 2017 compared to $5.3 million during the third quarter of 2016. For the first nine months of 2017, the provision for loan losses was $10.2 million compared to $9.5 million for the first nine months of 2016. During the first nine months of 2017, Heartland’s credit quality 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 $9.7 million compared to $3.5 million for the same period in 2016. Included in the 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 consumer finance subsidiary. During the nine months ended September 30, 2016, a recovery of $2.3 million was recorded on a previously charged-off loan.

Noninterest income allocable to the community and other banking segment totaled $19.7 million during the third quarter of 2017 compared to $17.3 million during the third quarter of 2016, an increase of $2.3 million or 14%. For the first nine months of 2017, noninterest income allocable to the community and other banking segment totaled $57.0 million compared to $55.8 million during 2016, an increase of $1.2 million or 2%. Increased service charges and fees income contributed to the majority of the change in noninterest income for both the three- and nine-month periods ended September 30, 2017, compared to the same periods in 2016.

Noninterest expenses allocable to the community and other banking segment totaled $70.0 million during the third quarter of 2017 compared to $58.0 million during the third quarter of 2016, an increase of $12.0 million or 21%. For the nine-month period ended September 30, 2017, noninterest expenses allocable to the community and other banking segment increased by $16.3 million or 9% to $193.8 million compared to $177.4 million recorded during the first 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 $2.4 million for the third quarter of 2017 compared to income before taxes of $1.8 million for the third quarter of 2016, a decrease of $4.2 million or 238%. For the first nine months of 2017,

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

Noninterest income from the retail mortgage banking segment totaled $5.3 million during the third quarter of 2017 compared to $11.2 million during the third quarter of 2016, a $5.9 million or 53% decrease. Noninterest income from the retail mortgage banking segment totaled $19.5 million for the first nine months of 2017 compared to $33.4 million for the first nine months of 2016, a decrease of $13.8 million or 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 $271.5 million in the third quarter of 2017 compared to $445.1 million in the third quarter of 2016, a decrease of $173.6 million or 39%. For the first nine months of 2017, mortgage loan applications were $828.2 million compared to $1.29 billion during the first nine months of 2016, a decrease of $464.8 million or 36%.The volume of mortgage loans sold totaled $188.5 million during the third quarter of 2017, a $127.4 million or 40% decrease from the $315.9 million of mortgage loans sold during the third quarter of 2016. For the first nine months of 2017, the volume of mortgage loans sold totaled $541.3 million compared to $838.7 million during the first nine months of 2016, a $297.4 million or 35% decrease. Decreases in the volume of mortgage loans sold was attributable to the higher mortgage interest rates during the first nine months of 2017, which significantly reduced mortgage loan refinancing activity.

Noninterest expenses allocable to the retail mortgage banking segment were $8.8 million during the third quarter of 2017 compared to $10.4 million during the third quarter of 2016, a decrease of $1.7 million or 16%. For the first nine months of 2017, noninterest expenses allocable to the retail mortgage banking segment were $26.0 million compared to $32.3 million during the first nine months of 2016, a decrease of $6.3 million or 19%. Lower expenses during the third quarter and first nine months of 2017 in comparison with the third quarter and first 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

Total assets of Heartland were ~~$9.76~~$12.16 billion at ~~September~~June 30, ~~2017,~~2019, an increase of ~~$1.51 billion~~$752.3 million or ~~18%~~7% since ~~year-end 2016.~~December 31, 2018. Excluding ~~$213.9~~$766.2 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.~~BVBC transaction, total assets decreased ~~$199.1~~$13.9 million or 2%less than 1% since ~~December 31, 2016.~~year-end 2018. Securities represented 22% and 24% of total assets at ~~September~~June 30, ~~2017,~~2019, and ~~26% of total assets at~~ December 31, ~~2016.~~2018, respectively.

Lending Activities

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.

During the fourth quarter of 2018, Heartland entered into arrangements with third parties to offer residential mortgage loans to customers in many of its markets. In addition, the acquisition in 2018 of First Bank & Trust in Lubbock, Texas, included its wholly owned mortgage subsidiary, PrimeWest Mortgage Corporation. PrimeWest Mortgage Corporation provides mortgage loans to customers in Texas and has expanded to also serve the mortgage needs of customers in several of Heartland's southwestern markets. PrimeWest Mortgage Corporation services the loans it sells into the secondary market.

Consumer lending includes motor vehicle, home improvement, home equity and small personal credit lines. Consumer loans typically have shorter terms, lower balances, higher yields and higher risks of default than one-to-four-family residential mortgage loans. Consumer loan collections are dependent on the borrower's continuing financial stability, and are therefore more likely to be affected by adverse personal circumstances. Risk is reduced through underwriting criteria, which include credit verification, appraisals, a review of the borrower's financial condition, and personal cash flows. A security interest, with title insurance when necessary, is taken in the underlying real estate.

Total loans held to maturity were ~~$6.37~~$7.85 billion at ~~September~~June 30, ~~2017,~~2019, compared to ~~$5.35~~$7.41 billion at ~~year-end 2016,~~December 31, 2018, an increase of ~~$1.02 billion~~$445.4 million or ~~19%~~6%. This change includes ~~$96.4 million of total loans held to maturity, at fair value, acquired in the Founders Bancorp transaction and $985.4~~$542.0 million of total loans held to maturity acquired ~~at fair value~~ in the ~~Citywide Banks~~BVBC transaction. During the first quarter of ~~Colorado, Inc. transaction. Exclusive~~2019, Heartland classified $32.1 million of ~~these transactions,~~loans as held for sale in conjunction with the branch sales. Excluding the reclassification of loans to held for sale and the BVBC transaction, total loans held to maturity decreased ~~$60.2~~$64.6 million or 1% since ~~year-end 2016.~~December 31, 2018. Loan changes by category were:

Commercial and commercial real estate loans totaled $6.23 billion at June 30, 2019, compared to $5.73 billion at December 31, 2018, which was an increase of $498.7 million or 9%. Excluding $14.9 million of commercial and commercial real estate loans classified as held for sale during the first quarter and $480.1 million of loans acquired in the ~~Citywide Banks~~BVBC transaction, commercial and commercial real estate loans increased $33.4 million or 1% since year-end.

Agricultural and agricultural real estate loans totaled $549.4 million at June 30, 2019, compared to $565.4 million at December 31, 2018, which was a decrease of ~~Colorado, Inc. transaction, total~~$16.0 million or 3%. Excluding $6.6 million of agricultural and agricultural real estate loans classified as held ~~to maturity increased $62.9 million~~for sale during the ~~third~~first quarter of ~~2017,~~2019 and ~~six~~$1.8 million of loans acquired in the ~~Heartland bank subsidiaries experienced net organic loan growth~~BVBC transaction, agricultural and agricultural real estate loans decreased $11.2 million or 2% since December 31, 2018.

Residential mortgage loans decreased $59.9 million or 9% to $613.7 million at June 30, 2019, from $673.6 million at December 31, 2018. Excluding $2.0 million of residential mortgage loans classified as held for sale during the ~~quarter. Price competition~~first quarter of 2019 and $17.2 million of loans acquired in the BVBC transaction, residential mortgage loans decreased $75.1 million or 11% since year-end.

Consumer loans increased $21.6 million or 5% to $461.8 million at June 30, 2019, compared to $440.2 million at December 31, 2018. Excluding $8.6 million of loans classified as held for ~~quality~~sale during the first quarter of 2019 and $42.9 million of loans ~~remains intense,~~acquired in the BVBC transaction, consumer loans decreased $12.6 million or 3% since year-end.

The declines in the residential and ~~Heartland remains committed~~consumer loan portfolios have primarily been the result of customers refinancing loans due to ~~its pricing strategy, disciplined credit approach and emphasis on~~ the ~~client relationship.~~recent decreases in mortgage interest rates.

The table below presents the composition of the loan portfolio as of ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016,~~2018, in thousands:


LOAN PORTFOLIO	September 30, 2017					December 31, 2016					June 30, 2019					December 31, 2018
	Amount			Percent		Amount			Percent		Amount			Percent		Amount			Percent
Loans receivable held to maturity:
Commercial	$	1,613,903		25.31	%	$	1,287,265		24.04	%	$	2,238,453		28.50	%	$	2,020,231		27.26	%
Commercial real estate	3,163,953			49.63		2,538,582			47.42		3,991,919			50.82		3,711,481			50.08
Agricultural and agricultural real estate	511,764			8.03		489,318			9.14		549,404			6.99		565,408			7.63
Residential mortgage	635,611			9.97		617,924			11.54		613,707			7.81		673,603			9.09
Consumer	450,088			7.06		420,613			7.86		461,802			5.88		440,158			5.94
Gross loans receivable held to maturity	6,375,319			100.00	%	5,353,702			100.00	%	7,855,285			100.00	%	7,410,881			100.00	%
Unearned discount	(605		)			(699		)			(942		)			(1,624		)
Deferred loan fees	(1,299		)			(1,284		)			(1,292		)			(1,560		)
Total net loans receivable held to maturity	6,373,415					5,351,719					7,853,051					7,407,697
Allowance for loan losses	(54,885		)			(54,324		)			(63,850		)			(61,963		)
Loans receivable, net	$	6,318,530				$	5,297,395				$	7,789,201				$	7,345,734

Loans secured by real estate, either fully or partially, totaled ~~$4.25~~$5.05 billion or ~~67%~~64% of gross loans at ~~September~~June 30, ~~2017.~~2019. Exclusive of purchase accounting valuations and the loans acquired in the ~~third~~second quarter of ~~2017, 52%~~2019, at June 30, 2019, approximately 51% of the properties securing non-farm, nonresidential real estate loans are owner occupied. The largest categories of Heartland's loans secured by real estate ~~secured loans~~ at ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016,~~2018, are listed below, in thousands:

											LOANS SECURED BY REAL ESTATE
	September 30, 2017			December 31, 2016			June 30, 2019		December 31, 2018
Residential real estate, excluding residential construction and residential lot loans	$	989,112		$	1,030,190		$	1,036,564	$	1,119,942
Industrial, manufacturing, business and commercial	461,281			474,632			644,914		805,265
Agriculture	254,315			255,046			266,341		270,023
Retail	350,888			332,009			454,437		435,680
Office	335,057			347,334			485,121		485,262
Land development and lots	132,625			127,700			213,923		216,665
Hotel, resort and hospitality	163,076			151,571			293,626		233,735
Multi-family	185,634			185,559			332,148		311,319
Food and beverage	107,846			102,225			143,638		130,981
Warehousing	125,231			120,471			199,733		186,436
Health services	132,785			147,412			206,942		182,882
Residential construction	93,968			143,962			147,932		171,116
All other	169,912			172,617			273,710		255,145
Loans acquired in the quarter	775,587			—			355,305		—
Purchase accounting valuations	(30,806		)	(17,559		)
Total loans secured by real estate	$	4,246,511		$	3,573,169		$	5,054,334	$	4,804,451

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~~Heartland's Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2018.

Nonperforming loans were ~~$65.8~~$79.9 million or ~~1.03%~~1.02% of total loans at ~~September~~June 30, ~~2017,~~2019, compared to ~~$64.4~~$72.7 million or ~~1.20%~~0.98% of total loans at December 31, ~~2016.~~2018. The increase was primarily related to two agribusiness relationships that were originated in Heartland's Midwestern markets and one commercial relationship that was originated in one of Heartland's Western markets. At ~~September~~June 30, ~~2017,~~2019, approximately ~~$29.6~~$46.9 million or ~~45%~~59% of Heartland's nonperforming loans had individual loan balances exceeding $1.0 million and represented loans to ~~eight~~eighteen borrowers. At June 30, 2019, and December 31, 2018, Heartland had $7.2 million and $7.7 million, respectively, of nonperforming residential real estate loans that were repurchased under various Government National Mortgage Association ("GNMA") or other guaranteed loan programs. The portion of Heartland's

nonperforming nonresidential real estate loans covered by government guarantees ~~was $23.2~~totaled $15.4 million at ~~September~~June 30, ~~2017, and $17.3~~2019, compared to $7.7 million at December 31, ~~2016, which includes $16.2 million and $14.3 million, respectively, of repurchased residential real estate loans.~~2018.

During the third quarter of 2017, Heartland 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 repurchase any additional non-performing government guaranteed residential real estate loans 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.

The allowance for loan losses was ~~0.86%~~0.81% and 0.84% of loans at ~~September~~June 30, ~~2017, compared to 1.02% at~~2019 and December 31, ~~2016,~~2018, respectively, and ~~83.41%~~79.91% and ~~84.37%~~85.27% of nonperforming loans at ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016,~~2018, respectively. Excluding the acquired loans covered by the valuation reserves, the ratio of the allowance for loan losses to outstanding loans was ~~1.17%~~1.00% and 1.03% at ~~September~~June 30, ~~2017,~~2019, and ~~1.22% at~~ December 31, ~~2016.~~2018, respectively. At ~~September~~June 30, ~~2017,~~2019, valuation reserves totaled ~~$42.8~~$48.3 million and covered ~~$1.75~~$1.84 billion of acquired loans. At December 31, ~~2016,~~2018, valuation reserves totaled ~~$25.3~~$40.9 million and covered ~~$956.0 million~~$1.63 billion of acquired loans.

Loans delinquent ~~30 to 89~~30-89 days as a percent of total loans was ~~0.33%~~0.31% at ~~September~~June 30, ~~2017,~~2019, in comparison with ~~0.37%~~0.21% at December 31, ~~2016.~~2018. At June 30, Heartland had two commercial credits totaling $2.7 million from a recently acquired portfolio that were 30-59 days past due. Management believes the increase in delinquencies in the acquired portfolios is due to the implementation of Heartland's underwriting and closing processes at the new entities and is not indicative of the underlying credit quality.

The table below presents the changes in the allowance for loan losses during the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, in thousands:


ANALYSIS OF ALLOWANCE FOR LOAN LOSSES	Three Months Ended September 30,						Three Months Ended June 30,
	2017			2016			2019			2018
Balance at beginning of period	$	54,051		$	51,756		$	62,639		$	58,656
Provision for loan losses	5,705			5,328			4,918			4,831
Recoveries on loans previously charged off	888			852			(4,780		)	(3,164		)
Charge-offs on loans	(5,759		)	(3,283		)	1,073			1,001
Balance at end of period	$	54,885		$	54,653		$	63,850		$	61,324
Annualized ratio of net charge offs to average loans	0.31		%	0.17		%	0.19		%	0.12		%

	Nine Months Ended September 30,						Six Months Ended June 30,
	2017			2016			2019			2018
Balance at beginning of period	$	54,324		$	48,685		$	61,963		$	55,686
Provision for loan losses	10,235			9,513			6,553			9,094
Recoveries on loans previously charged off	2,569			4,294			2,064			1,932
Charge-offs on loans	(12,243		)	(7,839		)	(6,730		)	(5,388		)
Balance at end of period	$	54,885		$	54,653		$	63,850		$	61,324
Annualized ratio of net charge offs to average loans	0.23		%	0.09		%	0.12		%	0.10		%

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


NONPERFORMING ASSETS	September 30,						December 31,						June 30,						December 31,
	2017			2016			2016			2015			2019			2018			2018			2017
Nonaccrual loans	$	63,456		$	57,799		$	64,299		$	39,655		$	79,619		$	69,376		$	71,943		$	62,581
Loans contractually past due 90 days or more	2,348			105			86			—			285			54			726			830
Total nonperforming loans	65,804			57,904			64,385			39,655			79,904			69,430			72,669			63,411
Other real estate	13,226			10,740			9,744			11,524			6,646			11,074			6,153			10,777
Other repossessed assets	773			821			663			485			39			499			459			411
Total nonperforming assets	$	79,803		$	69,465		$	74,792		$	51,664		$	86,589		$	81,003		$	79,281		$	74,599
Performing troubled debt restructured loans⁽¹⁾	$	10,040		$	10,281		$	10,380		$	11,075		$	3,539		$	4,012		$	4,026		$	6,617
Nonperforming loans to total loans	1.03		%	1.06		%	1.20		%	0.79		%	1.02		%	0.93		%	0.98		%	0.99		%
Nonperforming assets to total loans plus repossessed property	1.25		%	1.27		%	1.39		%	1.03		%	1.10		%	1.08		%	1.07		%	1.17		%
Nonperforming assets to total assets	0.82		%	0.85		%	0.91		%	0.67		%	0.71		%	0.72		%	0.69		%	0.76		%

(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 ~~third quarter~~three- and six-month periods of ~~2017 and the first nine months of 2017,~~2019, in thousands:


	Nonperforming Loans			Other Real Estate Owned			Other Repossessed Assets			Total Nonperforming Assets			Nonperforming Loans			Other Real Estate Owned			Other Repossessed Assets			Total Nonperforming Assets
June 30, 2017	$	66,091		$	9,269		$	675		$	76,035
March 31, 2019													$	79,000		$	5,391		$	8		$	84,399
Loan foreclosures	(425		)	408			17			—			(3,061		)	2,961			100			—
Net loan charge-offs	(4,871		)	—			—			(4,871		)	(3,707		)	—			—			(3,707		)
Acquired nonperforming assets	1,075			6,916			—			7,991			230			—			—			230
New nonperforming loans	9,117			—			—			9,117			13,688			—			—			13,688
Reduction of nonperforming loans⁽¹⁾	(5,183		)	—			—			(5,183		)	(6,246		)	—			—			(6,246		)
OREO/Repossessed assets sales proceeds	—			(3,315		)	(13		)	(3,328		)	—			(1,221		)	(67		)	(1,288		)
OREO/Repossessed assets writedowns, net	—			(52		)	(4		)	(56		)	—			(485		)	(2		)	(487		)
Net activity at Citizens Finance Co.	—			—			98			98			—			—			—			—
September 30, 2017	$	65,804		$	13,226		$	773		$	79,803
June 30, 2019													$	79,904		$	6,646		$	39		$	86,589
(1) Includes principal reductions and transfers to performing status.													(1) Includes principal reductions and transfers to performing status.

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


	Nonperforming Loans			Other Real Estate Owned			Other Repossessed Assets			Total Nonperforming Assets			Nonperforming Loans			Other Real Estate Owned			Other Repossessed Assets			Total Nonperforming Assets
December 31, 2016	$	64,385		$	9,744		$	663		$	74,792
December 31, 2018													$	72,669		$	6,153		$	459		$	79,281
Loan foreclosures	(4,955		)	4,710			245			—			(4,847		)	4,655			192			—
Net loan charge-offs	(9,674		)	—			—			(9,674		)	(4,666		)	—			—			(4,666		)
Acquired nonperforming assets	1,075			6,916			—			7,991			230			—			—			230
New nonperforming loans	37,636			—			—			37,636			29,002			—			—			29,002
Reduction of nonperforming loans⁽¹⁾	(22,663		)	—			—			(22,663		)	(12,484		)	—			—			(12,484		)
OREO/Repossessed assets sales proceeds	—			(7,560		)	(217		)	(7,777		)	—			(3,225		)	(155		)	(3,380		)
OREO/Repossessed assets writedowns, net	—			(584		)	(10		)	(594		)	—			(937		)	(12		)	(949		)
Net activity at Citizens Finance Co.	—			—			92			92			—			—			(445		)	(445		)
September 30, 2017	$	65,804		$	13,226		$	773		$	79,803
June 30, 2019													$	79,904		$	6,646		$	39		$	86,589

(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 ~~24%~~22% and ~~26%~~24% of total assets at ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016,~~2018, respectively. Total ~~available for sale~~ securities carried at fair value as of ~~September~~June 30, ~~2017,~~2019, were ~~$2.09~~$2.56 billion, an increase of ~~$247.5~~$111.2 million or ~~13%~~5% from ~~$1.85~~$2.45 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.~~2018.

The table below presents the composition of the securities portfolio, including ~~available for sale,~~securities carried at fair value, held to maturity securities and other, by major category, as of ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016,~~2018, in thousands:


SECURITIES PORTFOLIO COMPOSITION	September 30, 2017				December 31, 2016				June 30, 2019				December 31, 2018
	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
U.S. government corporations and agencies	$	7,415	0.31	%	$	4,700	0.22	%	$	18,621	0.69	%	$	31,951	1.18	%
Mortgage-backed securities	1,565,400		65.97		1,290,500		60.56
Mortgage and asset-backed securities									2,193,326		81.80		2,026,698		74.64
Obligation of states and political subdivisions	760,329		32.04		799,806		37.53		419,949		15.66		611,257		22.50
Equity securities	16,596		0.70		14,520		0.68		18,157		0.68		17,086		0.63
Other securities	23,176		0.98		21,560		1.01		31,366		1.17		28,396		1.05
Total securities	$	2,372,916	100.00	%	$	2,131,086	100.00	%	$	2,681,419	100.00	%	$	2,715,388	100.00	%

The percentage of Heartland's securities portfolio comprised of ~~mortgage-backed~~mortgage and asset-backed securities was ~~66%~~82% at ~~September~~June 30, ~~2017,~~2019, compared to ~~61%~~75% at December 31, ~~2016. Approximately 74% of Heartland's mortgage-backed securities were issued by government-sponsored enterprises at September 30, 2017.~~2018. Heartland's securities portfolio had an expected modified duration of ~~4.83~~4.71 years as of ~~September~~June 30, ~~2017,~~2019, compared to ~~4.34~~4.01 years atas of year-end ~~2016.~~2018.

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 ~~September~~June 30, ~~2017,~~2019, Heartland had ~~$23.2~~$31.4 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 ~~$8.23~~$10.11 billion as of ~~September~~June 30, ~~2017,~~2019, compared to ~~$6.85~~$9.40 billion at ~~year-end 2016,~~December 31, 2018, an increase of ~~$1.38 billion~~$712.1 million or ~~20%~~8%. ~~This~~This increase ~~included $181.5~~includes $617.1 million of deposits acquired at fair value in the BVBC transaction. During the first quarter of 2019, Heartland classified $77.0 million of deposits as held for sale in conjunction with the branch sales. Exclusive of the reclassification of deposits to held for sale and the deposits acquired at fair value in the BVBC transaction, total deposits increased $172.0 million or 2% since December 31, 2018. Deposit changes by category were:

Demand deposits increased $162.0 million or 5% to $3.43 billion at June 30, 2019, compared to $3.26 billion at December 31, 2018. Excluding $164.9 million of demand deposits acquired in the ~~Founders Bancorp~~BVBC transaction and ~~$1.21 billion~~$17.3 million of demand deposits ~~at fair value, acquired~~classified as held for sale in the ~~Citywide Banks~~first quarter of ~~Colorado, Inc. transaction. Exclusive of these transactions, total~~2019, demand deposits ~~decreased $7.1~~increased $14.4 million or less than 1% since year-end 2018.

Savings deposits increased $425.5 million or 8% to $5.53 billion at June 30, 2019, from $5.11 billion at December 31, ~~2016.~~2018. Excluding savings deposits of $346.2 million acquired in the BVBC transaction and $47.8 million of savings deposits classified as held for sale in the first quarter of 2019, savings deposits increased $127.2 million or 2% since year-end 2018.

Time deposits increased $124.6 million or 12% to $1.15 billion at June 30, 2019 from $1.02 billion at December 31, 2018. Excluding time deposits of $106.0 million acquired in the BVBC transaction and $11.9 million of time deposits classified as held for sale in the first quarter of 2019, time deposits increased $30.4 million or 3% since year-end 2018. The increase in time deposits was primarily due to an increase in brokered time deposits of $30.9 million.

The table below presents ~~in thousands,~~ the composition of Heartland's deposits by category as of ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016:~~2018, in thousands:


DEPOSITS	September 30, 2017				December 31, 2016				June 30, 2019				December 31, 2018
	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
Demand	$	3,009,940	36.56	%	$	2,202,036	32.16	%	$	3,426,758	33.90	%	$	3,264,737	34.74	%
Savings	4,227,340		51.36		3,788,089		55.32		5,533,503		54.74		5,107,962		54.37
Time	994,604		12.08		857,286		12.52		1,148,296		11.36		1,023,730		10.89
Total	$	8,231,884	100.00	%	$	6,847,411	100.00	%	$	10,108,557	100.00	%	$	9,396,429	100.00	%

Demand deposits totaled $3.01 billion at September 30, 2017, an increase of $807.9 million or 37% since year-end 2016, with $626.7 million of the increase attributable to the Founders Bancorp and Citywide Banks of Colorado, Inc. transactions. Excluding demand deposits acquired in these transactions, demand deposits increased $181.2 million or 8% since year-end 2016. Savings

deposits increased $439.3 million or 12% to $4.23 billion at September 30, 2017 from $3.79 billion at December 31, 2016. Excluding savings deposits of $619.0 million acquired in the Founders Bancorp and Citywide Banks of Colorado, Inc. transactions, savings deposits decreased $179.7 million or 5% 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 in 2017, time deposits decreased $8.6 million or 1% since year-end 2016.

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 ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016,~~2018, in thousands:


	September 30, 2017		December 31, 2016		June 30, 2019		December 31, 2018
Securities sold under agreement to repurchase	$	133,985	$	229,555	$	90,184	$	80,124
Federal funds purchased	2,400		40,200		4,600		35,400
Advances from the FHLB	25,000		30,367		—		100,838
Notes payable to unaffiliated banks	5,000		—
Other short-term borrowings	5,486		6,337		12,476		10,648
Total	$	171,871	$	306,459	$	107,260	$	227,010

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-~~

short-term or long-term purposes under a variety of programs. The amount of short-term borrowings of Heartland was ~~$171.9~~$107.3 million at ~~September~~June 30, ~~2017,~~2019, compared to ~~$306.5~~$227.0 million at year-end ~~2016,~~2018, a decrease of ~~$134.6~~$119.8 million or ~~44%~~53%.

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 ~~$134.0~~$90.2 million at ~~September~~June 30, ~~2017,~~2019, compared to ~~$229.6~~$80.1 million at December 31, ~~2016, a decrease~~2018, an increase of ~~$95.6~~$10.1 million or ~~42%~~13%. 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.~~

~~Also included in short-term borrowings is a $25.0~~renewed its $30.0 million revolving credit line agreement ~~Heartland has~~ with an unaffiliated bank ~~primarily~~on June 14, 2019. This revolving credit line agreement is included in short-term borrowings, and the primary purpose of this credit line agreement is to provide liquidity to Heartland. ~~The borrowing capacity~~Heartland had no advances on this ~~revolving credit~~ line ~~was increased from $20.0 million to $25.0 million on June 14, 2017. During~~during the ~~third quarter~~first six months of ~~2017, Heartland had advances of $20.0 million~~2019, and ~~repayments of $15.0 million on this line. The~~the outstanding balance ~~at September 30, 2017,~~ was ~~$5.0 million compared to~~ $0 at both June 30, 2019, and December 31, ~~2016.~~2018.

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 ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016:~~2018, in thousands:


	September 30, 2017		December 31, 2016		June 30, 2019		December 31, 2018
Advances from the FHLB	$	6,771	$	6,975	$	3,305	$	3,399
Wholesale repurchase agreements	30,000		30,000
Trust preferred securities	137,222		115,232		147,430		130,913
Senior notes	11,000		16,000		—		5,000
Note payable to unaffiliated bank	34,667		37,667		54,917		58,417
Contracts payable for purchase of real estate and other assets	1,965		2,339		1,917		1,953
Subordinated notes	73,964		73,857		74,214		74,143
Other borrowings	5,884		6,464		1,080		1,080
Total	$	301,473	$	288,534	$	282,863	$	274,905

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 ~~September~~June 30, ~~2017,~~2019, the amount of other borrowings was ~~$301.5~~$282.9 million, an increase of ~~$12.9~~$8.0 million or 4%3% since year-end ~~2016.~~

~~At September 30, 2017, $137.2~~2018. Heartland acquired $6.9 million of ~~trust~~subordinated debt in the BVBC transaction that was simultaneously paid off with the closing of the transaction. Trust preferred securities ~~were outstanding compared to $115.2 million outstanding at December 31, 2016, which is an increase of $22.0 million or 19%. Heartland acquired $21.6 million of trust preferred securities at~~with a fair value of $16.1 million were also acquired in the ~~Citywide Banks of Colorado, Inc.~~BVBC transaction.

Heartland has a non-revolving credit facility with an unaffiliated bank, which provides a borrowing capacity of up to ~~$75.0~~$70.0 million. At ~~September~~June 30, ~~2017, $34.7~~2019, $54.9 million was outstanding on this non-revolving credit line compared to ~~$37.7~~$58.4 million outstanding at December 31, ~~2016. The balance of the $34.7 million note is due in April 2021.~~2018. At ~~September~~June 30, ~~2017,~~2019, Heartland had ~~$39.3~~$14.8 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 September 30, 2017, and December 31, 2016, respectively. During the first quarter of 2017, $167,000 of subordinated convertible notes were converted into 6,128 shares of Heartland common 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 ~~September~~June 30, ~~2017,~~2019, is as follows, in thousands:

Amount

Issued

Issuance

Date

Interest

Rate

Interest

Rate as of

9/30/17⁽¹⁾

Maturity

Date

Callable

Date

Amount

Issued

Issuance

Date

Interest

Rate

Interest

Rate as of 6/30/19⁽¹⁾

Maturity

Date

Callable

Date

Heartland Financial Statutory Trust IV

25,774

03/17/2004

2.75% over LIBOR

4.07%⁽²⁾

03/17/2034

12/17/2017

10,310

03/17/2004

2.75% over LIBOR

5.16%

⁽²⁾

03/17/2034

09/17/2019

Heartland Financial Statutory Trust V

20,619

01/27/2006

1.33% over LIBOR

2.63%⁽³⁾

04/07/2036

01/07/2018

20,619

01/27/2006

1.33% over LIBOR

3.93%

⁽³⁾

04/07/2036

10/07/2019

Heartland Financial Statutory Trust VI

20,619

06/21/2007

1.48% over LIBOR

2.80%⁽⁴⁾

09/15/2037

12/15/2017

20,619

06/21/2007

1.48% over LIBOR

3.89%

⁽⁴⁾

09/15/2037

09/15/2019

Heartland Financial Statutory Trust VII

20,619

06/26/2007

1.48% over LIBOR

2.80%⁽⁵⁾

09/01/2037

12/01/2017

20,619

06/26/2007

1.48% over LIBOR

4.00%

⁽⁵⁾

09/01/2037

09/01/2019

Morrill Statutory Trust I

8,876

12/19/2002

3.25% over LIBOR

4.58%⁽⁶⁾

12/26/2032

12/26/2017

9,041

12/19/2002

3.25% over LIBOR

5.58%

12/26/2032

09/26/2019

Morrill Statutory Trust II

8,503

12/17/2003

2.85% over LIBOR

4.17%⁽⁷⁾

12/17/2033

12/17/2017

8,698

12/17/2003

2.85% over LIBOR

5.26%

12/17/2033

09/17/2019

Sheboygan Statutory Trust I

6,331

09/17/2003

2.95% over LIBOR

4.27%

09/17/2033

12/17/2017

6,484

09/17/2003

2.95% over LIBOR

5.36%

09/17/2033

09/17/2019

CBNM Capital Trust I

4,297

09/10/2004

3.25% over LIBOR

4.57%

12/15/2034

12/15/2017

4,384

09/10/2004

3.25% over LIBOR

5.66%

12/15/2034

09/15/2019

Citywide Capital Trust III

6,313

12/19/2003

2.80% over LIBOR

4.11%

12/19/2033

01/23/2018

6,410

12/19/2003

2.80% over LIBOR

5.38%

12/19/2033

10/23/2019

Citywide Capital Trust IV

4,166

09/30/2004

2.20% over LIBOR

3.51%

09/30/2034

02/23/2018

4,267

09/30/2004

2.20% over LIBOR

4.72%

09/30/2034

08/23/2019

Citywide Capital Trust V

11,241

05/31/2006

1.54% over LIBOR

2.86%

07/25/2036

12/15/2017

11,635

05/31/2006

1.54% over LIBOR

3.95%

07/25/2036

09/15/2019

OCGI Statutory Trust III

2,993

06/27/2002

3.65% over LIBOR

6.25%

⁽⁶⁾

09/30/2032

09/30/2019

OCGI Capital Trust IV

5,314

09/23/2004

2.50% over LIBOR

4.91%

⁽⁷⁾

12/15/2034

09/15/2019

BVBC Capital Trust II

7,167

04/10/2003

3.25% over LIBOR

5.83%

04/24/2033

10/24/2019

BVBC Capital Trust III

8,958

07/29/2005

1.60% over LIBOR

3.92%

09/30/2035

09/30/2019

137,358

147,518

(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.

(1) Effective weighted average interest rate as of June 30, 2019, 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 June 30, 2019, 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, 2019, 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, 2019, 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, 2019, 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, 2019, was 5.53% 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, 2019, was 4.37% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

CAPITAL REQUIREMENTS

The Federal Reserve Board, which supervises bank holding companies, has adopted capital adequacy guidelines that are used to assess the adequacy of capital ~~in supervising~~of 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~~ratios; however, the transition provisions related to the conservation buffer ~~for 2017 is 1.25%.~~have been extended indefinitely.

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~~Reserve Board's current capital adequacy guidelines for the dates indicated, in ~~thousands:~~

thousands. The table also indicates the fully-phased in capital conservation buffer, but the requirements to comply have been extended indefinitely.


	Total Capital (to Risk- Weighted Assets)			Tier 1 Capital (to Risk- Weighted Assets)			Common Equity Tier 1 (to Risk- Weighted Assets)			Tier 1 Capital (to Average Assets)			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		%
June 30, 2019													14.76		%	13.24		%	11.61		%	10.66		%
Minimum capital requirement													8.00		%	6.00		%	4.50		%	4.00		%
Well capitalized requirement													10.00		%	8.00		%	6.50		%	5.00		%
Minimum capital requirement, including fully-phased in capital conservation buffer													10.50		%	8.50		%	7.00		%	N/A
Risk-weighted assets													$	9,056,123		$	9,056,123		$	9,056,123		N/A
Average Assets													N/A			N/A			N/A			$	11,243,148

December 31, 2018													13.72		%	12.16		%	10.66		%	9.73		%
Minimum capital requirement	8.00		%	6.00		%	4.50		%	4.00		%	8.00		%	6.00		%	4.50		%	4.00		%
Well capitalized requirement	10.00		%	8.00		%	6.50		%	5.00		%	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			10.50		%	8.50		%	7.00		%	N/A
Risk-weighted assets	$	7,517,635		$	7,517,635		$	7,517,635		N/A			$	8,756,130		$	8,756,130		$	8,756,130		N/A
Average Assets	N/A			N/A			N/A			$	9,387,922		N/A			N/A			N/A			$	10,946,440

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 from its banks totaled approximately ~~$244.6~~$384.5 million and ~~$182.1~~$311.3 million at ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016,~~2018, respectively, under the capital requirements to remain well capitalized. At ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016,~~2018, retained earnings that could be available for the payment of dividends under the most restrictive minimum capital requirements totaled ~~$394.9~~$566.5 million and ~~$308.9~~$486.5 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~~provided Heartland with the ability to raise capital, subject to market conditions and SEC rules and limitations, if Heartland's board of directors ~~decides~~decided to do so. This registration statement ~~will permit~~permitted 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 behave been offered iswas not specified in the registration statement, and the terms of any future offerings ~~will~~were to 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,~~ Since Heartland's universal shelf registration statement expired on July 29, 2019, Heartland ~~completed the acquisition of Founders Bancorp, parent company of Founders Community Bank, based~~plans to file another registration statement 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.~~2019 to preserve its ability to register debt or raise capital.

On July ~~7, 2017, Heartland completed the acquisition~~22, 2019, Heartland's Board 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.

~~Common stockholders' equity was $980.7 million at September 30, 2017, compared~~Directors voted to ~~$739.6 million at December 31, 2016. Book value~~increase its quarterly dividend payment to $0.18 per common share, which was ~~$32.75 at September 30, 2017, compared to $28.31 at year-end 2016. Changes in common stockholders' equity and book value~~a $0.02 or 13% increase from $0.16 per common ~~share~~share.

OFF-BALANCE SHEET ARRANGEMENTS

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 ~~result~~secondary market and forward commitments for the future delivery of ~~earnings, dividends paid, stock transactions and mark-to-market adjustment~~such loans. Heartland enters into forward commitments for ~~unrealized gains and losses~~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 ~~securities~~the commitments to fund the loans as well as on the residential mortgage loans available for ~~sale~~sale. See Note 7, "Derivative Financial Instruments," to the consolidated financial statements for additional information on Heartland's derivative financial instruments.

Heartland also enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of customers. These financial instruments include commitments to extend credit and ~~derivative instruments. Heartland had~~standby letters of credit.

~~unrealized losses~~Off-balance sheet arrangements were disclosed in Heartland's Annual Report on ~~securities available~~Form 10-K for ~~sale, net of applicable taxes, of $20.1 million at September 30, 2017, compared to unrealized losses of $30.2 million at~~the year ended December 31, ~~2016.~~2018. There have been no material changes to Heartland's off-balance sheet arrangements since that report was filed.

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 ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016,~~2018, commitments to extend credit aggregated ~~$2.03~~$2.53 billion and ~~$1.57~~$2.47 billion, respectively. Standby letters of credit aggregated ~~$52.3~~$76.3 million at ~~September~~June 30, ~~2017,~~2019, and ~~$46.1~~$71.9 million at December 31, ~~2016.~~2018.

Contractual obligations and other commitments were disclosed in Heartland's Annual Report on Form 10-K for the year ended December 31, ~~2016, and there~~2018. There have been no material changes into Heartland's contractual obligations and other commitments since that report was filed.

~~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 September 30, 2017, $5.0 million was outstanding. Heartland also has a non-revolving credit line with the same unaffiliated bank. At 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 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 the size of 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. However, Heartland may also pursue acquisitions in areas outside of its current geographic footprint. 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~~these loans. ~~We enter~~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 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~~Heartland's derivative financial instruments.

LIQUIDITY

Liquidity refers to Heartland's ability to maintain a cash flow that is adequate to meet maturing obligations and existing commitments, to withstand fluctuations in deposit levels, to fund operations and to provide for ~~customers'~~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~~At June 30, 2019, Heartland had $642.1 million of ~~$129.9 million during the first nine months of 2017 compared to cash provided of $96.7 million during the first 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 $25.5 million during the first nine months of 2017 compared to using $3.5 million in cash during the first nine months of 2016.

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

~~Financing activities used cash of $193.5 million during the first nine months of 2017 compared to using cash of $322.1 million during the first nine months of 2016. A net increase in demand~~ deposits provided cash of $181.2 million during the first nine months of 2017 compared to providing cash of $160.3 million during the first nine months of 2016. The net decrease in savings deposits used cash of $179.7 million for the first nine months of 2017 compared to providing cash of $51.5 million during the first nine months of 2016. A net decrease in time deposits ~~used cash~~in other financial institutions of ~~$8.6~~$4.4 million ~~during the first nine months~~and securities carried at fair value of ~~2017 compared to using cash of $353.1 million during the first nine months of 2016. S~~hort-term borrowings activity, including short-term FHLB activity and revolving credit line agreement activity, used cash of $169.0 million during the first nine months of 2017 compared to using cash of $115.6 million during the first nine months of 2016. Other borrowing activity used cash of $8.6 million during the first nine months of 2017 compared to providing cash of $24.4 million during the first nine months of 2016. Included in the use of cash during the first 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.$2.56 billion.

Management of investing and financing activities, and market conditions, determine the level and the stability of net interest cash flows. Management attempts to mitigate the impact of changes in market interest rates to the extent possible, so that balance sheet growth is the principal determinant of ~~increases~~growth 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~~Heartland intends to rely ~~more heavily~~ on deposit growth and additional FHLB borrowings as needed in the future.

Additional funding is provided by long-term debt and short-term borrowings. In the event of short-term liquidity needs, Heartland's ~~bank subsidiaries~~banks may purchase federal funds from each other or from correspondent banks and may also borrow from the Federal Reserve Bank. As of June 30, 2019, Heartland had $107.3 million of short-term borrowings outstanding. As of June 30, 2019, Heartland had $282.9 million of long-term debt outstanding, and it is an important funding source because of its multi-year borrowing structure. Additionally, the ~~bank subsidiaries’~~banks' FHLB memberships give them the ability to borrow funds for ~~short-~~short-term and long-term purposes under a variety of programs. At June 30, 2019, Heartland had $1.66 billion of borrowing capacity under these programs.

~~Heartland's~~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. Heartland has a revolving credit agreement and non-revolving credit line ~~agreement~~ with an unaffiliated bank, ~~provides a~~which was renewed on June 14, 2019. Heartland's revolving credit agreement has $30.0 million of maximum borrowing capacity, of ~~$25.0 million. During the third quarter of 2017, Heartland had advances of $20.0 million and repayments of $15.0 million on this line.~~which none was outstanding at June 30, 2019. At ~~September~~June 30, ~~2017, $5.0~~2019, $14.8 million was ~~outstanding~~available on ~~this agreement. Heartland also has a~~the non-revolving credit ~~line with the same unaffiliated bank, which had $39.3 million of borrowing capacity at September 30, 2017,~~line. These credit agreements contain specific financial covenants, all of which ~~no balance had been drawn.~~Heartland complied with as of June 30, 2019.

The ability of Heartland to pay dividends to its stockholders is dependent upon dividends paid to Heartland 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 at Heartland's bank subsidiaries, certain portions of their retained earnings are not available for the payment of dividends.

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 ~~nine~~six months of ~~2017.~~2019.

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)one) and a rate shock (year 2two and beyond) could have on Heartland's net interest income. Starting balances in the model reflect actual balances on the ~~“as of”~~"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 ~~September~~June 30, ~~2017,~~2019, and ~~September~~June 30, ~~2016,~~2018, provided the following results, in thousands:


	2017				2016				2019				2018
	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	$	343,033	(2.69	)%	$	278,279	(2.74	)%	$	414,461	(3.28	)%	$	368,974	(7.85	)%
Base	$	352,502			$	286,122			$	428,520			$	400,387
Up 200 Basis Points	$	351,265	(0.35	)%	$	286,325	0.07	%	$	455,185	6.22	%	$	403,254	0.72	%
Year 2
Down 100 Basis Points	$	326,965	(7.24	)%	$	264,054	(7.71	)%	$	385,037	(10.15	)%	$	366,246	(8.53	)%
Base	$	354,238	0.49	%	$	286,429	0.11	%	$	425,238	(0.77	)%	$	409,788	2.35	%
Up 200 Basis Points	$	369,712	4.88	%	$	298,565	4.35	%	$	483,672	12.87	%	$	436,963	9.14	%

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 consolidated 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 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~~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~~ 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 ~~September~~June 30, ~~2017,~~2019, 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~~2018 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 ~~nine months~~quarter ended ~~September~~June 30, ~~2017.~~2019.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

Exhibits



~~31.1~~ 3.1	⁽¹⁾⁽²⁾	Amendment to Certificate of Incorporation of Heartland Financial USA, Inc. as filed with the Delaware Secretary of State on June 4, 2019.

3.2	⁽²⁾	Amendment to Certificate of Incorporation of Heartland Financial USA, Inc. as filed with the Delaware Secretary of State on June 6, 2019.

10.1	⁽¹⁾⁽²⁾	Business Line Loan Agreement dated June 14, 2019, between Heartland Financial USA, Inc. and Bankers Trust Company.

10.2	⁽¹⁾⁽²⁾	Promissory Note dated June 14, 2019 (issued under the non-revolving line of credit), and Change in Terms Agreement dated July 15, 2019 between Heartland Financial USA, Inc. and Bankers Trust Company.

10.3	⁽¹⁾⁽²⁾	Promissory Note dated June 14, 2019 (issued under the credit facility), and Change in Terms Agreement dated July 15, 2019 between Heartland Financial USA, Inc. and Bankers Trust Company.

10.4	⁽¹⁾⁽²⁾	Promissory Note dated May 10, 2016 (updated to be issued under the Business Line Loan Agreement related to the credit facility dated June 14, 2019), and Change in Terms Agreement dated June 14, 2019 between Heartland Financial USA, Inc. and Bankers Trust Company.

10.5	⁽¹⁾⁽²⁾	Promissory Note dated July 24, 2018 (updated to be issued under the Business Line Loan Agreement related to the credit facility dated June 14, 2019), and Change in Terms Agreement dated June 14, 2019 between Heartland Financial USA, Inc. and Bankers Trust Company.

10.6	⁽¹⁾	Heartland Financial USA, Inc. Deferred Compensation Plan effective April 30, 2019 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 6, 2019).

31.1	⁽²⁾	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.

31.2	⁽¹⁾⁽²⁾	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.

32.1	⁽¹⁾⁽²⁾	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	⁽¹⁾⁽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 statement formatted in Inline 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.
104		Cover page formatted in Inline Extensible Business Reporting Language

______________

(1) Management contracts or compensatory plans or arrangements

(2) Filed ~~herewith.~~or furnished 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~~Bruce K. Lee

By: ~~Lynn B. Fuller~~Bruce K. Lee

~~Chairman~~President 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: ~~November 8, 2017~~August 7, 2019



	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



(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



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	95		124		—		317		313		4
Wisconsin Bank & Trust	515		688		—		1,868		2,257		—
Total	$	622	$	827	$	—	$	2,239	$	2,631	$	4
December 31, 2016
Citywide Banks	$	19	$	23	$	—	$	107	$	114	$	—
Premier Valley Bank	156		180		—		359		326		33
Wisconsin Bank & Trust	833		997		—		2,249		2,487		—
Total	$	1,008	$	1,200	$	—	$	2,715	$	2,927	$	33



	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%
				Actual defaults	21.77 - 37.62% (33.11%)
				Actual deferrals	10.44 - 26.29% (14.81%)
Interest rate lock commitments	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⁾
Commercial servicing rights	326		Discounted cash flows	Third party valuation	(3)
Other real estate owned	9,744		Modified appraised value	Third party appraisal	(2)
				Appraisal discount	0-10%
Collateral dependent impaired loans:
Commercial	1,683		Modified appraised value	Third party appraisal	(2)
				Appraisal discount	0-8%⁽⁴⁾
Commercial real estate	3,026		Modified appraised value	Third party appraisal	(2)
				Appraisal discount	0-7%⁽⁴⁾
Agricultural and agricultural real estate	1,955		Modified appraised value	Third party appraisal	(2)
				Appraisal discount	0-10%⁽⁴⁾
Residential real estate	3,565		Modified appraised value	Third party appraisal	(2)
				Appraisal discount	0-8%⁽⁴⁾
Consumer	1,193		Modified appraised value	Third party valuation	(2)
				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.



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